Unassociated Document
 

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
 
[ X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2011.
 
 
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:
Common Stock, $.01 par value per share
 
As of  April 30, 2011
115,720,332 shares*
 
 
*  Includes 240,381 shares held by the Employee Stock Ownership Plan that have not been released, committed to be released, or allocated to participant accounts.
 

 
 

 

BANNER CORPORATION AND SUBSIDIARIES

Table of Contents

PART I - FINANCIAL INFORMATION
 
Item 1 - Financial Statements.  The Consolidated Financial Statements of Banner Corporation and Subsidiaries filed as a part of the report are as follows:
 
Consolidated Statements of Financial Condition as of March 31, 2011 and December 31, 2010
4
   
Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010
5
   
Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2011 and 2010
6
   
Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2011 and the Year Ended December 31, 2010
7
 
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010
9
   
Selected Notes to the Consolidated Financial Statements
11
   
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
 
   
Executive Overview
39
   
Comparison of Financial Condition at March 31, 2011 and December 31, 2010
43
   
Comparison of Results of Operations for the Three Months Ended March 31, 2011 and 2010
44
   
Asset Quality
48
   
Liquidity and Capital Resources
53
   
Capital Requirements
53
   
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
 
   
Market Risk and Asset/Liability Management
55
   
Sensitivity Analysis
55
   
Item 4 - Controls and Procedures
59
   
PART II - OTHER INFORMATION
 
   
Item 1 - Legal Proceedings
60
   
Item 1A - Risk Factors
60
   
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
60
   
Item 3 - Defaults upon Senior Securities
60
   
Item 4 – [Removed and Reserved]
 
   
Item 5 - Other Information
60
   
Item 6 - Exhibits
61
   
SIGNATURES
63

 

 

Special Note Regarding Forward-Looking Statements

Certain matters in this report on Form 10-Q contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning our future operations.  These statements relate to our financial condition, results of operations, plans, objectives, future performance or business.  Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.”  Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance and projections of financial items.  These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and 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 Memorandum 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 our bank subsidiaries which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds, or maintain or increase deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; our compliance with regulatory enforcement actions; the requirements and restrictions that have been imposed upon Banner Corporation and Banner Bank under the memoranda of understanding with the Federal Reserve Bank of San Francisco (in the case of Banner Corporation) and the FDIC and the Washington DFI (in the case of Banner Bank) and the possibility that Banner Corporation and Banner Bank will be unable to fully comply with their respective memoranda of understanding, which could result in the imposition of additional requirements or restrictions; 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; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations; 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.  Congress recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).  Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it more difficult to anticipate the overall financial impact on the Company and the financial services industry.  Provisions in the legislation could also increase the capital requirements applicable to the Company and our bank subsidiaries and could require the Company to seek additional sources of capital in the future.  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.

 

 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
March 31, 2011 and December 31, 2010

   
March 31
   
December 31
 
ASSETS
 
2011
   
2010
 
             
Cash and due from banks
  $ 316,305     $ 361,652  
                 
Securities—trading, amortized cost $123,501 and $128,070, respectively
    90,881       95,379  
Securities—available-for-sale, amortized cost $240,481 and $199,058, respectively
    240,968       200,227  
Securities—held-to-maturity, fair value $77,989 and $73,916, respectively
    75,114       72,087  
                 
Federal Home Loan Bank stock
    37,371       37,371  
Loans receivable:
               
Held for sale
    1,493       3,492  
Held for portfolio
    3,324,587       3,399,625  
Allowance for loan losses
    (97,632 )     (97,401 )
      3,228,448       3,305,716  
                 
Accrued interest receivable
    16,503       15,927  
Real estate owned, held for sale, net
    94,945       100,872  
Property and equipment, net
    94,743       96,502  
Other intangibles, net
    8,011       8,609  
Income taxes receivable, net
    --       12,981  
Bank-owned life insurance
    57,123       56,653  
Other assets
    39,291       42,106  
                 
    $ 4,299,703     $ 4,406,082  
LIABILITIES
               
Deposits:
               
Non-interest-bearing
  $ 622,759     $ 600,457  
Interest-bearing transaction and savings accounts
    1,459,895       1,433,248  
Interest-bearing certificates
    1,457,994       1,557,493  
      3,540,648       3,591,198  
                 
