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  September 30, 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  [X]       No   [   ]
 
 
 
   
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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 [X]        No   [   ]
 
 
 
   
 
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  October 31, 2011
Common Stock, $.01 par value per share
 
17,212,830 shares*
 
*  Includes 34,340 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 September 30, 2011 and December 31, 2010
4
   
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010
5
   
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2011 and 2010
6
   
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2011 and the Year Ended
December 31, 2010
7
 
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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
43
   
Comparison of Financial Condition at September 30, 2011 and December 31, 2010
47
   
Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2011 and 2010
48
   
Asset Quality
53
   
Liquidity and Capital Resources
58
   
Capital Requirements
58
   
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
 
   
Market Risk and Asset/Liability Management
60
   
Sensitivity Analysis
60
   
Item 4 - Controls and Procedures
64
   
PART II - OTHER INFORMATION
 
   
Item 1 - Legal Proceedings
65
   
Item 1A - Risk Factors
65
   
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
65
   
Item 3 - Defaults upon Senior Securities
65
   
Item 4 – [Removed and Reserved]
 
   
Item 5 - Other Information
65
   
Item 6 - Exhibits
66
   
SIGNATURES
68
 

 
 
2

 

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, 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, loan and deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System (the Federal Reserve Board) and of our bank subsidiaries by the Federal Deposit Insurance Corporation (the FDIC), the Washington State Department of Financial Institutions, Division of Banks (the Washington DFI) or other regulatory authorities, including 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 allowance 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;  increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; the failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; 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,” “Banner” or the “Company” refer to Banner Corporation and its consolidated subsidiaries, unless the context otherwise requires.

 
3

 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
September 30, 2011 and December 31, 2010

 
September 30
   
December 31
 
ASSETS
 
2011
   
2010
 
             
Cash and due from banks
$
288,327
 
$
361,652
 
             
Securities—trading, amortized cost $116,748 and $128,070, respectively
 
85,419
   
95,379
 
Securities—available-for-sale, amortized cost $380,562 and $199,058, respectively
 
383,670
   
200,227
 
Securities—held-to-maturity, fair value $83,372 and $73,916, respectively
 
79,289
   
72,087
 
             
Federal Home Loan Bank stock
 
37,371
   
37,371
 
Loans receivable:
           
Held for sale
 
2,003
   
3,492
 
Held for portfolio
 
3,223,243
   
3,399,625
 
Allowance for loan losses
 
(86,128
)
 
(97,401
)
   
3,139,118
   
3,305,716
 
             
Accrued interest receivable
 
16,101
   
15,927
 
Real estate owned, held for sale, net
 
66,459
   
100,872
 
Property and equipment, net
 
92,454
   
96,502
 
Other intangibles, net
 
6,887
   
8,609
 
Income taxes receivable, net
 
--
   
12,981
 
Bank-owned life insurance
 
58,058
   
56,653
 
Other assets
 
38,611
   
42,106
 
             
 
$
4,291,764
 
$
4,406,082
 
LIABILITIES
           
Deposits:
           
Non-interest-bearing
$
763,008
 
$
600,457
 
Interest-bearing transaction and savings accounts
 
1,461,383
   
1,433,248
 
Interest-bearing certificates
 
1,313,043
   
1,557,493
 
   
3,537,434
   
3,591,198
 
             
Advances from FHLB at fair value
 
10,572
   
43,523
 
Other borrowings
 
139,704
   
175,813
 
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
 
48,770
   
48,425
 
Accrued expenses and other liabilities
 
19,593
   
21,048
 
Deferred compensation
 
14,200
   
14,603
 
   
3,770,273
   
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
 
120,276
   
119,000
 
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized, 17,031,249 shares
issued: 16,996,909 shares and 16,130,441 shares outstanding at September 30, 2011 and December 31, 2010,
respectively
 
523,284
   
509,457
 
Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust at cost:
           
34,340 restricted shares outstanding at September 30, 2011 and December 31, 2010
 
(1,987
)
 
(1,987
)
Retained earnings (accumulated deficit)
 
(122,384
)
 
(115,348
)
Accumulated other comprehensive income:
           
Unrealized gain (loss) on securities available-for-sale and/or transferred to held-to-maturity
 
2,302
   
350
 
             
   
521,491
   
511,472
 
             
 
