q630.htm
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
|
Washington,
D.C. 20549
|
|
FORM
10-Q
|
|
|
(Mark
One)
|
|
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934 FOR THE QUARTERLY PERIOD ENDED June 30,
2010.
|
|
|
OR
|
|
[
] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
|
|
ACT
OF 1934 FOR THE TRANSITION PERIOD FROM __________to
__________ : |
|
|
Commission
File Number 0-26584
|
BANNER
CORPORATION
|
(Exact
name of registrant as specified in its charter)
|
|
|
Washington
(State
or other jurisdiction of incorporation or organization)
|
|
91-1691604
(I.R.S. Employer Identification Number)
|
|
|
10
South First Avenue, Walla Walla, Washington 99362
|
(Address of principal executive
offices and zip code)
|
|
Registrant's
telephone number, including area code: (509)
527-3636
|
|
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes
[X]
No
[ ]
|
|
Indicate
by check mark whether the registrant 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:
|
|
As of July 31,
2010
|
Common
Stock, $.01 par value per share
|
|
110,590,335 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 June 30, 2010 and December 31,
2009
|
3
|
|
|
Consolidated
Statements of Operations for the Quarters and Six Months Ended June 30,
2010 and 2009
|
4
|
|
|
Consolidated
Statements of Comprehensive Income (Loss) for the Quarters and Six Months
Ended June 30, 2010 and 2009
|
5
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the Six Months Ended
June 30, 2010 and 2009
|
6
|
|
|
Consolidated
Statements of Cash Flows for the Six Months Ended June 30, 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
|
33
|
|
|
Executive
Overview
|
33
|
|
|
Comparison
of Financial Condition at June 30, 2010 and December 31,
2009
|
38
|
|
|
Comparison
of Results of Operations for the Quarters and Six Months Ended June 30,
2010 and 2009
|
39
|
|
|
Asset
Quality
|
44
|
|
|
Liquidity
and Capital Resources
|
48
|
|
|
Capital
Requirements
|
49
|
|
|
Item
3 - Quantitative and Qualitative Disclosures About Market
Risk
|
|
|
|
Market
Risk and Asset/Liability Management
|
50
|
|
|
Sensitivity
Analysis
|
50
|
|
|
Item
4 - Controls and Procedures
|
54
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
Item
1 - Legal Proceedings
|
55
|
|
|
Item
1A - Risk Factors
|
55
|
|
|
Item
2 - Unregistered Sales of Equity Securities and Use of Proceeds
|
56
|
|
|
Item
3 - Defaults upon Senior Securities
|
56
|
|
|
Item
4 – [Removed and Reserved]
|
|
|
|
Item
5 - Other Information
|
56
|
|
|
Item
6 - Exhibits
|
57
|
|
|
SIGNATURES
|
59
|
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(In thousands, except shares)
June
30, 2010 and December 31, 2009
|
|
June
30
|
|
|
December
31
|
|
ASSETS
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
437,186
|
|
$
|
323,005
|
|
|
|
|
|
|
|
|
|
Securities—trading,
cost $149,386 and $192,853, respectively
|
|
|
105,381
|
|
|
147,151
|
|
Securities—available-for-sale,
cost $138,103 and $95,174, respectively
|
|
|
140,342
|
|
|
95,667
|
|
Securities—held-to-maturity,
fair value $76,996 and $76,489, respectively
|
|
|
73,632
|
|
|
74,834
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank (FHLB) stock
|
|
|
37,371
|
|
|
37,371
|
|
Loans
receivable:
|
|
|
|
|
|
|
|
Held
for sale, fair value $4,888 and $4,534, respectively
|
|
|
4,819
|
|
|
4,497
|
|
Held
for portfolio
|
|
|
3,626,685
|
|
|
3,785,624
|
|
Allowance
for loan losses
|
|
|
(95,508
|
)
|
|
(95,269
|
)
|
|
|
|
3,535,996
|
|
|
3,694,852
|
|
|
|
|
|
|
|
|
|
Accrued
interest receivable
|
|
|
16,930
|
|
|
18,998
|
|
Real
estate owned, held for sale, net
|
|
|
101,485
|
|
|
77,743
|
|
Property
and equipment, net
|
|
|
99,536
|
|
|
103,542
|
|
Other
intangibles, net
|
|
|
9,811
|
|
|
11,070
|
|
Deferred
income tax asset, net
|
|
|
14,364
|
|
|
14,811
|
|
Income
taxes receivable, net
|
|
|
22,581
|
|
|
17,436
|
|
Bank-owned
life insurance (BOLI)
|
|
|
55,477
|
|
|
54,596
|
|
Other
assets
|
|
|
51,514
|
|
|
51,145
|
|
|
|
$
|
4,701,606
|
|
$
|
4,722,221
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
Non-interest-bearing
|
|
$
|
548,251
|
|
$
|
582,480
|
|
Interest-bearing
transaction and savings accounts
|
|
|
1,403,231
|
|
|
1,341,145
|
|
Interest-bearing
certificates
|
|
|
1,887,513
|
|
|
1,941,925
|
|
|
|
|
3,838,995
|
|
|
3,865,550
|
|
|
|
|
|
|
|
|
|
Advances
from FHLB at fair value
|
|
|
47,003
|
|
|
189,779
|
|
Other
borrowings
|
|
|
172,737
|
|
|
176,842
|
|
Junior
subordinated debentures at fair value (issued in connection with Trust
Preferred Securities)
|
|
|
49,808
|
|
|
47,694
|
|
Accrued
expenses and other liabilities
|
|
|
25,440
|
|
|
24,020
|
|
Deferred
compensation
|
|
|
13,665
|
|
|
13,208
|
|
|
|
|
4,147,648
|
|
|
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
|
|
|
118,204
|
|
|
117,407
|
|
Common
stock and paid in capital - $0.01 par value per share, 200,000,000 shares
authorized, 102,954,738 shares
issued:
102,714,357 shares and 21,299,209 shares outstanding at June 30, 2010 and
December 31, 2009, respectively
|
|
|
490,119
|
|
|
331,538
|
|
Retained
earnings (accumulated deficit)
|
|
|
(53,768
|
)
|
|
(42,077
|
)
|
Accumulated
other comprehensive income:
|
|
|
|
|
|
|
|
Unrealized
gain on securities available-for-sale and/or transferred to
held-to-maturity
|
|
|
1,390
|
|
|
249
|
|
Unearned
shares of common stock issued to Employee Stock Ownership Plan (ESOP)
trust at cost:
|
|
|
|
|
|
|
|
240,381
restricted shares outstanding at June 30, 2010 and December 31,
2009
|
|
|
(1,987
|
)
|
|
(1,987
|
)
|
|
|
|
|
|
|
|
|
Carrying
value of shares held in trust for stock related compensation
plans
|
|
|
(9,051
|
)
|
|
(9,045
|
)
|
Liability
for common stock issued to deferred, stock related, compensation
plans
|
|
|
9,051
|
|
|
9,043
|
|
|
|
|
--
|
|
|
(2
|
)
|
|
|
|
553,958
|
|
|
405,128
|
|
|
|
$
|
4,701,606
|
|
$
|
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 and Six Months Ended June 30, 2010 and 2009
|
|
Quarters
Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30
|
|
|
June
30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable
|
|
$ |
52,473 |
|
|
$ |
55,500 |
|
|
$ |
105,232 |
|
|
$ |
111,847 |
|
Mortgage-backed
securities
|
|
|
1,045 |
|
|
|
1,569 |
|
|
|
2,171 |
|
|
|
3,370 |
|
Other
securities and cash equivalents
|
|
|
2,116 |
|
|
|
2,089 |
|
|
|
4,201 |
|
|
|
4,272 |
|
|
|
|
55,634 |
|
|
|
59,158 |
|
|
|
111,604 |
|
|
|
119,489 |
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
14,700 |
|
|
|
21,638 |
|
|
|
30,498 |
|
|
|
44,730 |
|
FHLB
advances
|
|
|
320 |
|
|
|
675 |
|
|
|
681 |
|
|
|
1,395 |
|
Other
borrowings
|
|
|
626 |
|
|
|
671 |
|
|
|
1,260 |
|
|
|
898 |
|
Junior
subordinated debentures
|
|
|
1,047 |
|
|
|
1,249 |
|
|
|
2,074 |
|
|
|
2,582 |
|
|
|
|
16,693 |
|
|
|
24,233 |
|
|
|
34,513 |
|
|
|
49,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income before provision for loan losses
|
|
|
38,941 |
|
|
|
34,925 |
|
|
|
77,091 |
|
|
|
69,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR LOAN LOSSES
|
|
|
16,000 |
|
|
|
45,000 |
|
|
|
30,000 |
|
|
|
67,000 |
|
Net
interest income (loss)
|
|
|
22,941 |
|
|
|
(10,075
|
) |
|
|
47,091 |
|
|
|
2,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
OPERATING INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
fees and other service charges
|
|
|
5,632 |
|
|
|
5,408 |
|
|
|
10,792 |
|
|
|
10,344 |
|
Mortgage
banking operations
|
|
|
817 |
|
|
|
2,860 |
|
|
|
1,765 |
|
|
|
5,575 |
|
Loan
servicing fees (expense)
|
|
|
315 |
|
|
|
248 |
|
|
|
628 |
|
|
|
(22
|
) |
Miscellaneous
|
|
|
243 |
|
|
|
412 |
|
|
|
869 |
|
|
|
932 |
|
|
|
|
7,007 |
|
|
|
8,928 |
|
|
|
14,054 |
|
|
|
16,829 |
|
Other-than-temporary
impairment losses
|
|
|
-- |
|
|
|
(162
|
) |
|
|
(1,231
|
) |
|
|
(162
|
) |
Net
change in valuation of financial instruments carried at fair
value
|
|
|
(821 |
) |
|
|
11,211 |
|
|
|
1,087 |
|
|
|
7,958 |
|
Total
other operating income
|
|
|
6,186 |
|
|
|
19,977 |
|
|
|
13,910 |
|
|
|
24,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary
and employee benefits
|
|
|
16,793 |
|
|
|
17,528 |
|
|
|
33,352 |
|
|
|
35,129 |
|
Less
capitalized loan origination costs
|
|
|
(1,740
|
) |
|
|
(2,834
|
) |
|
|
(3,345
|
) |
|
|
(4,950
|
) |
Occupancy
and equipment
|
|
|
5,581 |
|
|
|
5,928 |
|
|
|
11,185 |
|
|
|
11,982 |
|
Information/computer
data services
|
|
|
1,594 |
|
|
|
1,599 |
|
|
|
3,100 |
|
|
|
3,133 |
|
Payment
and card processing expenses
|
|
|
1,683 |
|
|
|
1,555 |
|
|
|
3,107 |
|
|
|
3,008 |
|
Professional
services
|
|
|
1,874 |
|
|
|
1,183 |
|
|
|
3,161 |
|
|
|
2,377 |
|
Advertising
and marketing
|
|
|
1,742 |
|
|
|
2,207 |
|
|
|
3,692 |
|
|
|
4,039 |
|
Deposit
insurance
|
|
|
2,209 |
|
|
|
4,102 |
|
|
|
4,341 |
|
|
|
5,599 |
|
State/municipal
business and use taxes
|
|
|
533 |
|
|
|
532 |
|
|
|
1,013 |
|
|
|
1,072 |
|
REO
operations
|
|
|
4,166 |
|
|
|
1,805 |
|
|
|
7,224 |
|
|
|
2,428 |
|
Amortization
of core deposit intangibles
|
|
|
615 |
|
|
|
661 |
|
|
|
1,259 |
|
|
|
1,351 |
|
Miscellaneous
|
|
|
2,974 |
|
|
|
2,625 |
|
|
|
5,350 |
|
|
|
5,516 |
|
Total
other operating expenses
|
|
|
38,024 |
|
|
|
36,891 |
|
|
|
73,439 |
|
|
|
70,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for (benefit from) income taxes
|
|
|
(8,897
|
) |
|
|
(26,989
|
) |
|
|
(12,438
|
) |
|
|
(43,175
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR (BENEFIT FROM) INCOME TAXES
|
|
|
(3,951
|
) |
|
|
(10,478
|
) |
|
|
(5,975
|
) |
|
|
(17,401
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
(4,946
|
) |
|
|
(16,511
|
) |
|
|
(6,463
|
) |
|
|
(25,774
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK DIVIDEND AND DISCOUNT ACCRETION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividend
|
|
|
1,550 |
|
|
|
1,550 |
|
|
|
3,100 |
|
|
|
3,100 |
|
Preferred
stock discount accretion
|
|
|
399 |
|
|
|
373 |
|
|
|
797 |
|
|
|
746 |
|
NET
INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
|
|
$ |
(6,895 |
) |
|
$ |
(18,434 |
) |
|
$ |
(10,360 |
) |
|
$ |
(29,620 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.28 |
) |
|
$ |
(1.04 |
) |
|
$ |
(0.44 |
) |
|
$ |
(1.70 |
) |
Diluted
|
|
$ |
(0.28 |
) |
|
$ |
(1.04 |
) |
|
$ |
(0.44 |
) |
|
$ |
(1.70 |
) |
Cumulative
dividends declared per common share:
|
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
$ |
0.02 |
|
See
selected notes to consolidated financial statements
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
For
the Quarters and Six Months Ended June 30, 2010 and 2009
|
|
Quarters
Ended
June
30
|
|
|
Six
Months Ended
June
30
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
NET
INCOME (LOSS)
|
$
|
(4,946
|
)
|
$
|
(16,511
|
)
|
$
|
(6,463
|
)
|
$
|
(25,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gain (loss) during the period, net of deferred
income
tax (benefit) of $323, ($220), $629 and ($70),
respectively
|
|
576
|
|
|
(802
|
)
|
|
1,119
|
|
|
(538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of unrealized loss on tax exempt securities transferred from
available-for-sale
to held-to-maturity
|
|
10
|
|
|
14
|
|
|
22
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
|
586
|
|
|
(788
|
)
|
|
1,141
|
|
|
(510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS)
|
$
|
(4,360
|
)
|
$
|
(17,299
|
)
|
$
|
(5,322
|
)
|
$
|
(26,284
|
)
|
See
selected notes to consolidated financial statements
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
For
the Six Months Ended June 30, 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)
|
|
|
|
|
|
|
|
(6,463
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation of securities—available-for-
sale, net of income tax
|
|
|
|
|
|
|
|
|
|
|
1,119
|
|
|
|
|
|
|
|
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrealized loss on tax exempt
securities transferred from available-for-sale to
held-to-maturity, net of income taxes
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock discount
|
|
797
|
|
|
|
|
|
(797
|
)
|
|
|
|
|
|
|
|
|
|
|
--
|
|
Accrual of dividends on preferred stock
|
|
|
|
|
|
|
|
(3,100
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,100
|
)
|
Accrual of dividends on common stock
($.02/share cumulative)
|
|
|
|
|
|
|
|
(1,331
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock for
stockholder reinvestment program, net of
registration expenses
|
|
|
|
|
10,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock, net of
offering costs
|
|
|
|
|
148,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of compensation related to MRP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of compensation related to stock options
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
June 30, 2010
|
$
|
118,204
|
|
$
|
490,119
|
|
$
|
(53,768
|
)
|
$
|
1,390
|
|
$
|
(1,987
|
)
|
$
|
--
|
|
$
|
553,958
|
|
See
selected notes to consolidated financial statements
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)
(Unaudited)
(In thousands)
For
the Six Months Ended June 30, 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, 2009
|
$
|
115,915
|
|
$
|
316,740
|
|
$
|
2,150
|
|
$
|
572
|
|
$
|
(1,987
|
)
|
$
|
(42
|
)
|
$
|
433,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
|
|
|
|
|
(25,774
|
)
|
|
|
|
|
|
|
|
|
|
|
(25,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in valuation of securities—available-for-
sale, net of income tax
|
|
|
|
|
|
|
|
|
|
|
(538
|
)
|
|
|
|
|
|
|
|
(538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of unrealized loss on tax exempt
securities transferred from available-for-sale to
held-to-maturity, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
registration costs for issuance of
preferred stock
|
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of preferred stock discount
|
|
746
|
|
|
|
|
|
(746
|
)
|
|
|
|
|
|
|
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
of dividends on preferred stock
|
|
|
|
|
|
|
|
(3,100
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
of dividends on common stock ($.02/share
cumulative)
|
|
|
|
|
|
|
|
(356
|
)
|
|
|
|
|
|
|
|
|
|
|
(356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock for
stockholder reinvestment program, net of
registration expenses
|
|
|
|
|
5,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of compensation related to MRP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of compensation related to stock
options
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
June 30, 2009
|
$
|
116,661
|
|
$
|
322,582
|
|
$
|
(27,826
|
)
|
$
|
62
|
|
$
|
(1,987
|
)
|
$
|
(18
|
)
|
$
|
409,474
|
|
See
selected notes to consolidated financial statements
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)
(Unaudited)
(In thousands)
For
the Six Months Ended June 30, 2010 and 2009
|
|
|
Six
Months Ended
June
30
|
|
|
|
|
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
|
|
|
2,915
|
|
1,274
|
|
Issuance
of common stock, net of offering costs
|
|
|
78,500
|
|
--
|
|
Net
number of shares issued during the period
|
|
|
81,415
|
|
1,274
|
|
|
|
|
|
|
|
|
COMMON
SHARES ISSUED AND OUTSTANDING, END OF PERIOD
|
|
|
102,954
|
|
18,426
|
|
|
|
|
|
|
|
|
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
|
|
|
102,714
|
|
18,186
|
|
See
selected notes to consolidated financial statements
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For
the Six Months Ended June 30, 2010 and 2009
|
|
Six
Months Ended
June
30
|
|
|
|
2010
|
|
|
2009
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(6,463 |
) |
|
$ |
(25,774 |
) |
Adjustments
to reconcile net income (loss) to net cash provided by
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,683 |
|
|
|
4,998 |
|
Deferred
income and expense, net of amortization
|
|
|
1,211 |
|
|
|
(749
|
) |
Amortization
of core deposit intangibles
|
|
|
1,259 |
|
|
|
1,351 |
|
Other-than-temporary
impairment losses
|
|
|
1,231 |
|
|
|
162 |
|
Net
change in valuation of financial instruments carried at fair
value
|
|
|
(1,088
|
) |
|
|
(7,958
|
) |
Purchases
of securities—trading
|
|
|
(2,572
|
) |
|
|
(64,761
|
) |
Principal
repayments and maturities of securities—trading
|
|
|
45,970 |
|
|
|
96,104 |
|
Deferred
taxes
|
|
|
141 |
|
|
|
(3,343
|
) |
Equity-based
compensation
|
|
|
38 |
|
|
|
98 |
|
Increase
in cash surrender value of bank-owned life insurance
|
|
|
(881
|
) |
|
|
(661
|
) |
Gain
on sale of loans, excluding capitalized servicing rights
|
|
|
(1,348
|
) |
|
|
(2,294
|
) |
Loss
(gain) on disposal of real estate held for sale and property
and
equipment
|
|
|
1,383 |
|
|
|
607 |
|
Provision
for losses on loans and real estate held for sale
|
|
|
31,340 |
|
|
|
67,113 |
|
Origination
of loans held for sale
|
|
|
(121,652
|
) |
|
|
(345,007
|
) |
Proceeds
from sales of loans held for sale
|
|
|
121,330 |
|
|
|
344,043 |
|
Net
change in:
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
(3,631
|
) |
|
|
(5,855
|
) |
Other
liabilities
|
|
|
1,025 |
|
|
|
(3,565
|
) |
Net
cash provided from operating activities
|
|
|
71,976 |
|
|
|
54,509 |
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of securities available-for-sale
|
|
|
(79,801
|
) |
|
|
(18,672
|
) |
Principal
repayments and maturities of securities available-for-sale
|
|
|
34,725 |
|
|
|
13,992 |
|
Proceeds
from sales of securities available-for-sale
|
|
|
1,965 |
|
|
|
6,459 |
|
Purchases
of securities held-to-maturity
|
|
|
(499
|
) |
|
|
(17,975
|
) |
Principal
repayments and maturities of securities held-to-maturity
|
|
|
1,675 |
|
|
|
408 |
|
Principal
repayments (originations) of loans, net
|
|
|
84,328 |
|
|
|
(52,937
|
) |
Purchases
of loans and participating interest in loans
|
|
|
(129
|
) |
|
|
(27
|
) |
Purchases
of property and equipment, net
|
|
|
(698
|
) |
|
|
(4,415
|
) |
Proceeds
from sale of real estate held for sale, net
|
|
|
18,886 |
|
|
|
9,633 |
|
Other
|
|
|
(80
|
) |
|
|
(225
|
) |
Net
cash provided from (used by) investing activities
|
|
|
60,372 |
|
|
|
(63,759
|
) |
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Decrease
in deposits
|
|
|
(26,555
|
) |
|
|
(29,007
|
) |
Proceeds
from FHLB advances
|
|
|
-- |
|
|
|
91,200 |
|
Repayment
of FHLB advances
|
|
|
(142,502
|
) |
|
|
(86,203
|
) |
Increase
(decrease) in other borrowings, net
|
|
|
(4,110
|
) |
|
|
13,016 |
|
Cash
dividends paid
|
|
|
(3,545
|
) |
|
|
(4,016
|
) |
Cash
proceeds from issuance of stock for stockholder reinvestment
program
|
|
|
10,503 |
|
|
|
5,768 |
|
Cash
proceeds from issuance of stock in secondary offering, net of offering
costs
|
|
|
148,042 |
|
|
|
-- |
|
Net
cash used by financing activities
|
|
|
(18,167
|
) |
|
|
(9,242
|
) |
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS
|
|
|
114,181 |
|
|
|
(18,492
|
) |
|
|
|
|
|
|
|
|
|
CASH
AND DUE FROM BANKS, BEGINNING OF PERIOD
|
|
|
323,005 |
|
|
|
102,750 |
|
CASH
AND DUE FROM BANKS, END OF PERIOD
|
|
$ |
437,186 |
|
|
$ |
84,258 |
|
(Continued
on next page)
BANNER
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(In thousands)
For
the Six Months Ended June 30, 2010 and 2009
|
|
Six
Months Ended
June
30
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
Interest paid in cash
|
|
$ |
35,784 |
|
|
$ |
49,668 |
|
Taxes paid (received) in cash
|
|
|
(561
|
) |
|
|
(6,377
|
) |
|
|
|
|
|
|
|
|
|
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
|
|
|
45,487 |
|
|
|
52,160 |
|
Real
estate owned transferred to property and equipment
|
|
|
-- |
|
|
|
7,030 |
|
Net
decrease in accrued dividends payable
|
|
|
(886
|
) |
|
|
(560
|
) |
Change
in other assets/liabilities
|
|
|
(42
|
) |
|
|
169 |
|
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 June 30, 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.”
