XNAS:BANR Banner Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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, 2012.
 
 
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 [   ]    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, 2012
18,208,497 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 March 31, 2012 and December 31, 2011
4
   
Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011
5
   
Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2012 and 2011
6
   
Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2012 and the Year Ended
December 31, 2011
7
 
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011
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
42
   
Comparison of Financial Condition at March 31, 2012 and December 31, 2011
46
   
Comparison of Results of Operations for the Three Months Ended March 31, 2012 and 2011
47
   
Asset Quality
51
   
Liquidity and Capital Resources
56
   
Capital Requirements
57
   
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
 
   
Market Risk and Asset/Liability Management
58
   
Sensitivity Analysis
58
   
Item 4 - Controls and Procedures
62
   
PART II - OTHER INFORMATION
 
   
Item 1 - Legal Proceedings
63
   
Item 1A - Risk Factors
63
   
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
63
   
Item 3 - Defaults upon Senior Securities
63
   
Item 4 – Mine Safety Disclosures
63
   
Item 5 - Other Information
63
   
Item 6 - Exhibits
64
   
SIGNATURES
66
 
 
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 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 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; 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 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; 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 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.
 
 
3

 
 
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
March 31, 2012 and December 31, 2011

   
March 31
   
December 31
 
ASSETS
 
2012
   
2011
 
             
Cash and due from banks
  $ 199,609     $ 132,436  
                 
Securities—trading, amortized cost $108,642 and $112,663, respectively
    77,706       80,727  
Securities—available-for-sale, amortized cost $383,555 and $462,579, respectively
    386,716       465,795  
Securities—held-to-maturity, fair value $82,294 and $80,107, respectively
    76,853       75,438  
                 
Federal Home Loan Bank stock
    37,371       37,371  
Loans receivable:
               
Held for sale
    4,623       3,007  
Held for portfolio
    3,225,039       3,293,331  
Allowance for loan losses
    (81,544 )     (82,912 )
      3,148,118       3,213,426  
                 
Accrued interest receivable
    16,047       15,570  
Real estate owned, held for sale, net
    27,723       42,965  
Property and equipment, net
    90,106       91,435  
Intangible assets, net
    5,777       6,331  
Bank-owned life insurance (BOLI)
    59,055       58,563  
Other assets
    35,683       37,255  
                 
    $ 4,160,764     $ 4,257,312  
LIABILITIES
               
Deposits:
               
Non-interest-bearing
  $ 771,812     $ 777,563  
Interest-bearing transaction and savings accounts
    1,457,030       1,447,594  
Interest-bearing certificates
    1,197,328       1,250,497  
      3,426,170       3,475,654  
                 
Advances from FHLB at fair value
    10,467       10,533  
Other borrowings
    91,253       152,128  
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
    49,368       49,988  
Accrued expenses and other liabilities
    21,136       23,253  
Deferred compensation
    13,580       13,306  
      3,611,974       3,724,862  
                 
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
    121,156       120,702  
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized, 18,027,768 shares
issued: 17,993,428 shares and 17,519,132  shares outstanding at March 31, 2012 and December 31, 2011,
respectively
    540,068       531,149  
Accumulated deficit
    (112,465 )     (119,465 )
Accumulated other comprehensive income
    2,018       2,051  
Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust at cost
               
34,340 restricted shares outstanding at March 31, 2012 and December 31, 2011
    (1,987 )     (1,987 )
                 
      548,790       532,450  
                 
    $ 4,160,764     $ 4,257,312  

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 Months Ended March 31, 2012 and 2011

   
Three Months Ended
March 31
 
   
2012
   
2011
 
INTEREST INCOME:
           
Loans receivable
  $ 43,988     $ 46,755  
Mortgage-backed securities
    927       875  
Securities and cash equivalents
    2,283       2,033  
      47,198       49,663  
INTEREST EXPENSE:
               