$
4,291,764
 
$
4,406,082
 

See Selected Notes to the Consolidated Financial Statements

 
4

 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands except for per share amounts)
For the Three and Nine Months Ended September 30, 2011 and 2010

   
Three Months Ended
   
Nine Months Ended
 
   
September 30
   
September 30
 
   
2011
   
2010
   
2011
   
2010
 
INTEREST INCOME:
                       
Loans receivable
$
45,641
 
$
51,162
 
$
139,242
 
$
156,394
 
Mortgage-backed securities
 
799
   
972
   
2,533
   
3,143
 
Other securities and cash equivalents
 
3,121
   
2,116
   
7,337
   
6,317
 
   
49,561
   
54,250
   
149,112
   
165,854
 
INTEREST EXPENSE:
                       
Deposits
 
6,169
   
12,301
   
20,995
   
42,799
 
FHLB advances
 
64
   
323
   
306
   
1,004
 
Other borrowings
 
559
   
604
   
1,706
   
1,864
 
Junior subordinated debentures
 
1,041
   
1,100
   
3,120
   
3,174
 
   
7,833
   
14,328
   
26,127
   
48,841
 
                         
Net interest income before provision for loan losses
 
41,728
   
39,922
   
122,985
   
117,013
 
                         
PROVISION FOR LOAN LOSSES
 
5,000
   
20,000
   
30,000
   
50,000
 
Net interest income
 
36,728
   
19,922
   
92,985
   
67,013
 
                         
OTHER OPERATING INCOME:
                       
Deposit fees and other service charges
 
6,096
   
5,702
   
17,068
   
16,494
 
Mortgage banking operations
 
1,401
   
2,519
   
3,218
   
4,284
 
Loan servicing fees
 
289
   
146
   
942
   
774
 
Miscellaneous
 
586
   
919
   
1,448
   
1,788
 
   
8,372
   
9,286
   
22,676
   
23,340
 
                         
Other-than-temporary impairment recovery (loss)
 
3,000
   
(3,000
)
 
3,000
   
(4,231
)
Net change in valuation of financial instruments carried at fair value
 
(1,032
)
 
1,366
   
1,163
   
2,453
 
Total other operating income
 
10,340
   
7,652
   
26,839
   
21,562
 
                         
OTHER OPERATING EXPENSES:
                       
Salary and employee benefits
 
18,226
   
17,093
   
53,769
   
50,445
 
Less capitalized loan origination costs
 
(1,929
)
 
(1,731
)
 
(5,597
)
 
(5,076
)
Occupancy and equipment
 
5,352
   
5,546
   
16,182
   
16,731
 
Information/computer data services
 
1,547
   
1,501
   
4,635
   
4,601
 
Payment and card processing expenses
 
2,132
   
2,018
   
5,718
   
5,125
 
Professional services
 
1,950
   
1,500
   
4,807
   
4,661
 
Advertising and marketing
 
1,602
   
2,025
   
5,245
   
5,717
 
Deposit insurance
 
1,299
   
2,282
   
4,657
   
6,623
 
State/municipal business and use taxes
 
553
   
630
   
1,591
   
1,643
 
REO operations
 
6,698
   
11,757
   
17,897
   
18,981
 
Amortization of core deposit intangibles
 
554
   
600
   
1,721
   
1,859
 
Miscellaneous
 
3,054
   
3,107
   
8,812
   
8,457
 
Total other operating expenses
 
41,038
   
46,328
   
119,437
   
119,767
 
                         
Income (loss) before provision for income taxes
 
6,030
   
(18,754
)
 
387
   
(31,192
)
                         
PROVISION FOR INCOME TAXES
 
--
   
23,988
   
--
   
18,013
 
                         
NET INCOME (LOSS)
 
6,030
   
(42,742
)
 
387
   
(49,205
)
                         
PREFERRED STOCK DIVIDEND AND DISCOUNT ACCRETION
                       
Preferred stock dividend
 
1,550
   
1,550
   
4,650
   
4,650
 
Preferred stock discount accretion
 
425
   
398
   
1,276
   
1,195
 
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
$
4,055
 
$
(44,690
)
$
(5,539
)
$
(55,050
)
                         
Earnings (loss) per common share:
                       
Basic
$
0.24
 
$
(2.83
)
$
(0.33
)
$
(7.31
)
Diluted
$
0.24
 
$
(2.83
)
$
(0.33
)
$
(7.31
)
Cumulative dividends declared per common share:
$
0.01
 