Secondary Offering of Common
Stock: On June 30, 2010, the Company announced the completion
of its offering of 75,000,000 shares of its common stock and the sale of an
additional 3,500,000 shares pursuant to the partial exercise of the
underwriters’ over-allotment option, at a price to the public of $2.00 per
share. On July 2, 2010, the Company further announced the completion
of the capital raise as the underwriters had exercised their over-allotment
option for an additional 7,139,000 shares, at a price to the public of $2.00 per
share. Together with the
78,500,000
shares the Company issued on June 30, 2010 (including 3,500,000 shares issued
pursuant to the underwriters’ initial exercise of their over-allotment option),
the Company issued a total of 85,639,000 shares in the offering, resulting in
net proceeds, after deducting underwriting discounts and commissions and
estimated offering expenses, of approximately $161.6 million. Of that
amount, $13.6 million (related to the 7,139,000 shares) will be recorded in the
Consolidated Statements of Changes in Stockholders’ Equity during the third
quarter of 2010, as that portion of the transaction settled after June 30,
2010.
Banner
intends to use a significant portion of the net proceeds from the offering to
strengthen Banner Bank’s regulatory capital ratios in accordance with the MOU
and to support managed growth. To that end, at June 30, 2010, the
Company had invested $50 million as additional paid-in common equity in Banner
Bank. As a result, the Tier 1 leverage capital of Banner Bank
increased to 10.77% of average assets on June 30, 2010. The Company
expects to use the remaining net proceeds for general working capital purposes,
including additional capital investments in its subsidiary banks if
appropriate.
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. For purposes of calculating the
prepaid amount, an institution’s third quarter 2009 assessment base was also
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 $25.4 million at June 30, 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 FDIC 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, 2013,
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 was 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 FDIC 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.
In April
2010, FASB issued ASU No. 2010-13, Effect of Denominating the Exercise
Price of a Share-Based Payment Award in the Currency of the Market in Which the
Underlying Equity Security Trades – a consensus of the FASB Emerging Issues Task
Force. ASU No. 2010-13 addresses whether an employee stock
option should be classified as a liability or as an equity instrument if the
exercise price is denominated in the currency in which a substantial portion of
the entity’s equity securities trades. That currency may differ from
the entity’s functional currency and from the payroll currency of the employee
receiving the option. This guidance amends ASC 718, Compensation – Stock
Compensation, to clarify that an employee share-based payment award that
has an exercise price denominated in the currency of the market in which a
substantial portion of the entity’s equity shares trades should not be
considered to contain a condition that is not a market, performance, or service
condition. The guidance in the ASU is effective for fiscal years, and
for interim periods within those fiscal years, beginning on or after December
15, 2010, and is not expected to have a material impact on the Company’s
consolidated financial statements.
In April
2010, FASB issued ASU No. 2010-18, Effect of a Loan Modification When
the Loan Is Part of a Pool That Is Accounted for as a Single Asset—a consensus
of the FASB Emerging Issues Task Force. ASU No. 2010-18
clarifies that a creditor should not apply specific guidance in ASC 310,
Receivables, 40, Troubled Debt
Restructurings by Creditors, to acquired loans accounted for as a pooled
asset under ASC 310-30,
Loans and Debt Securities Acquired
with Deteriorated Credit Quality. However, that guidance in
ASC 310-30 continues to apply to acquired loans within the scope of ASC 310-30
that a creditor accounts for individually. This amended guidance is
effective for a modification of a loan(s) accounted for within a pool under ASC
310-30 occurring in the first interim or annual period ending on or after July
15, 2010. The amended guidance must be applied prospectively, and
early application is permitted. Upon initial application of the
amended guidance, an entity may make a one-time election to terminate accounting
for loans as a pool under ASC 310-30. An entity may make the election
on a pool-by-pool basis. The election does not preclude an entity
from applying pool accounting to future acquisitions of loans with credit
deterioration. The implementation of this ASU is not expected to 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.
U.S. 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):
|
June
30
|
|
December
31
|
|
June
30
|
|
|
2010
|
|
2009
|
|
2009
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits included in cash and due from banks
|
$
|
369,864
|
|
$
|
244,641
|
|
$
|
16,919
|
|
Mortgage-backed
or related securities
|
|
|
|
|
|
|
|
|
|
GNMA
|
|
16,844
|
|
|
18,458
|
|
|
21,186
|
|
FHLMC
|
|
37,087
|
|
|
43,469
|
|
|
53,153
|
|
FNMA
|
|
36,691
|
|
|
37,549
|
|
|
43,501
|
|
Private
issuer
|
|
3,949
|
|
|
6,465
|
|
|
7,641
|
|
Total
mortgage-backed securities
|
|
94,571
|
|
|
105,941
|
|
|
125,481
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
agency obligations
|
|
108,672
|
|
|
94,367
|
|
|
46,704
|
|
Taxable
municipal bonds
|
|
3,221
|
|
|
3,717
|
|
|
4,608
|
|
Corporate
bonds
|
|
43,710
|
|
|
43,267
|
|
|
43,065
|
|
Total
other taxable securities
|
|
155,603
|
|
|
141,351
|
|
|
94,377
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
municipal bonds
|
|
69,051
|
|
|
70,018
|
|
|
75,573
|
|
Equity
securities (excludes FHLB stock)
|
|
130
|
|
|
342
|
|
|
346
|
|
Total
securities
|
|
319,355
|
|
|
317,652
|
|
|
295,777
|
|
FHLB
stock
|
|
37,371
|
|
|
37,371
|
|
|
37,371
|
|
|
$
|
726,590
|
|
$
|
599,664
|
|
$
|
350,067
|
|
Securities—Trading: The
amortized cost and estimated fair value of securities—trading at June 30, 2010
and December 31, 2009 are summarized as follows (dollars in
thousands):
|
June
30, 2010
|
|
|
December
31, 2009
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Percent
of
Total
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Percent
of
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency obligations
|
$
|
4,170
|
|
$
|
4,472
|
|
|
4.2
|
%
|
|
$
|
41,178
|
|
$
|
41,255
|
|
|
28.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bond:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
848
|
|
|
862
|
|
|
0.8
|
|
|
|
1,004
|
|
|
1,034
|
|
|
0.7
|
|
Tax
exempt
|
|
5,753
|
|
|
6,029
|
|
|
5.7
|
|
|
|
6,065
|
|
|
6,117
|
|
|
4.2
|
|
|
|
6,601
|
|
|
6,891
|
|
|
6.5
|
|
|
|
7,069
|
|
|
7,151
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
76,373
|
|
|
35,460
|
|
|
33.7
|
|
|
|
76,411
|
|
|
35,017
|
|
|
23.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
20,714
|
|
|
21,737
|
|
|
20.7
|
|
|
|
25,030
|
|
|
25,837
|
|
|
17.6
|
|
FNMA
|
|
34,613
|
|
|
36,691
|
|
|
34.8
|
|
|
|
36,250
|
|
|
37,549
|
|
|
25.5
|
|
|
|
55,327
|
|
|
58,428
|
|
|
55.5
|
|
|
|
61,280
|
|
|
63,386
|
|
|
43.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
6,915
|
|
|
130
|
|
|
0.1
|
|
|
|
6,915
|
|
|
342
|
|
|
0.2
|
|
|
$
|
149,386
|
|
$
|
105,381
|
|
|
100.0
|
%
|
|
$
|
192,853
|
|
|
147,151
|
|
$
|
100.0
|
%
|
The
amortized cost and estimated fair value of securities—trading at June 30, 2010
and December 31, 2009, by contractual maturity, are shown below (in
thousands). Expected maturities will differ from contractual
maturities because some securities may be called or prepaid with or without call
or prepayment penalties.
|
June
30, 2010
|
|
December
31, 2009
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
$
|
335
|
|
$
|
340
|
|
$
|
550
|
|
$
|
565
|
|
Due
after one year through five years
|
|
3,124
|
|
|
3,299
|
|
|
40,232
|
|
|
40,277
|
|
Due
after five years through ten years
|
|
22,222
|
|
|
23,389
|
|
|
21,230
|
|
|
21,641
|
|
Due
after ten years through twenty years
|
|
18,958
|
|
|
19,625
|
|
|
20,931
|
|
|
21,186
|
|
Due
after twenty years
|
|
97,832
|
|
|
58,598
|
|
|
102,995
|
|
|
63,140
|
|
|
|
142,471
|
|
|
105,251
|
|
|
185,938
|
|
|
146,809
|
|
Equity
securities
|
|
6,915
|
|
|
130
|
|
|
6,915
|
|
|
342
|
|
|
$
|
149,386
|
|
$
|
105,381
|
|
$
|
192,853
|
|
$
|
147,151
|
|
Securities—Available-for-Sale: The
amortized cost and estimated fair value of securities available-for-sale at June
30, 2010 and December 31, 2009 are summarized as follows (dollars in
thousands):
|
June
30, 2010
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Percent
of
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency obligations
|
$
|
103,596
|
|
$
|
604
|
|
$
|
--
|
|
$
|
104,200
|
|
|
74.2
|
%
|
Mortgage-backed
or related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
collateralized mortgage obligations
|
|
14,878
|
|
|
472
|
|
|
--
|
|
|
15,350
|
|
|
11.0
|
|
GNMA
certificates
|
|
15,596
|
|
|
1,248
|
|
|
--
|
|
|
16,844
|
|
|
12.0
|
|
Other
collateralized mortgage obligations
|
|
4,033
|
|
|
--
|
|
|
(85
|
)
|
|
3,948
|
|
|
2.8
|
|
|
$
|
138,103
|
|
$
|
2,324
|
|
$
|
(85
|
)
|
$
|
140,342
|
|
|
100.0
|
%
|
|
December
31, 2009
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
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 June
30, 2010 and December 31, 2009, an aging of unrealized losses and fair value of
related securities—available-for-sale was as follows (in
thousands):
|
June
30, 2010
|
|
|
Less
Than 12 Months
|
|
12
Months or More
|
|
Total
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Other
collateralized mortgage obligations
|
$
|
3,948
|
|
$
|
(85
|
)
|
$
|
--
|
|
$
|
--
|
|
$
|
3,948
|
|
$
|
(85
|
)
|
|
$
|
3,948
|
|
$
|
(85
|
)
|
$
|
--
|
|
$
|
--
|
|
$
|
3,948
|
|
$
|
(85
|
)
|
|
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 June 30, 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 June 30, 2010, there was one security—available-for-sale
with unrealized losses, compared to eight at December 31, 2009.
The
amortized cost and estimated fair value of securities—available-for-sale at June
30, 2010 and December 31, 2009, by contractual maturity, are shown below (in
thousands). Expected maturities will differ from contractual
maturities because some securities may be called or prepaid with or without call
or prepayment penalties.
|
June
30, 2010
|
|
December
31, 2009
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
Due
after one year through five years
|
|
78,618
|
|
|
79,070
|
|
|
48,748
|
|
|
48,257
|
|
Due
after five years through ten years
|
|
24,978
|
|
|
25,130
|
|
|
4,983
|
|
|
4,854
|
|
Due
after ten years through twenty years
|
|
4,033
|
|
|
3,948
|
|
|
5,133
|
|
|
5,196
|
|
Due
after twenty years
|
|
30,474
|
|
|
32,194
|
|
|
36,310
|
|
|
37,360
|
|
|
$
|
138,103
|
|
$
|
140,342
|
|
$
|
95,174
|
|
$
|
95,667
|
|
Securities—Held-to-Maturity: The
amortized cost and estimated fair value of securities held-to-maturity are
summarized as follows (dollars in thousands):
|
|
June
30, 2010
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Percent
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
of
Total
|
|
Municipal
bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
$
|
2,359
|
|
$
|
147
|
|
$
|
--
|
|
$
|
2,506
|
|
|
3.3
|
%
|
Tax
exempt
|
|
63,023
|
|
|
3,472
|
|
|
(33
|
)
|
|
66,462
|
|
|
86.3
|
|
|
|
65,382
|
|
|
3,619
|
|
|
(33
|
)
|
|
68,968
|
|
|
89.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
8,250
|
|
|
10
|
|
|
(232
|
)
|
|
8,028
|
|
|
10.4
|
|
|
$
|
73,632
|
|
$
|
3,629
|
|
$
|
(265
|
)
|
$
|
76,996
|
|
|
100.0
|
%
|
|
|
December
31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
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 June
30, 2010 and December 31, 2009, an aging of unrealized losses and fair value of
related securities—held-to-maturity was as follows (in thousands):
|
June
30, 2010
|
|
|
Less
Than 12 Months
|
|
12
Months or More
|
|
Total
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Municipal
bonds
|
$
|
4,510
|
|
$
|
(33
|
)
|
$
|
--
|
|
$
|
--
|
|
$
|
4,510
|
|
$
|
(33
|
)
|
Corporate
bonds
|
7,268
|
|
(232
|
)
|
--
|
|
--
|
|
7,268
|
|
(232
|
)
|
|
$
|
11,778
|
|
$
|
(265
|
)
|
$
|
--
|
|
$
|
--
|
|
$
|
11,778
|
|
$
|
(265
|
)
|
|
December
31, 2009
|
|
|
Less
Than 12 Months
|
|
12
Months or More
|
|
Total
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Municipal
bonds
|
$
|
2,920
|
|
$
|
(43
|
)
|
$
|
10,112
|
|
$
|
(59
|
)
|
$
|
13,032
|
|
$
|
(102
|
)
|
Corporate
bonds
|
2,556
|
|
(444
|
)
|
3,404
|
|
(596
|
)
|
5,960
|
|
(1,040
|
)
|
|
$
|
5,476
|
|
$
|
(487
|
)
|
$
|
13,516
|
|
$
|
(655
|
)
|
$
|
18,992
|
|
$
|
(1,142
|
)
|
Management
does not believe that any individual unrealized losses as of June 30, 2010 or
December 31, 2009 represent an other-than-temporary impairment. The
decline in fair market value of these securities was generally due to changes in
interest rates and changes in market-desired spreads subsequent to their
purchase. There were seven and twelve securities—held-to-maturity
with unrealized losses at June 30, 2010 and December 31, 2009,
respectively. As of June 30, 2010, there were three held-to-maturity
securities in nonaccrual status. One was a trust
preferred security with an amortized cost of $3.0 million for which the
issuer has exercised their option to defer interest payments. The
other two were non-rated corporate bonds issued by a housing authority with an
amortized cost of $250,000 each. At this time, management expects to
collect all amounts due for these securities.