Deposits
    4,448       7,812  
FHLB advances
    63       178  
Other borrowings
    549       579  
Junior subordinated debentures
    1,012       1,038  
      6,072       9,607  
                 
Net interest income before provision for loan losses
    41,126       40,056  
                 
PROVISION FOR LOAN LOSSES
    5,000       17,000  
Net interest income
    36,126       23,056  
                 
OTHER OPERATING INCOME:
               
Deposit fees and other service charges
    5,869       5,279  
Mortgage banking operations
    2,649       962  
Loan servicing fees, net of amortization and impairment
    217       256  
Miscellaneous
    551       493  
      9,286       6,990  
                 
Net change in valuation of financial instruments carried at fair value
    1,685       256  
Total other operating income
    10,971       7,246  
                 
OTHER OPERATING EXPENSES:
               
Salary and employee benefits
    19,510       17,255  
Less capitalized loan origination costs
    (2,250 )     (1,720 )
Occupancy and equipment
    5,477       5,394  
Information/computer data services
    1,515       1,567  
Payment and card processing expenses
    1,890       1,647  
Professional services
    1,344       1,672  
Advertising and marketing
    2,066       1,740  
Deposit insurance
    1,363       1,969  
State/municipal business and use taxes
    568       494  
REO operations
    2,598       4,631  
Amortization of core deposit intangibles
    552       597  
Miscellaneous
    3,280       2,898  
Total other operating expenses
    37,913       38,144  
                 
Income (loss) before provision for income taxes
    9,184       (7,842 )
                 
PROVISION FOR INCOME TAXES
    --       --  
                 
NET INCOME (LOSS)
    9,184       (7,842 )
                 
PREFERRED STOCK DIVIDEND AND DISCOUNT ACCRETION
               
Preferred stock dividend
    1,550       1,550  
Preferred stock discount accretion
    454       426  
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
  $ 7,180     $ (9,818 )
                 
Earnings (loss) per common share:
               
Basic
  $ 0.40     $ (0.60 )
Diluted
  $ 0.40     $ (0.60 )
Cumulative dividends declared per common share:
  $ 0.01     $ 0.07  

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 Months Ended March 31, 2012 and 2011

   
Three Months Ended
March 31
 
   
2012
   
2011
 
             
NET INCOME (LOSS)
  $ 9,184     $ (7,842 )
                 
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
               
Unrealized holding gain (loss) during the period, net of deferred
income tax provision (benefit) of $(20) and $0, respectively
    (35 )     (682 )
                 
Amortization of unrealized loss on tax exempt securities transferred from available-for-sale to held-to-maturity
    2       5  
                 
Other comprehensive income (loss)
    (33 )     (677 )
                 
COMPREHENSIVE INCOME (LOSS)
  $ 9,151     $ (8,519 )

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 Three Months Ended March 31, 2012

                        Retained      Accumulated         
             Common Stock and     Earnings      Other         
 
Preferred Stock
 
Paid in Capital
    (Accumulated      Comprehensive      Stockholders'   
 
Shares
    Amount   
Shares
    Amount      Deficit)      Income (Loss)       Equity  
                                       
Balance, January 1, 2012
124,000
 
$
120,702
 
17,519,132
 
$
529,162
 
$
(119,465
)
$
2,051
 
$
532,450
 
                                       
Net income (loss)
                     
9,184
         
9,184
 
                                       
Change in valuation of securities—available-for-
   sale, net of income tax
                           
(35
)
 
(35
)
                                       
Amortization of unrealized loss on tax exempt
    securities transferred from available-for-sale to
    held-to-maturity, net of income tax
                           
2
   
2
 
                                       
Accretion of preferred stock discount
     
454
             
(454
)
       
--
 
                                       
Accrual of dividends on preferred stock
                     
(1,550
)
       
(1,550
)
                                       
Accrual of dividends on common stock
    ($.01/share cumulative)
                     
(180
)
       
(180
)
                                       
