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UNITED STATES |
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SECURITIES AND EXCHANGE COMMISSION |
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Washington, D.C. 20549 |
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FORM 10-K |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________to________ |
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Commission File Number 0-26584 |
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BANNER CORPORATION |
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(Exact name of registrant as specified in its charter) |
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Washington |
91-1691604 |
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(State or other jurisdiction of incorporation |
(I.R.S. Employer |
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or organization) |
Identification Number) |
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10 South First Avenue, Walla Walla, Washington 99362 |
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(Address of principal executive offices and zip code) |
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Registrant’s telephone number, including area code: (509) 527-3636 |
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Securities registered pursuant to Section 12(b) of the Act: |
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Common Stock, par value $.01 per share |
The Nasdaq Stock Market LLC |
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(Title of Each Class) |
(Name of Each Exchange on Which Registered) |
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Securities registered pursuant to section 12(g) of the Act: |
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None. |
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Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act
Yes o No x
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act
Yes o No x
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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
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Large accelerated filer o |
Accelerated filer x |
Non-accelerated filer o |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o No x
The aggregate market value of the voting and nonvoting common equity
held by nonaffiliates of the registrant based on the closing sales price of the
registrant’s common stock quoted on The Nasdaq Stock Market on June 30, 2008,
was:
Common Stock - $144,464,799
(The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Registrant that such person is an affiliate of the Registrant.)
The number of shares outstanding of the registrant’s classes of common
stock as of February 27, 2009:
Common Stock, $.01 par value – 17,472,692
shares
Documents Incorporated by Reference
Portions of Proxy
Statement for Annual Meeting of Shareholders to be held April 28, 2009 are
incorporated by reference into Part III.
BANNER CORPORATION AND SUBSIDIARIES
Table of Contents
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Comparison of Financial Condition at December 31, 2008 and 2007 |
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Comparison of Results of
Operations |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Certain Relationships and Related Transactions, and Director Independence |
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Forward-Looking Statements
Management’s Discussion and Analysis and other portions of this report on Form 10-K contain certain forward-looking statements concerning our future operations. Management desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement so that we may rely on the protections of such safe harbor with respect to all forward-looking statements contained in this report. We have used forward-looking statements to describe future plans and strategies, including expectations of our future financial results. Our ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could cause actual results to differ materially include, but are not limited to, the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs; which may be impacted by deterioration in the housing and commercial real estate markets, 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, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity or earnings; 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 and in real estate values in our market areas; fluctuations in agricultural commodity prices, crop yields and weather conditions; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect or result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; our ability to successfully implement our branch expansion strategy; 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; our ability to manage loan delinquency rates; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; legislative or regulatory changes that adversely affect our business; 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; war or 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. We caution readers not to place undue reliance on any forward-looking statements. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results to differ materially from those expressed in any forward-looking statements by, or on behalf of, us.
As used throughout this report, the terms “we”, “our”, “us”, or the “Company” refer to Banner Corporation and its consolidated subsidiaries.
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Banner Corporation is a bank holding company incorporated in the State of Washington. We are primarily engaged in the business of planning, directing and coordinating the business activities of our wholly owned subsidiaries, Banner Bank and, subsequent to May 1, 2007, Islanders Bank. Banner Bank is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington and, as of December 31, 2008, its 83 branch offices and 10 loan production offices located in Washington, Oregon and Idaho. Islanders Bank is also a Washington-chartered commercial bank that conducts business from three locations in San Juan County, Washington. Banner Corporation is subject to regulation by the Board of Governors of the Federal Reserve System. Banner Bank and Islanders Bank (the Banks) are subject to regulation by the Washington State Department of Financial Institutions, Division of Banks and the FDIC. As of December 31, 2008, we had total consolidated assets of $4.6 billion, total deposits of $3.8 billion and total stockholders’ equity of $433 million.
Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets, consisting of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of customer deposits and repurchase agreements, Federal Home Loan Bank (FHLB) advances, Federal Reserve Bank of San Francisco (FRBSF) borrowings, and junior subordinated debentures issued in connection with the sale of trust preferred securities. Our net income is also significantly affected by provisions for loan losses and the level of our other operating income, including deposit service charges, loan origination and servicing fees, and gains and losses on the sale of loans, as well as our non-interest operating expenses and income tax provisions. For the year ended December 31, 2008, we recorded a net loss of $128.0 million, or ($7.94) per share available to common shareholders, on a fully diluted basis. The current year’s results were adversely affected by a $121.1 million write-off of goodwill, as well as by a substantial $62.5 million provision for loan losses and a meaningfully narrower net interest margin, all reflecting unprecedented difficulties in the operating environment for banking institutions and deteriorating economic conditions throughout 2008. This stress in the economy, particularly in the financial and housing markets, was the most significant factor impacting our operating results in 2008 and, like most financial institutions, our future operating results will be significantly affected by the course of the current recession. We also recorded a $9.2 million ($5.9 million after tax) net gain in fair value adjustments on our financial instruments recorded for the year ended December 31, 2008 in accordance with the adoption of Statement of Financial Accounting Standards (SFAS) No. 159 and SFAS No. 157. For 2007, our net income was also significantly impacted by a substantial net change in the value of financial instruments carried at fair value; however, our provision for loan losses was much smaller and there was no goodwill impairment charge. Our net income for the year ended December 31, 2007 was $36.9 million, or $2.49 per share, on a fully diluted basis, and included a $5.9 million provision for loan losses and $11.6 million ($7.4 million after tax) of net gains as a result of changes in the valuation of financial instruments carried at fair value. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more detailed information about our financial performance and critical accounting policies.
Banner Bank is a regional bank which offers a wide variety of commercial banking services and financial products to individuals, businesses and public sector entities in its primary market areas. Islanders Bank is a community bank which offers similar banking services to individuals, businesses and public entities located in the San Juan Islands. Our primary business is that of traditional financial institutions, accepting deposits and originating loans in locations surrounding our offices in portions of Washington, Oregon and Idaho. Banner Bank is also an active participant in the secondary market, engaging in mortgage banking operations largely through the origination and sale of one- to four-family residential loans. Lending activities include commercial business and commercial real estate loans, agriculture business loans, construction and land development loans, one- to four-family residential loans and consumer loans. A portion of Banner Bank’s construction and mortgage lending activities are conducted through its subsidiary, Community Financial Corporation (CFC), which is located in the Lake Oswego area of Portland, Oregon. As discussed more thoroughly in later sections of this report, increased delinquencies and defaults in the residential construction and land development portions of our loan portfolio had a materially adverse effect on our results of operations for the year ended December 31, 2008. While it is difficult to predict when and how the weak housing markets that caused this increase in delinquencies and defaults will improve, we anticipate that an elevated level of non-performing assets will persist for a number of quarters and will have a continuing adverse effect on our earnings during 2009 and possibly continuing into 2010.