The
amortized cost and estimated fair value of securities—held-to-maturity at June
30, 2010 and December 31, 2009, by contractual maturity, are shown below (in
thousands). Expected maturities will differ from contractual
maturities because some securities may be called or prepaid with or without call
or prepayment penalties.
|
June
30, 2010
|
|
December
31, 2009
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
$
|
994
|
|
$
|
1,002
|
|
$
|
2,095
|
|
$
|
2,131
|
|
Due
after one year through five years
|
|
10,496
|
|
|
11,106
|
|
|
11,017
|
|
|
11,613
|
|
Due
after five years through ten years
|
|
14,166
|
|
|
14,697
|
|
|
13,794
|
|
|
14,379
|
|
Due
after ten years through twenty years
|
|
45,157
|
|
|
47,045
|
|
|
41,792
|
|
|
42,504
|
|
Due
after twenty years
|
|
2,819
|
|
|
3,146
|
|
|
6,136
|
|
|
5,862
|
|
|
$
|
73,632
|
|
$
|
76,996
|
|
$
|
74,834
|
|
$
|
76,489
|
|
The
following table presents, as of June 30, 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, U.S. Treasury Tax and Loan deposits
|
$
|
1,651
|
|
$
|
1,707
|
|
State
and local governments public deposits
|
|
85,663
|
|
|
89,348
|
|
Pacific
Coast Bankers’ Bank (PCBB) interest rate swaps
|
|
3,845
|
|
|
4,037
|
|
Retail
repurchase transaction accounts
|
|
141,362
|
|
|
145,888
|
|
Other
|
|
4,538
|
|
|
4,707
|
|
|
|
|
|
|
|
|
Total
pledged securities
|
$
|
237,059
|
|
$
|
245,687
|
|
The
carrying value of investment securities pledged as of June 30, 2010 was $242.9
million.
Note
6: FHLB STOCK
At June
30, 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
June 30, 2010, the FHLB was classified as "undercapitalized" by its regulator
and therefore did not pay a dividend for the first or second quarters 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
June 30, 2010. The FHLB reported a risk-based capital surplus of
$681.7 million as of June 30, 2010 compared to $531.7 million as of December 31,
2009. The FHLB’s total capital at June 30, 2010 was $1.089 billion
compared to $993.7 million at December 31, 2009.
Management
periodically evaluates FHLB stock for impairment. Management’s
determination of whether these investments are impaired is based on its
assessment of the ultimate recoverability of cost rather than by recognizing
temporary declines in value. The determination of whether a decline
affects the ultimate recoverability of cost is influenced by criteria such as
(1) the significance of any decline in net assets of the FHLB as compared to the
capital stock amount for the FHLB and the length of time this situation has
persisted, (2) commitments by the FHLB to make payments required by law or
regulation and the level of such payments in relation to the operating
performance of the FHLB, (3) the impact of legislative and regulatory changes on
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 impairment of its FHLB
stock investment as of June 30, 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 June 30, 2010 and 2009 and
December 31, 2009 are summarized as follows (dollars in thousands):
|
June
30
2010
|
|
December
31
2009
|
|
June
30
2009
|
|
|
Amount
|
|
Percent
of
Total
|
|
Amount
|
|
Percent
of
Total
|
|
Amount
|
|
Percent
of
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(including loans held for sale):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner
occupied
|
$
|
503,796
|
|
|
13.9
|
%
|
$
|
509,464
|
|
|
13.4
|
%
|
$
|
475,749
|
|
|
12.2
|
%
|
Investment
properties
|
|
553,689
|
|
|
15.3
|
|
|
573,495
|
|
|
15.1
|
|
|
574,172
|
|
|
14.7
|
|
Multifamily
real estate
|
|
149,980
|
|
|
4.1
|
|
|
153,497
|
|
|
4.1
|
|
|
150,168
|
|
|
3.8
|
|
Commercial
construction
|
|
84,379
|
|
|
2.3
|
|
|
80,236
|
|
|
2.1
|
|
|
90,762
|
|
|
2.3
|
|
Multifamily
construction
|
|
56,573
|
|
|
1.6
|
|
|
57,422
|
|
|
1.5
|
|
|
56,968
|
|
|
1.5
|
|
One-
to four-family construction
|
|
182,928
|
|
|
5.0
|
|
|
239,135
|
|
|
6.3
|
|
|
337,368
|
|
|
8.6
|
|
Land
and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
228,156
|
|
|
6.3
|
|
|
284,331
|
|
|
7.5
|
|
|
371,247
|
|
|
9.5
|
|
Commercial
|
|
29,410
|
|
|
0.8
|
|
|
43,743
|
|
|
1.2
|
|
|
32,450
|
|
|
0.8
|
|
Commercial
business
|
|
635,130
|
|
|
17.5
|
|
|
637,823
|
|
|
16.8
|
|
|
678,273
|
|
|
17.3
|
|
Agricultural
business, including
secured
by farmland
|
|
208,815
|
|
|
5.8
|
|
|
205,307
|
|
|
5.4
|
|
|
215,339
|
|
|
5.5
|
|
One-
to four-family real estate
|
|
702,420
|
|
|
19.3
|
|
|
703,277
|
|
|
18.6
|
|
|
653,513
|
|
|
16.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
103,065
|
|
|
2.8
|
|
|
110,937
|
|
|
2.9
|
|
|
91,173
|
|
|
2.3
|
|
Consumer
secured by one- to four-
family real estate
|
|
193,163
|
|
|
5.3
|
|
|
191,454
|
|
|
5.1
|
|
|
185,899
|
|
|
4.8
|
|
Total
consumer
|
|
296,228
|
|
|
8.1
|
|
|
302,391
|
|
|
8.0
|
|
|
277,072
|
|
|
7.1
|
|
Total
loans outstanding
|
|
3,631,504
|
|
|
100.0
|
%
|
|
3,790,121
|
|
|
100.0
|
%
|
|
3,913,081
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
allowance for loan losses
|
|
(95,508
|
)
|
|
|
|
|
(95,269
|
)
|
|
|
|
|
(90,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net loans outstanding at
end of period
|
$
|
3,535,996
|
|
|
|
|
$
|
3,694,852
|
|
|
|
|
$
|
3,822,387
|
|
|
|
|
Loans are
net of unearned, unamortized loan fees or discounts of $12.1 million, $11.2
million and $8.0 million at June 30, 2010, December 31, 2009 and June 30, 2009,
respectively.
The
geographic concentration of our loans by state at June 30, 2010 was as follows
(dollars in thousands):
|
|
Washington
|
|
Oregon
|
|
Idaho
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
$
|
390,085
|
|
$
|
64,642
|
|
$
|
45,491
|
|
$
|
3,578
|
|
$
|
503,796
|
|
Investment
properties
|
|
|
397,813
|
|
|
107,790
|
|
|
41,669
|
|
|
6,417
|
|
|
553,689
|
|
Multifamily
real estate
|
|
|
123,707
|
|
|
12,177
|
|
|
9,580
|
|
|
4,516
|
|
|
149,980
|
|
Commercial
construction
|
|
|
61,202
|
|
|
11,689
|
|
|
11,488
|
|
|
--
|
|
|
84,379
|
|
Multifamily
construction
|
|
|
28,324
|
|
|
28,249
|
|
|
--
|
|
|
--
|
|
|
56,573
|
|
One-
to four-family construction
|
|
|
87,895
|
|
|
84,796
|
|
|
10,237
|
|
|
--
|
|
|
182,928
|
|
Land
and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
119,268
|
|
|
86,619
|
|
|
22,269
|
|
|
--
|
|
|
228,156
|
|
Commercial
|
|
|
25,807
|
|
|
1,144
|
|
|
2,459
|
|
|
--
|
|
|
29,410
|
|
Commercial
business
|
|
|
447,545
|
|
|
97,569
|
|
|
71,344
|
|
|
18,672
|
|
|
635,130
|
|
Agricultural business, including
secured
by farmland
|
|
|
112,674
|
|
|
39,266
|
|
|
56,875
|
|
|
--
|
|
|
208,815
|
|
One-
to four-family real estate
|
|
|
458,681
|
|
|
213,069
|
|
|
28,241
|
|
|
2,429
|
|
|
702,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
74,522
|
|
|
22,860
|
|
|
5,683
|
|
|
--
|
|
|
103,065
|
|
Consumer secured by one- to four-family
real
estate
|
|
|
136,559
|
|
|
41,598
|
|
|
14,506
|
|
|
500
|
|
|
193,163
|
|
Total consumer
|
|
|
211,081
|
|
|
64,458
|
|
|
20,189
|
|
|
500
|
|
|
296,228
|
|
Total
loans outstanding
|
|
$
|
2,464,082
|
|
$
|
811,468
|
|
$
|
319,842
|
|
$
|
36,112
|
|
$
|
3,631,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of total loans
|
|
|
67.9
|
%
|
|
22.3
|
%
|
|
8.8
|
%
|
|
1.0
|
%
|
|
100.0
|
%
|
The
geographic concentration of our land and land development loans by state at June
30, 2010 was as follows (dollars in thousands):
|
|
Washington
|
|
Oregon
|
|
Idaho
|
|
Total
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
and development
|
|
$
|
53,196
|
|
$
|
52,154
|
|
$
|
6,219
|
|
$
|
111,569
|
|
Improved
land and lots
|
|
|
43,863
|
|
|
27,027
|
|
|
1,568
|
|
|
72,458
|
|
Unimproved
land
|
|
|
22,209
|
|
|
7,438
|
|
|
14,482
|
|
|
44,129
|
|
Commercial
and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
and development
|
|
|
5,896
|
|
|
--
|
|
|
559
|
|
|
6,455
|
|
Improved
land
|
|
|
8,857
|
|
|
--
|
|
|
--
|
|
|
8,857
|
|
Unimproved
land
|
|
|
11,054
|
|
|
1,144
|
|
|
1,900
|
|
|
14,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
land and land development loans outstanding
|
|
$
|
145,075
|
|
$
|
87,763
|
|
$
|
24,728
|
|
$
|
257,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of total land and land development loans
|
|
|
56.3
|
%
|
|
34.1
|
%
|
|
9.6
|
%
|
|
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 and the related allocated reserve for loan losses are
presented in the following table (in thousands). A loan is considered
impaired when, based on current information and circumstances, we determine it
is probable we will be unable to collect all amounts due according to the
contractual terms of the loan agreement, including scheduled interest
payments. Impaired loans include loans on non-accrual, troubled debt
restructurings (TDRs) that are performing under their restructured terms, and
loans that are 90 days or more past due, but are still on accrual.
|
June
30, 2010
|
|
December
31, 2009
|
|
|
Loan
Amount
|
|
Allocated
Reserves
|
|
Loan
Amount
|
|
Allocated
Reserves
|
|
Impaired
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
|
$
|
175,223
|
|
$
|
18,625
|
|
$
|
213,401
|
|
$
|
18,872
|
|
Accrual,
including TDRs
|
|
46,618
|
|
|
3,277
|
|
|
48,337
|
|
|
3,309
|
|
Total
impaired loans
|
$
|
221,841
|
|
$
|
21,902
|
|
$
|
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):
|
June
30
2010
|
|
December
31
2009
|
|
June
30
2009
|
|
Fixed-rate
(term to maturity):
|
|
|
|
Due
in one year or less
|
$
|
187,864
|
|
$
|
162,894
|
|
$
|
155,756
|
|
Due
after one year through three years
|
|
216,061
|
|
|
198,107
|
|
|
204,129
|
|
Due
after three years through five years
|
|
214,659
|
|
|
239,145
|
|
|
221,595
|
|
Due
after five years through ten years
|
|
124,755
|
|
|
142,900
|
|
|
165,129
|
|
Due
after ten years
|
|
551,897
|
|
|
551,375
|
|
|
497,054
|
|
|
|
1,295,236
|
|
|
1,294,421
|
|
|
1,243,663
|
|
Adjustable-rate
(term to rate adjustment):
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
1,452,687
|
|
|
1,582,046
|
|
|
1,802,578
|
|
Due
after one year through three years
|
|
457,819
|
|
|
417,777
|
|
|
375,608
|
|
Due
after three years through five years
|
|
382,801
|
|
|
447,228
|
|
|
454,586
|
|
Due
after five years through ten years
|
|
41,760
|
|
|
47,287
|
|
|
36,646
|
|
Due
after ten years
|
|
1,201
|
|
|
1,362
|
|
|
--
|
|
|
|
2,336,268
|
|
|
2,495,700
|
|
|
2,669,418
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,631,504
|
|
$
|
3,790,121
|
|
$
|
3,913,081
|
|
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):
|
June
30
2010
|
|
December
31
2009
|
|
June
30
2009
|
|
|
|
|
|
Specific
or allocated loss allowances:
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
$
|
7,042
|
|
$
|
8,278
|
|
$
|
5,333
|
|
Multifamily
real estate
|
|
2,364
|
|
|
90
|
|
|
83
|
|
Construction
and land
|
|
45,601
|
|
|
45,209
|
|
|
55,585
|
|
One-
to four-family real estate
|
|
3,530
|
|
|
2,912
|
|
|
1,333
|
|
Commercial
business
|
|
23,905
|
|
|
22,054
|
|
|
19,474
|
|
Agricultural
business, including secured by farmland
|
|
679
|
|
|
919
|
|
|
1,323
|
|
Consumer
|
|
1,890
|
|
|
1,809
|
|
|
1,540
|
|
Total
allocated
|
|
85,011
|
|
|
81,271
|
|
|
84,671
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
allowance for undisbursed commitments
|
|
909
|
|
|
1,594
|
|
|
1,976
|
|
Unallocated
|
|
9,588
|
|
|
12,404
|
|
|
4,047
|
|
Total
allowance for loan losses
|
$
|
95,508
|
|
$
|
95,269
|
|
$
|
90,694
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses as a percentage of total loans outstanding
|
|
2.63
|
%
|
|
2.51
|
%
|
|
2.32
|
%
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses as a percentage of non-performing loans
|
|
54
|
%
|
|
45
|
%
|
|
40
|
%
|
An
analysis of the changes in our allowance for loan losses is as follows (dollars
in thousands):
|
Quarters
Ended
|
|
Six
Months Ended
|
|
|
June
30
|
|
June
30
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of the period
|
$
|
95,733
|
|
$
|
79,724
|
|
$
|
95,269
|
|
$
|
75,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
16,000
|
|
|
45,000
|
|
|
30,000
|
|
|
67,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
of loans previously charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Multifamily
real estate
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Construction
and land
|
|
235
|
|
|
266
|
|
|
622
|
|
|
318
|
|
One-
to four-family real estate
|
|
71
|
|
|
89
|
|
|
71
|
|
|
91
|
|
Commercial
business
|
|
595
|
|
|
249
|
|
|
1,885
|
|
|
319
|
|
Agricultural
business, including secured by farmland
|
|
--
|
|
|
22
|
|
|
--
|
|
|
22
|
|
Consumer
|
|
69
|
|
|
32
|
|
|
128
|
|
|
63
|
|
|
|
970
|
|
|
658
|
|
|
2,706
|
|
|
813
|
|
Loans
charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
--
|
|
|
--
|
|
|
(92
|
)
|
|
--
|
|
Multifamily
real estate
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Construction
and land
|
|
(12,255
|
)
|
|
(27,290
|
)
|
|
(19,979
|
)
|
|
(39,707
|
)
|
One-
to four-family real estate
|
|
(2,128
|
)
|
|
(1,181
|
)
|
|
(4,243
|
)
|
|
(2,272
|
)
|
Commercial
business
|
|
(1,447
|
)
|
|
(2,438
|
)
|
|
(6,231
|
)
|
|
(6,232
|
)
|
Agricultural
business, including secured by farmland
|
|
(986
|
)
|
|
(3,186
|
)
|
|
(988
|
)
|
|
(3,186
|
)
|
Consumer
|
|
(379
|
)
|
|
(593
|
)
|
|
(934
|
)
|
|
(919
|
)
|
|
|
(17,195
|
)
|
|
(34,688
|
)
|
|
(32,467
|
)
|
|
(52,316
|
)
|
Net
(charge-offs) recoveries
|
|
(16,225
|
)
|
|
(34,030
|
)
|
|
(29,761
|
)
|
|
(51,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of the period
|
$
|
95,508
|
|
$
|
90,694
|
|
$
|
95,508
|
|
$
|
90,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loan charge-offs to average outstanding loans during the
period
|
|
0.44
|
%
|
|
0.87
|
%
|
|
0.80
|
%
|
|
1.31
|
%
|
Note
9: REAL ESTATE OWNED, NET
The
following table presents the changes in real estate owned (REO), net of
valuation allowance, for the quarters and six months ended June 30, 2010 and
2009 (in thousands):
|
Quarters
Ended
June
30
|
|
Six
Months Ended
June
30
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of the period
|
$
|
95,074
|
|
$
|
38,951
|
|
$
|
77,743
|
|
$
|
21,782
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
from loan foreclosures
|
|
17,966
|
|
|
32,863
|
|
|
45,293
|
|
|
52,038
|
Additions
from capitalized costs
|
|
380
|
|
|
1,624
|
|
|
1,516
|
|
|
2,663
|
Dispositions
of REO
|
|
(10,451
|
)
|
|
(9,082
|
)
|
|
(20,366
|
)
|
|
(12,176)
|
Transfers
to property and equipment
|
|
--
|
|
|
(7,030
|
)
|
|
--
|
|
|
(7,030)
|
Gain
(loss) on sale of REO
|
|
(660
|
)
|
|
(296
|
)
|
|
(1,361
|
)
|
|
(197)
|
Valuation
adjustments in the period
|
|
(824
|
)
|
|
(63
|
)
|
|
(1,340
|
)
|
|
(113)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of the period
|
$
|
101,485
|
|
$
|
56,967
|
|
$
|
101,485
|
|
$
|
56,967
|
The
following table shows REO by type and geographic location by state as of June
30, 2010 (in thousands):
|
|
Washington
|
|
Oregon
|
|
Idaho
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
$
|
8,349
|
|
$
|
-
|
|
$
|
--
|
|
$
|
8,349
|
|
One-
to four-family construction
|
|
|
891
|
|
|
1,190
|
|
|
--
|
|
|
2,081
|
|
Land
development- commercial
|
|
|
3,430
|
|
|
6,656
|
|
|
485
|
|
|
10,571
|
|
Land
development- residential
|
|
|
22,681
|
|
|
24,579
|
|
|
9,731
|
|
|
56,991
|
|
Agricultural
land
|
|
|
329
|
|
|
-
|
|
|
2,236
|
|
|
2,565
|
|
One-
to four-family real estate
|
|
|
9,354
|
|
|
7,801
|
|
|
3,773
|
|
|
20,928
|
|
Balance,
end of period
|
|
$
|
45,034
|
|
$
|
40,226
|
|
$
|
16,225
|
|
$
|
101,485
|
|
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 June 30, 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.