Proceeds from issuance of common stock for
    stockholder reinvestment program
         
474,296
   
8,874
               
8,874
 
                                       
Amortization of compensation related to
    restricted stock grant
               
42
               
42
 
                                       
Amortization of compensation related to stock
    options
               
3
               
3
 
                                       
BALANCE, March 31, 2012
124,000
 
$
121,156
 
17,993,428
 
$
538,081
 
$
(112,465
)
$
2,018`
 
$
548,790
 


See Selected Notes to the Consolidated Financial Statements

 
7

 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 (Unaudited) (In thousands, except for shares)
For the Year Ended December 31, 2011

                        Retained      Accumulated       
            Common Stock and       Earnings      Other       
  Preferred Stock   Paid in Capital     (Accumulated      Comprehensive    Stockholders'   
  Shares      Amount    Shares      Amount      Deficit)      Income (Loss)    Equity   
                                     
Balance, January 1, 2011
124,000
 
$
119,000
 
16,130,441
 
$
507,470
 
$
(115,348
)
$
350
$
511,472
 
                                     
Net income (loss)
                     
5,457
       
5,457
 
                                     
Change in valuation of securities—available-for-
    sale, net of income tax
                           
1,685
 
1,685
 
                                     
Amortization of unrealized loss on tax exempt
    securities transferred from available-for-sale to
    held-to-maturity, net of income tax
                           
16
 
16
 
                                     
Accretion of preferred stock discount
     
1,701
             
(1,701
)
     
--
 
                                     
Accrual of dividends on preferred stock
                     
(6,200
)
     
(6,200
)
                                     
Accrual of dividends on common stock
    ($.10/share cumulative)
                     
(1,673
)
     
(1,673
)
                                     
Proceeds from issuance of common stock for
    stockholder reinvestment program
         
1,372,625
   
21,556
             
21,556
 
                                     
Amortization of compensation related to
    restricted stock grant
         
16,066
   
111
             
111
 
                                     
Amortization of compensation related to stock
    options
               
25
             
25
 
                                     
Other
     
1
                       
1
 
                                     
BALANCE, December 31, 2011
124,000
 
$
120,702
 
17,519,132
 
$
529,162
 
$
(119,465
)
$
2,051
$
532,450
 


See Selected Notes to the Consolidated Financial Statements

 
8

 



BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2012 and 2011

   
Three Months Ended
March 31
 
   
2012
   
2011
 
OPERATING ACTIVITIES:
           
Net income (loss)
  $ 9,184     $ (7,842 )
Adjustments to reconcile net income (loss) to net cash provided by
  operating activities:
               
Depreciation
    1,907       2,169  
Deferred income and expense, net of amortization
    542       613  
Amortization of core deposit intangibles
    552       597  
Net change in valuation of financial instruments carried at fair value
    (1,685 )     (256 )
Principal repayments and maturities of securities—trading
    4,046       4,554  
Equity-based compensation
    45       29  
Increase in cash surrender value of bank-owned life insurance
    (489 )     (470 )
Gain on sale of loans, excluding capitalized servicing rights
    (1,736 )     (694 )
(Gain) Loss on disposal of real estate held for sale and property
and equipment
    (113 )     539  
Provision for losses on loans and real estate held for sale
    6,629       20,027  
Origination of loans held for sale
    (122,732 )     (61,208 )
Proceeds from sales of loans held for sale
    122,853       63,207  
Net change in:
               
Other assets
    1,360       15,086  
Other liabilities
    (1,866 )     (210 )
Net cash provided from operating activities
    18,497       36,141  
                 
INVESTING ACTIVITIES:
               
Purchases of available-for-sale securities
    (46,409 )     (64,730 )
Principal repayments and maturities of available-for-sale securities
    124,547       22,844  
Purchases of securities held-to-maturity
    (1,896 )     (3,241 )
Principal repayments and maturities of securities held-to-maturity
    451       205  
Principal repayments of loans, net of originations
    65,012       44,092  
Purchases of loans and participating interest in loans
    (4,635 )     (68 )
Purchases of property and equipment
    (587 )     (395 )
Proceeds from sale of real estate held for sale, net
    15,410       17,335  
Other
    (3 )     (51 )
Net cash provided from investing activities
    151,890       15,991  
                 