Advances from FHLB at fair value
    10,567       43,523  
Other borrowings
    159,902       175,813  
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
    48,395       48,425  
Accrued expenses and other liabilities
    20,958       21,048  
Deferred compensation
    14,489       14,603  
      3,794,959       3,894,610  
                 
COMMITMENTS AND CONTINGENCIES (Note 15)
               
                 
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
    119,426       119,000  
Common stock and paid in capital - $0.01 par value per share, 200,000,000 shares authorized, 115,106,042 shares
issued: 114,865,661 shares and 112,913,084 shares outstanding at March 31, 2011 and December 31, 2010,
respectively
    513,950       509,457  
Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust at cost:
               
240,381 restricted shares outstanding at March 31, 2011 and December 31, 2010
    (1,987 )     (1,987 )
Retained earnings (accumulated deficit)
    (126,318 )     (115,348 )
Accumulated other comprehensive income:
               
Unrealized gain (loss) on securities available-for-sale and/or transferred to held-to-maturity
    (327 )     350  
                 
      504,744       511,472  
                 
    $ 4,299,703     $ 4,406,082  

See Selected Notes to the Consolidated Financial Statements

 

 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands except for per share amounts)
For the Three Months Ended March 31, 2011 and 2010

   
Three Months Ended
March 31
 
   
2011
   
2010
 
INTEREST INCOME:
           
Loans receivable
$
46,755
 
$
52,759
 
Mortgage-backed securities
 
875
   
1,126
 
Securities and cash equivalents
 
2,033
   
2,085
 
   
49,663
   
55,970
 
INTEREST EXPENSE:
           
Deposits
 
7,812
   
15,798
 
FHLB advances
 
178
   
361
 
Other borrowings
 
579
   
634
 
Junior subordinated debentures
 
1,038
   
1,027
 
   
9,607
   
17,820
 
             
Net interest income before provision for loan losses
 
40,056
   
38,150
 
             
PROVISION FOR LOAN LOSSES
 
17,000
   
14,000
 
Net interest income
 
23,056
   
24,150
 
             
OTHER OPERATING INCOME:
           
Deposit fees and other service charges
 
5,279
   
5,169
 
Mortgage banking operations
 
962
   
948
 
Loan servicing fees, net of amortization and impairment
 
256
   
313
 
Miscellaneous
 
493
   
617
 
   
6,990
   
7,047
 
             
Other-than-temporary impairment losses
 
--
   
(1,231
)
Net change in valuation of financial instruments carried at fair value
 
256
   
1,908
 
Total other operating income
 
7,246
   
7,724
 
             
OTHER OPERATING EXPENSES:
           
Salary and employee benefits
 
17,255
   
16,559
 
Less capitalized loan origination costs
 
(1,720
)
 
(1,605
)
Occupancy and equipment
 
5,394
   
5,604
 
Information/computer data services
 
1,567
   
1,506
 
Payment and card processing expenses
 
1,647
   
1,424
 
Professional services
 
1,672
   
1,287
 
Advertising and marketing
 
1,740
   
1,950
 
Deposit insurance
 
1,969
   
2,132
 
State/municipal business and use taxes
 
494
   
480
 
REO operations
 
4,631
   
3,058
 
Amortization of core deposit intangibles
 
597
   
644
 
Miscellaneous
 
2,898
   
2,376
 
Total other operating expenses
 
38,144
   
35,415
 
             
Income (loss) before provision for (benefit from) income taxes
 
(7,842
)
 
(3,541
)
             
PROVISION FOR (BENEFIT FROM) INCOME TAXES
 
--
   
(2,024
)
             
NET INCOME (LOSS)
 
(7,842
)
 
(1,517
)
             
PREFERRED STOCK DIVIDEND AND DISCOUNT ACCRETION
           
Preferred stock dividend
 
1,550
   
1,550
 
Preferred stock discount accretion
 
426
   
398
 
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
$
(9,818
)
$
(3,465
)
             
Earnings (loss) per common share:
           
Basic
$
(0.09
)
$
(0.16
)
Diluted
$
(0.09
)
$
(0.16
)
Cumulative dividends declared per common share:
$
0.01
 