We
amortize CDI 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 six months ended June 30, 2010 and 2009 (in
thousands):
|
|
|
|
|
Core
Deposit
Intangibles
|
|
|
Other
|
|
|
Total
|
|
Balance,
December 31, 2009
|
|
|
|
$
|
11,057
|
|
$
|
13
|
|
$
|
11,070
|
|
Amortization
|
|
|
|
|
(1,259
|
)
|
|
--
|
|
|
(1,259
|
)
|
Impairment
write-off
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Balance,
June 30, 2010
|
|
|
|
$
|
9,798
|
|
$
|
13
|
|
$
|
9,811
|
|
|
|
|
|
|
Core
Deposit
Intangibles
|
|
|
Other
|
|
|
Total
|
|
Balance,
December 31, 2008
|
|
|
|
$
|
13,701
|
|
$
|
15
|
|
$
|
13,716
|
|
Amortization
|
|
|
|
|
(1,350
|
)
|
|
(1
|
)
|
|
(1,351
|
)
|
Impairment
write-off
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Balance,
June 30, 2009
|
|
|
|
$
|
12,351
|
|
$
|
14
|
|
$
|
12,365
|
|
Estimated
annual amortization expense with respect to existing intangibles as of June 30,
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
$674.7 million and $454.7 million at June 30, 2010 and 2009,
respectively. Custodial accounts maintained in connection with this
servicing totaled $4.8 million at both June 30, 2010 and
2009. Mortgage servicing rights as a percentage of total loans
serviced for others was 0.79% and 1.18 %, respectively, for the same time
periods.
An
analysis of our mortgage servicing rights for the quarters ended June 30, 2010
and 2009 is presented below (in thousands):
|
Quarters
Ended
June
30
|
|
Six
Months Ended
June
30
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of the period
|
$
|
5,562
|
|
$
|
4,152
|
|
$
|
5,703
|
|
$
|
3,554
|
Amounts
capitalized
|
|
161
|
|
|
1,771
|
|
|
417
|
|
|
3,281
|
Amortization
(1)
|
|
(408
|
)
|
|
(559
|
)
|
|
(805
|
)
|
|
(1,171)
|
Valuation
adjustments in the period
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(300)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of the period
|
$
|
5,315
|
|
$
|
5,364
|
|
$
|
5,315
|
|
$
|
5,364
|
(1)
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 June 30, 2010 and 2009 and December 31, 2009
(dollars in thousands):
|
June
30
2010
|
|
December
31
2009
|
|
June
30
2009
|
|
|
Amount
|
|
Percent
of
Total
|
|
Amount
|
|
Percent
of
Total
|
|
Amount
|
|
Percent
of
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing
accounts
|
$
|
548,251
|
|
|
14.3
|
%
|
$
|
582,480
|
|
|
15.1
|
%
|
$
|
508,284
|
|
|
13.6
|
%
|
Interest-bearing
checking
|
|
368,418
|
|
|
9.6
|
|
|
360,256
|
|
|
9.3
|
|
|
312,024
|
|
|
8.4
|
|
Regular
savings accounts
|
|
593,591
|
|
|
15.4
|
|
|
538,765
|
|
|
13.9
|
|
|
499,447
|
|
|
13.3
|
|
Money
market accounts
|
|
441,222
|
|
|
11.5
|
|
|
442,124
|
|
|
11.4
|
|
|
319,622
|
|
|
8.5
|
|
Total
transaction and saving accounts
|
|
1,951,482
|
|
|
50.8
|
|
|
1,923,625
|
|
|
49.7
|
|
|
1,639,377
|
|
|
43.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
which mature or reprice:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
1 year
|
|
1,605,190
|
|
|
41.8
|
|
|
1,593,575
|
|
|
41.3
|
|
|
1,354,316
|
|
|
36.1
|
|
After
1 year, but within 3 years
|
|
241,639
|
|
|
6.3
|
|
|
311,115
|
|
|
8.0
|
|
|
706,464
|
|
|
18.8
|
|
After
3 years
|
|
40,684
|
|
|
1.1
|
|
|
37,235
|
|
|
1.0
|
|
|
49,686
|
|
|
1.3
|
|
Total
certificate accounts
|
|
1,887,513
|
|
|
49.2
|
|
|
1,941,925
|
|
|
50.3
|
|
|
2,110,466
|
|
|
56.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
$
|
3,838,995
|
|
|
100.0
|
%
|
$
|
3,865,550
|
|
|
100.0
|
%
|
$
|
3,749,843
|
|
|
100.0
|
%
|
Included
in total deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
transaction accounts
|
$
|
85,292
|
|
|
2.2
|
%
|
$
|
78,202
|
|
|
2.0
|
%
|
$
|
48,644
|
|
|
1.3
|
%
|
Public
interest-bearing certificates
|
|
81,668
|
|
|
2.1
|
|
|
88,186
|
|
|
2.3
|
|
|
134,213
|
|
|
3.5
|
|
Total
public deposits
|
$
|
166,960
|
|
|
4.3
|
%
|
$
|
166,388
|
|
|
4.3
|
%
|
$
|
182,857
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
brokered deposits
|
$
|
145,571
|
|
|
3.8
|
%
|
$
|
165,016
|
|
|
4.3
|
%
|
$
|
247,514
|
|
|
6.6
|
%
|
Geographic
Concentration of Deposits at
June
30, 2010
|
|
Washington
|
|
Oregon
|
|
Idaho
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,943,408
|
|
$
|
615,790
|
|
$
|
279,797
|
|
$
|
3,838,995
|
|
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 June 30,
2010 and 2009 and December 31, 2009 (in thousands):
|
|
|
|
June
30
2010
|
|
December
31
2009
|
|
June
30
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Repurchase Agreements
|
|
|
|
|
$
|
122,755
|
|
$
|
124,330
|
|
$
|
108,277
|
|
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 June 30, 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.
|
From
mid-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 June 30, 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 June 30,
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 June 30, 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 OTTI charge.
At June
30, 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 not actively traded, but for which more market data is
available. Similar to the TRUP CDOs
above,
there were too few, if any, issuances of new TPS securities or sales of existing
TPS securities to provide Level 1 or even Level 2 fair value
measurements. 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 significant
pricing pressure at June 30, 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 June 30, 2010, and discount rates equal to three-month LIBOR plus 600
to 800 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 2, 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 OTTI charges—one in the
third quarter of 2009 and one during the first quarter of 2010. The
single TPS security considered Level 2 was transferred to Level 2 during the
quarter due to the security not being actively traded.
·
|
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 June
30, 2010, management evaluated discounted cash flows to maturity and for
the discount rate used the June 30, 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 June 30, 2010 and December 31, 2009 (in
thousands):
|
June
30, 2010
|
|
|
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities—available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government and agency
|
$
|
104,200
|
|
$
|
--
|
|
$
|
104,200
|
|
$
|
--
|
|
Mortgage-backed
securities
|
|
36,142
|
|
|
--
|
|
|
36,142
|
|
|
--
|
|
|
|
140,342
|
|
|
--
|
|
|
140,342
|
|
|
--
|
|
Securities—trading
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government and agency
|
|
4,472
|
|
|
--
|
|
|
4,472
|
|
|
--
|
|
Municipal
bonds
|
|
6,891
|
|
|
--
|
|
|
6,891
|
|
|
--
|
|
TPS
and TRUP CDOs
|
|
35,460
|
|
|
--
|
|
|
4,870
|
|
|
30,590
|
|
Mortgage-backed
securities
|
|
58,428
|
|
|
--
|
|
|
58,428
|
|
|
--
|
|
Equity
securities and other
|
|
130
|
|
|
--
|
|
|
130
|
|
|
--
|
|
|
|
105,381
|
|
|
--
|
|
|
74,791
|
|
|
30,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
245,723
|
|
$
|
--
|
|
$
|
215,133
|
|
$
|
30,590
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
from FHLB at fair value
|
$
|
47,003
|
|
$
|
--
|
|
$
|
47,003
|
|
$
|
--
|
|
Junior
subordinated debentures net of
unamortized deferred issuance costs
at fair value
|
|
49,808
|
|
-
|
--
|
|
|
--
|
|
|
49,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
96,811
|
|
$
|
--
|
|
$
|
47,003
|
|
$
|
49,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 six months ended June 30, 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
|
|
|
|
|
|
|
|
Asset
gains (losses)
|
|
|
398
|
|
|
--
|
|
Liability
(gains) losses
|
|
|
--
|
|
|
2,114
|
|
Purchases,
issuances and settlements
|
|
|
--
|
|
|
--
|
|
Paydowns
and maturities
|
|
|
--
|
|
|
--
|
|
|
Transfers
in and/or out of Level 3
|
|
|
--
|
|
|
--
|
|
|
Ending
balance at June 30, 2010
|
|
$
|
30,590
|
|
$
|
49,808
|
|
|
|
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
|
|
|
|
|
|
|
|
Asset
gains (losses)
|
|
|
(5,805
|
)
|
|
--
|
|
Liability
(gains) losses
|
|
|
--
|
|
|
(12,213
|
)
|
Purchases,
issuances and settlements
|
|
|
--
|
|
|
--
|
|
Paydowns
and maturities
|
|
|
--
|
|
|
--
|
|
|
Transfers
in and/or out of Level 3
|
|
|
--
|
|
|
--
|
|
|
Ending
balance at June 30, 2009
|
|
$
|
30,490
|
|
$
|
49,563
|
|
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:
Carrying
values of certain impaired loans that are on non-accrual are periodically
evaluated to determine if valuation adjustments, or partial write-downs, should
be recorded. These non-recurring fair value adjustments are recorded
when observable market prices or current appraised values of collateral indicate
a shortfall in collateral value or discounted cash flows indicate a shortfall
compared to current carrying values of the related loan. If we
determine that the value of the impaired loan is less than the carrying value of
the loan, we either establish an impairment reserve as a specific component of
the allowance for loan and lease losses (ALLL) or charge off the impaired
amount. The remaining impaired loans are evaluated for reserve needs
in homogenous pools within our ALLL methodology. As of June 30, 2010,
the Company reviewed all of its classified loans totaling $392 million for
potential impairment and identified $222 million which were considered
impaired. Of those $222 million in impaired loans, $153 million were
individually evaluated to determine if valuation adjustments, or partial
write-downs, should be recorded, or if specific impairment reserves should be
established. The $153 million had original carrying values of $183
million which have already been reduced by partial write-downs totaling $30
million. Of the $153 million individually evaluated, $79 million are
carried at fair value after netting out charge-offs already recognized or
specific impairment reserves totaling $17 million.
The
Company also records REO (acquired through a lending relationship) at fair value
on a non-recurring basis. All REO 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 REO. From time to time, non-recurring fair value adjustments
to REO are recorded to reflect partial write downs based on an observable market
price or current appraised value of property. We consider any
valuation inputs related to REO to be Level 3 inputs. The individual
carrying values of these assets are reviewed for impairment at least annually
and any additional impairment charges are expensed to operations. For
the three months ended June 30, 2010, we recognized $824,000 of additional
impairment charges related to these types of assets, compared to $63,000 for the
same quarter one year earlier. For the six months ended June 30,
2010, these impairment charges totaled $1.3 million, compared to $113,000 for
the same period in 2009.
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 June 30,
2010 and December 31, 2009 (in thousands):
|
June
30, 2010
|
|
|
Fair
Value
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
$
|
79,201
|
|
|
--
|
|
|
--
|
|
$
|
79,201
|
|
REO
|
|
101,485
|
|
|
--
|
|
|
--
|
|
|
101,485
|
|
Mortgage
servicing rights
|
|
5,315
|
|
|
--
|
|
|
--
|
|
|
5,315
|
|
|
December
31, 2009
|
|
|
Fair
Value
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
$
|
111,945
|
|
|
--
|
|
|
--
|
|
$
|
111,945
|
|
REO
|
|
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 June 30, 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):
|
June
30, 2010
|
|
December
31, 2009
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Fair
Value
|
|
|
Value
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
$
|
437,186
|
|
$
|
437,186
|
|
$
|
323,005
|
|
$
|
323,005
|
|
Securities—trading
|
|
105,381
|
|
|
105,381
|
|
|
147,151
|
|
|
147,151
|
|
Securities—available-for-sale
|
|
140,342
|
|
|
140,342
|
|
|
95,667
|
|
|
95,667
|
|
Securities—held-to-maturity
|
|
73,632
|
|
|
76,996
|
|
|
74,834
|
|
|
76,489
|
|
Loans
receivable held for sale
|
|
4,819
|
|
|
4,819
|
|
|
4,497
|
|
|
4,534
|
|
Loans
receivable
|
|
3,531,177
|
|
|
3,374,115
|
|
|
3,690,355
|
|
|
3,490,419
|
|
FHLB
stock
|
|
37,371
|
|
|
37,371
|
|
|
37,371
|
|
|
37,371
|
|
Bank-owned
life insurance (BOLI)
|
|
55,477
|
|
|
55,477
|
|
|
54,596
|
|
|
54,596
|
|
Mortgage
servicing rights
|
|
5,315
|
|
|
5,315
|
|
|
5,703
|
|
|
5,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand,
NOW and money market accounts
|
1,357,891
|
|
|
1,271,703
|
|
|
1,384,860
|
|
|
1,272,322
|
|
Regular
savings
|
|
593,591
|
|
|
559,993
|
|
|
538,765
|
|
|
495,409
|
|
Certificates
of deposit
|
|
1,887,513
|
|
|
1,897,715
|
|
|
1,941,925
|
|
|
1,954,825
|
|
FHLB
advances at fair value
|
|
47,003
|
|
|
47,003
|
|
|
189,779
|
|
|
189,779
|
|
Junior
subordinated debentures at fair value
|
49,808
|
|
|
49,808
|
|
|
47,694
|
|
|
47,694
|
|
Other
borrowings
|
|
172,737
|
|
|
172,737
|
|
|
176,842
|
|
|
176,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance-sheet
financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to originate loans
|
|
265
|
|
|
265
|
|
|
362
|
|
|
362
|
|
Commitments
to sell loans
|
|
(265
|
)
|
|
(265
|
)
|
|
(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 TPS and TRUP CDOs
(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 $51 million and $25 million at June 30,
2010 and December 31, 2009, respectively, have a carrying value of $265,000 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 $51 million and $25 million at June 30, 2010
and December 31, 2009, respectively, have a carrying value of ($265,000) 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 $759 million and
$777 million at June 30, 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 June 30, 2010 or December 31, 2009.
Limitations: The fair value
estimates presented herein are based on pertinent information available to
management as of June 30, 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
June 30, 2010 and December 31, 2009, the Company had recorded net deferred
income tax assets of approximately $14.4 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 of $36.2
million. Two other significant components of our deferred tax asset
relate to the timing of deferred compensation of $6.6 million and our net
operating loss carryforward of $5.8 million. Our material deferred
tax liabilities relate to fair value adjustments for financial instruments
carried at fair value of $11.9 million, FHLB stock dividends of $6.2 million,
timing differences related to depreciation of $5.4 million, loan origination
costs of $4.8 million, and intangible assets of $3.5 million.