$
0.07
 
$
0.09
 
$
0.21
 

See Selected Notes to the Consolidated Financial Statements

 
5

 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) (In thousands)
For the Three and Nine Months Ended September 30, 2011 and 2010

   
Three Months Ended
September 30
   
Nine Months Ended
September 30
 
   
2011 
   
2010  
   
2011 
   
2010  
 
NET INCOME (LOSS)
$
6,030 
 
$
(42,742 
)
$
387  
 
$
(49,205 
)
                         
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
                       
Unrealized holding gain (loss) during the period, net of deferred
income tax (benefit) of $0, ($11), $0 and $618, respectively
 
651 
   
(20 
)
 
1,940  
   
1,099 
 
                         
Amortization of unrealized loss on tax exempt securities transferred from available-for-sale to
   held-to-maturity
 
   
11 
   
12  
   
33 
 
                         
Other comprehensive income (loss)
 
654 
   
(9 
)
 
1,952  
   
1,132 
 
                         
COMPREHENSIVE INCOME (LOSS)
$
6,684 
 
$
(42,751 
)
$
2,339  
 
$
(48,073 
)
 

 
See Selected Notes to the Consolidated Financial Statements
 
 
 
 
 
6

 
 
 
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited) (In thousands except for shares)
For the Nine Months Ended September 30, 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
   
16,130,441
 
$
507,470
 
$
(115,348
)
$
350
 
$
511,472
 
                                           
Net income (loss)
                         
387
         
387
 
                                           
Change in valuation of securities—available-for-sale, net of income tax
                               
1,940
   
1,940
 
                                           
Amortization of unrealized loss on tax exempt securities transferred from available-for-sale to held-to-maturity, net of income tax
                               
12
   
12
 
                                           
Accretion of preferred stock discount
       
1,276
               
(1,276
)
       
--
 
                                           
Accrual of dividends on preferred stock
                         
(4,650
)
       
(4,650
)
                                           
Accrual of dividends on common stock ($.09/share cumulative)
                         
(1,497
)
       
(1,497
)
                                           
Proceeds from issuance of common stock for dividend reinvestment and direct stock purchase and sale plan, net of registration expenses and reverse stock split fractional share repurchases
             
850,402
   
13,736
               
13,736
 
                                           
Amortization of compensation related to restricted stock grant, net of shares surrendered for income tax withholding
             
16,066
   
69
               
69
 
                                           
Amortization of compensation related to stock options
                   
22
               
22
 
                                           
BALANCE, September 30, 2011
 
124,000
 
$
120,276
   
16,996,909
 
$
521,297
 
$
(122,384
)
$
2,302
 
$
521,491
 

(1)  
  Common Stock and Paid in Capital includes a reduction of $2 million related to 34,340 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 except for shares)
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
   
3,042,744
 
$
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 ($.28/share cumulative)
                         
(3,582
)
       
(3,582
)
                                           
Proceeds from issuance of common stock for dividend reinvestment and direct stock purchase and sale plan, net of registration expenses
             
836,989
   
16,201
               
16,201
 
                                           
Proceeds from issuance of common stock, net of offering costs
             
12,234,143
   
161,637
               
161,637
 
                                           
Amortization of compensation related to
Management Recognition Plan (MRP)
                   
2
               
2
 
                                           
Amortization of compensation related to restricted stock grant
             
16,565
   
28
               
28
 
                                           
Amortization of compensation related to stock options
                   
53
               
53
 
                                           
BALANCE, December 31, 2010
 
124,000
 
$
119,000
   
16,130,441
 
$
507,470
 
$
(115,348
)
$
350
 
$
511,472
 

(1)  
  Common Stock and Paid in Capital includes a reduction of $2 million related to 34,340 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 Nine Months Ended September 30, 2011 and 2010

   
Nine Months Ended
September 30
 
   
2011
   
2010
 
OPERATING ACTIVITIES:
           
Net income (loss)
$
387
 
$
(49,205
)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
           
Depreciation
 
6,509
   
6,963
 
Deferred income and expense, net of amortization
 
1,207
   
105
 
Amortization of core deposit and other intangibles
 
1,722
   
1,860
 
Other-than-temporary impairment (recovery) or loss
 
(3,000
)
 
4,231
 
Net change in valuation of financial instruments carried at fair value
 
(1,163
)
 