$
0.01
 

See Selected Notes to the Consolidated Financial Statements

 

 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2011 and 2010

   
Three Months Ended
March 31
 
   
2011
   
2010
 
             
NET INCOME (LOSS)
  $ (7,842 )   $ (1,517 )
                 
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
               
Unrealized holding gain (loss) during the period, net of deferred
income tax provision (benefit) of $0 and $306, respectively
    (682 )     543  
                 
Amortization of unrealized loss on tax exempt securities transferred from available-for-sale to held-to-maturity
    5       12  
                 
Other comprehensive income (loss)
    (677 )     555  
                 
COMPREHENSIVE INCOME (LOSS)
  $ (8,519 )   $ (962 )

See Selected Notes to the Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
6

 
 
 
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2011

             
Retained Earnings (Accumulated Deficit)
 
Accumulated Other Comprehensive Income (Loss)
 
Stockholders’
Equity
 
                       
 
Preferred Stock
 
Common Stock and Paid in Capital (1)
       
 
Shares
 
Amount
 
Shares
 
Amount
       
                                           
Balance, January 1, 2011
 
124,000
 
$
119,000
   
112,913,084
 
$
507,470
 
$
(115,348
)
$
350
 
$
511,472
 
                                           
Net income (loss)
                         
(7,842
)
       
(7,842
)
                                           
Change in valuation of securities—available-for-sale, net of income tax
                               
(682
)
 
(682
)
                                           
Amortization of unrealized loss on tax exempt securities transferred from available-for-sale to held-to-maturity, net of income tax
                               
5
   
5
 
                                           
Accretion of preferred stock discount
       
426
               
(426
)
       
--
 
                                           
Accrual of dividends on preferred stock
                         
(1,550
)
       
(1,550
)
                                           
Accrual of dividends on common stock ($.01/share cumulative)
                         
(1,152
)
       
(1,152
)
                                           
Proceeds from issuance of common stock for stockholder reinvestment program, net of registration expenses
             
1,952,577
   
4,464
               
4,464
 
                                           
Amortization of compensation related to restricted stock grant
                   
21
               
21
 
                                           
Amortization of compensation related to stock options
                   
8
               
8
 
                                           
BALANCE, March 31, 2011
 
124,000
 
$
119,426
   
114,865,661
 
$
511,963
 
$
(126,318
)
$
(327
)
$
504,744
 

(1)  
Common Stock and Paid in Capital includes a reduction of $2 million related to 240,381 unearned shares of common stock issued to the ESOP.

See Selected Notes to the Consolidated Financial Statements



 

 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 (In thousands)
For the Year Ended December 31, 2010

             
Retained Earnings (Accumulated Deficit)
 
Accumulated Other Comprehensive Income (Loss)
 
Stockholders’
Equity
 
                       
 
Preferred Stock
 
Common Stock and Paid in Capital (1)
       
 
Shares
 
Amount
 
Shares
 
Amount
       
                                           
Balance, January 1, 2010
 
124,000
 
$
117,407
   
21,299,209
 
$
329,549
 
$
(42,077
)
$
249
 
$
405,128
 
                                           
Net income (loss)
                         
(61,896
)
       
(61,896
)
                                           
Change in valuation of securities—available-for-sale, net of income tax
                               
59
   
59
 
                                           
Amortization of unrealized loss on tax exempt securities transferred from available-for-sale to held-to-maturity, net of income tax
                               
42
   
42
 
                                           
Accretion of preferred stock discount
       
1,593
               
(1,593
)
       
--
 
                                           
Accrual of dividends on preferred stock
                         
(6,200
)
       
(6,200
)
                                           
Accrual of dividends on common stock ($.04/share cumulative)
                         
(3,582
)
       
(3,582
)
                                           
Proceeds from issuance of common stock for stockholder reinvestment program, net of registration expenses
             
5,858,920
   
16,201
               
16,201
 
                                           
Proceeds from issuance of common stock, net of offering costs
             
85,639,000
   
161,637
               
161,637
 
                                           
Amortization of compensation related to
Management Recognition Plan (MRP)
                   
2
               
2
 
                                           
Amortization of compensation related to restricted stock grant
             
115,955
   
28
               
28
 
                                           
Amortization of compensation related to stock options
                   
53
               
53
 
                                           
BALANCE, December 31, 2010
 
124,000
 
$
119,000
   
112,913,084
 
$
507,470
 
$
(115,348
)
$
350
 
$
511,472
 

(1)
Common Stock and Paid in Capital includes a reduction of $2 million related to 240,381 unearned shares of common stock issued to the ESOP.

