XNAS:BANR Banner Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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q10banr63012.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
     
 
 
(Mark One)
 
 
[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 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  July 31, 2012
19,223,271 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 June 30, 2012 and December 31, 2011
4
   
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2012 and 2011
5
   
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2012 and 2011
6
   
Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2012 and the Year Ended
December 31, 2011
7
 
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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
44
   
Comparison of Financial Condition at June 30, 2012 and December 31, 2011
48
   
Comparison of Results of Operations for the Three and Six Months Ended June 30, 2012 and 2011
49
   
Asset Quality
54
   
Liquidity and Capital Resources
59
   
Capital Requirements
60
   
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
 
   
Market Risk and Asset/Liability Management
61
   
Sensitivity Analysis
61
   
Item 4 - Controls and Procedures
65
   
PART II - OTHER INFORMATION
 
   
Item 1 - Legal Proceedings
66
   
Item 1A - Risk Factors
66
   
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
66
   
Item 3 - Defaults upon Senior Securities
66
   
Item 4 – Mine Safety Disclosures
66
   
Item 5 - Other Information
66
   
Item 6 - Exhibits
67
   
SIGNATURES
69

 
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 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; 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)
June 30, 2012 and December 31, 2011

 
June 30
   
December 31
 
ASSETS
 
2012
   
2011
 
             
Cash and due from banks
$
189,176
 
$
132,436
 
             
Securities—trading, amortized cost $106,220 and $112,663, respectively
 
77,368
   
80,727
 
Securities—available-for-sale, amortized cost $433,051 and $462,579, respectively
 
436,130
   
465,795
 
Securities—held-to-maturity, fair value $89,153 and $80,107, respectively
 
83,312
   
75,438
 
             
Federal Home Loan Bank stock
 
37,371
   
37,371
 
Loans receivable:
           
Held for sale
 
6,752
   
3,007
 
Held for portfolio
 
3,205,505
   
3,293,331
 
Allowance for loan losses
 
(80,221
)
 
(82,912
)
   
3,132,036
   
3,213,426
 
             
Accrued interest receivable
 
14,656
   
15,570
 
Real estate owned, held for sale, net
 
25,816
   
42,965
 
Property and equipment, net
 
90,228
   
91,435
 
Intangible assets, net
 
5,252
   
6,331
 
Bank-owned life insurance (BOLI)
 
59,800
   
58,563
 
Deferred tax assets, net
 
31,572
   
--
 
Other assets
 
38,710
   
37,255
 
             
 
$
4,221,427
 
$
4,257,312
 
LIABILITIES
           
Deposits:
           
Non-interest-bearing
$
804,562
 
$
777,563
 
Interest-bearing transaction and savings accounts
 
1,449,890
   
1,447,594
 
Interest-bearing certificates
 
1,171,297
   
1,250,497
 
   
3,425,749
   
3,475,654
 
             
Advances from FHLB at fair value
 
10,423
   
10,533
 
Other borrowings
 
90,030
   
152,128
 
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
 
70,553
   
49,988
 
Accrued expenses and other liabilities
 
23,564
   
23,253
 
Deferred compensation
 
13,916
   
13,306
 
   
3,634,235
   
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
 
121,610
   
120,702
 
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized, 18,804,819 shares
issued: 18,770,479 shares and 17,519,132  shares outstanding at June 30, 2012 and December 31, 2011,
respectively
 
554,866
   
531,149
 
Accumulated deficit
 
(89,266
)
 
(119,465
)
Accumulated other comprehensive income
 
1,969
   
2,051
 
Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust at cost
           
34,340 restricted shares outstanding at June 30, 2012 and December 31, 2011
 
(1,987
)
 
(1,987
)
             
   
587,192
   
532,450
 
             
 
$
4,221,427
 
$
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 and Six Months Ended June 30, 2012 and 2011

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
2012
   
2011
   
2012
   
2011
 
INTEREST INCOME:
                       
Loans receivable
  $ 44,040     $ 46,846     $ 88,028     $ 93,601  
Mortgage-backed securities
    995       859       1,922       1,734  
Securities and cash equivalents
    2,230       2,183       4,513       4,216  
      47,265       49,888       94,463       99,551  
INTEREST EXPENSE:
                               