Over the past several years, we have invested significantly in expanding our branch and distributions systems with a primary emphasis on expanding our presence in the four largest areas of commerce in the Northwest: the Puget Sound region of Washington and the greater Boise, Idaho, Portland, Oregon, and Spokane, Washington markets. As a result of our aggressive franchise expansion, we have added 18 new branches through acquisition, opened 23 new branches and relocated eight others in the last four years. In 2007, we completed the acquisitions of three smaller commercial banks in the State of Washington. These acquisitions increased our presence within desirable marketplaces and allow us to better serve existing and future customers. Our branch expansion has been a significant element in our strategy to grow loans, deposits and customer relationships. This emphasis on growth has resulted in an elevated level of operating expenses; however, we believe that over time these new branches should help improve profitability by providing lower cost core deposits which will allow us to proportionately reduce higher cost borrowings as a source of funds. We now have reached our goal in terms of the number of branches required to generate deposit growth sufficient to fund our expected loan growth and produce significant fee generating opportunities. As a result, during 2008 we opened just two new branches and we plan to open only three additional branches in 2009, a normal level of growth for a bank of our size.
Participation in the U.S. Treasury’s Capital Purchase Program: On November 21, 2008, we received $124 million from the U.S. Treasury Department as part of the Treasury’s Capital Purchase Program. We issued $124 million in senior preferred stock, with a related warrant to purchase up to $18.6 million in common stock, to the U.S. Treasury. The warrant provides the Treasury the option to purchase up to 1,707,989 shares of Banner Corporation common stock at a price of $10.89 per share at any time during the next ten years. The preferred stock will pay a 5% dividend for the first five years, after which the rate will increase to 9% if the preferred shares are not redeemed by the Company. The terms and conditions of the transaction and the preferred stock conform to those provided by the U.S. Treasury. A summary of the Capital Purchase Program can be found on the Treasury’s web site at www.ustreas.gov/initiatives/eesa. The additional capital will enhance our capacity to
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support the communities we serve through expanded lending activities and economic development. This capital will also add flexibility in considering strategic opportunities that may be available to us as the financial services industry continues to consolidate.
Goodwill write-off: As a result of the significant decline in our stock price and market capitalization over the course of 2008 and in conjunction with similar declines in the value of most financial institutions and the ongoing disruption in related financial markets, we decided to reduce the carrying value of goodwill in our Consolidated Statements of Financial Condition by recording a $50 million write-down in the second quarter and, in response to worsening economic indicators and further price declines, an additional $71 million write-down in the fourth quarter of 2008. The total $121 million write-off of goodwill was a non-cash charge that did not affect the Company’s or the Banks’ liquidity or operations. The adjustment brought our book value and tangible book value more closely in line with each other and more accurately reflected current market conditions. Also, since goodwill is excluded from regulatory capital, the impairment charge (which was not deductible for tax purposes) did not have an adverse effect on the regulatory capital ratios of the Company or either of our subsidiary banks, each of which continues to remain “well capitalized” under the regulatory requirements. (See Note 23 of the Selected Notes to Consolidated Financial Statements for additional information with respect to our valuation of intangible assets.)
Fannie Mae and Freddie Mac Stock Valuation: In September 2008, the United States Treasury announced a plan to place the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) into conservatorship under the authority of the Federal Housing Finance Agency. As of June 30, 2008, Banner Corporation owned both common and preferred equity securities issued by Fannie Mae and Freddie Mac with a combined book value of $6.9 million. At December 31, 2008, the fair value of these securities had declined to approximately $227,000, with the decrease in the value included in the net fair value adjustments detailed in Note 24, Fair Value Accounting and Measurement. The events that led to the significant valuation adjustment for the Fannie Mae and Freddie Mac stock were disappointing and we do not anticipate a meaningful recovery with respect to the valuation of that stock.
Acquisition of F&M Bank, San Juan Financial Holding Company and NCW Community Bank: We completed the acquisitions of F&M Bank (F&M) and San Juan Financial Holding Company (SJFHC) effective May 1, 2007, and NCW Community Bank (NCW) effective October 10, 2007. SJFHC was merged into Banner Corporation and its wholly owned subsidiary, Islanders Bank, has continued operations as a subsidiary of Banner Corporation. F&M and NCW were merged into Banner Bank upon acquisition and now operate under the Banner Bank name. The financial results for the year to date ended December 31, 2008 include assets, liabilities and results of operations for all three of the acquired companies. The financial results for the year to date ended December 31, 2007 include the assets and liabilities acquired in the F&M and SJFHC transactions as well as the impact of those two acquisitions subsequent to May 1, 2007 as reported in the results of operations. The purchase of F&M allowed us to immediately expand Banner Bank’s franchise in the Spokane, Washington area, the fourth largest metropolitan market in the Pacific Northwest, by the addition of 13 branches and one loan office. The acquisition of Islanders Bank, with its three branches located in the San Juan Islands, added to our presence in the North Puget Sound region. NCW operated one branch in Wenatchee, Washington and had another branch under construction in East Wenatchee. The NCW merger added to our customer base and market share in the North Central Washington area and allowed for the consolidation of the two banks’ branch locations and staffs. (See Notes 3 and 5 of Selected Notes to Consolidated Financial Statements for additional information with respect to these acquisitions).
Recently Adopted Accounting Standards: In September 2006, the Emerging Issues Task Force (EITF) issued EITF 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 implemented a change in accounting principle that required the recognition of a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to post-retirement periods. On January 1, 2008, the Company adopted EITF 06-4 and recognized the effects of this change in accounting principle through a $617,000 cumulative effect adjustment charge to opening retained earnings and an increase in benefit plan reserve liability of the same amount. The Company recorded an expense of $64,000 in 2008 from the adoption of EITF 06-4.
General: All of our lending activities are conducted through Banner Bank, its subsidiary, Community Financial Corporation, and Islanders Bank. We offer a wide range of loan products to meet the demands of our customers. We originate loans for our own loan portfolio and for sale in the secondary market. Management’s strategy has been to maintain a well diversified portfolio with a significant percentage of assets in the loan portfolio having more frequent interest rate repricing terms or shorter maturities than traditional long-term fixed-rate mortgage loans. As part of this effort, we have developed a variety of floating or adjustable interest rate products that correlate more closely with our cost of funds, particularly loans for commercial business and real estate, agricultural business, and construction and development purposes. However, in response to customer demand, we continue to originate fixed-rate loans, including fixed interest rate mortgage loans with terms of up to 30 years. The relative amount of fixed-rate loans and adjustable-rate loans that can be originated at any time is largely determined by the demand for each in a competitive environment.