The
following table reflects the effect of temporary differences that give rise to
the components of the net deferred tax asset as of June 30, 2010 and December
31, 2009 (in thousands):
|
|
June
30, 2010
|
|
|
December
31, 2009
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
REO
and loan loss reserves
|
$
|
36,209
|
|
$
|
35,653
|
|
Deferred
compensation
|
|
6,626
|
|
|
6,470
|
|
Net
operating loss carryforward
|
|
5,756
|
|
|
5,586
|
|
Other
|
|
73
|
|
|
98
|
|
|
|
48,664
|
|
|
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
|
|
4,765
|
|
|
5,002
|
|
Intangibles
|
|
3,518
|
|
|
3,969
|
|
Financial
instruments accounted for under fair value accounting
|
|
11,879
|
|
|
12,194
|
|
Other
|
|
1,706
|
|
|
1
|
|
|
|
33,494
|
|
|
32,819
|
|
|
|
15,170
|
|
|
14,988
|
|
Unrealized gain
on securities available-for-sale
|
|
(806
|
)
|
|
(177
|
)
|
|
|
|
|
|
|
|
Deferred
tax asset, net
|
$
|
14,364
|
|
$
|
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 $48.7 million and
$47.8 million at June 30, 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
June
30
|
|
Six
Months Ended
June
30
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
$
|
(4,946
|
)
|
$
|
(16,511
|
)
|
$
|
(6,463
|
)
|
$
|
(25,774)
|
Preferred
stock dividend accrual
|
|
1,550
|
|
|
1,550
|
|
|
3,100
|
|
|
3,100
|
Preferred
stock discount accretion
|
|
399
|
|
|
373
|
|
|
797
|
|
|
746
|
Net
income (loss) available to common shareholders
|
$
|
(6,895
|
)
|
$
|
(18,434
|
)
|
$
|
(10,360
|
)
|
$
|
(29,620)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
24,452
|
|
|
17,746
|
|
|
23,298
|
|
|
17,455
|
Plus
MRP, common stock options and common stock
warrants considered outstanding for diluted EPS
|
|
2
|
|
|
2
|
|
|
2
|
|
|
2
|
Less
dilutive shares not included as they are anti-dilutive for
|
|
|
|
|
|
|
|
|
|
|
|
calculations
of earning (loss) per share
|
|
(2
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
(2)
|
|
|
24,452
|
|
|
17,746
|
|
|
23,298
|
|
|
17,455
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.28
|
)
|
$
|
(1.04
|
)
|
$
|
(0.44
|
)
|
$
|
(1.70)
|
Diluted
|
$
|
(0.28
|
)
|
$
|
(1.04
|
)
|
$
|
(0.44
|
)
|
$
|
(1.70)
|
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 June 30, 2010, there were only 57,295 options
eligible for grants under the 2001 SOP. We did not make any grants
under any of these plans during the three or six months ended June 30, 2010 or
the twelve months ended December 31, 2009. Stock based compensation
costs related to the SOPs were $19,000 and $48,000 for the quarters ended June
30, 2010 and 2009, respectively, and $38,000 and $98,000 for the six months
ended June 30, 2010 and 2009, respectively. At June 30, 2010, there
were options for 483,172 shares outstanding with a weighted average exercise
price of $22.35 per share and a weighted average remaining contractual term of
3.29 years. None of the options had any intrinsic value on that
date. The Company had $50,000 of total unrecognized compensation
costs related to stock options at June 30, 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 June 30, 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 did
not recognize any compensation expense related to the change in the fair value
of SARs and additional vesting during the quarters ended June 30, 2010 and 2009,
although this expense was $137,000 and $16,000 for the six months ended June 30,
2010 and 2009, respectively.
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 June 30, 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
|
$
|
103,507
|
Revolving
open-end lines secured by one-to four- family residential
properties
|
|
121,123
|
Real
estate secured by one- to four-family residential
properties
|
|
51,093
|
Credit
card lines
|
|
61,312
|
Other,
primarily business and agricultural loans
|
|
411,648
|
Standby
letters of credit and financial guarantees
|
|
10,171
|
|
|
|
Total
commitments
|
$
|
758,854
|
|
|
|
Commitments
to sell loans secured by one- to four-family residential
properties
|
$
|
51,093
|
|
|
|
Interest
rate swaps (notional amount)
|
$
|
19,420
|
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. These forward-looking statements are intended to be
covered by the safe harbor for forward-looking statements provided by the
Private Securities Litigation Reform Act of 1995. Forward-looking
statements are not statements of historical fact and often include the words
“believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,”
“plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar
expressions or future or conditional verbs such as “may,” “will,” “should,”
“would” and “could.” Forward-looking statements include statements
with respect to our beliefs, plans, objectives, goals, expectations, assumptions
and statements about future economic performance and projections of financial
items. These forward-looking statements are subject to known and
unknown risks, uncertainties and other factors that could cause actual results
to differ materially from the results anticipated or implied by our
forward-looking statements, including, but not limited to: the
credit risks of lending activities, including changes in the level and trend of
loan delinquencies and write-offs and
changes in our allowance for loan losses and provision for loan losses that may
be impacted by deterioration in the housing and commercial real estate markets
and may lead to increased losses and nonperforming assets in our loan portfolio,
and may result in our allowance for loan losses not being adequate to cover
actual losses, and require us to materially increase our reserves; changes in
general economic conditions, either nationally or in our market areas; changes
in the levels of general interest rates and the relative differences between
short and long-term interest rates, 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, or impose additional requirements and restrictions on us, any of which
could adversely affect our liquidity and earnings; legislative or regulatory
changes that adversely affect our business including changes in regulatory
policies and principles, or the interpretation of regulatory capital or other
rules; 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 and result in significant declines in
valuation; difficulties in reducing risk associated with the loans on our
balance sheet; staffing fluctuations in response to product demand or the
implementation of corporate strategies that affect our work force and potential
associated charges; the failure or security breach of computer systems on which
we depend; our ability to retain key members of our senior management team;
costs and effects of litigation, including settlements and judgments; our
ability to implement our business strategies; our ability to successfully
integrate any assets, liabilities, customers, systems, and management personnel
we may acquire into our operations and our ability to realize related revenue
synergies and cost savings within expected time frames and any goodwill charges
related thereto; our ability to manage loan delinquency rates; increased
competitive pressures among financial services companies; changes in consumer
spending, borrowing and savings habits; the availability of resources to address
changes in laws, rules, or regulations or to respond to regulatory actions; our
ability to pay dividends on our common 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;
the economic impact of war or any 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, unless the context
otherwise requires.
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 June 30, 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 June 30, 2010, we had total consolidated assets of
$4.7 billion, total loans of $3.6 billion, total deposits of $3.8 billion and
total stockholders’ equity of $554 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
second 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 continuing factors, for the quarter ended June 30, 2010, we had
a net loss of $4.9 million which, after providing for the preferred stock
dividend and related discount accretion, resulted in a net loss to common
shareholders of $6.9 million, or ($0.28) per diluted share, compared to a net
loss to common shareholders of $18.4 million, or ($1.04) per diluted share, for
the quarter ended June 30, 2009. For the six months ended June 30,
2010, we had a net loss of $6.5 million which, after providing for the preferred
stock dividend and related discount accretion, resulted in a net loss to common
shareholders of $10.4 million, or ($0.44) per diluted share, compared to a net
loss to common shareholders of $29.6 million, or ($1.70) per diluted share, for
the six months ended June 30, 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 $16.0 million for the quarter ended June 30, 2010,
compared to $14.0 million in the prior quarter and $45.0 million recorded for
the same period a year earlier. For the six months ended June 30,
2010, the provision for loan losses was $30.0 million, compared to $67.0 million
for the same period in 2009. While considerably less than a year
earlier, the significant provision for loan losses in the current quarter
reflects continuing 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 $4.0 million for
the quarter ended June 30, 2010 to $38.9 million compared to $34.9 million for
the same quarter one year earlier, reflecting significant 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. For the six months ended June 30, 2010, the net interest
income was $77.1 million, an increase of $7.2 million, or 10%, compared to the
same period in 2009. Our net interest margin improved meaningfully
during the first six months of 2010 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 when the economy
recovers.
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 impairment (OTTI) losses on investment
securities. For the quarter ended June 30, 2010, we recorded a loss
of $821,000 ($525,000 after tax) in fair value adjustments, compared to $11.2
million in fair value gains (partially offset by OTTI losses of $162,000) for
the same period one year earlier. For the six months ended June 30,
2010, we recorded a net gain of $1.1 million ($696,000 after tax) in fair value
adjustments, which was more than offset by an OTTI charge on investments of $1.2
million. In contrast, for the six months ended June 30, 2009, the
fair value gains totaled $8.0 million ($5.1 million after tax) and were only
partially offset by an OTTI charge on investments of $162,000.
Other
operating income, excluding the fair value adjustments and OTTI losses,
decreased $1.9 million to $7.0 million for the quarter ended June 30, 2010 from
$8.9 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 modest increases in deposit fees and other service charges and loan
servicing fees. Revenues (net interest income before the provision
for loan losses plus other operating income), excluding fair value adjustments
and OTTI losses, increased $2.1 million to $45.9 million for the quarter ended
June 30, 2010, compared to $43.8 million for the quarter ended June 30, 2009,
primarily as a result of the improvement in the net interest income driven by
the significant decrease in the cost of deposits over the past several
quarters. Revenues, excluding fair value adjustments and OTTI losses,
increased $4.4 million to $91.1 million for the six months ended June 30, 2010,
compared to $86.7 million for the six months ended June 30,
2009. Revenues and other earnings information excluding the change in
valuation of financial instruments carried at fair value and OTTI 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
decreased
mortgage banking revenues and increased collection costs on
REO. Reconciliations of the earnings or loss from core operations are
contained in the table below.
Other
operating expenses were $38.0 million for the quarter ended June 30, 2010,
compared to the $36.9 million for the quarter ended June 30,
2009. The current quarter’s expenses reflect significantly increased
costs associated with problem loan collection activities, including professional
services and charges related to REO, as well as a reduction in capitalized loan
origination costs. These increases were partially offset
by reductions in deposit insurance, compensation and marketing
expenses. For the six months ended June 30, 2010, other operating
expenses were $73.4 million, an increase of $2.7 million from the six months
ended June 30, 2009. As with the quarter, the primary increase during
the current six-month period was increased expenses related to
REO. See “Comparison of Results of Operations for the Quarters
and Six Months Ended June 30, 2010 and 2009” and for more detailed information
about our financial performance.
The
following tables set forth reconciliations of non-GAAP financial measures
discussed in this report (in thousands):
|
Quarters
Ended
June
30
|
|
Six
Months Ended
June
30
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other operating income
|
$
|
6,186
|
|
$
|
19,977
|
|
$
|
13,910
|
|
$
|
24,625
|
Less
change in valuation of financial instruments carried at fair
value
|
|
821
|
|
|
(11,211
|
)
|
|
(1,087
|
)
|
|
(7,958)
|
Less
other-than-temporary impairment losses
|
|
--
|
|
|
162
|
|
|
1,231
|
|
|
162
|
Total
other operating income, excluding fair value adjustments and
OTTI
|
$
|
7,007
|
|
$
|
8,928
|
|
$
|
14,054
|
|
$
|
16,829
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income before provision for loan losses
|
$
|
38,941
|
|
$
|
34,925
|
|
$
|
77,091
|
|
$
|
69,884
|
Total
other operating income
|
|
6,186
|
|
|
19,977
|
|
|
13,910
|
|
|
24,625
|
Less
change in valuation of financial instruments carried at fair
value
|
|
821
|
|
|
(11,211
|
)
|
|
(1,087
|
)
|
|
(7,958)
|
Less
other-than-temporary impairment losses
|
|
--
|
|
|
162
|
|
|
1,231
|
|
|
162
|
Total
revenue, excluding fair value adjustments and OTTI
|
$
|
45,948
|
|
$
|
43,853
|
|
$
|
91,145
|
|
$
|
86,713
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
$
|
(4,946
|
)
|
$
|
(16,511
|
)
|
$
|
(6,463
|
)
|
$
|
(25,774)
|
Less
change in valuation of financial instruments carried at fair
value
|
|
821
|
|
|
(11,211
|
)
|
|
(1,087
|
)
|
|
(7,958)
|
Less
other-than-temporary impairment losses
|
|
--
|
|
|
162
|
|
|
1,231
|
|
|
162
|
Less
related tax expense (benefit)
|
|
(296
|
)
|
|
3,978
|
|
|
(52
|
)
|
|
2,807
|
Total
earnings, excluding fair adjustments and OTTI and related tax
effects
|
$
|
(4,421
|
)
|
$
|
(23,582
|
)
|
$
|
(6,371
|
)
|
$
|
(30,763)
|
|
|
June
30
2010
|
|
|
December
31
2009
|
|
|
June
30
2009
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
$
|
553,958
|
|
$
|
405,128
|
|
$ |
409,474 |
|
Other
intangible assets, net
|
|
9,811
|
|
|
11,070
|
|
|
12,365 |
|
Tangible
equity
|
|
544,147
|
|
|
394,058
|
|
|
397,109 |
|
|
|
|
|
|
|
|
|
|
|
Preferred
equity
|
|
118,204
|
|
|
117,407
|
|
|
116,661 |
|
|
|
|
|
|
|
|
|
|
|
Tangible
common stockholders’ equity
|
$
|
425,943
|
|
$
|
276,651
|
|
$ |
280,448 |
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
4,701,606
|
|
$
|
4,722,221
|
|
$ |
4,532,542 |
|
Other
intangible assets, net
|
|
9,811
|
|
|
11,070
|
|
|
12,365 |
|
|
|
|
|
|
|
|
|
|
|
Tangible
assets
|
$
|
4,691,795
|
|
$
|
4,711,151
|
|
$ |
4,520,177 |
|
|
|
|
|
|
|
|
|
|
|
Tangible
common stockholders’ equity to tangible assets (1)
|
|
9.08
|
%
|
|
5.87
|
%
|
|
6.20 |
% |
|
(1) The
ratio of tangible common stockholders’ equity to tangible assets is a
non-GAAP financial measure. We calculate tangible common equity
by excluding the balance of goodwill, other intangible assets and
preferred equity from stockholders’ equity. We calculate
tangible assets by excluding the balance of goodwill and other intangible
assets from total assets. We believe that this is consistent
with the treatment by our bank regulatory agencies, which exclude goodwill
and other intangible assets from the calculation of risk-based capital
ratios. In addition, excluding preferred equity, the level of
which may vary from company to company, allows investors to more easily
compare our capital adequacy to other companies in the industry that also
use this measure. Management believes that this non-GAAP
financial measure provides information to investors that is useful in
understanding the basis of our capital position. However, this
non-GAAP financial measure is supplemental and is not a substitute for any
analysis based on GAAP. Because not all companies use the same
calculation of tangible common equity and tangible assets, this
presentation may not be comparable to other similarly titled measures as
calculated by other companies.
|
We offer
a wide range of loan products to meet the demands of our customers and our loan
portfolio is very diversified by product type, borrower and geographic location
within our market areas. Historically, our lending activities have
been primarily directed toward the origination of real estate and commercial
loans. Until recent periods, real estate lending activities were
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
continued during this cycle 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; however, for the most recent twelve months,
demand for residential mortgage loans has been modest. 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. Our consumer loan activity is primarily directed at
meeting demand from existing deposit customers and while we have increased our
emphasis on consumer lending, 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 June 30, 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 June 30, 2010
represented 11% of the loan portfolio, compared to 18% 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, will be modest
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.
Deposits
declined slightly in the current quarter and have decreased by $27 million in
the six months ended June 30, 2010. The decrease largely reflects a
planned $19 million reduction in brokered deposits for the six-month
period. Total deposits were $3.839 billion at June 30, 2010, an $89
million increase compared to $3.750 billion at June 30, 2009. Retail
deposit growth during this twelve-month period has been solid as we have added
accounts and balances; however, we chose to reduce brokered deposits and public
funds deposits over the same period partially offsetting this retail
growth. While brokered deposits have never been an important
component of our funding, brokered deposits have declined by $102 million over
the past twelve months. In addition, although most of our planned
reduction in public funds deposits occurred prior to June 30, 2009, public funds
deposits also declined by $16 million during the past year. Changes
in the mix of deposits have been an important element in our improved funding
costs of recent quarters. Our deposit totals at June 30, 2010 reflect
an 8% year-over-year growth in non-interest-bearing accounts and a 24% increase
in interest-bearing transaction and savings accounts, partially offset by an 11%
decrease in higher rate certificate of deposit accounts including brokered and
public funds accounts.
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: (Note 1) 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, among others, changes
in the size and composition of the loan portfolio, delinquency rates, actual
loan loss experience, current and anticipated economic conditions, detailed
analysis of individual loans for which full collectability may not be assured,
and determination of the existence and realizable value of the collateral and
guarantees securing the loans. Realized losses related to specific
assets are applied as a reduction of the carrying value of the assets and
charged immediately against the allowance for loan loss
reserve. Recoveries on previously charged off loans are credited to
the allowance. The reserve is based upon factors and trends
identified by us at the time financial statements are
prepared. Although we use the best information available, future
adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions beyond our control. The adequacy of
general and specific reserves is based on our continuing evaluation of the
pertinent factors underlying the 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, which
in our judgment affect the collectability of the portfolio as of the evaluation
date. The unallocated allowance is based upon our evaluation of
various factors that are not directly measured in the determination of the
formula and specific allowances. This methodology may result in
losses or recoveries differing significantly from those provided in the
Consolidated Financial Statements.
While we
believe the estimates and assumptions used in our determination of the adequacy
of the allowance are reasonable, there can be no assurance that such estimates
and assumptions will not be proven incorrect in the future, or that the actual
amount of future provisions will not exceed the amount of past provisions or
that any increased provisions that may be required will not adversely impact our
financial condition and results of operations. In addition, the
determination of the amount of the Banks’ allowance for loan losses is subject
to review by bank regulators as part of the routine examination process, which
may result in the adjustment of reserves based upon their judgment of
information available to them at the time of their examination.
Fair Value Accounting and
Measurement: (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 June 30, 2010 and December 31, 2009
General. Total
assets decreased $21 million, or 0.4%, to $4.702 billion at June 30, 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 $159 million, or 4%, to $3.536 billion at June 30, 2010, from
$3.695 billion at December 31, 2009. The contraction in net loans was
largely due to decreases of $71 million in land and land development loans, $56
million in one- to four-family construction loans and $25 million in commercial
real estate loans. Other categories of loans were only slightly
changed from December 31, 2009. 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 three 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 REO and charge-offs, loans to
finance the construction of one- to four-family residential real estate, which
totaled $183 million at June 30, 2010, have decreased by $472 million, or 72%,
since their peak quarter-end balance of $655 million at June 30,
2007. In addition, land and development loans, which totaled $258
million at June 30, 2010, have decreased by $244 million, or 49%, 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.
Aggregate
securities balances were essentially flat, at $319 million at June 30, 2010
compared to $318 million at December 31, 2009; however, the classification of
the portfolio shifted more from trading securities to available-for-sale
securities, particularly for U.S. Agency securities. 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 June 30, 2010, the fair value of our trading securities
was $44 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 $41 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. Most of our
recent purchases have been classified as available-for-sale. For the
three months ended June 30, 2010, we recorded an increase of $899,000 ($576,000
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 unless an
other-than-temporary impairment has been recognized.