Deposits
    4,035       7,014       8,483       14,826  
FHLB advances
    64       64       127       242  
Other borrowings
    74       568       623       1,147  
Junior subordinated debentures
    802       1,041       1,814       2,079  
      4,975       8,687       11,047       18,294  
                                 
Net interest income before provision for loan losses
    42,290       41,201       83,416       81,257  
                                 
PROVISION FOR LOAN LOSSES
    4,000       8,000       9,000       25,000  
Net interest income
    38,290       33,201       74,416       56,257  
                                 
OTHER OPERATING INCOME:
                               
Deposit fees and other service charges
    6,283       5,693       12,152       10,972  
Mortgage banking operations
    2,855       855       5,504       1,817  
Loan servicing fees, net of amortization and impairment
    343       397       560       653  
Miscellaneous
    485       369       1,036       862  
      9,966       7,314       19,252       14,304  
                                 
Gain on sale of securities
    29       --       29       --  
Net change in valuation of financial instruments carried at fair value
    (19,059 )     1,939       (17,374 )     2,195  
Total other operating income (loss)
    (9,064 )     9,253       1,907       16,499  
                                 
OTHER OPERATING EXPENSES:
                               
Salary and employee benefits
    19,390       18,288       38,900       35,543  
Less capitalized loan origination costs
    (2,747 )     (1,948 )     (4,997 )     (3,668 )
Occupancy and equipment
    5,204       5,436       10,681       10,830  
Information/computer data services
    1,746       1,521       3,261       3,088  
Payment and card processing expenses
    2,116       1,939       4,006       3,586  
Professional services
    1,224       1,185       2,568       2,857  
Advertising and marketing
    1,650       1,903       3,716       3,643  
Deposit insurance
    816       1,389       2,179       3,358  
State/municipal business and use taxes
    565       544       1,133       1,038  
REO operations
    1,969       6,568       4,567       11,199  
Amortization of core deposit intangibles
    525       570       1,079       1,167  
Miscellaneous
    3,208       2,860       6,486       5,758  
Total other operating expenses
    35,666       40,255       73,579       78,399  
                                 
Income (loss) before provision for income taxes
    (6,440 )     2,199       2,744       (5,643 )
                                 
PROVISION FOR (BENEFIT FROM) INCOME TAXES
    (31,830 )     --       (31,830 )     --  
                                 
NET INCOME (LOSS)
    25,390       2,199       34,574       (5,643 )
                                 
PREFERRED STOCK DIVIDEND AND DISCOUNT ACCRETION
                               
Preferred stock dividend
    1,550       1,550       3,100       3,100  
Preferred stock discount accretion
    454       425       908       851  
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
  $ 23,386     $ 224     $ 30,566     $ (9,594 )
                                 
Earnings (loss) per common share:
                               
Basic
  $ 1.27     $ 0.01     $ 1.69     $ (0.58 )
Diluted
  $ 1.27     $ 0.01     $ 1.69     $ (0.58 )
Cumulative dividends declared per common share:
  $ 0.01     $ 0.01     $ 0.02     $ 0.08  

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 Six Months Ended June 30, 2012 and 2011

   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
2012
   
2011
   
2012
   
2011
 
                         
NET INCOME (LOSS)
  $ 25,390     $ 2,199     $ 34,574     $ (5,643 )
                                 
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
                               
Unrealized holding gain (loss) during the period, net of deferred
income tax provision (benefit) of ($29), $0, ($49) and $0, respectively
    (52 )     1,970       (87 )     1,289  
                                 
Amortization of unrealized gain (loss) on tax exempt securities transferred
   from available-for-sale to held-to-maturity
    3       4       5       9  
                                 
Other comprehensive income (loss)
    (49 )     1,974       (82 )     1,298  
                                 
COMPREHENSIVE INCOME (LOSS)
  $ 25,341     $ 4,173     $ 34,492     $ (4,345 )

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 Six Months Ended June 30, 2012

             
 (Accumulated
 Deficit)
 