(2,453
)
Purchases of securities—trading
 
--
   
(3,266
)
Principal repayments and maturities of securities—trading
 
11,305
   
50,048
 
Deferred taxes
 
--
   
14,193
 
Equity-based compensation
 
91
   
47
 
Increase in cash surrender value of bank-owned life insurance
 
(1,405
)
 
(1,545
)
Gain on sale of loans, excluding capitalized servicing rights
 
(1,992
)
 
(2,994
)
Loss on disposal of real estate held for sale and property
and equipment, net
 
1,254
   
1,382
 
Provision for losses on loans and real estate held for sale
 
42,407
   
59,923
 
Origination of loans held for sale
 
(186,341
)
 
(235,084
)
Proceeds from sales of loans held for sale
 
187,830
   
236,036
 
Net change in:
           
Other assets
 
16,307
   
10,922
 
Other liabilities
 
(677
)
 
529
 
Net cash provided from operating activities
 
74,441
   
91,692
 
             
INVESTING ACTIVITIES:
           
Purchases of securities available-for-sale
 
(420,910
)
 
(161,516
)
Principal repayments and maturities of securities available-for-sale
 
224,716
   
102,704
 
Proceeds from sales of securities available-for-sale
 
13,179
   
1,965
 
Purchases of securities held-to-maturity
 
(11,303
)
 
(1,158
)
Principal repayments and maturities of securities held-to-maturity
 
7,066
   
6,020
 
Principal repayments of loans, net of originations
 
92,156
   
174,900
 
Purchases of loans and participating interest in loans
 
(620
)
 
(286
)
Purchases of property and equipment, net
 
(2,486
)
 
(1,741
)
Proceeds from sale of other repossessed assets and REO held for sale, net
 
66,653
   
30,306
 
Other
 
(169
)
 
(108
)
Net cash provided from (used by) investing activities
 
(31,718
)
 
151,086
 
             
FINANCING ACTIVITIES:
           
Decrease in deposits, net
 
(53,764
)
 
(105,064
)
Repayment of FHLB advances
 
(32,804
)
 
(142,504
)
Increase (decrease) in other borrowings, net
 
(36,109
)
 
1,285
 
Cash dividends paid
 
(7,107
)
 
(6,212
)
Cash proceeds from issuance of stock for dividend reinvestment and direct stock
    purchase and sale program, net of reverse stock split fractional share repurchases
 
13,736
   
13,198
 
Cash proceeds from issuance of stock in secondary offering, net of offering costs
 
--
   
161,637
 
Net cash used by financing activities
 
(116,048
)
 
(77,660
)
             
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS
 
(73,325
)
 
165,118
 
             
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD
 
361,652
   
323,005
 
CASH AND DUE FROM BANKS, END OF PERIOD
$
288,327
 
$
488,123
 

(Continued on next page)

 

 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Nine Months Ended September 30, 2011 and 2010

   
Nine Months Ended
September 30
 
   
2011
   
2010
 
             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
Interest paid in cash
$
28,231
 
$
52,132
 
Taxes received in cash
 
(13,048
)
 
(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
 
45,880
   
71,102
 

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

The accompanying unaudited consolidated financial statements include the accounts of Banner Corporation (the Company), a bank holding company incorporated in the State of Washington and its wholly-owned subsidiaries, Banner Bank and Islanders Bank (the Banks).

These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC).  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.  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 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 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 (2010 Form 10-K).  Interim results are not necessarily indicative of results for a full year.

Note 2:  RECENT DEVELOPMENTS AND SIGNIFICANT EVENTS

Amended Federal Income Tax Returns:  On October 25, 2011, the Company filed amended federal income tax returns for tax years 2005, 2006, 2008 and 2009.  The amended tax returns, which are expected to be reviewed by the Internal Revenue Service (IRS), would significantly affect the timing for recognition of credit losses within previously filed income tax returns and, if approved, would result in the refund of up to $13.6 million of previously paid taxes from the utilization of net operating loss carryback claims into prior tax years.  The outcome of the anticipated IRS review is inherently uncertain and since there can be no assurance of approval of some or all of the tax carryback claims, no asset has been recognized to reflect the possible results of these amendments as of September 30, 2011, because of this uncertainty.  Accordingly, we do not anticipate recognizing any tax benefit until the results of the IRS review have been determined.