See Selected Notes to the Consolidated Financial Statements





 

 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2011 and 2010

   
Three Months Ended
March 31
 
   
2011
   
2010
 
OPERATING ACTIVITIES:
           
Net income (loss)
  $ (7,842 )   $ (1,517 )
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
               
Depreciation
    2,169       2,319  
Deferred income and expense, net of amortization
    613       609  
Amortization of core deposit and other intangibles
    597       644  
Other-than-temporary impairment losses
    --       1,231  
Net change in valuation of financial instruments carried at fair value
    (256 )     (1,908 )
Principal repayments and maturities of securities—trading
    4,554       9,394  
Deferred taxes
    --       35  
Equity-based compensation
    29       19  
Increase in cash surrender value of bank-owned life insurance
    (470 )     (529 )
Gain on sale of loans, excluding capitalized servicing rights
    (694 )     (692 )
Loss on disposal of real estate held for sale and property
and equipment, net
    539       708  
Provision for losses on loans and real estate held for sale
    20,027       15,067  
Origination of loans held for sale
    (61,208 )     (67,132 )
Proceeds from sales of loans held for sale
    63,207       67,231  
Net change in:
               
Other assets
    15,086       (326 )
Other liabilities
    (210 )     408  
Net cash provided from operating activities
    36,141       25,561  
                 
INVESTING ACTIVITIES:
               
Purchases of securities available-for-sale
    (64,730 )     (5,022 )
Principal repayments and maturities of securities available-for-sale
    22,844       2,778  
Proceeds from sales of securities available-for-sale
    --       1,965  
Purchases of securities held-to-maturity
    (3,241 )     --  
Principal repayments and maturities of securities held-to-maturity
    205       1,269  
Principal repayments of loans, net
    44,092       59,807  
Purchases of loans and participating interest in loans
    (68 )     (12 )
Purchases of property and equipment, net
    (395 )     (318 )
Proceeds from sale of other repossessed assets and REO held for sale, net
    17,335       9,078  
Other
    (51 )     (40 )
Net cash provided from investing activities
    15,991       69,505  
                 
FINANCING ACTIVITIES:
               
Decrease in deposits, net
    (50,550 )     (15,772 )
Repayment of FHLB advances
    (32,800 )     (127,502 )
Increase (decrease) in other borrowings, net
    (15,911 )     400  
Cash dividends paid
    (2,682 )     (1,767 )
Cash proceeds from issuance of stock for stockholder reinvestment program
    4,464       4,322  
Net cash used by financing activities
    (97,479 )     (140,319 )
                 
NET DECREASE IN CASH AND DUE FROM BANKS
    (45,347 )     (45,253 )
                 
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD
    361,652       323,005  
CASH AND DUE FROM BANKS, END OF PERIOD
  $ 316,305     $ 277,752  

(Continued on next page)

 

 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2011 and 2010

   
Three Months Ended
March 31
 
   
2011
   
2010
 
             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
Interest paid in cash
  $ 10,480     $ 18,868  
Taxes received in cash
    (13,078 )     (561 )
                 
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
    14,939       28,218  

See Selected Notes to the Consolidated Financial Statements
 
 
 

 
10 

 

BANNER CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1:  BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES

Banner Corporation (the Company) is a bank holding company incorporated in the State of Washington. We are primarily engaged in the business of planning, directing and coordinating the business activities of our wholly-owned subsidiaries, Banner Bank and Islanders Bank.  Banner Bank is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington and, as of March 31, 2011, 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 (the Federal Reserve Board).  Banner Bank and Islanders Bank (the Banks) are subject to regulation by the Washington State Department of Financial Institutions, Division of Banks and the Federal Deposit Insurance Corporation (the FDIC).