While we offer a wide range of loan products, we do not now and have not previously engaged in any sub-prime lending programs, nor do we hold any option-payment or negatively amortizing loan products in our portfolio. Historically, our lending activities have been primarily directed toward the origination of real estate and commercial loans. Real estate lending activities have been significantly focused on residential construction and first mortgages on owner occupied, one- to four-family residential properties. In response to strong housing markets, construction and land loan growth was significant for several years, up until the second half of 2007 when housing markets began to weaken and the origination of new construction and land loans began to slow appreciably. As market conditions continued to deteriorate throughout 2008, we have had a significant increase in non-performing loans and, as a result, an increase in our loan loss provision with regard most notably to construction and land loans. At December 31, 2008, construction and land loans represent slightly over one fourth of our loan portfolio. Our lending activities have also included the origination of multifamily and commercial real estate loans. Commercial business lending has been directed toward meeting the credit and related deposit needs of various small- to medium-sized business and agri-business borrowers operating in our primary market areas. We have also recently increased our emphasis on consumer lending, although the portion of the loan portfolio invested in consumer loans is still relatively small. While continuing our commitment to residential lending, we expect commercial lending
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(including commercial real estate, commercial business and agricultural lending) and consumer lending to become increasingly important activities for us. By contrast, we anticipate residential construction and land development lending will be restrained by market conditions for the next two to three years and construction and land loans will become a proportionately smaller amount of our loan portfolio over time.
At December 31, 2008, our net loan portfolio totaled $3.9 billion. For additional information concerning our loan portfolio, see Item 7, “Management’s Discussion and Analysis of Financial Condition—Comparison of Financial Condition at December 31, 2008 and 2007—Loans/Lending.” See also Table 7 contained therein, which sets forth the composition of our loan portfolio, and Tables 6 and 6(a), which contain information regarding the loans maturing in our portfolio.
One- to Four-Family Residential Real Estate Lending: At both Banner Bank and Islanders Bank, we originate loans secured by first mortgages on one- to four-family residences in the Northwest communities where we have offices. Banner Bank’s mortgage lending subsidiary, CFC, provides residential lending primarily in the greater Portland, Oregon and Pasco (Tri Cities), Washington market areas. As noted above, we have not engaged in any sub-prime lending, which we define as loans to borrowers with poor credit histories or undocumented repayment capabilities and with excessive reliance on the collateral as the source of repayment; however, we have experienced a modest increase in delinquencies on our residential loans in response to the weakened housing market conditions. At December 31, 2008, $599 million, or 15% of our loan portfolio, consisted of permanent loans on one- to four-family residences.
We offer fixed- and adjustable-rate mortgages (ARMs) at rates and terms competitive with market conditions, primarily with the intent of selling these loans into the secondary market. Fixed-rate loans generally are offered on a fully amortizing basis for terms ranging from 15 to 30 years at interest rates and fees that reflect current secondary market pricing. Most ARM products offered adjust annually after an initial period ranging from one to five years, subject to a limitation on the annual change of 1.0% to 2.0% and a lifetime limitation of 5.0% to 6.0%. For a small portion of the portfolio, where the initial period exceeds one year, the first rate change may exceed the annual limitation on subsequent rate changes. Our ARM products most frequently adjust based upon the average yield on U.S. Treasury securities adjusted to a constant maturity of one year plus a margin or spread above the index. ARM loans held in our portfolio may allow for interest-only payments for an initial period up to five years but do not provide for negative amortization of principal and carry no prepayment restrictions. The retention of ARM loans in our loan portfolio can help reduce our exposure to changes in interest rates. However, borrower demand for ARM loans versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the initial interest rates and fees charged for each type of loan. In recent years, borrower demand for ARM loans has been limited and we have chosen not to aggressively pursue ARM loans by offering minimally profitable, deeply discounted teaser rates or option-payment ARM products. As a result, ARM loans have represented only a small portion of our loans originated during this period and of our portfolio.
Our residential loans are generally underwritten and documented in accordance with the guidelines established by the Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC) and the Federal National Mortgage Corporation (Fannie Mae or FNMA). Government insured loans are underwritten and documented in accordance with the guidelines established by the Department of Housing and Urban Development (HUD) and the Veterans Administration (VA). In the loan approval process, we assess the borrower’s ability to repay the loan, the adequacy of the proposed security, the employment stability of the borrower and the creditworthiness of the borrower. For ARM loans, our standard practice provides for underwriting based upon fully indexed interest rates and payments. Generally, we will lend up to 95% of the lesser of the appraised value of the property or purchase price of the property on conventional loans, although higher loan-to-value ratios are available on certain government insured programs. We require private mortgage insurance on residential loans with a loan-to-value ratio at origination exceeding 80%. A growing but immaterial number of exceptions to these general underwriting guidelines have been granted in connection with the sale or refinance of properties, particularly new construction, for which we were already providing financing. These exceptions most commonly relate to loan-to-value and mortgage insurance requirements and not to credit underwriting or loan documentation standards. Such exceptions will likely increase in the near term to facilitate troubled loan resolution in the current distressed housing market, but likely will not have a material effect on the performance characteristics of our one- to four-family loan portfolio or become a significant portion of our total loan portfolio.
Through our mortgage banking activities, we sell residential loans on either a servicing-retained or servicing-released basis. The decision to hold or sell loans is based on asset/liability management goals and policies and market conditions. During the past three years, we have sold a significant portion of our conventional residential mortgage originations and nearly all of our government insured loans into the secondary market.
Construction and Land Lending: We have invested a significant portion of our loan portfolio in residential construction and land loans to professional home builders and developers. To a lesser extent, we also originate construction loans for commercial and multifamily real estate. In years prior to 2008, residential construction and land development lending was an area of major emphasis at Banner Bank and the primary focus of its subsidiary, CFC. Our largest concentration of construction and land development loans is in the Portland/Vancouver market area. We also have a significant amount of construction and land loans for properties in the Puget Sound region and to a much smaller extent in the greater Boise area and certain eastern Washington and eastern Oregon markets. At December 31, 2008, construction and land loans totaled $1.045 billion, or 26% of total loans of the Company, consisting of $421 million of one- to four-family construction loans, $486 million of land or land development loans and $138 million of commercial and multifamily real estate construction loans.
Historically, construction and land lending has afforded us the opportunity to achieve higher interest rates and fees with shorter terms to maturity than are usually available on other types of lending. Construction and land lending, however, involve a higher degree of risk than other lending opportunities because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost of the project. If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value upon completion proves to be inaccurate, we may be confronted at, or prior to, the maturity of the loan with a project the value of which is insufficient to assure full repayment. Disagreements between borrowers and builders and the failure of builders to pay subcontractors may also jeopardize projects. Loans to builders to construct homes for which no purchaser has been identified carry additional risk because the payoff for the loan is dependent on the builder’s ability to sell the property before the construction loan is due. We address these risks by adhering to strict underwriting policies, disbursement procedures and monitoring practices.
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Construction loans made by us include those with a sale contract or permanent loan in place for the finished homes and those for which purchasers for the finished homes may be identified either during or following the construction period. We actively monitor the number of unsold homes in our construction loan portfolio and local housing markets to attempt to maintain an appropriate balance between home sales and new loan originations. The maximum number of speculative loans approved for each builder is based on a combination of factors, including the financial capacity of the builder, the market demand for the finished product and the ratio of sold to unsold inventory the builder maintains. We have attempted to diversify the risk associated with speculative construction lending by doing business with a large number of small and mid-sized builders spread over a relatively large geographic area with numerous sub-markets.