Regulatory Actions:  On March 23, 2010, Banner Bank entered into a Memorandum of Understanding (Bank MOU) with the FDIC and Washington DFI.  Banner Corporation 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 common stock without the prior written non-objection of the Federal Reserve Bank of San Francisco.  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 2010 Form 10-K.

Reverse stock split: On May 26, 2011, Banner Corporation filed with the Secretary of State of the State of Washington Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company, which effected a 1-for-7 reverse stock split. The amendment to the Company's Amended and Restated Articles of Incorporation was effective June 1, 2011.

As a result of the reverse stock split, every seven shares of the Company's common stock issued and outstanding immediately prior to the effective date automatically consolidated into one share of common stock.  No fractional shares of common stock were issued by the Company in connection with the reverse stock split.  Approximately $50,000 in cash was paid for fractional shares based on the closing price of the common stock on May 31, 2011.  All prior shares outstanding and per share information have been retroactively adjusted for the reverse stock split.
 
 
 
 
11

 

 
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 sustained 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 or nine months ended September 30, 2011.  See Note 12 of the Notes to the Consolidated Financial Statements for more information.

Note 3:  ACCOUNTING STANDARDS RECENTLY ADOPTED OR ISSUED

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (International Financial Reporting Standards).  This guidance is effective for the first interim or annual period beginning on or after December 15, 2011, and will be applied prospectively beginning in the period of adoption.  The amendments change the wording used to describe requirements for measuring fair value under U.S. GAAP to be more consistent with IFRSs.  The adoption of this guidance is not expected to have a material effect on the Company’s Consolidated Financial Statements.

In April 2011, 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 became effective for the first interim or annual period beginning on or after June 15, 2011, and was applied retrospectively to the beginning of the annual period of adoption.  The adoption of this guidance did not have a material effect on the Company’s Consolidated Financial Statements.

In July 2010, FASB issued 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 became effective for fiscal periods beginning after December 15, 2010.  The implementation of this ASU did not have a material impact on the Company’s consolidated financial statements.

Note 4:  BUSINESS SEGMENTS

The Company is managed by legal entity and not by lines of business.  Each of the Banks is a community oriented commercial bank chartered in the State of Washington.  The Banks’ primary business is that of a traditional banking institution, gathering deposits and originating loans for 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.

 
 
 
 
12

 

 
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):

 
September 30
2011
 
December 31
2010
 
September 30
2010
           
Interest-bearing deposits included in cash and due from banks
$
234,824
 
$
321,896
 
$
441,977
                 
U.S. Government and agency obligations
 
292,012
   
139,807
   
116,188
                 
Municipal bonds:
               
Taxable
 
15,220
   
7,123
   
2,953
Tax exempt
 
92,432
   
75,509
   
69,504
Total municipal bonds
 
107,652
   
82,632
   
72,457
                 
Corporate bonds
 
52,238
   
58,495
   
46,035
                 
Mortgage-backed or related securities:
               
GNMA
 
20,815
   
23,732
   
16,105
FHLMC
 
25,350
   
26,952
   
32,160
FNMA
 
47,177
   
32,341
   
35,509
Private issuer
 
2,589
   
3,544
   
3,994
Total mortgage-backed or related securities
 
95,931
   
86,569
   
87,768
                 
Equity securities (excludes FHLB stock)
 
545
   
190
   
144
                 
Total securities
 
548,378
   
367,693
   
322,592
                 
FHLB stock
 
37,371
   
37,371
   
37,371
 
$
820,573
 
$
726,960
 
$
801,940

 

 
 
13 

 
 

 
Securities—Trading:  The amortized cost and estimated fair value of securities—trading at September 30, 2011 and December 31, 2010 are summarized as follows (dollars in thousands):

 
September 30, 2011
   
December 31, 2010
 
Amortized Cost
 
Fair Value
 
Percent of Total
   
Amortized Cost
 
Fair Value
 
Percent of Total
                                       
U.S. Government and agency obligations
$
3,402
 
$
3,633
   
4.3
%
 
$
4,167
 
$
4,379
   
4.6
%
                                       
Municipal bonds:
                                     