FINANCING ACTIVITIES:
               
Decrease in deposits, net
    (49,483 )     (50,550 )
Repayment of FHLB advances
    (2 )     (32,800 )
Decrease in other borrowings, net
    (60,878 )     (15,911 )
Cash dividends paid
    (1,725 )     (2,682 )
Cash proceeds from issuance of stock for stockholder reinvestment plan
    8,874       4,464  
Net cash used by financing activities
    (103,214 )     (97,479 )
                 
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS
    67,173       (45,347 )
                 
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD
    132,436       361,652  
CASH AND DUE FROM BANKS, END OF PERIOD
  $ 199,609     $ 316,305  

(Continued on next page)
 
 
9

 
 
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Three Months Ended March 31, 2012 and 2011

   
Three Months Ended
March 31
 
   
2012
   
2011
 
             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
Interest paid in cash
  $ 6,715     $ 10,480  
Taxes received in cash
    --       (13,078 )
                 
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
    1,611       14,939  

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 or Banner), 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 2011 Consolidated Financial Statements and/or schedules to conform to the 2012 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 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, 2011 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, 2011 filed with the SEC (2011 Form 10-K).  Interim results are not necessarily indicative of results for a full year.

Note 2:  RECENT DEVELOPMENTS AND SIGNIFICANT EVENTS

Regulatory Actions:  On March 19, 2012, the Memorandum of Understanding (MOU) by and between Banner Bank and the FDIC and Washington State Department of Financial Institutions, Division of Banks (originally effective March 29, 2010) was terminated.  On April 10, 2012, a similar MOU by and between the Company and the Federal Reserve Bank of San Francisco (originally effective March 23, 2010) was also terminated.

Income Tax Reporting and Accounting:

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 under review by the Internal Revenue Service (IRS), could 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 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 March 31, 2012, because of this uncertainty.  Accordingly, the Company does not anticipate recognizing any tax benefit until the results of the IRS review have been determined.

Deferred Tax Asset Valuation Allowance:  The Company and its wholly-owned subsidiaries file consolidated U.S. federal income tax returns, as well as state income tax returns in Oregon and Idaho.  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 GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that all or a portion of Banner’s deferred tax assets will not be realized.  During the third quarter of 2010, the Company evaluated its net deferred tax asset and determined it was prudent to establish a valuation allowance against the entire asset.  The Company continued to maintain a full valuation allowance through March 31, 2012.  As a result, no tax benefit or expense was recognized during 2011, nor during the three months ended March 31, 2012.  See Note 12 of the Selected Notes to the Consolidated Financial Statements for more information.

 
11

 
 
Stockholder Equity Transactions:
 
Restricted Stock Grants:  On April 24, 2012, shareholders approved the Banner Corporation 2012 Restricted Stock Plan (the Plan).  Under the Plan, the Company was authorized to issue up to 300,000 shares of its common stock to provide a means for attracting and retaining highly skilled officers of Banner and its affiliates.  Shares granted under the Plan have a minimum vesting period of three years.  The Plan shall continue in effect for a term of ten years, after which no further awards may be granted.  Concurrent with the approval of the Plan was the approval of a grant of $300,000 of restricted stock to Mark J. Grescovich, President and Chief Executive Officer of Banner Corporation and Banner Bank.
 
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.

Participation in the U.S. Treasury’s Capital Purchase Program:  On March 29, 2012, the Company’s $124 million of senior preferred stock, originally issued to the U.S. Treasury as part of its Capital Purchase Program, was sold by the Treasury as part of its efforts to manage and recover its investments under the Troubled Asset Relief Program (TARP).  While the sale of these preferred shares to new owners did not result in any accounting entries and does not change the Company’s capital position, it does eliminate many restrictions put in place by the Treasury on TARP recipients.  The Treasury retained its related warrants to purchase up to $18.6 million in common stock.