In the opinion of management, the accompanying unaudited Consolidated Statements of Financial Condition and related Consolidated Statements of Operations, Comprehensive Income (Loss), Changes in Stockholders’ Equity and Cash Flows of Banner Corporation and its subsidiaries reflect all adjustments (which include reclassification and normal recurring adjustments) that are necessary for a fair presentation in conformity with U.S. Generally Accepted Accounting Principles (GAAP).  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements.  Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments.  In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of Banner’s financial statements.  These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for loan and lease losses, (iii) the valuation of financial assets and liabilities recorded at fair value, including other-than-temporary impairment (OTTI) losses, (iv) the valuation of intangibles, such as goodwill, core deposit intangibles and mortgage servicing rights, (v) the valuation of real estate held for sale and (vi) the valuation of or recognition of deferred tax assets and liabilities.  These policies and judgments, estimates and assumptions are described in greater detail in subsequent notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (Critical Accounting Policies) in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission (SEC).  Management believes that the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the factual circumstances at the time.  However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in the Company’s results of operations or financial condition.  Further, subsequent changes in economic or market conditions could have a material impact on these estimates and the Company’s financial condition and operating results in future periods.

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 2010 Consolidated Financial Statements and/or schedules to conform to the 2011 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, 2010 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 (Bank MOU) with the FDIC and Washington DFI.  Banner Corporation (the Company) also entered into a similar MOU with the Federal Reserve Bank of San Francisco on March 29, 2010 (FRB MOU).  Under the Bank 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 is not permitted 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 that we have entered into with the FDIC and DFI and the Federal Reserve and lack of compliance could result in additional regulatory actions” in our Form 10-K for the year ended December 31, 2010.

 
 
 
 
 
11

 
 
Reverse stock split: On May 2, 2011 Banner Corporation announced that its Board of Directors had voted to proceed on a 1-for-7 reverse stock split to be effective June 1, 2011. The Company expects that the reverse stock split will take effect prior to the opening of the NASDAQ Global Select Market on June 1, 2011 and will be effective with respect to shareholders of record at the close of business on May 31, 2011 (the "Effective Time"). At the Effective Time of the reverse stock split, every seven shares of the Company's pre-split common shares will automatically be consolidated into one post-split share.

Secondary Offering of Common Stock:  On June 30, 2010, the Company announced the initial closing 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 this offering as the underwriters 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 offering expenses, of approximately $161.6 million.

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 Bank MOU and to support managed growth as economic conditions improve.  To that end, at March 31, 2011, the Company had invested a cumulative $110 million as additional paid-in common equity in Banner Bank.  As a result, the Tier 1 leverage capital of Banner Bank was 11.03% of average assets on March 31, 2011, compared to 10.84% at December 31, 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.

Deferred Tax Asset Valuation Allowance:  The Company and the Banks file consolidated U.S. federal income tax returns, as well as state income tax returns in Oregon and Idaho.  Income taxes are accounted for using the asset and liability method.  Under this method a deferred tax asset or liability is determined based on the enacted tax rates which are expected to be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns.  The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.  Under U.S. generally acceptable accounting principles (GAAP), 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.  While realization of the deferred tax asset is ultimately dependent on a return to profitability, which management believes is more likely than not, the guidance reflected in the accounting standard is significantly influenced by consideration of recent historical operating results.  During the third quarter of 2010, we evaluated our net deferred tax asset and determined it was prudent to establish a valuation allowance against the entire asset.  This action caused our income tax expense to be $24.0 million for that period.  As a result, we recorded $18.0 million income tax expense for the year ended December 31, 2010.  No tax benefit or expense was recognized during the three months ended March 31, 2011.  See Note 12 of the Notes to the Consolidated Financial Statements for more information.

Note 3:  ACCOUNTING STANDARDS RECENTLY ADOPTED OR ISSUED

In April 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.  ASU No. 2011-02 clarifies when a loan modification or restructuring is considered a troubled debt restructuring.  This guidance is effective for the first interim or annual period beginning on or after June 15, 2011, and will be applied retrospectively to the beginning of the annual period of adoption.  The adoption of this guidance is not expected to have a material effect on the Company’s Consolidated Financial Statements.