Taxable
 
391
   
441
   
0.5
     
682
   
693
   
0.7
 
Tax exempt
 
5,428
   
5,545
   
6.5
     
5,422
   
5,705
   
6.0
 
Total municipal bonds
 
5,819
   
5,986
   
7.0
     
6,104
   
6,398
   
6.7
 
                                       
Corporate bonds
 
63,507
   
35,257
   
41.3
     
63,581
   
34,724
   
36.4
 
                                       
Mortgage-backed or related securities:
                                     
FHLMC
 
11,615
   
12,416
   
14.5
     
16,554
   
17,347
   
18.2
 
FNMA
 
25,490
   
27,582
   
32.3
     
30,749
   
32,341
   
33.9
 
Total mortgage-backed or
related securities
 
37,105
   
39,998
   
46.8
     
47,303
   
49,688
   
52.1
 
                                       
Equity securities
 
6,915
   
545
   
0.6
     
6,915
   
190
   
0.2
 
 
$
116,748
 
$
85,419
   
100.0
%
 
$
128,070
 
$
95,379
   
100.0
%

There were no sales of securities—trading during the nine months ended September 30, 2011 or 2010.  The Company did not recognize an OTTI charge on securities—trading during the nine months ended September 30, 2011.  However, for the nine months ended September 30, 2010, we recognized a $1.2 million OTTI charge on a corporate bond that is a single-issue trust preferred security.  At September 30, 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 September 30, 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.

 
September 30, 2011
 
December 31, 2010
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
                       
Due in one year or less
$
2,001
 
$
2,023
 
$
1,762
 
$
1,816
Due after one year through five years
 
1,545
   
1,632
   
2,549
   
2,668
Due after five years through ten years
 
18,330
   
19,579
   
20,442
   
21,328
Due after ten years through twenty years
 
13,769
   
14,129
   
16,234
   
16,840
Due after twenty years
 
74,188
   
47,511
   
80,168
   
52,537
                       
   
109,833
   
84,874
   
121,155
   
95,189
                       
Equity securities
 
6,915
   
545
   
6,915
   
190
 
$
116,748
 
$
85,419
 
$
128,070
 
$
95,379
 

 

 
14 

 
 

 
Securities—Available-for-Sale:  The amortized cost and estimated fair value of securities—available-for-sale at September 30, 2011 and December 31, 2010 are summarized as follows (dollars in thousands):

 
September 30, 2011
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
   
Percent of
Total
 
                               
U.S. Government and agency obligations
$
287,683
 
$
787
 
$
(91
)
$
288,379
   
75.1
%
                               
Municipal bonds:
                             
Taxable
 
7,380
   
197
   
(1
)
 
7,576
   
2.0
 
Tax exempt
 
15,920
   
153
   
(22
)
 
16,051
   
4.2
 
Total municipal bonds
 
23,300
   
350
   
(23
)
 
23,627
   
6.2
 
                               
Corporate bonds
 
15,718
   
15
   
(3
)
 
15,730
   
4.1
 
                               
Mortgage-backed or related securities:
                             
FHLMC
 
19,321
   
1,494
   
--
   
20,815
   
5.4
 
FNMA
 
12,731
   
204
   
--
   
12,935
   
3.4
 
GNMA
 
19,362
   
266
   
(33
)
 
19,595
   
5.1
 
Private issuer
 
2,447
   
142
   
--
   
2,589
   
0.7
 
Total mortgage-backed or related securities
 
53,861
   
2,106
   
(33
)
 
55,934
   
14.6
 
 
$
380,562
 
$
3,258
 
$
(150
)
$
383,670
   
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 September 30, 2011 and December 31, 2010, an aging of unrealized losses and fair value of related securities—available-for-sale was as follows (in thousands):

 
September 30, 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
$
104,885
 
$
(91
)
$
--
 
$
--
 
$
104,885
 
$
(91
)
                                     
Municipal bonds:
                                   
Taxable
 
600
   
(1
)
 
--
   
--
   
600
   
(1
)
Tax exempt
 
5,907
   
(22
)
 
--
   
--
   
5,907
   
(22
)
Total municipal bonds
 
6,507
   
(23
)
 
--
   
--
   
6,507
   
(23
)
                                     
Corporate bonds
 
2,222
   
(3
)
 
--
   
--
   
2,222
   
(3
)
                                     
Mortgage-backed or related securities
 
15,278
   
(33
)
 
--
   
--
   
15,278
   
(33
)
 
$
128,892
 
$
(150
)
$
--
 
$
--
 
$
128,892
 
$
(150
)
     
 
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
)

Proceeds from the sale of three securities—available-for-sale during the nine months ended September 30, 2011 were $13.2 million compared to proceeds of $2.0 million from the sale of one security during the nine months ended September 30, 2010.  There were no gains or losses from the sale of securities—available-for-sale for the nine months ended September 30, 2011 and 2010, and in addition we had no OTTI charges over those same time periods.  At September 30, 2011, there were 25 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 September 30, 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 September 30, 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.