Note 3:  ACCOUNTING STANDARDS RECENTLY ADOPTED

In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 was 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 April 2011, FASB issued ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements.  This guidance was effective for the first interim or annual period beginning on or after December 15, 2011.  The guidance was applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date.  The amendments remove the transferor’s ability criterion from the consideration of effective control for repurchase and other agreements that both entitle and obligate the transferor to repurchase or redeem financial assets before their maturity.  The adoption of this guidance did not have a material effect on the Company’s Consolidated Financial Statements.

In May 2011, FASB issued ASU No. 2011-04, Fair Value Measurement - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.  ASU 2011-04 amends Topic 820, Fair Value Measurements and Disclosures, to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures.  ASU 2011-04 became effective for the first interim or annual period beginning on or after December 15, 2011 and did not have a significant impact on the Corporation’s financial statements.

In June 2011, FASB issued ASU No. 2011-05, Presentation of Comprehensive Income.  The amendments in this ASU were effective for fiscal years and interim periods within those years beginning after December 15, 2011 and were to be applied retrospectively.  The FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  Additionally, the amendments require the consecutive presentation of the statement of net income and other comprehensive income and require the presentation of reclassification adjustments on the face of the financial statements from other comprehensive income to net income.  See also ASU No. 2011-12.  The adoption of this guidance did not have a material effect on the Company’s Consolidated Financial Statements.

In December 2011, FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05.  This ASU was made to allow FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented.  While FASB is considering the operational concerns about the presentation requirements for reclassification adjustments, and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05.  The amendments in this ASU were effective at the same time as the amendments in ASU 2011-05 so that entities will not be required to comply with the presentation requirements effective at the same time as the amendments in ASU 2011-05 that this ASU is deferring.  The amendments in this ASU were effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The adoption of this guidance did not have a material effect 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
2012
   
December 31
2011
   
March 31
2011
 
                   
Interest-bearing deposits included in cash and due from banks
  $ 143,885     $ 69,758     $ 271,924  
                         
U.S. Government and agency obligations
    238,866       341,606       173,270  
                         
Municipal bonds:
                       
Taxable
    18,071       18,497       13,004  
Tax exempt
    90,965       88,963       80,131  
Total municipal bonds
    109,036       107,460       93,135  
                         
Corporate bonds
    43,674       42,565       58,369  
                         
Mortgage-backed or related securities:
                       
Ginnie Mae (GNMA)
    18,178       19,572       22,275  
Freddie Mac (FHLMC)
    49,488       42,001       23,375  
Fannie Mae (FNMA)
    79,818       66,519       32,577  
Private issuer
    1,808       1,835       3,456  
Total mortgage-backed or related securities
    149,292       129,927       81,683  
                         
Equity securities (excludes FHLB stock)
    407       402       506  
                         
Total securities
    541,275       621,960       406,963  
                         
FHLB stock
    37,371       37,371       37,371  
                         
    $ 722,531     $ 729,089     $ 716,258  
 

 
 
13

 
Securities—Trading:  The amortized cost and estimated fair value of securities—trading at March 31, 2012 and December 31, 2011 are summarized as follows (dollars in thousands):

   
March 31, 2012
   
December 31, 2011
 
   
Amortized
Cost
   
Fair Value
   
Percent of
Total
   
Amortized
Cost
   
Fair Value
   
Percent of
Total
 
                                     
U.S. Government and agency obligations
  $ 1,400     $ 1,589       2.1 %   $ 2,401     $ 2,635       3.3 %
                                                 
Municipal bonds:
                                               