Accumulated
Other Comprehensive Income
 
Stockholders’
Equity
 
                       
 
Preferred Stock
 
Common Stock and Paid in Capital
       
 
Shares
 
Amount
 
Shares
 
Amount
       
                                           
Balance, January 1, 2012
 
124,000
 
$
120,702
   
17,519,132
 
$
529,162
 
$
(119,465
)
$
2,051
 
$
532,450
 
                                           
Net income (loss)
                         
34,574
         
34,574
 
                                           
Change in valuation of securities—available-for-
    sale, net of income tax
                               
(87
)
 
(87
)
                                           
Amortization of unrealized loss on tax exempt
    securities transferred from available-for-sale to
    held-to-maturity, net of income tax
                               
5
   
5
 
                                           
Accretion of preferred stock discount
       
908
               
(908
)
       
--
 
                                           
Accrual of dividends on preferred stock
                         
(3,100
)
       
(3,100
)
                                           
Accrual of dividends on common stock ($.02/share
    cumulative)
                         
(367
)
       
(367
)
                                           
Proceeds from issuance of common stock for
    stockholder reinvestment program
             
1,236,812
   
23,610
               
23,610
 
                                           
Amortization of compensation related to restricted
    stock grant
             
14,535
   
100
               
100
 
                                           
Amortization of compensation related to
    stock options
                   
7
               
7
 
                                           
BALANCE, June 30, 2012
 
124,000
 
$
121,610
   
18,770,479
 
$
552,879
 
$
(89,266
)
$
1,969
 
$
587,192
 


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

             
 (Accumulated
Deficit)
 
Accumulated
Other
Comprehensive Income
 
Stockholders’
Equity
 
                       
 
Preferred Stock
 
Common Stock and Paid in Capital
       
 
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)
                         
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 Six Months Ended June 30, 2012 and 2011

   
Six Months Ended
June 30
 
   
2012
   
2011
 
OPERATING ACTIVITIES:
           
Net income (loss)
  $ 34,574     $ (5,643 )
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
               
Depreciation
    2,384       4,358  
Deferred income and expense, net of amortization
    1,273       860  
Amortization of core deposit intangibles
    1,079       1,167  
Net change in valuation of financial instruments carried at fair value
    17,374       (2,195 )
Principal repayments and maturities of securities—trading
    6,520       7,600  
Deferred taxes
    (31,572 )     --  
Equity-based compensation
    107       60  
Increase in cash surrender value of bank-owned life insurance
    (917 )     (925 )
Gain on sale of loans, excluding capitalized servicing rights
    (3,651 )     (1,164 )
(Gain) loss on disposal of real estate held for sale and property
and equipment
    (688 )     521  
Provision for losses on loans and real estate held for sale
    12,197       32,838  
Origination of loans held for sale
    (243,516 )     (114,706 )
Proceeds from sales of loans held for sale
    243,422       116,291  
Net change in:
               
Other assets
    127       16,368  
Other liabilities
    855       (827 )
Net cash provided from operating activities
    39,568       54,603  
                 
INVESTING ACTIVITIES:
               
Purchases of available-for-sale securities
    (186,650 )     (174,739 )
Principal repayments and maturities of available-for-sale securities
    202,693       88,031  
Proceeds from sales of securities available-for-sale
    11,751       --  
Purchases of securities held-to-maturity
    (10,224 )     (7,488 )
Principal repayments and maturities of securities held-to-maturity
    2,287       2,964  
Principal repayments of loans, net of originations
    72,176       39,025  
Purchases of loans and participating interest in loans
    (4,735 )     (97 )
Purchases of property and equipment
    (1,184 )     (1,413 )
Proceeds from sale of real estate held for sale, net
    23,229       48,264  
Other
    (320 )     (106 )
Net cash provided from (used by) investing activities
    109,023       (5,559 )
                 
FINANCING ACTIVITIES:
               
Decrease in deposits, net
    (49,905 )     (124,798 )
Repayment of FHLB advances
    (3 )     (32,802 )
Decrease in other borrowings, net
    (62,098 )     (39,528 )
Cash dividends paid
    (3,456 )     (5,389 )
Cash proceeds from issuance of stock for stockholder reinvestment plan
    23,611       8,265  
Net cash used by financing activities
    (91,851 )     (194,252 )
                 