REO
acquired through foreclosures or other means increased $24 million, to $101
million at June 30, 2010, from $78 million at December 31, 2009. The
total balance of REO included $72 million in land or land development projects,
$8 million in commercial real estate and $21 million in single-family homes at
June 30, 2010. During the quarter ended June 30, 2010, we transferred
$18 million of loans into REO, capitalized additional investments of $380,000 in
acquired properties, disposed of slightly more than $10 million of properties
and recognized $1.5 million in charges against earnings for a net loss on sales
and valuation adjustments (See “Asset Quality” discussion below).
Deposits
decreased $27 million, to $3.839 billion at June 30, 2010 from $3.866 billion at
December 31, 2009. Non-interest-bearing deposits decreased by $34
million, or 6%, to $548 million from $582 million, and interest-bearing deposits
increased by $8 million, to $3.291 billion at June 30, 2010 from $3.283 billion
at December 31, 2009, in part reflecting expected seasonal
variations. While public fund deposits were relatively unchanged
during the first six months of 2010, we expect further declines during the
remainder of 2010 in public fund deposits as we continue to manage the reduction
of these deposits in response to changes in the collateralization requirements
under the Washington and Oregon State public deposit protection
regulations. We elected to reduce brokered deposits by $19
million during the six months ended June 30, 2010, as funding from retail
deposit growth was more than adequate to meet loan demand. The net
decrease in retail deposits for the six months ended June 30, 2010 likely also
reflects our efforts to reduce the overall cost of deposits through less
aggressive pricing of certificates of deposit and other interest-bearing
deposits in response to generally weak loan demand.
FHLB
advances decreased $143 million, to $47 million at June 30, 2010 from $190
million at December 31, 2009, while other borrowings decreased slightly to $173
million at June 30, 2010 from $177 million at December 31, 2009. 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 June 30, 2010 include $123 million of
retail repurchase agreements that are primarily related to customer cash
management accounts. 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 $2.1 million since December 31, 2009,
reflecting only modest fair value adjustments resulting from an 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 during the first half 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.)
Total
equity at June 30, 2010 increased $149 million, or 37%, to $554 million from
$405 million at December 31, 2009. On June 30, 2010, the Company
announced the completion of its offering of 75,000,000 shares of its common
stock and the sale of an additional 3,500,000 shares pursuant to the partial
exercise of the underwriters’ over-allotment option, at a price to the public of
$2.00 per share. On July 2, 2010, the Company further announced the
completion of the capital raise as the underwriters had exercised their
over-allotment option for an additional 7,139,000 shares, at a price to the
public of $2.00 per share. The 78,500,000 shares the Company issued
on June 30, 2010 resulted in net proceeds, after deducting underwriting
discounts and commissions and estimated offering expenses, of approximately
$148.0 million. Approximately $13.6 million related to the 7,139,000
shares will be recorded in the Company’s financial statements during the third
quarter of 2010, as that portion of the transaction settled after June 30,
2010. Additionally, during the six months ended June 30, 2010, we
issued 2,915,148 additional shares of common stock for $10.5 million at an
average net per share price of $3.60 through our Dividend Reinvestment and
Direct Stock Purchase and Sale Plan.
Comparison
of Results of Operations for the Quarters and Six Months Ended June 30, 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 June 30,
2010, we had a net loss of $4.9 million which, after providing for the preferred
stock dividend of $1.6 million and related discount accretion of $399,000,
resulted in a net loss to common shareholders of $6.9 million, or ($0.28) per
diluted share. This loss compares to a net loss to common
shareholders of $18.4 million, or ($1.04) per diluted share, for the quarter
ended June 30, 2009. For the six months ended June 30, 2010, our net
loss was $6.5 million which, after providing for the preferred stock dividend of
$3.1 million and related discount accretion of $797,000, resulted in a net loss
to common shareholders of $10.4 million, or ($0.44) per diluted
share. This loss compares to a net loss to common shareholders of
$29.6 million, or ($1.70) per diluted share, during the same period a year
earlier.
The net
loss for the current quarter continues to reflect an elevated level of loan loss
provisioning compared to our historical experience. However, driven
by improvement in our net interest margin as a result of a significant decline
in deposit costs, revenues did increase meaningfully compared to the same
quarter and six month-period in the prior year, as well as to the immediately
preceding quarter. As more fully explained below, our provision for
loan losses was $16.0 million for the quarter ended June 30, 2010, compared to
$45.0 million for the same quarter in the prior year. For the six
months ended June 30, 2010, our provision for loan losses was $30.0 million,
compared to $67.0 million for the same period a year earlier. While
less significantly than the same period in 2009, our provision for losses during
2010 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 June 30, 2010 also reflected a decrease
in other operating income that included an $821 million ($525,000 after tax) net
loss as a result of changes in the valuation of financial instruments carried at
fair value. During the second quarter of 2009, this fair value
adjustment was an $11.2 million increase ($7.2 million after tax), partially
offset by a $162,000 OTTI charge on securities. Excluding these fair
value adjustments and the OTTI loss, other operating income decreased to $7.0
million for the quarter ended June 30, 2010 compared to $8.9 million for the
same period a year earlier primarily due to a decrease in the gain on the sale
of loans from mortgage banking operations between those periods reflecting the
weak housing market and a decline in refinancing activity for single family
homes. Other operating expenses increased $1.1 million to $38.0
million for the quarter ended June 30, 2010 from $36.9 million a year earlier,
which was primarily a result of increased costs related to REO, partially offset
by lower deposit insurance, compensation and occupancy costs.
Compared
to levels a year ago, total assets increased 4% to $4.702 billion at June 30,
2010, while net loans decreased 7% to $3.536 billion, cash and securities
(exclusive of FHLB stock) increased 99% to $757 million, deposits increased 2%
to $3.839 billion and borrowings, including customer sweep accounts (retail
repurchase agreements) and junior subordinated debentures, decreased 17% to $270
million. The average balance of interest-earning assets was $4.285
billion for the quarter ended June 30, 2010, an increase of $35 million, or 1%,
compared to $4.319 billion for the same period one year
earlier.
Net Interest
Income. Net interest income before provision for loan losses
increased by $4.0 million, or 12%, to $38.9 million for the quarter ended June
30, 2010, compared to $34.9 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 3.65%
for the quarter ended June 30, 2010 was 41 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 including real estate
acquired through foreclosure. Nonaccruing loans reduced the margin by
34 basis points in the quarter ended June 30, 2010 compared to a 45 basis point
reduction for the second 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 of higher rate securities, the
yield on
earning assets for the quarter ended June 30, 2010 decreased by 28 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 3.61% for the current quarter
compared to 3.12% for the quarter ended June 30, 2009. This resulted
in the fourth consecutive quarterly increase in our net interest
margin.
Net
interest income before provision for loan losses increased by $7.2 million, or
10%, to $77.1 million for the six months ended June 30, 2010 compared to $69.9
million for the same period one year earlier, as a result of a 37 basis point
increase in the net interest margin and despite a modest decrease in average
interest-earning assets. The net interest margin increased to 3.62%
for the six months ended June 30, 2010 compared to 3.25% for the same period 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.
Interest
Income. Interest income for the quarter ended June 30, 2010
was $55.6 million, compared to $59.2 million for the same quarter in the prior
year, a decrease of $3.5 million, or 6%. The decrease in interest
income occurred as a result of a 28 basis point decrease in the yield on earning
assets coupled with a $35 million decrease in the average balance of those
assets. The yield on average interest-earning assets decreased to
5.21% for the quarter ended June 30, 2010, compared to 5.49% 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 and as loan demand has remained
weak. Average loans receivable for the quarter ended June 30, 2010
decreased $248 million, or 6%, to $3.677 billion, compared to $3.925 billion for
the same quarter in the prior year. Interest income on loans
decreased by $3.0 million, or 5%, to $52.5 million for the current quarter from
$55.5 million for the quarter ended June 30, 2009, directly related to the
decrease in average loan balances, and despite a five basis point increase in
the average yield on loans. The average loan yield reflects the
continuing very low level of market interest rates during the past year which
was offset by a decrease in the adverse effect from nonaccrual
loans. The average yield on loans was 5.72% for the quarter ended
June 30, 2010, compared to 5.67% for the same quarter one year
earlier. Interest income for the six months ended June 30, 2010 was
$105.2 million, compared to $111.8 million for the same quarter in the prior
year, a decrease of $6.6 million, or 6%. As with the quarterly
result, the year-to-date results reflect a decrease in both the average balance
of interest-earning assets ($44.3 million) and the related yield (31 basis
points).
The
combined average balance of mortgage-backed securities, investment securities,
and daily interest-bearing deposits increased by $213 million (excluding the
effect of fair value adjustments) for the quarter ended June 30, 2010, while the
interest and dividend income from those investments decreased by $497,000
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 163 basis points to 2.09%
for the quarter ended June 30, 2010, from 3.72% 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 June 30, 2010
was $16.7 million, compared to $24.2 million for the prior quarter one year
earlier, a decrease of $7.5 million, or 31%. 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 1.60% for the quarter ended June 30, 2010,
from 2.37% for the same quarter one year earlier, somewhat offset by a $71
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 and
other borrowings. 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 $6.9 million, or 32%, to $14.7 million for the
quarter ended June 30, 2010 compared to $21.6 million for the same quarter in
the prior year as a result of an 82 basis point decrease in the cost of
interest-bearing deposits and despite a modest (4.1%) increase in the average
balance of deposits. Average deposit balances increased $151 million,
to $3.830 billion for the quarter ended June 30, 2010, from $3.680 billion for
the quarter ended June 30, 2009, while the average rate paid on deposit balances
decreased to 1.54% in the current quarter from 2.36% for the quarter ended June
30, 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 second quarter of 2010. While we
do not anticipate further significant reductions in market interest rates, we do
expect some 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 $46
million for the quarter ended June 30, 2010, compared to $116 million for the
same quarter one year earlier. The average rate paid on FHLB advances
for the quarter ended June 30, 2010 increased by 45 basis points to 2.79%,
compared to the same quarter in the prior year, while average FHLB borrowings
decreased $70 million, resulting in a $355,000 decrease in the related interest
expense. The higher average rate for FHLB advances was primarily the
result of the repayment of certain short-term low rate borrowings, resulting in
average outstanding advances that reflect fixed-rate borrowings that are all
more than two years old.
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 $130 million in customer retail repurchase agreements
and $50 million of senior bank notes, was $180 million for the quarter ended
June 30, 2010, a decrease of $10 million over the same quarter in the prior
year. The related interest expense for other borrowings decreased by
$45,000 to $626,000 for the quarter ended June 30, 2010, from $671,000 for the
same quarter one year earlier, as the decrease in average balances outstanding
for the quarter was mitigated by a three basis points decrease in the average
rate paid. The average rate paid on other borrowings was 1.39% for
the quarter ended June 30, 2010, compared to 1.42% for the same quarter one year
earlier. 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 21 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 3.39% for the quarter ended June 30,
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
4.05%. 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, although three-month LIBOR did increase
modestly compared to the immediately preceding quarter.
The
following tables provide additional comparative data on our operating
performance (dollars in thousands):
|
Quarters Ended
|
|
Six Months Ended
|
|
Average Balances
|
June 30
|
|
June 30
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
216,576
|
|
$
|
8,793
|
|
$
|
194,188
|
|
$
|
8,665
|
|
Investment securities
|
|
|
262,554
|
|
|
215,055
|
|
|
261,266
|
|
|
213,787
|
|
Mortgage-backed obligations
|
|
|
91,142
|
|
|
133,025
|
|
|
94,229
|
|
|
139,033
|
|
FHLB stock
|
|
|
37,371
|
|
|
37,371
|
|
|
37,371
|
|
|
37,371
|
|
Total average interest-earning securities and cash
equivalents
|
|
|
607,643
|
|
|
394,244
|
|
|
587,014
|
|
|
398,856
|
|
Loans receivable
|
|
|
3,677,140
|
|
|
3,925,196
|
|
|
3,701,552
|
|
|
3,934,002
|
|
Total average interest-earning assets
|
|
|
4,284,783
|
|
|
4,319,440
|
|
|
4,288,566
|
|
|
4,332,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets (including fair value
adjustments on
interest-earning assets)
|
|
|
268,864
|
|
|
199,981
|
|
|
262,193
|
|
|
196,604
|
|
Total average assets
|
|
$
|
4,553,647
|
|
$
|
4,519,421
|
|
$
|
4,550,759
|
|
$
|
4,529,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
3,830,659
|
|
$
|
3,679,653
|
|
$
|
3,815,798
|
|
$
|
3,686,455
|
|
Advances from FHLB
|
|
|
46,026
|
|
|
115,841
|
|
|
57,299
|
|
|
124,882
|
|
Other borrowings
|
|
|
180,255
|
|
|
190,151
|
|
|
180,563
|
|
|
174,761
|
|
Junior subordinated debentures
|
|
|
123,716
|
|
|
123,716
|
|
|
123,716
|
|
|
123,716
|
|
Total average interest-bearing
liabilities
|
|
|
4,180,656
|
|
|
4,109,361
|
|
|
4,177,376
|
|
|
4,109,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing
liabilities (including fair value adjustments on interest-bearing
liabilities)
|
|
(38,527
|
)
|
|
(18,421
|
)
|
|
(37,498
|
)
|
|
(13,201
|
)
|
Total average liabilities
|
|
|
4,142,129
|
|
|
4,090,940
|
|
|
4,139,878
|
|
|
4,096,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
411,518
|
|
|
428,481
|
|
|
410,881
|
|
|
432,849
|
|
Total average liabilities and equity
|
|
$
|
4,553,647
|
|
$
|
4,519,421
|
|
$
|
4,550,759
|
|
$
|
4,529,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Yield/Expense (rates are
annualized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Yield:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
0.23
|
%
|
|
0.23
|
%
|
|
0.23
|
%
|
|
0.23
|
%
|
Investment securities
|
|
|
3.04
|
|
|
3.89
|
|
|
3.07
|
|
|
4.02
|
|
Mortgage-backed obligations
|
|
|
4.60
|
|
|
4.73
|
|
|
4.65
|
|
|
4.89
|
|
FHLB stock
|
|
|
0.00
|
|
|
0.00
|
|
|
0.00
|
|
|
0.00
|
|
Total interest rate yield on securities and cash
equivalents
|
|
|
2.09
|
|
|
3.72
|
|
|
2.19
|
|
|
3.86
|
|
Loans receivable
|
|
|
5.72
|
|
|
5.67
|
|
|
5.73
|
|
|
5.73
|
|
Total interest rate yield on interest-earning
assets
|
|
|
5.21
|
|
|
5.49
|
|
|
5.25
|
|
|
5.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1.54
|
|
|
2.36
|
|
|
1.61
|
|
|
2.45
|
|
Advances from FHLB
|
|
|
2.79
|
|
|
2.34
|
|
|
2.40
|
|
|
2.25
|
|
Other borrowings
|
|
|
1.39
|
|
|
1.42
|
|
|
1.41
|
|
|
1.04
|
|
Junior subordinated debentures
|
|
|
3.39
|
|
|
4.05
|
|
|
3.38
|
|
|
4.21
|
|
Total interest rate expense on interest-bearing
liabilities
|
|
|
1.60
|
|
|
2.37
|
|
|
1.67
|
|
|
2.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest spread
|
|
|
3.61
|
%
|
|
3.12
|
%
|
|
3.58
|
%
|
|
3.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin on interest earning
assets
|
|
|
3.65
|
%
|
|
3.24
|
%
|
|
3.62
|
%
|
|
3.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Key Financial Ratios (ratios are
annualized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return (loss) on average assets
|
|
|
(0.44
|
)%
|
|
(1.47
|
)%
|
|
(0.29
|
)%
|
|
(1.15
|
)%
|
Return (loss) on average equity
|
|
(4.82
|
)
|
|
(15.46
|
)
|
|
(3.17
|
)
|
|
(12.01
|
)
|
Average equity / average assets
|
|
9.04
|
|
|
9.48
|
|
|
9.03
|
|
|
9.56
|
|
Average interest-earning assets / interest-bearing
liabilities
|
|
102.49
|
|
|
105.11
|
|
|
102.66
|
|
|
105.43
|
|
Non-interest (other operating) income/average
assets
|
|
0.54
|
|
|
1.77
|
|
|
0.62
|
|
|
1.10
|
|
Non-interest (other operating) expenses / average
assets
|
|
3.35
|
|
|
3.27
|
|
|
3.25
|
|
|
3.15
|
|
Efficiency ratio (1)
|
|
84.26
|
|
|
67.19
|
|
|
80.70
|
|
|
74.79
|
|
Tangible common stockholders’
equity to tangible assets (2)
|
|
9.08
|
|
|
6.20
|
|
|
9.08
|
|
|
6.20
|
|
|
(1) Other
operating expense divided by the total of net interest income (before
provision for loan losses) and other operating income
(non-interest income)
|
(2) Tangible common equity and tangible assets exclude
preferred stock, goodwill, core deposit and other intangibles (see page
35).
Provision and Allowance for Loan
Losses. During the quarter ended June 30, 2010, the provision
for loan losses was $16.0 million, compared to $45.0 million for the quarter
ended June 30, 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 in the first
half of 2010, 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 June 30, 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 June 30, 2010 was significantly
less than the previous year, it still remains significantly elevated in relation
to our less recent 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
has moderated. The provisions for loan losses for the quarter and six
months ended June 30, 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. Since the second half of 2008, these concerns have remained
elevated as evidence of price declines for certain housing and related lot and
land markets has accumulated. 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 $16 million for the quarter ended June 30, 2010, compared to $34
million for the same quarter a year earlier. During the six months
ended June 30, 2010, net charge-offs were $30 million, compared to $52 million
during the comparable period in 2009. Non-performing loans decreased
by $48 million over the last twelve months to $177 million at June 30, 2010,
compared to $225 million at June 30, 2009. A comparison of the
allowance for loan losses at June 30, 2010 and 2009 reflects an increase of $5
million, or 5%, to $96 million at June 30, 2010, from $91 million at June 30,
2009. Similarly, the allowance for loan losses as a percentage of
total loans (loans receivable excluding allowance for losses) increased to 2.63%
at June 30, 2010, compared to 2.32% at June 30, 2009. Likewise, the
allowance as a percentage of non-performing loans increased to 54% at June 30,
2010, compared to 40% a year earlier.