Loans for the construction of one- to four-family residences are generally made for a term of twelve to eighteen months. Our loan policies include maximum loan-to-value ratios of up to 80% for speculative loans. Individual speculative loan requests are supported by an independent appraisal of the property, a set of plans, a cost breakdown and a completed specifications form. Underwriting is focused on the borrowers’ financial strength, credit history and demonstrated ability to produce a quality product and effectively market and manage their operations. All speculative construction loans must be approved by senior loan officers.
We also make land loans to developers, builders and individuals to finance the acquisition and/or development of improved lots or unimproved land. In making land loans, we follow underwriting policies and disbursement and monitoring procedures similar to those for construction loans. The initial term on land loans is typically one to three years with interest only payments, payable monthly, and provisions for principal reduction as lots are sold and released from the lien of the mortgage.
We regularly monitor the construction and land loan portfolios and the economic conditions and housing inventory in each of our markets and decrease this type of lending if we perceive unfavorable market conditions. Unfortunately, housing markets in most areas of the Pacific Northwest have significantly deteriorated over the past twelve to eighteen months and our origination of new construction loans has declined sharply. We believe that the underwriting policies and internal monitoring systems we have in place mitigate many of the risks inherent in construction and land lending; however, current weak housing market conditions have resulted in a material increase of delinquencies in our construction and land loan portfolios. While construction and land loans represent 26% of our portfolio and are responsible for approximately 82% of our non-performing assets, they are well diversified with respect to sub-markets, price ranges and borrowers; however, they are significantly concentrated in the greater Puget Sound region of Washington State and the Portland, Oregon market area. Reducing the amount of non-performing construction and land development loans is currently the most critical issue that we face and need to resolve to return to acceptable levels of profitability. The most significant risk in this portfolio relates to the land development loans as demand for building lots is currently weak. (See “Asset Quality” below and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Asset Quality.”)
Commercial and Multifamily Real Estate Lending: We originate loans secured by multifamily and commercial real estate including, as noted above, loans for construction of multifamily and commercial real estate projects. Commercial real estate loans are made for both owner-occupied and investor properties. At December 31, 2008, our loan portfolio included $151 million in multifamily and $1.014 billion in commercial real estate loans which together comprised 29% of our total loans. Multifamily and commercial real estate lending affords us an opportunity to receive interest at rates higher than those generally available from one- to four-family residential lending. However, loans secured by multifamily and commercial properties are generally greater in amount, more difficult to evaluate and monitor and, therefore, riskier than one- to four-family residential mortgage loans. Because payments on loans secured by multifamily and commercial properties are often dependent on the successful operation and management of the properties, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. In originating multifamily and commercial real estate loans, we consider the location, marketability and overall attractiveness of the properties. Our current underwriting guidelines for multifamily and commercial real estate loans require an appraisal from a qualified independent appraiser and an economic analysis of each property with regard to the annual revenue and expenses, debt service coverage and fair value to determine the maximum loan amount. In the approval process we assess the borrowers’ willingness and ability to manage the property and repay the loan and the adequacy of the collateral in relation to the loan amount.
Multifamily and commercial real estate loans originated by us are both fixed- and adjustable-rate loans generally with intermediate terms of five to ten years. Most multifamily and commercial real estate loans originated in the past five years are linked to various U.S. Treasury indices, Federal Home Loan Bank advance rates, certain prime rates or other market rate indices. Rates on these adjustable-rate loans generally adjust with a frequency of one to five years after an initial fixed-rate period ranging from one to ten years. Our commercial real estate portfolio consists of loans on a variety of property types with no large concentrations by property type, location or borrower.
Commercial Business Lending: We are active in small- to medium-sized business lending and are engaged to a lesser extent in agricultural lending primarily by providing crop production loans. Our officers devote a great deal of effort to developing customer relationships and the ability to serve these types of borrowers. Management believes that many larger banks have neglected these lending markets, which has contributed to our success. While strengthening our commitment to small business lending, in recent years we have added experienced officers and staff focused on corporate lending opportunities for borrowers with credit needs generally in a $3 million to $15 million range. Management has leveraged the past success of these officers with local decision making ability to continue to expand this market niche. In addition to providing earning assets, this type of lending has helped us increase our deposit base. Expanding commercial lending and related commercial banking services is currently an area of significant focus by us and staffing has been increased in the areas of credit administration, business development, and loan and deposit operations.
Commercial business loans may entail greater risk than other types of loans. Commercial business loans may be unsecured or secured by special purpose or rapidly depreciating assets, such as equipment, inventory and receivables, which may not provide an adequate source of repayment on defaulted loans. In addition, commercial business loans are dependent on the borrower’s continuing financial strength and management ability, as well as market conditions for various products, services and commodities. For these reasons, commercial business loans generally provide higher yields than many other types of loans but also require more administrative and management attention. Loan terms, including the fixed or adjustable interest rate, the loan maturity and the collateral considerations, vary significantly and are negotiated on an individual loan basis.
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We underwrite our commercial business loans on the basis of the borrower’s cash flow and ability to service the debt from earnings rather than on the basis of the underlying collateral value. We seek to structure these loans so that they have more than one source of repayment. The borrower is required to provide us with sufficient information to allow us to make a lending determination. In most instances, this information consists of at least three years of financial statements, tax returns, a statement of projected cash flows, current financial information on any guarantor and information about the collateral. Loans to closely held businesses typically require personal guarantees by the principals. Our commercial loan portfolio is geographically dispersed across the market areas serviced by our branch network and there are no significant concentrations by industry or products.
Our commercial business loans may be structured as term loans or as lines of credit. Commercial business term loans are generally made to finance the purchase of fixed assets and have maturities of five years or less. Commercial business lines of credit are typically made for the purpose of providing working capital and are usually approved with a term of one year. Adjustable- or floating-rate loans are primarily tied to various prime rate and London Inter-Bank Offering Rate or LIBOR indices. At December 31, 2008, commercial loans totaled $680 million, or 17% of our total loans.
Agricultural Lending: Agriculture is a major industry in many parts of our service areas. While agricultural loans are not a large part of our portfolio, we intend to continue to make agricultural loans to borrowers with a strong capital base, sufficient management depth, proven ability to operate through agricultural cycles, reliable cash flows and adequate financial reporting. Payments on agricultural loans depend, to a large degree, on the results of operations of the related farm entity. The repayment is also subject to other economic and weather conditions as well as market prices for agricultural products, which can be highly volatile. At December 31, 2008, agricultural business loans, including collateral secured loans to purchase farm land and equipment, totaled $204 million, or 5% of our loan portfolio.