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS
    56,740       (145,208 )
                 
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD
    132,436       361,652  
CASH AND DUE FROM BANKS, END OF PERIOD
  $ 189,176     $ 216,444  

(Continued on next page)

 
9

 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Six Months Ended June 30, 2012 and 2011

   
Six Months Ended
June 30
 
   
2012
   
2011
 
             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
Interest paid in cash
  $ 11,799     $ 19,575  
Taxes received in cash
    --       (13,058 )
  Taxes paid in cash
    800       --  
                 
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
    8,521       26,917  

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 June 30, 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 quarter ended September 30, 2010, the Company evaluated its net deferred tax asset and determined it was prudent to establish a full valuation allowance against the net asset.  At each subsequent quarter-end, the Company has re-analyzed that position and the Company continued to maintain a full valuation allowance through March 31, 2012.  During the quarter ended June 30, 2012, management analyzed the Company’s performance and trends over the previous five quarters, focusing strongly on trends in asset quality, loan loss provisioning, capital position, net interest margin, core operating income and net income.  Based on this analysis, management determined that a full valuation allowance was no longer appropriate and reversed nearly all of the valuation allowance.  The Company anticipates utilizing the remaining $7.0 million in valuation allowance to offset its projected tax expense in the third and fourth quarters of 2012.  The ultimate utilization of the remaining valuation allowance and realization of deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible.  Management considers
 
 
 
 
11

 
 
the scheduled reversal of deferred tax assets and liabilities, taxes paid in carryback years, projected future taxable income, available tax planning strategies, and other factors in making its assessment to reverse the deferred tax valuation allowance.  As a result, the valuation allowance decreased to $7.0 million at June 30, 2012 from $38.2 million at December 31, 2011.  See Note 12 of the Selected Notes to the Consolidated Financial Statements for more information.

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.  In June 2012, the Board of Directors approved grants of 76,500 restricted shares to certain other officers of the Company, to be effective July 2, 2012, that will vest in one-third increments over a three-year period.
 
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 proceeds to the Company and does not change the Company’s capital position or accounting for these securities, it does eliminate 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. 2011-03, 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 Company’s Consolidated 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 reclassification 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):

   
June 30
2012
   
December 31
2011
   
June 30
2011
 
                   
Interest-bearing deposits included in cash and due from banks
  $ 132,536     $ 69,758     $ 168,198  
                         
U.S. Government and agency obligations
    229,669       341,606       216,761  
                         
Municipal bonds:
                       
Taxable
    19,225       18,497       14,486  
Tax exempt
    102,139       88,963       83,315  
Total municipal bonds
    121,364       107,460       97,801  
                         
Corporate bonds
    42,923       42,565       59,788  
                         
Mortgage-backed or related securities:
                       
Ginnie Mae (GNMA)
    16,736       19,572       21,818  
Freddie Mac (FHLMC)
    62,782       42,001       25,941  
Fannie Mae (FNMA)
    88,610       66,519       27,362  
Private issuer
    1,780       1,835       3,108  
Total mortgage-backed or related securities
    169,908       129,927       78,229  
                         
Asset-backed securities:
                       
        Student Loan Marketing Association (SLMA)
    32,492       --       --  
                         
Equity securities (excludes FHLB stock)
    454       402       646  
                         
Total securities
    596,810       621,960       453,225  
                         
FHLB stock
    37,371       37,371       37,371  
                         
    $ 766,717     $ 729,089     $ 658,794  


 
13

 

Securities—Trading:  The amortized cost and estimated fair value of securities—trading at June 30, 2012 and December 31, 2011 are summarized as follows (dollars in thousands):

   
June 30, 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     $ 1,645       2.1 %   $ 2,401     $ 2,635       3.3 %
                                                 
Municipal bonds:
                                               
Taxable
    85       92       0.1       391       420       0.5  
Tax exempt
    5,437       5,509       7.1       5,431       5,542       6.9  
Total municipal bonds
    5,522       5,601       7.2       5,822       5,962       7.4  
                                                 