As of
June 30, 2010, we had identified $222 million of impaired
loans. Impaired loans include loans on non-accrual, TDRs that are
performing under their restructured terms and loans that are 90 days or more
past due, but are still on accrual. Impaired loans may be evaluated
for reserve purposes using either a specific impairment analysis or collectively
evaluated as part of homogeneous pools. Impaired loans totaling $153
million were subjected to a specific impairment analysis and of those loans, $78
million were found to have no need for an allowance 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 $75
million of loans subjected to a specific impairment analysis were found to
require allowances totaling $17 million. Impaired loans that were
collectively evaluated for reserve purposes within homogeneous pools totaled $69
million and were found to require allowances totaling $5 million. The
$69 million evaluated for reserve purposes within homogeneous pools included $44
million of restructured loans which are currently performing according to their
restructured terms.
We
believe that the allowance for loan losses as of June 30, 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 $6.2 million for the quarter ended June 30,
2010, compared to $20.0 million for the same quarter in the prior
year. Excluding the fair value adjustments, other operating income
from core operations decreased by $1.9 million, or 21%, to $7.0 million for the
quarter ended June 30, 2010 compared to $8.9 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 stronger
than in the current year. As a result of this drop in activity, gains
on sale of loans decreased by $2.0 million to $817,000 for the quarter ended
June 30, 2010, compared to $2.9 million for the same quarter in the prior
year. Loan sales for the quarter ended June 30, 2010 totaled $53
million, compared to $195 million for the quarter ended June 30,
2009. 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 although modestly stronger
in the most recent quarter. Despite the restrained level of customer
transaction volumes, income from deposit fees and other service charges
increased by $224,000, or 4%, to $5.6 million for the quarter ended June 30,
2010, compared to $5.4 million for the same quarter in the prior year, aided in
part by growth in our account base. For the quarter ended June 30,
2010, we recorded an aggregate net loss of $821,000 in fair value
adjustments. By comparison, we recorded a net gain of $11.0 million
in fair value adjustments for the quarter ended June 30,
2009. The fair value adjustments in both the quarters and six
months ended June 30, 2010 and 2009 primarily reflect changes in the values of
junior subordinated debentures we have issued, partially offset by modest
changes in the value of certain investment securities and OTTI
charges.
Other
operating income, including changes in the valuation of financial instruments
carried at fair value as well as non-interest revenues from core operations, was
$13.9 million for the six months ended June 30, 2010, compared to $24.6 million
for the same period a year earlier.
Excluding
the fair value adjustments, other operating income from core operations
decreased by $2.8 million, or 16%, to $14.1 million for the six months ended
June 30, 2010 compared to $16.8 million for the first six months of the prior
year, again as a result of decreased mortgage banking activity. Gains
on sale of loans decreased by $3.8 million, or 68%, to $1.8 million for the six
months ended June 30, 2010, compared to $5.6 million for the same period in the
prior year. Loan sales for the six months ended June 30, 2010 totaled
$121 million, compared to $344 million for the six months ended June 30,
2009. During the first six months of 2010, we experienced a slight
increase in deposit service fees of $448,000 and net loan servicing fees of
$650,000. For the six months ended June 30, 2010, we recorded a net
gain of $1.1 million in fair value adjustments, more than offset by $1.2 million
of OTTI charges on certain investments. During the six months ended
June 30, 2009, we recorded a net gain of $8.0 million, only partially offset by
a minor OTTI charge of $162,000.
Other Operating
Expenses. Other operating expenses for the quarter ended June
30, 2010 increased $1.1 million, or 3%, to $38.0 million compared to $36.9
million for the quarter ended June 30, 2009. Expenses for the second
quarter of 2010 reflected significantly higher costs associated with problem
loan collection activities including charges related to REO, and a reduced
credit for capitalized loan origination costs, partially offset by reductions in
compensation, occupancy and deposit insurance costs. With regards to
the decrease in FDIC deposit insurance expense, during the second quarter of
2009, the FDIC imposed a five basis point special assessment on
banks. The Company paid $2.1 million in addition to regular deposit
insurance during that period. Other operating expenses as a
percentage of average assets were 3.35% for the quarter ended June 30, 2010,
compared to 3.27% for the same quarter one year earlier. Expenses
related to REO, including losses on sales and valuation adjustments as well as
taxes and maintenance, increased $2.4 million, or 131%, to $4.2 million for the
quarter ended June 30, 2010, compared to $1.8 million for the same quarter in
the prior year. Professional services increased by $691,000, or 58%,
to $1.9 million for the quarter ended June 30, 2010, compared to $1.2 million in
the same quarter in the prior year, primarily as a result of legal fees related
to collection on nonaccrual loans. In contrast, salary and employee
benefits decreased $735,000, or 4%, to $16.8 million for the quarter ended June
30, 2010 from $17.5 million for the quarter ended June 30, 2009, primarily
reflecting reduced staffing levels. Likewise, occupancy costs
decreased $347,000, or 6%, to $5.6 million for the quarter ended June 30, 2010
compared to $5.9 million in the same quarter one year ago as we continued to
achieve additional operating efficiencies in this important area.
Other
operating expenses for the six months ended June 30, 2010 increased $2.8
million, or 4%, to $73.4 million compared to $70.7 million for the six months
ended June 30, 2009. Expenses for the first half of 2010 reflected
significantly higher costs associated with problem loan collection activities
including charges related to REO, a reduced credit for capitalized loan
origination costs, and higher professional services, partially offset by
reductions in compensation, occupancy and deposit insurance
costs. Other operating expenses as a percentage of average assets
were 3.25% for the six months ended June 30, 2010, compared to 3.15% for the
same period one year earlier. Expenses related to REO increased $4.8
million, or 198%, to $7.2 million for the six months ended June 30, 2010,
compared to $2.4 million for the first half of 2009. Professional
services increased by $784,000, or 33%, to $3.2 million for the six months ended
June 30, 2010, compared to $2.4 million in the same period in the prior year,
primarily as a result of legal fees related to collection on nonaccrual
loans. In contrast, salary and employee benefits decreased $1.8
million, or 5%, to $33.4 million for the six months ended June 30, 2010 from
$35.1 million for the six months ended June 30, 2009, and occupancy costs
decreased $797,000, or 7%, to $11.2 million for the six months ended June 30,
2010 compared to $12.0 million in the same period one year ago, again reflecting
reduced staffing and additional operating efficiencies.
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 June 30, 2010 and 2009 were 48.0% and
40.3%, 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 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 throughout 2009 and into the early months of 2010, home and lot
sales activity has been 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 and six months ended June
30, 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 to $282 million, or
6.02% of total assets, at June 30, 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 elevated levels of
delinquencies and foreclosures for residential construction and land development
loans, which, including related REO, represented approximately 64% of our
non-performing assets at June 30, 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 through the first half of 2010. Reflecting these value
declines, we maintained the size of our allowance for loan losses even though
non-performing loans and 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
June 30, 2010, our allowance for loan losses was $95.5 million, or 2.63% of
total loans and 54% 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 declined slightly during 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 $283 million in non-performing assets are $175 million in nonaccrual loans,
including $111 million of construction and land development loans, and $102
million in REO and other repossessed assets. While we had a decrease
in our nonaccrual loans in the most recent quarter, it was partially 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 REO included approximately $83
million, or 46%, in the Puget Sound region, $64 million, or 35%, in the greater
Portland market area, $14 million, or 8%, in the greater Boise market area, with
the remaining $20 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 Banks will
not collect all amounts due, both principal and interest, in accordance with the
terms of the original loan agreement. If any restructured loan becomes
delinquent or other matters call into question the borrower's ability to repay
full interest and principal in accordance with the restructured terms, the
restructured loan(s) would be reclassified as 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):
|
June
30
2010
|
|
December
31
2009
|
|
June
30
2009
|
|
|
|
|
|
Nonaccrual
Loans: (1)
|
|
|
|
|
|
|
|
|
|
Secured
by real estate:
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
9,433
|
|
$
|
7,300
|
|
$
|
7,244
|
|
Multifamily
|
|
363
|
|
|
383
|
|
|
--
|
|
Construction
and land
|
|
110,931
|
|
|
159,264
|
|
|
180,989
|
|
One-
to four-family
|
|
19,878
|
|
|
14,614
|
|
|
15,167
|
|
Commercial
business
|
|
23,474
|
|
|
21,640
|
|
|
10,508
|
|
Agricultural
business, including secured by farmland
|
|
7,556
|
|
|
6,277
|
|
|
7,478
|
|
Consumer
|
|
3,588
|
|
|
3,923
|
|
|
2,058
|
|
|
|
175,223
|
|
|
213,401
|
|
|
223,444
|
|
Loans
more than 90 days delinquent, still on accrual:
|
|
|
|
|
|
|
|
|
|
Secured
by real estate:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
1,137
|
|
|
--
|
|
|
--
|
|
Multifamily
|
|
--
|
|
|
--
|
|
|
--
|
|
Construction
and land
|
|
692
|
|
|
--
|
|
|
603
|
|
One-
to four-family
|
|
772
|
|
|
358
|
|
|
624
|
|
Commercial
business
|
|
--
|
|
|
--
|
|
|
209
|
|
Agricultural
business, including secured by farmland
|
|
--
|
|
|
--
|
|
|
--
|
|
Consumer
|
|
118
|
|
|
91
|
|
|
189
|
|
|
|
2,719
|
|
|
449
|
|
|
1,625
|
|
Total
non-performing loans
|
|
177,942
|
|
|
213,850
|
|
|
225,069
|
|
Securities
on nonaccrual at fair value
|
|
3,500
|
|
|
4,232
|
|
|
--
|
|
REO
and other repossessed assets held for sale, net
|
|
101,701
|
|
|
77,802
|
|
|
57,197
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-performing assets
|
$
|
283,143
|
|
$
|
295,884
|
|
$
|
282,266
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-performing loans to net loans before allowance for loan
losses
|
|
4.90
|
%
|
|
5.64
|
%
|
|
5.75
|
%
|
Total
non-performing loans to total assets
|
|
3.78
|
%
|
|
4.53
|
%
|
|
4.97
|
%
|
Total
non-performing assets to total assets
|
|
6.02
|
%
|
|
6.27
|
%
|
|
6.23
|
%
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans (2)
|
$
|
43,899
|
|
$
|
43,683
|
|
$
|
55,031
|
|
|
|
|
|
|
|
|
|
|
|
Loans
30-89 days past due and on accrual
|
$
|
26,050
|
|
$
|
34,156
|
|
$
|
31,453
|
|
(1) For
the quarter and six months ended June 30, 2010, interest income of $3.6 million
and $7.2 million, respectively, 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 June 30, 2010 (dollars in thousands):
|
|
Washington
|
|
Oregon
|
|
Idaho
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
9,488
|
|
$
|
744
|
|
$
|
338
|
|
$
|
--
|
|
$
|
10,570
|
|
Multifamily
|
|
|
363
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
363
|
|
Construction
and land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family construction
|
|
|
10,966
|
|
|
6,978
|
|
|
5,568
|
|
|
--
|
|
|
23,512
|
|
Multifamily
construction
|
|
|
9,280
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
9,280
|
|
Commercial
construction
|
|
|
1,551
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,551
|
|
Residential
land acquisition & development
|
|
|
30,076
|
|
|
16,765
|
|
|
898
|
|
|
--
|
|
|
47,739
|
|
Residential
land improved lots
|
|
|
3,771
|
|
|
9,610
|
|
|
317
|
|
|
--
|
|
|
13,698
|
|
Residential
land unimproved
|
|
|
10,644
|
|
|
348
|
|
|
321
|
|
|
--
|
|
|
11,313
|
|
Commercial
land acquisition & development
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Commercial
land improved
|
|
|
454
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
454
|
|
Commercial
land unimproved
|
|
|
4,076
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
4,076
|
|
Total
construction and land
|
|
|
70,818
|
|
|
33,701
|
|
|
7,104
|
|
|
--
|
|
|
111,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-
to four-family
|
|
|
13,068
|
|
|
7,582
|
|
|
--
|
|
|
--
|
|
|
20,650
|
|
Commercial
business
|
|
|
14,117
|
|
|
4,424
|
|
|
958
|
|
|
3,975
|
|
|
23,474
|
|
Agricultural
business, including secured by farmland
|
|
|
1,775
|
|
|
569
|
|
|
5,212
|
|
|
--
|
|
|
7,556
|
|
Consumer
|
|
|
3,422
|
|
|
42
|
|
|
242
|
|
|
--
|
|
|
3,706
|
|
Total
non-performing loans
|
|
|
113,051
|
|
|
47,062
|
|
|
13,854
|
|
|
3,975
|
|
|
177,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
on nonaccrual
|
|
|
3,000
|
|
|
--
|
|
|
500
|
|
|
--
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REO
and repossessed assets
|
|
|
45,199
|
|
|
40,277
|
|
|
16,225
|
|
|
--
|
|
|
101,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-performing assets
|
|
$
|
161,250
|
|
$
|
87,339
|
|
$
|
30,579
|
|
$
|
3,975
|
|
$
|
283,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of non-performing assets
|
|
|
57.0
|
%
|
|
30.8
|
%
|
|
10.8
|
%
|
|
1.4
|
%
|
|
100.0
|
%
|
In
addition to the non-performing loans as of June 30, 2010, we had other
classified loans with an aggregate outstanding balance of $217 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 June 30, 2010 are included
in the following table (dollars in thousands):
Amount
|
|
Percent
of Total Non-Performing Loans
|
|
Collateral
Securing the Indebtedness
|
|
Geographic
Location
|
|
$
|
16,230
|
|
|
9.1
|
%
|
|
85
residential lots
Two
completed homes
|
|
Greater
Seattle-Puget Sound
|
|
|
|
|
|
|
|
|
|
|
|
9,280
|
|
|
5.2
|
|
|
163-unit
multi-family complex under construction
|
|
Greater
Seattle-Puget Sound
|
|
|
|
|
|
|
|
|
|
|
|
8,876
|
|
|
5.0
|
|
|
105
residential lots
|
|
Greater
Seattle-Puget Sound
|
|
|
|
|
|
|
|
|
|
|
|
6,172
|
|
|
3.5
|
|
|
19
residential lots
Three
completed homes
|
|
Greater
Portland, OR area
|
|
|
|
|
|
|
|
|
|
|
|
6,093
|
|
|
3.4
|
|
|
Five
parcels of land with plat approval for 51
residential
lots
|
|
Greater
Seattle-Puget Sound
|
|
|
|
|
|
|
|
|
|
|
|
6,091
|
|
|
3.4
|
|
|
68
completed townhouse lots
|
|
Greater
Portland, OR area
|
|
|
|
|
|
|
|
|
|
|
|
4,437
|
|
|
2.5
|
|
|
85
residential lots
Two
completed homes
|
|
Central
Oregon
|
|
|
|
|
|
|
|
|
|
|
|
4,076
|
|
|
2.3
|
|
|
Seven
acres commercial land
|
|
Greater
Seattle-Puget Sound
|
|
|
|
|
|
|
|
|
|
|
|
3,974
|
|
|
2.2
|
|
|
Accounts
receivable, inventory and equipment
|
|
Helena,
MT
|
|
|
|
|
|
|
|
|
|
|
|
3,966
|
|
|
2.2
|
|
|
Unsecured
|
|
Central
Oregon
|
|
|
|
|
|
|
|
|
|
|
|
3,888
|
|
|
2.2
|
|
|
Dairy
cows and farm equipment
|
|
Greater
Boise area
|
|
|
|
|
|
|
|
|
|
|
|
3,450
|
|
|
1.9
|
|
|
Three
residential lots
Two
completed homes
|
|
Greater
Spokane, WA
|
|
|
|
|
|
|
|
|
|
|
|
3,251
|
|
|
1.8
|
|
|
30
condo sites
13
completed residential condos
|
|
Greater
Portland, OR area
|
|
|
|
|
|
|
|
|
|
|
|
2,689
|
|
|
1.5
|
|
|
Accounts
receivable, inventory and equipment
|
|
Greater
Seattle-Puget Sound
|
|
|
|
|
|
|
|
|
|
|
|
2,599
|
|
|
1.5
|
|
|
Land
with preliminary plat approval for 29 residential lots 22 unfinished
lots
|
|
Greater
Seattle-Puget Sound
|
|
|
|
|
|
|
|
|
|
|
|
2,456
|
|
|
1.4
|
|
|
18
residential lots
|
|
Greater
Seattle-Puget Sound
|
|
|
|
|
|
|
|
|
|
|
|
2,444
|
|
|
1.4
|
|
|
Four
unfinished homes
Four
residential lots
|
|
Greater
Portland, OR area
|
|
|
|
|
|
|
|
|
|
|
|
2,435
|
|
|
1.4
|
|
|
11
completed homes
10
residential lots
|
|
Greater
Boise/South Idaho area
|
|
|
|
|
|
|
|
|
|
|
|
2,081
|
|
|
1.2
|
|
|
15
residential lots
|
|
Greater
Portland, OR area
|
|
|
|
|
|
|
|
|
|
|
|
83,454
|
|
|
46.9
|
|
|
Various
collateral; relationships under $2 million
|
|
Various
(mostly in WA, OR, ID)
|
|
|
|
|
|
|
|
|
|
|
$
|
177,942
|
|
|
100.0
|
%
|
|
Total
non-performing loans
|
|
|
At June
30, 2010, we had $101.5 million of REO, 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 mixed-use three-story office/retail commercial property in the
greater Seattle area with a book value of $6.8 million. The third
largest holding consists of three contiguous parcels of commercially-zoned land
in central Oregon with a book value of $6.1 million. The fourth
largest is a 165-lot townhouse development in the greater Portland area with a
book value of $5.7 million. The fifth largest holding is an
unfinished residential subdivision with 35 lots and a book value of $3.5 million
in the greater Portland area. The sixth largest holding is an
unfinished residential subdivision with 65 lots and a book value of $3.4 million
in the greater Portland area. The table below summarizes
our REO by geographic location and property type as of June 30, 2010 (dollars in
thousands):
Amount
|
|
Percent
of Total REO
|
|
|
REO
Description
|
|
Geographic
Location
|
|
|
|
|
|
|
|
|
|
|
$
|
38,544
|
|
|
37.9
|
%
|
|
22
completed homes
Six
homes under construction
288
residential lots
173
townhouse lots
Finished
site for 114 apartments
20
acres of land
One
developed parcel of commercial land
One
undeveloped parcel of commercial land
|
|
Greater
Portland, OR area
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,857
|
|
|
33.4
|
|
|
21
completed homes
One
mixed-use three-story retail/commercial property
One
land development project: 167 SFD lots
41
residential lots
25
acres of land
One
agricultural property with a SFD
|
|
Greater
Seattle-Puget Sound
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,225
|
|
|
16.0
|
|
|
Six
completed four-plexes
13
completed homes
277
residential lots
Seven
land development projects
Three
commercial lots
32
townhouse lots
|
|
Greater
Boise, ID area
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,065
|
|
|
6.0
|
|
|
Three
parcels of unimproved land zoned commercial
|
|
Other
Oregon locations
|
|
|
|
|
|
|
|
|
|
|
|
4,017
|
|
|
4.0
|
|
|
Four
completed homes
34
residential lots
Two
mini-storage sites
Two
commercial real estate sites
|
|
Other
Washington locations
|
|
|
|
|
|
|
|
|
|
|
|
2,777
|
|
|
2.7
|
|
|
Two
completed homes
Three
unfinished condos under construction
Land
for 81 residential lots
One
agricultural property with a SFD
|
|
Greater
Spokane, WA area
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101,485
|
|
|
100.0
|
%
|
|
|
|
Total
REO
|
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 six
months ended June 30, 2010, repayments exceeded loan originations by $114
million. In addition, during the six months ended June 30, 2010, we
sold $121 million of loans while purchases of securities exceeded repayments and
sales of securities by only $212,000. Net deposits decreased $27
million for the six months ended June 30, 2010. While public funds
and retail deposits were relatively stable, deposit activity for the six months
ended June 30, 2010 included a net decrease of $19 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 an
additional $15 million for the quarter ended June 30, 2010 after decreasing $128
million during the first quarter of 2010. Other borrowings, including
$50 million of senior bank notes issued under the TLGP, were nearly unchanged
for the six months ended June 30, 2010. During the quarter the
Company announced the completion of an offering of its common
stock. Net receipts, after the deduction for stock offering costs,
were $148.0 million through June 30, 2010. During the first week of
July 2010, an additional 7,139,000 shares from the over-allotment option were
exercised, which settled on July 2, 2010. As a result of all of this
activity, our overall liquidity remained strong and our net cash position
increased by $159 million during the second quarter of 2010 and was $114 million
higher on June 30, 2010 than it was at December 31, 2009.