In July 2010, FASB issued Accounting Standards Update (ASU) No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  ASU No. 2010-20 provides enhanced disclosures related to the credit quality of financing receivables and the allowance for credit losses, and provides that new and existing disclosures should be disaggregated based on how an entity develops its allowance for credit losses and how it manages credit exposures.  Under the provisions of this ASU, additional disclosures required for financing receivables include information regarding the aging of past due receivables, credit quality indicators, and modifications of financing receivables.  The provisions of ASU No. 2010-20 are effective for periods ending after December 15, 2010, with the exception of the amendments to the rollforward of the allowance for credit losses and the disclosures about modifications which are effective for periods beginning after December 15, 2010.  Comparative disclosures are required only for periods ending subsequent to initial adoption.  This ASU was implemented for the period ended December 31, 2010 and did not have a material effect 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 (i) 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, (ii) 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 (iii) 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 implementation of this ASU did not have a material impact on the Company’s consolidated financial statements.
 
 
 
 
 
12

 
 
Note 4:  BUSINESS SEGMENTS

The Company is managed by legal entity and not by lines of business.  Each of the Banks is a community oriented commercial bank chartered in the State of Washington.  The Banks’ primary business is that of a traditional banking institution, gathering deposits and originating loans for portfolio in its respective primary market areas.  The Banks offer a wide variety of deposit products to their consumer and commercial customers.  Lending activities include the origination of real estate, commercial/agriculture business and consumer loans.  Banner Bank is also an active participant in the secondary market, originating residential loans for sale on both a servicing released and servicing retained basis.  In addition to interest income on loans and investment securities, the Banks receive other income from deposit service charges, loan servicing fees and from the sale of loans and investments.  The performance of the Banks is reviewed by the Company’s executive management and Board of Directors on a monthly basis.  All of the executive officers of the Company are members of Banner Bank’s management team.

Generally accepted accounting principles establish standards to report information about operating segments in annual financial statements and require reporting of selected information about operating segments in interim reports to stockholders.  The Company has determined that its current business and operations consist of a single business segment.

Note 5:  INTEREST-BEARING DEPOSITS AND SECURITIES

The following table sets forth additional detail regarding our interest-bearing deposits and securities at the dates indicated (includes securities—trading, available-for-sale and held-to-maturity, all at carrying value) (in thousands):

   
March 31
2011
   
December 31
2010
   
March 31
2010
 
                   
Interest-bearing deposits included in cash and due from banks
  $ 271,924     $ 321,896     $ 236,629  
                         
U.S. Government and agency obligations
    173,270       139,807       95,247  
                         
Municipal bonds:
                       
Taxable
    13,004       7,123       3,243  
Tax exempt
    80,131       75,509       69,287  
Total municipal bonds
    93,135       82,632       72,530  
                         
Corporate bonds
    58,369       58,495       43,366  
                         
Mortgage-backed or related securities:
                       
GNMA
    22,275       23,732       17,514  
FHLMC
    23,375       26,952       40,106  
FNMA
    32,577       32,341       35,907  
Private issuer
    3,456       3,544       3,881  
Total mortgage-backed or related securities
    81,683       86,569       97,408  
                         
Equity securities (excludes FHLB stock)
    506       190       381  
                         
Total securities
    406,963       367,693       308,932  
                         
FHLB stock
    37,371       37,371       37,371  
                         
    $ 716,258     $ 726,960     $ 582,932  

 
 
 

 
 
13 

 

Securities—Trading:  The amortized cost and estimated fair value of securities—trading at March 31, 2011 and December 31, 2010 are summarized as follows (dollars in thousands):

   
March 31, 2011
   
December 31, 2010
 
   
Amortized Cost
   
Fair Value
   
Percent of Total
   
Amortized Cost
   
Fair Value
   
Percent of Total
 
                                     
U.S. Government and agency obligations
  $ 4,165     $ 4,330       4.7 %   $ 4,167     $ 4,379       4.6 %
                                                 
Municipal bonds:
                                               
Taxable
    632       637       0.7       682       693       0.7  
Tax exempt
    5,424       5,699       6.3       5,422       5,705       6.0  
Total municipal bonds
    6,056       6,336       7.0       6,104       6,398       6.7  
                                                 