Taxable
    85       91       0.1       391       420       0.5  
Tax exempt
    5,434       5,466       7.0       5,431       5,542       6.9  
Total municipal bonds
    5,519       5,557       7.1       5,822       5,962       7.4  
                                                 
Corporate bonds
    63,353       36,155       46.5       63,502       35,055       43.4  
                                                 
Mortgage-backed or related securities:
                                               
FHLMC
    9,436       10,109       13.0       10,535       11,246       13.9  
FNMA
    22,020       23,889       30.8       23,489       25,427       31.5  
Total mortgage-backed or
related securities
    31,456       33,998       43.8       34,024       36,673       45.4  
                                                 
Equity securities
    6,914       407       0.5       6,914       402       0.5  
                                                 
    $ 108,642     $ 77,706       100.0 %   $ 112,663     $ 80,727       100.0 %

There were no sales of securities—trading during the three months ended March 31, 2012 or 2011.  The Company did not recognize any OTTI charges on securities—trading during the three months ended March 31, 2012 or 2011.  At March 31, 2012, there were no securities—trading in a nonaccrual status.  At March 31, 2011, there was one single-issuer trust preferred security that was on nonaccrual; however, subsequently deferred and current payments have been received, removing the security from nonaccrual status.

The amortized cost and estimated fair value of securities—trading at March 31, 2012 and December 31, 2011, 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, 2012
   
December 31, 2011
 
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
                         
Due in one year or less
  $ --     $ --     $ 1,000     $ 1,009  
Due after one year through five years
    5,027       5,412       1,545       1,626  
Due after five years through ten years
    15,689       16,664       17,755       18,975  
Due after ten years through twenty years
    19,744       18,697       13,244       13,431  
Due after twenty years
    61,268       36,526       72,205       45,284  
                                 
      101,728       77,299       105,749       80,325  
                                 
Equity securities
    6,914       407       6,914       402  
                                 
    $ 108,642     $ 77,706     $ 112,663     $ 80,727  
 
 
14

 

Securities—Available-for-Sale:  The amortized cost and estimated fair value of securities—available-for-sale at March 31, 2012 and December 31, 2011 are summarized as follows (dollars in thousands):

 
March 31, 2012
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
   
Percent of
Total
 
                               
U.S. Government and agency obligations
  $ 236,540     $ 768     $ (31 )   $ 237,277       61.3 %
                                         
Municipal bonds:
                                       
Taxable
    10,335       248       (1 )     10,582       2.7  
Tax exempt
    17,059       239       (4 )     17,294       4.5  
Total municipal bonds
    27,394       487       (5 )     27,876       7.2  
                                         
Corporate bonds
    6,209       60       --       6,269       1.6  
                                         
Mortgage-backed or related securities:
                                       
FHLMC collateralized mortgage obligations
    39,108       305       (34 )     39,379       10.2  
FNMA collateralized mortgage obligations
    55,814       390       (275 )     55,929       14.5  
GNMA certificates
    16,784       1,394       --       18,178       4.7  
Other collateralized mortgage obligations
    1,706       102       --       1,808       0.5  
Total mortgage-backed or related
securities
    113,412       2,191       (309 )     115,294       29.9  
                                         
    $ 383,555     $ 3,506     $ (345 )   $ 386,716       100.0 %
 
 
 
December 31, 2011
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
   
Percent of
Total
 
                                         
U.S. Government and agency obligations
  $ 338,165     $ 862     $ (56 )   $ 338,971       72.8 %
                                         
Municipal bonds:
                                       
Taxable
    10,358       225       (2 )     10,581       2.3  
Tax exempt
    16,535       210       (16 )     16,729       3.6  
Total municipal bonds
    26,893       435       (18 )     27,310       5.9  
                                         
Corporate bonds
    6,240       20       --       6,260       1.3  
                                         
Mortgage-backed or related securities:
                                       