Agricultural operating loans generally are made as a percentage of the borrower’s anticipated income to support budgeted operating expenses. These loans are secured by a blanket lien on all crops, livestock, equipment, accounts and products and proceeds thereof. In the case of crops, consideration is given to projected yields and prices from each commodity. The interest rate is normally floating based on the prime rate plus a negotiated margin. Because these loans are made to finance a farm or ranch’s annual operations, they are written on a one-year review and renewable basis. The renewal is dependent upon the prior year’s performance and the forthcoming year’s projections as well as the overall financial strength of the borrower. We carefully monitor these loans and related variance reports on income and expenses compared to budget estimates. To meet the seasonal operating needs of a farm, borrowers may qualify for single payment notes, revolving lines of credit and/or non-revolving lines of credit.
In underwriting agricultural operating loans, we consider the cash flow of the borrower based upon the expected operating results as well as the value of collateral used to secure the loans. Collateral generally consists of cash crops produced by the farm, such as milk, grains, fruit, grass seed, peas, sugar beets, mint, onions, potatoes, corn and alfalfa or livestock. In addition to considering cash flow and obtaining a blanket security interest in the farm’s cash crop, we may also collateralize an operating loan with the farm’s operating equipment, breeding stock, real estate and federal agricultural program payments to the borrower.
We also originate loans to finance the purchase of farm equipment. Loans to purchase farm equipment are made for terms of up to seven years. On occasion, we also originate agricultural real estate loans secured primarily by first liens on farmland and improvements thereon located in our market areas, although generally only to service the needs of our existing customers. Loans are written in amounts ranging from 50% to 75% of the tax assessed or appraised value of the property for terms of five to 20 years. These loans generally have interest rates that adjust at least every five years based upon a U.S. Treasury index or Federal Home Loan Bank advance rate plus a negotiated margin. Fixed-rate loans are granted on terms usually not to exceed five years. In originating agricultural real estate loans, we consider the debt service coverage of the borrower’s cash flow, the appraised value of the underlying property, the experience and knowledge of the borrower, and the borrower’s past performance with us and/or the market area. These loans normally are not made to start-up businesses and are reserved for existing customers with substantial equity and a proven history.
Among the more common risks to agricultural lending can be weather conditions and disease. These risks may be mitigated through multi-peril crop insurance. Commodity prices also present a risk, which may be reduced by the use of set price contracts. Normally, required beginning and projected operating margins provide for reasonable reserves to offset unexpected yield and price deficiencies. In addition to these risks, we also consider management succession, life insurance and business continuation plans when evaluating agricultural loans.
Consumer and Other Lending: We originate a variety of consumer loans, including home equity lines of credit, automobile loans and loans secured by deposit accounts. While consumer lending has traditionally been a small part of our business, with loans made primarily to accommodate our existing customer base, it has received renewed emphasis in recent years and management anticipates increased activity in future periods. Part of this emphasis has been the reintroduction of a Banner Bank-funded credit card program which we began marketing in the fourth quarter of 2005. Similar to other consumer loan programs, we focus this credit card program on our existing customer base to add to the depth of our customer relationships. As a result of increased marketing efforts, an improved retail delivery network and strong borrower demand, as well as the three bank acquisitions, our consumer loans increased significantly in the past two years. Our underwriting of consumer loans is focused on the borrower’s credit history and ability to repay the debt as evidenced by documented sources of income. At December 31, 2008, we had $268 million, or 7% of our loans receivable, in consumer related loans, an increase of $56 million or 26% from December 31, 2007.
Similar to commercial loans, consumer loans often entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. These
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loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of such loans such as us, and a borrower may be able to assert against the assignee claims and defenses that it has against the seller of the underlying collateral.
Loan Solicitation and Processing: We originate real estate loans in our market areas by direct solicitation of real estate brokers, builders, depositors, walk-in customers and visitors to our Internet website. Loan applications are taken by our loan officers and are processed in branch or regional locations. Most underwriting and loan administration functions for our real estate loans are performed by loan personnel at central locations. We do not make loans originated by independent third-party loan brokers or any similar wholesale loan origination channels.
Our commercial loan officers solicit commercial and agricultural business loans through call programs focused on local businesses and farmers. While commercial loan officers are delegated reasonable commitment authority based upon their qualifications, credit decisions on significant commercial and agricultural loans are made by senior loan officers or in certain instances by the Board of Directors of Banner Bank, Islanders Bank or Banner Corporation.
We originate consumer loans through various marketing efforts directed primarily toward our existing deposit and loan customers. Consumer loan applications may be processed at branch locations or by administrative personnel at our main office.
Loan Originations, Sales and Purchases
While we originate a variety of loans, our ability to originate each type of loan is dependent upon the relative customer demand and competition in each market we serve. For the years ended December 31, 2008, 2007 and 2006, we originated loans, net of repayments, of $562 million, $607 million and $921 million, respectively. The decline in originations, net of repayments, in the two most recent years is primarily the result of a decrease in the origination of new construction and land loans in response to slower new home sales.
In recent years, we have sold most of our newly originated one- to four-family residential mortgage loans and a portion of our SBA guaranteed loans to secondary market purchasers as part of our interest rate risk management strategy. Proceeds from sales of loans for the years ended December 31, 2008, 2007 and 2006, totaled $366 million, $393 million and $442 million, respectively. Sales of loans generally are beneficial to us because these sales may generate income at the time of sale, provide funds for additional lending and other investments, increase liquidity or reduce interest rate risk. We sell loans on both a servicing-retained and a servicing-released basis. All loans are sold without recourse. See “Loan Servicing.” At December 31, 2008, we had $7.4 million in loans held for sale.
We periodically purchase whole loans and loan participation interests primarily during periods of reduced loan demand in our primary market area and at times to support our Community Reinvestment Act lending activities. Any such purchases are made consistent with our underwriting standards; however, the loans may be located outside of our normal lending area. During the years ended December 31, 2008, 2007 and 2006, we purchased $13 million, $23 million and $45 million, respectively, of loans and loan participation interests.
Loan Servicing
We receive fees from a variety of institutional owners in return for performing the traditional services of collecting individual payments and managing portfolios of sold loans. At December 31, 2008, we were servicing $446 million of loans for others. Loan servicing includes processing payments, accounting for loan funds and collecting and paying real estate taxes, hazard insurance and other loan-related items such as private mortgage insurance. In addition to earning fee income, we retain certain amounts in escrow for the benefit of the lender for which we incur no interest expense but are able to invest the funds into earning assets. At December 31, 2008, we held $4.0 million in escrow for our portfolio of loans serviced for others. The loan servicing portfolio at December 31, 2008 was composed of $193 million of Freddie Mac residential mortgage loans, $100 million of Fannie Mae residential mortgage loans and $152 million of both residential and non-residential mortgage loans serviced for a variety of private investors. The portfolio included loans secured by property located primarily in the states of Washington and Oregon. For the year ended December 31, 2008, we recognized $2.0 million of loan servicing fees, net of $902,000 of servicing rights amortization, in our results of operations.