Corporate bonds
    63,559       34,808       38.3       63,581       34,724       36.4  
                                                 
Mortgage-backed or related securities:
                                               
FHLMC
    14,622       15,288       16.8       16,554       17,347       18.2  
FNMA
    28,184       29,613       32.6       30,749       32,341       33.9  
Total mortgage-backed or
related securities
    42,806       44,901       49.4       47,303       49,688       52.1  
                                                 
Equity securities
    6,915       506       0.6       6,915       190       0.2  
                                                 
    $ 123,501     $ 90,881       100.0 %   $ 128,070      $ 95,379       100.0 %

There were no sales of securities—trading during the first three months of 2011 or 2010.  The Company did not recognize an OTTI charge on securities—trading during the first quarter of 2011.  However, in the first quarter of 2010, we recognized a $1.2 million OTTI charge on a corporate bond that is a single-issue trust preferred security.  At March 31, 2011, there was one single-issuer trust preferred security in our trading portfolio on nonaccrual status with an amortized cost of $4.3 million and an estimated fair value of $1.4 million.  This same security was on nonaccrual status as of December 31, 2010.

The amortized cost and estimated fair value of securities—trading at March 31, 2011 and December 31, 2010, 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.

   
March 31, 2011
   
December 31, 2010
 
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
                         
Due in one year or less
  $ 2,763     $ 2,841     $ 1,762     $ 1,816  
Due after one year through five years
    1,546       1,620       2,549       2,668  
Due after five years through ten years
    19,701       20,545       20,442       21,328  
Due after ten years through twenty years
    15,139       15,737       16,234       16,840  
Due after twenty years
    77,437       49,632       80,168       52,537  
                                 
      116,586       90,375       121,155       95,189  
                                 
Equity securities
    6,915       506       6,915       190  
                                 
    $ 123,501     $ 90,881     $ 128,070     $ 95,379  


 
14 

 

Securities—Available-for-Sale:  The amortized cost and estimated fair value of securities—available-for-sale at March 31, 2011 and December 31, 2010 are summarized as follows (dollars in thousands):

 
March 31, 2011
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
   
Percent of
Total
 
                               
U.S. Government and agency obligations
  $ 169,491     $ 259     $ (810 )   $ 168,940       70.1 %
                                         
Municipal bonds:
                                       
Taxable
    6,824       --       (379 )     6,445       2.7  
Tax exempt
    6,461       69       (39 )     6,491       2.7  
Total municipal bonds
    13,285       69       (418 )     12,936       5.4  
                                         
Corporate bonds
    22,299       15       (3 )     22,311       9.3  
                                         
Mortgage-backed or related securities:
                                       
FHLMC
    7,830       257       --       8,087       3.4  
FNMA
    3,067       --       (103 )     2,964       1.2  
GNMA
    21,244       1,052       (22 )     22,274       9.2  
Private issuer
    3,265       191       --       3,456       1.4  
Total mortgage-backed or related
securities
    35,406       1,500       (125 )     36,781       15.2  
                                         
    $ 240,481     $ 1,843     $ (1,356 )   $ 240,968       100.0 %
                                         
 
 
December 31, 2010
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
   
Percent of
Total
 
                                         
U.S. Government and agency obligations
  $ 135,770     $ 323     $ (665 )   $ 135,428       67.6 %
                                         
Municipal bonds:
                                       
Taxable
    800       --       (25 )     775       0.4  
Tax exempt
    4,723       --       (102 )     4,621       2.3  
Total municipal bonds
    5,523       --       (127 )     5,396       2.7  
                                         
Corporate bonds
    22,536       --       (14 )     22,522       11.2  
                                         
Mortgage-backed or related securities:
                                       
FHLMC
    9,314       291       --       9,605       4.8  
GNMA
    22,597       1,167       (32 )     23,732       11.9  
Private issuer
    3,318       226       --       3,544       1.8  
Total mortgage-backed or related
securities
    35,229       1,684       (32 )     36,881       18.5  
                                         
    $ 199,058     $ 2,007     $ (838 )   $ 200,227       100.0 %

 
15 

 

At March 31, 2011 and December 31, 2010, an aging of unrealized losses and fair value of related securities—available-for-sale was as follows (in thousands):