Corporate bonds
    62,948       37,605       48.6       63,502       35,055       43.4  
                                                 
Mortgage-backed or related securities:
                                               
FHLMC
    8,509       9,132       11.8       10,535       11,246       13.9  
FNMA
    20,927       22,931       29.7       23,489       25,427       31.5  
Total mortgage-backed or
related securities
    29,436       32,063       41.5       34,024       36,673       45.4  
                                                 
Equity securities
    6,914       454       0.6       6,914       402       0.5  
                                                 
    $ 106,220     $ 77,368       100.0 %   $ 112,663     $ 80,727       100.0 %

There were no sales of securities—trading during the six months ended June 30, 2012 or 2011.  The Company did not recognize any OTTI charges on securities—trading during the six months ended June 30, 2012 or 2011.  At June 30, 2012, there were no securities—trading in a nonaccrual status.  At June 30, 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 June 30, 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.

   
June 30, 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
    1,544       1,619       1,545       1,626  
Due after five years through ten years
    4,093       4,091       4,087       4,123  
Due after ten years through twenty years
    6,717       6,728       6,544       6,184  
Due after twenty years
    57,516       32,413       58,549       30,710  
                                 
      69,870       44,851       71,725       43,652  
                                 
Mortgage-backed securities
    29,436       32,063       34,024       36,673  
Equity securities
    6,914       454       6,914       402  
                                 
    $ 106,220     $ 77,368     $ 112,663     $ 80,727  


 
14

 

Securities—Available-for-Sale:  The amortized cost and estimated fair value of securities—available-for-sale at June 30, 2012 and December 31, 2011 are summarized as follows (dollars in thousands):

 
June 30, 2012
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
   
Percent of
Total
 
                               
U.S. Government and agency obligations
  $ 227,344     $ 700     $ (20 )   $ 228,024       52.3 %
                                         
Municipal bonds:
                                       
Taxable
    12,587       257       (2 )     12,842       2.9  
Tax exempt
    20,646       225       (11 )     20,860       4.8  
Total municipal bonds
    33,233       482       (13 )     33,702       7.7  
                                         
Corporate bonds
    4,032       36       --       4,068       0.9  
                                         
Mortgage-backed or related securities:
                                       
FHLMC
    53,656       169       (175 )     53,650       12.3  
FNMA
    64,986       748       (56 )     65,678       15.1  
GNMA
    15,476       1,260       --       16,736       3.8  
Other
    1,672       108       --       1,780       0.4  
Total mortgage-backed or related
securities
    135,790       2,285       (231 )     137,844       31.6  
                                         
Asset-backed securities:
                                       
         SLMA
    32,652       --       (160 )     32,492       7.5  
                                         
    $ 433,051     $ 3,503     $ (424 )   $ 436,130       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
    30,504       284       (33 )     30,755       6.6  
FNMA
    40,897       310       (115 )     41,092       8.8  
GNMA
    18,145       1,427       --       19,572       4.2  
Other
    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 June 30, 2012 and December 31, 2011, an aging of unrealized losses and fair value of related securities—available-for-sale was as follows (in thousands):

 
June 30, 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
  $ 32,016     $ (20 )   $ --     $ --     $ 32,016     $ (20 )
                                                 
Municipal bonds:
                                               
Taxable
    5,873       (2 )     --       --       5,873       (2 )
Tax exempt
    3,083       (11 )     --       --       3,083       (11 )
Total municipal bonds
    8,956       (13 )     --       --       8,956       (13 )
                                                 
Mortgage-backed or related securities:
                                               
FNMA
    18,113       (56 )     --       --       18,113       (56 )
FHLMC
    32,676       (175 )     --       --       32,676       (175 )
Total mortgage-backed or related
securities
    50,789       (231 )     --       --       50,789       (231 )
                                                 
Asset-backed securities:
                                               
          SLMA
    32,492       (160 )     --       --       32,492       (160 )
                                                 
    $ 124,253     $ (424 )   $ --     $ --     $ 124,253     $ (424 )
     
 
December 31, 2011
 
 
Less Than 12 Months
 
12 Months or More
 
Total