Mortgage Servicing Rights: We record mortgage servicing rights (MSRs) with respect to loans we originate and sell in the secondary market on a servicing-retained basis. The cost of MSRs is capitalized and amortized in proportion to, and over the period of, the estimated future net servicing income. For the years ended December 31, 2008, 2007 and 2006, we capitalized $1.6 million $781,000 and $1.6 million, respectively, of MSRs relating to loans sold with servicing retained. No MSRs were purchased in those periods. Amortization of MSRs for the years ended December 31, 2008, 2007 and 2006, was $902,000, $658,000, and $518,000, respectively. Management periodically evaluates the estimates and assumptions used to determine the carrying values of MSRs and the amortization of MSRs. These carrying values are adjusted when the valuation indicates the carrying value is impaired. MSRs generally are adversely affected by higher levels of current or anticipated prepayments resulting from decreasing interest rates. At December 31, 2008, MSRs were carried at a value of $3.6 million, net of amortization.
Classified Assets: State and federal regulations require that the Banks review and classify their problem assets on a regular basis. In addition, in connection with examinations of insured institutions, state and federal examiners have authority to identify problem assets and, if appropriate, require them to be classified. Banner Bank’s Credit Policy Division reviews detailed information with respect to the composition and performance of the loan portfolios, including information on risk concentrations, delinquencies and classified assets for both Banner Bank and Islanders Bank. The Credit Policy Division approves all recommendations for new classified assets or changes in classifications, and develops and monitors action plans to resolve the problems associated with the assets. The Credit Policy Division also approves recommendations for establishing the appropriate level of the allowance for loan losses. Significant problem loans are transferred to Banner Bank’s Special Assets Department for resolution or collection activities. The Banks’ and Banner Corporation’s Boards of Directors are given a detailed report on classified assets and asset quality at least quarterly.
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For additional information with respect to asset quality and non-performing loans, see Item 7, “Management’s Discussion and Analysis of Financial Condition—Comparison of Financial Condition at December 31, 2008 and 2007—Asset Quality,” and Table 13 contained therein.
Allowance for Loan Losses: In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. As a result, we maintain an allowance for loan losses consistent with the generally acceptable accounting principles (GAAP) guidelines. We increase our allowance for loan losses by charging provisions for possible loan losses against our income. The allowance for losses on loans is maintained at a level which, in management’s judgment, is sufficient to provide for estimated losses based on evaluating known and inherent risks in the loan portfolio and upon continuing analysis of the factors underlying the quality of the loan portfolio. At December 31, 2008, we had an allowance for loan losses of $75 million, which represented 1.90% of net loans and 40% of non-performing loans compared to 1.20% and 108%, respectively, at December 31, 2007. For additional information concerning our allowance for loan losses, see Item 7, “Management’s Discussion and Analysis of Financial Condition—Comparison of Results of Operations for the Years Ended December 31, 2008 and 2007—Provision and Allowance for Loan Losses,” and Tables 14 and 15 contained therein.
Under Washington state law, banks are permitted to invest in various types of marketable securities. Authorized securities include but are not limited to U.S. Treasury obligations, securities of various federal agencies (including government-sponsored enterprises), mortgage-backed securities, certain certificates of deposit of insured banks and savings institutions, bankers’ acceptances, repurchase agreements, federal funds, commercial paper, corporate debt and equity securities and obligations of states and their political subdivisions. Our investment policies are designed to provide and maintain adequate liquidity and to generate favorable rates of return without incurring undue interest rate or credit risk. Our policies generally limit investments to U.S. Government and government agency (including government-sponsored entities) securities, municipal bonds, certificates of deposit, marketable corporate debt obligations and mortgage-backed securities. Investment in mortgage-backed securities may include those issued or guaranteed by Freddie Mac, Fannie Mae, Government National Mortgage Association (Ginnie Mae or GNMA) and privately-issued mortgage-backed securities that have an AA credit rating or higher, as well as collateralized mortgage obligations (CMOs). A high credit rating indicates only that the rating agency believes there is a low risk of loss or default. To the best of our knowledge, we do not have any investments in mortgage-backed securities, collateralized debt obligations or structured investment vehicles that have a material exposure to sub-prime mortgages. However, we do have investments in single-issuer and pooled trust preferred securities that have been materially adversely impacted by concerns related to the banking and insurance industries. Further, all of our investment securities, including those that have high credit ratings, are subject to market risk in so far as a change in market rates of interest or other conditions may cause a change in an investment’s earning performance and/or market value.
At December 31, 2008, our consolidated investment portfolio totaled $317 million and consisted principally of U.S. Government agency obligations, mortgage-backed securities, municipal bonds and corporate debt obligations. From time to time, investment levels may be increased or decreased depending upon yields available on investment alternatives, and management’s projections as to the demand for funds to be used in loan originations, deposits and other activities. During the year ended December 31, 2008, holdings of mortgage-backed securities increased $35 million to $134 million, U.S. Treasury and agency obligations increased $40 million to $70 million, corporate securities including equities decreased $24 million (largely as a result of fair value adjustments) to $49 million, and municipal bonds increased $9 million to $64 million.
For detailed information on our investment securities, see Item 7, “Management’s Discussion and Analysis of Financial Condition—Comparison of Financial Condition at December 31, 2008 and 2007—Investments,” and Tables 1 to 6 contained therein.
Off-Balance-Sheet Derivatives: Derivatives include “off-balance-sheet” financial products whose value is dependent on the value of an underlying financial asset, such as a stock, bond, foreign currency, or a reference rate or index. Such derivatives include “forwards,” “futures,” “options” or “swaps.” We generally have not invested in “off-balance-sheet” derivative instruments, although investment policies authorize such investments. However, through our acquisition of F&M we became a party to approximately $23.0 million ($20.1 million as of December 31, 2008) in notional amounts of interest rate swaps. These swaps serve as hedges to an equal amount of fixed-rate loans which include market value prepayment penalties that mirror the provision of the specifically matched interest rate swaps. The fair value adjustments for these swaps and the related loans are reflected in other assets or other liabilities as appropriate, and in the carrying value of the hedged loans. Also, as a part of mortgage banking activities, we issue “rate lock” commitments to borrowers and obtain offsetting “best efforts” delivery commitments from purchasers of loans. While not providing any trading or net settlement mechanisms, these off-balance-sheet commitments do have many of the prescribed characteristics of derivatives and as a result are accounted for as such in accordance with SFAS No. 133, as amended. Accordingly, on December 31, 2008, we recorded an asset of $62,000 and a liability of $62,000, representing the estimated market value of those commitments. On December 31, 2008, we had no other investment related off-balance-sheet derivatives.
Deposit Activities and Other Sources of Funds
General: Deposits, FHLB advances (or other borrowings) and loan repayments are our major sources of funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced by general economic, interest rate and money market conditions and may vary significantly. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. Borrowings may also be used on a longer-term basis for general business purposes, including funding loans and investments.
We compete with other financial institutions and financial intermediaries in attracting deposits. There is strong competition for transaction balances and savings deposits from commercial banks, credit unions and nonbank corporations, such as securities brokerage companies, mutual funds and other diversified companies, some of which have nationwide networks of offices. Much of the focus of our recent branch expansion, relocations and renovation has been directed toward attracting additional deposit customer relationships and balances. In addition, our
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electronic banking activities including debit card and automated teller machine (ATM) programs, online Internet banking services and, most recently, customer remote deposit and mobile banking capabilities are all directed at providing products and services that enhance customer relationships and result in growing deposit balances. Growing deposits is a fundamental element of our core business strategy.