 
March 31, 2011
 
 
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
  $ 101,957     $ (810 )   $ --     $ --     $ 101,957     $ (810 )
                                                 
Municipal bonds:
                                               
Taxable
    6,445       (379 )     --       --       6,445       (379 )
Tax exempt
    4,675       (39 )     --       --       4,675       (39 )
Total municipal bonds
    11,120       (418 )     --       --       11,120       (418 )
                                                 
Corporate bonds
    4,705       (3 )     --       --       4,705       (3 )
                                                 
Mortgage-backed or related securities
    5,252       (125 )     --       --       5,252       (125 )
                                                 
    $ 123,034     $ (1,356 )   $ --     $ --     $ 123,034     $ (1,356 )
     
 
 
December 31, 2010
 
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
                                                 
U.S. Government and agency obligations
  $ 70,426     $ (665 )   $ --     $ --     $ 70,426     $ (665 )
                                                 
Municipal bonds:
                                               
Taxable
    775       (25 )     --       --       775       (25 )
Tax exempt
    4,621       (102 )     --       --       4,621       (102 )
Total municipal bonds
    5,396       (127 )     --       --       5,396       (127 )
                                                 
Corporate bonds
    17,604       (14 )     --       --       17,604       (14 )
                                                 
Mortgage-backed or related securities
    2,488       (32 )     --       --       2,488       (32 )
                                                 
    $ 95,914     $ (838 )   $ --     $ --     $ 95,914     $ (838 )

There were no sales of securities—available-for-sale during the first quarter of 2011.  However, proceeds from the sale of one security during the first quarter of 2010 were $2.0 million.  There were no OTTI charges on securities—available-for-sale for the quarters ended March 31, 2011 and 2010.  At March 31, 2011, there were 23 securities—available-for-sale with unrealized losses, compared to 24 at December 31, 2010.  Management does not believe that any individual unrealized loss as of March 31, 2011 represents OTTI.  The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase.
 
 
The amortized cost and estimated fair value of securities—available-for-sale at March 31, 2011 and December 31, 2010, 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.

   
March 31, 2011
   
December 31, 2010
 
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
                         
Due in one year or less
  $ 47,456     $ 47,496     $ 55,135     $ 55,132  
Due after one year through five years
    148,513       147,799       107,356       106,916  
Due after five years through ten years
    12,173       11,855       1,338       1,298  
Due after ten years through twenty years
    3,265       3,457       3,318       3,544  
Due after twenty years
    29,074       30,361       31,911       33,337  
                                 
    $ 240,481     $ 240,968     $ 199,058     $ 200,227  



 
16 

 

Securities—Held-to-Maturity:  The amortized cost and estimated fair value of securities—held-to-maturity at March 31, 2011 and December 31, 2010 are summarized as follows (dollars in thousands):

   
March 31, 2011
 
   
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
   
Percent of Total
 
Municipal bonds:
                             
Taxable
  $ 5,922     $ 58     $ (25 )   $ 5,955       7.6 %
Tax exempt
    67,942       2,859       (10 )     70,791       90.8  
Total municipal bonds
    73,864       2,917       (35 )     76,746       98.4  
                                         
Corporate bonds
    1,250       10       (17 )     1,243       1.6  
                                         
    $ 75,114     $ 2,927     $ (52 )   $ 77,989       100.0 %
       
   
 
December 31, 2010
 
           
Gross
   
Gross
                 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
   
Percent
 
   
Cost
   
Gains
   
Losses
   
Value
   
of Total
 
Municipal bonds:
                                       
Taxable
  $ 5,654     $ 68     $ (71 )   $ 5,651       7.6 %
Tax exempt
    65,183       1,952       (106 )     67,029       90.7  
Total municipal bonds
    70,837       2,020       (177 )     72,680       98.3  
                                         
Corporate bonds
    1,250       8       (22 )     1,236       1.7  
                                         
    $ 72,087     $ 2,028     $ (199 )   $ 73,916       100.0 %

At March 31, 2011 and December 31, 2010, an age analysis of unrealized losses and fair value of related securities—held-to-maturity was as follows (in thousands):

 
March 31, 2011