 
September 30, 2011
 
December 31, 2010
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
                       
Due in one year or less
$
20,104
 
$
20,124
 
$
55,135
 
$
55,132
Due after one year through five years
 
244,455
   
245,311
   
107,356
   
106,916
Due after five years through ten years
 
88,270
   
88,699
   
1,338
   
1,298
Due after ten years through twenty years
 
2,446
   
2,589
   
3,318
   
3,544
Due after twenty years
 
25,287
   
26,947
   
31,911
   
33,337
 
$
380,562
 
$
383,670
 
$
199,058
 
$
200,227


 
16 

 

Securities—Held-to-Maturity:  The amortized cost and estimated fair value of securities—held-to-maturity at September 30, 2011 and December 31, 2010 are summarized as follows (dollars in thousands):

   
September 30, 2011
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
   
Percent of
Total
 
Municipal bonds:
                             
Taxable
$
7,203
 
$
366
 
$
--
 
$
7,569
   
9.1
%
Tax exempt
 
70,836
   
3,728
   
(8
)
 
74,556
   
89.4
 
Total municipal bonds
 
78,039
   
4,094
   
(8
)
 
82,125
   
98.5
 
                               
Corporate bonds
 
1,250
   
--
   
(3
)
 
1,247
   
1.5
 
 
$
79,289
 
$
4,094
 
$
(11
)
$
83,372
   
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 September 30, 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):

 
September 30, 2011
 
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Municipal bonds:
                                   
Taxable
$
--
 
$
--
 
$
--
 
$
--
 
$
--
 
$
--
 
Tax exempt
2,156
 
(3
)
1,854
 
(5
)
4,010
 
(8
)
Total municipal bonds
2,156
 
(3
)
1,854
 
(5
)
4,010
 
(8
)
                         
Corporate bonds
--
 
--
 
497
 
(3
)
497
 
(3
)
 
$
2,156
 
$
(3
)
$
2,351
 
$
(8
)
$
4,507
 
$
(11
)
     
 
December 31, 2010
 
 
Less Than 12 Months
 
12 Months or More
 
Total
 
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Municipal bonds:
                                   
Taxable
$
3,443
 
$
(71
)
$
--
 
$
--
 
$
3,443
 
$
(71
)
Tax exempt
13,301
 
(106
)
--
 
--
 
13,301
 
(106
)
Total municipal bonds
16,744
 
(177
)
--
 
--
 
16,744
 
(177
)
                         
Corporate bonds
--
 
--
 
478
 
(22
)
478
 
(22
)
 
$
16,744
 
$
(177
)
$
478
 
$
(22
)
$
17,222
 
$
(199
)

There were no sales of securities—held-to-maturity during the nine months ended September 30, 2011 and 2010.  The Company did not recognize any OTTI charge on securities—held-to-maturity during the nine months ended September 30, 2011; however, we did recognize $3.0 million from the recovery of one security—held-to-maturity which had previously been charged off as OTTI in the prior year.  Aside from the previously mentioned $3.0 million OTTI charge, there were no other OTTI charges for the nine months ended September 30, 2010 for securities—held-to-maturity.  As of September 30, 2011, there were two held-to-maturity non-rated corporate bonds issued by a housing authority on nonaccrual status each with an amortized cost of $250,000 and estimated fair value of $249,000.  Management expects to collect all amounts due for these securities.  There were four securities—held-to-maturity with unrealized losses at September 30, 2011, compared to 13 at December 31, 2010.  Management does not believe that any individual unrealized loss as of September 30, 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.
 
 
 
 
17

 
 

The amortized cost and estimated fair value of securities—held-to-maturity at September 30, 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.

 
September 30, 2011
 
December 31, 2010
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
                       
Due in one year or less
$
3,069
 
$
3,108
 
$
2,297
 
$
2,342
Due after one year through five years
 
14,465
   
15,142
   
10,634
   
11,145
Due after five years through ten years