Deposit Accounts: We generally attract deposits from within our primary market areas by offering a broad selection of deposit instruments, including demand checking accounts, negotiable order of withdrawal (NOW) accounts, money market deposit accounts, regular savings accounts, certificates of deposit, cash management services and retirement savings plans. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of deposit accounts, we consider current market interest rates, profitability to us, matching deposit and loan products and customer preferences and concerns. At December 31, 2008, we had $3.8 billion of deposits, including $1.7 billion of transaction and savings accounts and $2.1 billion in time deposits. For additional information concerning our deposit accounts, see Item 7, “Management’s Discussion and Analysis of Financial Condition—Comparison of Financial Condition at December 31, 2008 and 2007—Deposit Accounts.” See also Table 9 contained therein, which sets forth the balances of deposits in the various types of accounts, and Table 10, which sets forth the amount of our certificates of deposit greater than $100,000 by time remaining until maturity as of December 31, 2008.
Borrowings: While deposits are the primary source of funds for our lending and investment activities and for general business purposes, we also use borrowings to supplement our supply of lendable funds, to meet deposit withdrawal requirements and to more efficiently leverage our capital position. The FHLB-Seattle serves as our primary borrowing source. The FHLB-Seattle provides credit for member financial institutions such as Banner Bank and Islanders Bank. As members, the Banks are required to own capital stock in the FHLB-Seattle and are authorized to apply for advances on the security of that stock and certain of their mortgage loans and securities provided certain credit worthiness standards have been met. Limitations on the amount of advances are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit. At December 31, 2008, we had $109 million of borrowings from the FHLB-Seattle. At that date, Banner Bank had been authorized by the FHLB-Seattle to borrow up to $916 million under a blanket floating lien security agreement, while Islanders Bank was approved to borrow up to $43 million under a similar agreement. More recently, the Federal Reserve Bank of San Francisco (FRBSF) has also served as an important source of borrowings. The FRBSF provides credit based upon acceptable loan collateral, which includes certain loan types not eligible for pledging to the FHLB-Seattle. At December 31, 2008, based upon our available unencumbered collateral, Banner Bank was eligible to borrow $853 million from the FRBSF, although at that date we had no funds borrowed under this arrangement. Although eligible to participate, Islanders Bank has not applied for approval to borrow from the FRBSF. At December 31, 2008, there was no outstanding balance on these commercial banking credit lines. For additional information concerning our borrowings, see Item 7, “Management’s Discussion and Analysis of Financial Condition—Comparison of Financial Condition at December 31, 2008 and 2007—Borrowings,” Table 12 contained therein, and Notes 13 and 14 of the Notes to the Consolidated Financial Statements.
We issue retail repurchase agreements, generally due within 90 days, as an additional source of funds, primarily in connection with cash management services provided to our larger deposit customers. At December 31, 2008, we had issued retail repurchase agreements totaling $145 million, which were secured by a pledge of certain mortgage-backed securities with a market value of $150 million.
We also may borrow funds through the use of secured wholesale repurchase agreements with securities brokers. However, we did not have any wholesale repurchase borrowings at December 31, 2008.
In addition to our borrowings, we have also issued $120 million of junior subordinated debentures in connection with the sale of trust preferred securities (TPS). The TPS were issued from 2002 through 2007 by special purpose business trusts formed by Banner Corporation and were sold in private offerings to pooled investment vehicles. The junior subordinated debentures associated with the TPS have been recorded as liabilities and are reported at fair value on our Consolidated Statements of Financial Condition; however, at December 31, 2008, all of the fair value of the debentures qualifies as Tier 1 capital for regulatory capital purposes. We have invested a significant portion of the proceeds from the issuance of the TPS as additional paid in capital at Banner Bank. For additional information about deposits and other sources of funds, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” and Notes 12, 13 and 14 of the Notes to the Consolidated Financial Statements contained in Item 8.
As of December 31, 2008, we had 1,053 full-time and 87 part-time employees. Banner Corporation has no employees except for those who are also employees of Banner Bank, its subsidiaries, and Islanders Bank. The employees are not represented by a collective bargaining unit. We believe our relationship with our employees is good.
Federal Taxation
General: For tax reporting purposes, we report our income on a calendar year basis using the accrual method of accounting on a consolidated basis. We are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to us. Reference is made to Note 15 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K for additional information concerning the income taxes payable by us.
Provisions of the Small Business Job Protection Act of 1996 (the Job Protection Act) significantly altered our tax bad debt deduction method and the circumstances that would require a tax bad debt reserve recapture. Prior to enactment of the Job Protection Act, savings institutions (Banner Bank was previously chartered as a savings institution) were permitted to compute their tax bad debt deduction through use of either the reserve method or the percentage of taxable income method. The Job Protection Act repealed both of these methods for large savings institutions and allows bad debt deductions based only on actual current losses. While repealing the reserve method for computing tax bad debt
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deductions, the Job Protection Act allowed savings institutions to retain their existing base year bad debt reserves but required that reserves in excess of the balance at December 31, 1987, be recaptured into taxable income over six years. The reserves in excess of the base year (December 31, 1987) had been fully recaptured into taxable income as of December 31, 2003.
The base year reserve is recaptured into taxable income only in limited situations, such as in the event of certain excess distributions, complete liquidation or disqualification as a bank. None of the limited circumstances requiring recapture are contemplated by us. The amount of our tax bad debt reserves subject to recapture in these circumstances was approximately $5.3 million at December 31, 2008. As a result of the remote nature of events that may trigger the recapture provisions, no tax liability has been established in the accompanying Consolidated Financial Statements.
State Taxation
Washington Taxation: We are subject to a Business and Occupation (B&O) tax which is imposed under Washington law at the rate of 1.50% of gross receipts; however, interest received on loans secured by mortgages or deeds of trust on residential properties, residential mortgage-backed securities, and certain U.S. Government and agency securities is not subject to such tax. Our B&O tax expense was $2.3 million, $2.0 million and $1.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Oregon and Idaho Taxation: Corporations with nexus in the states of Oregon and Idaho are subject to a corporate level income tax. Our operations in those states resulted in corporate income taxes of approximately $422,000, $740,000 and $587,000 (net of federal tax benefit) for the years ended December 31, 2008, 2007 and 2006, respectively. As our operations in these states increase, the state income tax provision will have an increasing effect on our effective tax rate and results of operations.
We encounter significant competition both in attracting deposits and in originating loans. Our most direct competition for deposits comes from other commercial and savings banks, savings associations and credit unions with offices in our market areas. We also experience competition from securities firms, insurance companies, money market and mutual funds, and other investment vehicles. We expect continued strong competition from such financial institutions and investment vehicles in the foreseeable future, including increasing competition from on-line Internet banking competitors. Our ability to attract and retain deposits depends on our ability to provide transaction services and investment opportunities that satisfy the requirements of depositors. We compete for deposits by offering a variety of accounts and financial services, including robust electronic banking capabilities, with competitive rates and terms, at convenient locations and business hours, and delivered with a high level of personal service and expertise.