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 June 30, 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
June 30, 2010, we had outstanding loan commitments totaling $759 million,
including undisbursed loans in process and unused credit lines totaling $712
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 June 30, 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 $955
million, 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 $46 million, or 1% of our assets at June 30,
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 $350 million. We have
utilized facility on a limited basis; however, we had no funds borrowed from the
Federal Reserve Bank at June 30, 2010 or 2009.
At June
30, 2010, certificates of deposit amounted to $1.888 billion, or 49% of our
total deposits, including $1.605 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 June 30, 2010, Banner Corporation and
the Banks each exceeded all current regulatory capital requirements including
the requirements included in both the Bank MOU and FRB MOU. (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 June 30, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banner
Corporation—consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
$
|
639,089
|
|
|
17.12
|
%
|
$
|
298,716
|
|
|
8.00
|
%
|
|
|
|
|
|
|
Tier
1 capital to risk-weighted assets
|
|
591,812
|
|
|
15.85
|
|
|
149,358
|
|
|
4.00
|
|
|
|
|
|
|
|
Tier
1 leverage capital to average assets
|
|
591,812
|
|
|
13.02
|
|
|
181,816
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banner
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
|
512,933
|
|
|
14.44
|
|
|
284,109
|
|
|
8.00
|
|
$
|
355,137
|
|
|
10.00
|
%
|
Tier
1 capital to risk-weighted assets
|
|
467,936
|
|
|
13.18
|
|
|
142,055
|
|
|
4.00
|
|
|
213,082
|
|
|
6.00
|
|
Tier
1 leverage capital to average assets
|
|
467,936
|
|
|
10.77
|
|
|
173,846
|
|
|
4.00
|
|
|
217,307
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Islanders
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
|
28,046
|
|
|
13.68
|
|
|
16,398
|
|
|
8.00
|
|
|
20,497
|
|
|
10.00
|
|
Tier
1 capital to risk-weighted assets
|
|
25,942
|
|
|
12.66
|
|
|
8,199
|
|
|
4.00
|
|
|
12,298
|
|
|
6.00
|
|
Tier
1 leverage capital to average assets
|
|
25,942
|
|
|
11.94
|
|
|
8,689
|
|
|
4.00
|
|
|
10,861
|
|
|
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 June 30, 2010, our loans with interest rate floors
totaled approximately $1.6 billion and had a weighted average floor rate of
5.74%. 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 June 30, 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
|
|
$
|
11,204
|
|
|
6.9
|
%
|
$
|
(156,883
|
)
|
|
(23.7
|
)%
|
|
+300
|
|
|
11,093
|
|
|
6.8
|
|
|
(125,709
|
)
|
|
(19.0
|
)
|
|
+200
|
|
|
10,246
|
|
|
6.3
|
|
|
(86,149
|
)
|
|
(13.0
|
)
|
|
+100
|
|
|
6,358
|
|
|
3.9
|
|
|
(42,027
|
)
|
|
(6.3
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
-25
|
|
|
(985
|
)
|
|
(0.6
|
)
|
|
4,763
|
|
|
0.7
|
|
|
-50
|
|
|
(2,597
|
)
|
|
(1.6
|
)
|
|
8,818
|
|
|
1.3
|
|
|
(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 June 30, 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 June 30, 2010, total
interest-earning assets maturing or repricing within one year exceeded total
interest-bearing liabilities maturing or repricing in the same time period by
$94.4 million, representing a one-year cumulative gap to total assets ratio of
1.99%.
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 June 30, 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 June 30, 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
|
|
|
(dollars
in thousands)
|
|
Interest-earning
assets: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
loans
|
$
|
321,806
|
|
$
|
18,787
|
|
$
|
23,653
|
|
$
|
2,906
|
|
$
|
15
|
|
$
|
--
|
|
$
|
367,167
|
|
Fixed-rate
mortgage loans
|
|
137,140
|
|
|
93,085
|
|
|
301,401
|
|
|
176,790
|
|
|
168,726
|
|
|
73,638
|
|
|
950,780
|
|
Adjustable-rate
mortgage loans
|
|
480,827
|
|
|
168,814
|
|
|
416,616
|
|
|
186,506
|
|
|
9,612
|
|
|
53
|
|
|
1,262,428
|
|
Fixed-rate
mortgage-backed securities
|
|
27,253
|
|
|
17,956
|
|
|
24,613
|
|
|
3,604
|
|
|
2,196
|
|
|
1,149
|
|
|
76,771
|
|
Adjustable-rate
mortgage-backed securities
|
|
3,198
|
|
|
2,099
|
|
|
6,441
|
|
|
1,062
|
|
|
--
|
|
|
--
|
|
|
12,800
|
|
Fixed-rate
commercial/agricultural loans
|
|
74,019
|
|
|
35,718
|
|
|
73,417
|
|
|
25,575
|
|
|
5,791
|
|
|
1,568
|
|
|
216,088
|
|
Adjustable-rate
commercial/agricultural loans
|
|
514,378
|
|
|
12,994
|
|
|
41,936
|
|
|
11,512
|
|
|
50
|
|
|
--
|
|
|
580,870
|
|
Consumer
and other loans
|
|
154,252
|
|
|
15,180
|
|
|
49,130
|
|
|
20,462
|
|
|
26,636
|
|
|
943
|
|
|
266,603
|
|
Investment
securities and interest-earning deposits
|
|
523,913
|
|
|
10,663
|
|
|
35,537
|
|
|
16,601
|
|
|
33,664
|
|
|
63,235
|
|
|
683,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
rate sensitive assets
|
|
2,236,786
|
|
|
375,296
|
|
|
972,744
|
|
|
445,018
|
|
|
246,690
|
|
|
140,586
|
|
|
4,417,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular
savings and NOW accounts
|
|
161,379
|
|
|
141,288
|
|
|
329,671
|
|
|
329,671
|
|
|
--
|
|
|
--
|
|
|
962,009
|
|
Money
market deposit accounts
|
|
220,610
|
|
|
132,367
|
|
|
88,245
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
441,222
|
|
Certificates
of deposit
|
|
1,143,787
|
|
|
461,553
|
|
|
241,489
|
|
|
37,249
|
|
|
3,385
|
|
|
50
|
|
|
1,887,513
|
|
FHLB
advances
|
|
4,203
|
|
|
32,800
|
|
|
10,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
47,003
|
|
Other
borrowings
|
|
(18
|
)
|
|
--
|
|
|
50,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
49,982
|
|
Junior
subordinated debentures
|
|
97,942
|
|
|
--
|
|
|
25,774
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
123,716
|
|
Retail
repurchase agreements
|
|
122,755
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
122,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
rate sensitive liabilities
|
|
1,750,658
|
|
|
768,008
|
|
|
745,179
|
|
|
366,920
|
|
|
3,385
|
|
|
50
|
|
|
3,634,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
(deficiency) of interest-sensitive assets over interest-sensitive
liabilities
|
$
|
486,128
|
|
$
|
(392,712
|
)
|
$
|
227,565
|
|
$
|
78,098
|
|
$
|
243,305
|
|
$
|
140,536
|
|
$
|
782,920
|
|
Cumulative
excess (deficiency) of interest-sensitive assets
|
$
|
486,128
|
|
$
|
93,416
|
|
$
|
320,981
|
|
$
|
399,079
|
|
$
|
642,384
|
|
$
|
782,920
|
|
$
|
782,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
ratio of interest-earning assets to interest-bearing
liabilities
|
|
127.77
|
%
|
|
103.71
|
%
|
|
109.83
|
%
|
|
110.99
|
%
|
|
117.68
|
%
|
|
121.54
|
%
|
|
121.54
|
%
|
Interest
sensitivity gap to total assets
|
|
10.34
|
%
|
|
(8.35
|
)%
|
|
4.84
|
%
|
|
1.66
|
%
|
|
5.17
|
%
|
|
2.99
|
%
|
|
16.65
|
%
|
Ratio
of cumulative gap to total assets
|
|
10.34
|
%
|
|
1.99
|
%
|
|
6.83
|
%
|
|
8.49
|
%
|
|
13.66
|
%
|
|
16.65
|
%
|
|
16.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $(653.2) million, or (13.9%) of total assets at June 30,
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 June 30, 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 June 30, 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 June 30, 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 that we have entered into with the FDIC and
DFI and the Federal Reserve and lack of compliance could result in additional
regulatory actions.
On March
23, 2010, the FDIC and the DFI entered into an agreement on a Memorandum of
Understanding, or Bank MOU, with Banner Bank. Under the terms of the Bank MOU,
Banner Bank may not:
·
|
appoint
any new director or senior executive officer or change the
responsibilities of any current senior executive officers without the
prior written non-objection of the FDIC and/or the DFI;
and
|
·
|
pay
cash dividends to its holding company, Banner Corporation, without the
prior written consent of the FDIC and/or the
DFI.
|
Other
material provisions of the Bank MOU require Banner Bank to:
·
|
maintain
Tier 1 Capital of not less than 10.0% of Banner 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;
|
·
|
formulate
and implement a written plan addressing retention of profits, reduction of
overhead expenses and a budget through 2012 acceptable to the FDIC and the
DFI;
|
·
|
eliminate
from its books all assets classified “Loss” that have not been previously
collected or charged-off;
|
·
|
by
June 30, 2010, reduce all assets classified “Substandard” in the report of
examination to not more than 80% of Tier 1 capital plus the allowance for
loan losses;
|
·
|
develop
a written plan for reducing adversely classified
assets;
|
·
|
develop
a written plan for reducing the aggregate amount of its commercial real
estate concentration; and
|
·
|
revise,
adopt and fully implement a written liquidity and funds management
policy.
|
Banner
Bank is required to provide the FDIC and DFI with progress reports regarding its
compliance with the provisions of the Bank MOU.
In
addition, on March 29, 2010, the Federal Reserve Bank of San Francisco entered
into a Memorandum of Understanding with Banner Corporation (the FRB
MOU). Under the terms of the FRB MOU, Banner Corporation, without
prior written approval, or non-objection, of the Federal Reserve Bank of San
Francisco, 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 including payments
on our junior subordinated debentures underlying our trust preferred
securities;
|
· |
incur, renew,
increase, or guarantee any debt; |
· |
issue any
trust preferred securities; and |
· |
purchase or
redeem any of our stock. |
Under the
FRB MOU, we also agreed to take any required action to ensure compliance by
Banner Bank with the Bank MOU and to submit to the Federal Reserve Bank of San
Francisco for review and approval a plan to maintain minimum levels of capital
at Banner Bank, as well as cash flow projections for Banner Corporation through
2011. We are also limited and/or prohibited, in certain
circumstances, in our ability to enter into contracts to pay and to make golden
parachute severance and indemnification payments. Under the FRB MOU,
the Company is required to provide the Federal Reserve Bank of San Francisco
with quarterly progress reports regarding its compliance with the provisions of
the FRB MOU and Banner Corporation financial statements.
The Bank
MOU and the FRB MOU will remain in effect until stayed, modified, terminated or
suspended by the FDIC and the DFI or the Federal Reserve Bank of San Francisco,
as the case may be. If either Banner Corporation or Banner 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 Banner Corporation and Banner 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 the Federal Reserve Bank of San Francisco,
management believes that Banner Corporation and Banner Bank will comply in all
material respects with the provisions of each respective MOU. Any of
these regulators may determine in their sole discretion that the matters covered
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 our business and negatively affect our
ability to implement our business plan, pay dividends on our common stock or the
value of our common stock, as well as our financial condition and results of
operations.
Financial
reform legislation recently enacted by Congress will, among other things,
tighten capital standards, create a new Consumer Financial Protection Bureau and
result in new laws and regulations that are expected to increase our costs of
operations.
Congress
recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Act”). This new law will significantly change the
current bank regulatory structure and affect the lending, deposit, investment,
trading and operating activities of financial institutions and their holding
companies. The Dodd-Frank Act requires various federal agencies to
adopt a broad range of new implementing rules and regulations, and to prepare
numerous studies and reports for Congress. The federal agencies are
given significant discretion in drafting the implementing rules and regulations,
and consequently, many of the details and much of the impact of the Dodd-Frank
Act may not be known for many months or years.
Certain
provisions of the Dodd-Frank Act are expected to have a near term impact on
Banner. For example, one year after the date of enactment is a
provision of the Dodd-Frank Act that eliminates the federal prohibitions on
paying interest on demand deposits, thus allowing businesses to have interest
bearing checking accounts. Depending on competitive responses, this
significant change to existing law could have an adverse impact on the Company’s
interest expense.
The
Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation
insurance assessments. Assessments will now be based on the average
consolidated total assets less tangible equity capital of a financial
institution. The Dodd-Frank Act also permanently increases the
maximum amount of deposit insurance for banks, savings institutions and credit
unions to $250,000 per depositor, retroactive to January 1, 2009, and
non-interest-bearing transaction accounts have unlimited deposit insurance
through December 31, 2013.
The
Dodd-Frank Act will require publicly traded companies to give stockholders a
non-binding vote on executive compensation and so-called “golden parachute”
payments and authorizes the Securities and Exchange Commission to promulgate
rules that would allow stockholders to nominate their own candidates using a
company’s proxy materials. The legislation also directs the Federal
Reserve Board to promulgate rules prohibiting excessive compensation paid to
bank holding company executives, regardless of whether the company is publicly
traded or not.
The
Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad
powers to supervise and enforce consumer protection laws. The
Consumer Financial Protection Bureau has broad rule-making authority for a wide
range of consumer protection laws that apply to all banks and savings
institutions, including the authority to prohibit “unfair, deceptive or abusive”
acts and practices. The Consumer Financial Protection Bureau has
examination and enforcement authority over all banks and savings institutions
with more than $10 billion in assets. Financial institutions such as the Banks
with $10 billion or less in assets will continued to be examined for compliance
with the consumer laws by their primary bank regulators.
It is
difficult to predict at this time what specific impact the Dodd-Frank Act and
the yet to be written implementing rules and regulations will have on community
banks. However, it is expected that at a minimum they will increase
our operating and compliance costs and could increase our interest
expense.
Item
2. Unregistered Sales
of Equity Securities and Use of Proceeds
During
the quarter ended June 30, 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 April 1, 2010 through June 30,
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}
|
Amended
and Restated Articles of Incorporation of Registrant [incorporated by
reference to the Registrant’s Current Report on Form 8-K filed on April
28, 2010 (File No. 000-26584)].
|
|
|
|
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 to the Current
Report on Form 8-K filed on December 18, 2007 (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 to the Current Report on Form 8-K filed on April 30, 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
|
|
|
|
|
|
|
|
|
August
6, 2010
|
/s/ D. Michael
Jones
|
|
D.
Michael Jones
|
|
Chief
Executive Officer
|
|
(Principal Executive
Officer) |
August
6, 2010
|
/s/ Lloyd W.
Baker
|
|
Lloyd W.
Baker |
|
Treasurer
and Chief Financial Officer
|
|
(Principal Financial
and Accounting Officer) |