FHLMC collateralized mortgage obligations
    30,504       284       (33 )     30,755       6.6  
FNMA collateralized mortgage obligations
    40,897       310       (115 )     41,092       8.8  
GNMA collateralized mortgage obligations
    18,145       1,427       --       19,572       4.2  
Other collateralized mortgage obligations
    1,735       100       --       1,835       0.4  
Total mortgage-backed or related
securities
    91,281       2,121       (148 )     93,254       20.0  
                                         
    $ 462,579     $ 3,438     $ (222 )   $ 465,795       100.0 %
 
 
15

 
 
At March 31, 2012 and December 31, 2011, an aging of unrealized losses and fair value of related securities—available-for-sale was as follows (in thousands):

 
March 31, 2012
 
 
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
  $ 13,948     $ (31 )   $ --     $ --     $ 13,948     $ (31 )
                                                 
Municipal bonds:
                                               
Taxable
    3,599       (1 )     --       --       3,599       (1 )
Tax exempt
    924       (4 )     --       --       924       (4 )
Total municipal bonds
    4,523       (5 )     --       --       4,523       (5 )
                                                 
Corporate bonds
    --       --       --       --       --       --  
                                                 
Mortgage-backed or related securities
    48,781       (308 )     --       --       48,781       (308 )
                                                 
    $ 67,252     $ (344 )   $ --     $ --     $ 67,252     $ (344 )
 
 
 
December 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
  $ 74,326     $ (56 )   $ --     $ --     $ 74,326     $ (56 )
                                                 
Municipal bonds:
                                               
Taxable
    3,599       (2 )     --       --       3,599       (2 )
Tax exempt
    4,075       (16 )     --       --       4,075       (16 )
Total municipal bonds
    7,674       (18 )     --       --       7,674       (18 )
                                                 
Corporate bonds
    --       --       --       --       --       --  
                                                 
Mortgage-backed or related securities
    33,888       (148 )     --       --       33,888       (148 )
                                                 
    $ 115,888     $ (222 )   $ --     $ --     $ 115,888     $ (222 )

There were no sales of securities—available-for-sale during the three months ended March 31, 2012 or 2011.  There were no OTTI charges on securities—available-for-sale for the three months ended March 31, 2012 and 2011.  At March 31, 2012, there were 18 securities—available-for-sale with unrealized losses, compared to 26 securities at December 31, 2011.  Management does not believe that any individual unrealized loss as of March 31, 2012 represents OTTI.  The decline in fair market values 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, 2012 and December 31, 2011, 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, 2012
   
December 31, 2011
 
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
                         
Due in one year or less
  $ 29,767     $ 29,880     $ 19,520     $ 19,602  
Due after one year through five years
    237,541       238,755       329,451       330,505  
Due after five years through ten years
    52,501       52,757       69,813       70,083  
Due after ten years through twenty years
    42,612       42,698       20,505       20,787  
Due after twenty years
    21,134       22,626       23,290       24,818  
                                 
    $ 383,555     $ 386,716     $ 462,579     $ 465,795  

 
16

 

Securities—Held-to-Maturity:  The amortized cost and estimated fair value of securities—held-to-maturity at March 31, 2012 and December 31, 2011 are summarized as follows (dollars in thousands):

   
March 31, 2012
 
   
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
   
Percent of Total
 
Municipal bonds:
                             
Taxable
  $ 7,399     $ 431     $ (21 )   $ 7,809       9.5 %
Tax exempt
    68,204       5,034       --       73,238       89.0  
Total municipal bonds
    75,603       5,465       (21 )     81,047       98.5  
                                         
Corporate bonds
    1,250       --       (3 )     1,247       1.5  
                                         
    $ 76,853     $ 5,465     $ (24 )   $ 82,294       100.0 %
 
       
   
December 31, 2011
 
           
Gross
   
Gross
                 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
   
Percent
 
   
Cost
   
Gains
   
Losses
   
Value
   
of Total
 
Municipal bonds:
                                       
Taxable
  $ 7,496     $ 390     $ --     $ 7,886       9.8 %
Tax exempt