Competition for loans comes principally from other commercial banks, loan brokers, mortgage banking companies, savings banks and credit unions. The competition for loans is intense as a result of the large number of institutions competing in our market areas. We compete for loans primarily by offering competitive rates and fees and providing timely decisions and excellent service to borrowers.
Banner Bank and Islanders Bank
General: As state-chartered, federally insured commercial banks, Banner Bank and Islanders Bank (the Banks) are subject to extensive regulation and must comply with various statutory and regulatory requirements, including prescribed minimum capital standards. The Banks are regularly examined by the FDIC and state banking regulators and file periodic reports concerning their activities and financial condition with the regulators. The Banks’ relationship with depositors and borrowers also is regulated to a great extent by both federal and state law, especially in such matters as the ownership of deposit accounts and the form and content of mortgage and other loan documents.
Federal and state banking laws and regulations govern all areas of the operation of the Banks, including reserves, loans, investments, deposits, capital, issuance of securities, payment of dividends and establishment of branches. Federal and state bank regulatory agencies also have the general authority to limit the dividends paid by insured banks and bank holding companies if such payments should be deemed to constitute an unsafe and unsound practice. The respective primary federal regulators of Banner Corporation, Banner Bank and Islanders Bank have authority to impose penalties, initiate civil and administrative actions and take other steps intended to prevent banks from engaging in unsafe or unsound practices.
State Regulation and Supervision: As a Washington state-chartered commercial bank with branches in the States of Washington, Oregon and Idaho, Banner Bank is subject to the applicable provisions of Washington, Oregon and Idaho law and regulations. State law and regulations govern Banner Bank’s ability to take deposits and pay interest thereon, to make loans on or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various banking services to its customers and to establish branch offices. In a similar fashion, Washington State laws and regulations apply to Islanders Bank.
Deposit Insurance: The FDIC is an independent federal agency that insures the deposits, up to applicable limits, of depository institutions. As insurer of the Banks’ deposits, the FDIC has supervisory and enforcement authority over Banner Bank and Islanders Bank.
The deposits of the Banks are insured up to applicable limits by the Deposit Insurance Fund, or DIF, which is administered by the FDIC. The FDIC insures deposits up to the applicable limits and this insurance is backed by the full faith and credit of the United States government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by institutions insured by the FDIC. It also may prohibit any institution insured by the FDIC from engaging in any activity determined by regulation or order to pose a serious risk to the institution. The FDIC also has the authority to initiate enforcement actions and may terminate the deposit insurance if it determines that an institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
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The FDIC assesses deposit insurance premiums on all FDIC-insured institutions quarterly based on annualized rates for four risk categories. Each institution is assigned to one of four risk categories based on its capital, supervisory ratings and other factors. Well capitalized institutions that are financially sound with only a few minor weaknesses are assigned to Risk Category I. Risk categories II, III and IV present progressively greater risks to the DIF. Under the FDIC’s risk-based assessment rules, effective April 1, 2009, the initial base assessment rates prior to adjustments range from 12 to 16 basis points for Risk Category I, and are 22 basis points for Risk Category II, 32 basis points for Risk Category III, and 45 basis points for Risk Category IV. Initial base assessment rates are subject to adjustments based on an institution’s unsecured debt, secured liabilities and brokered deposits, such that the total base assessment rates after adjustments range from 7 to 24 basis points for Risk Category I, 17 to 43 basis points for Risk Category II, 27 to 58 basis points for Risk Category III, and 40 to 77.5 basis points for Risk Category IV. The rule also includes authority for the FDIC to increase or decrease total base assessment rates in the future by as much as three basis points without a formal rulemaking proceeding.
In addition to the regular quarterly assessments, due to losses and projected losses attributed to failed institutions, the FDIC has adopted a rule, effective April 1, 2009, imposing on every insured institution a special assessment equal to 20 basis points of its assessment base as of June 30, 2009, to be collected on September 30, 2009. There is a proposal under discussion, under which the FDIC’s line of credit with the U.S. Treasury would be increased and the FDIC would reduce the special assessment to 10 basis points. There can be no assurance whether the proposal will become effective. The special assessment rule also authorizes the FDIC to impose additional special assessments if the reserve ratio of the DIF is estimated to fall to a level that the FDIC’s board believes would adversely affect public confidence or that is close to zero or negative. Any additional special assessment would be in an amount up to 10 basis points on the assessment base for the quarter in which it is imposed and would be collected at the end of the following quarter.
Insured institutions are required to pay a Financing Corporation assessment in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. For the year ended December 31, 2008, the Financing Corporation assessment ranged between 1.10 and 1.14 basis points of average domestic deposits. These assessments, which may be revised based upon the level of DIF deposits, will continue until the bonds mature in the years 2017 through 2019. For 2008, the Banks incurred $419,000 in FICO assessments.
The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which would result in termination of the deposit insurance of either Banner Bank or Islanders Bank.
Prompt Corrective Action: Federal statutes establish a supervisory framework based on five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution’s category depends upon where its capital levels are in relation to relevant capital measures, which include a risk-based capital measure, a leverage ratio capital measure and certain other factors. The federal banking agencies have adopted regulations that implement this statutory framework. Under these regulations, an institution is treated as well capitalized if its ratio of total capital to risk-weighted assets is 10% or more, its ratio of core capital to risk-weighted assets is 6% or more, its ratio of core capital to adjusted total assets (leverage ratio) is 5% or more, and it is not subject to any federal supervisory order or directive to meet a specific capital level. In order to be adequately capitalized, an institution must have a total risk-based capital ratio of not less than 8%, a Tier 1 risk-based capital ratio of not less than 4%, and a leverage ratio of not less than 4%. Any institution which is neither well capitalized nor adequately capitalized is considered undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized. Failure by either Banner Bank and Islanders Bank to comply with applicable capital requirements would, if unremedied, result in progressively more severe restrictions on their respective activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or conservator. Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. Additionally, approval of any regulatory application filed for their review may be dependent on compliance with capital requirements.
At December 31, 2008, both Banner Bank and Islanders Bank were categorized as “well capitalized” under the prompt corrective action regulations of the FDIC.
Capital Requirements: Federally insured financial institutions, such as Banner Bank and Islanders Bank, are required to maintain a minimum level of regulatory capital. FDIC regulations recognize two types, or tiers, of capital: core (Tier 1) capital and supplementary (Tier 2) capital. Tier 1 capital generally includes common stockholders’ equity and qualifying noncumulative perpetual preferred stock, less most intangible assets. Tier 2 capital, which is limited to 100% of Tier 1 capital, includes such items as qualifying general loan loss reserves, cumulative perpetual preferred stock, mandatory convertible debt, term subordinated debt and limited life preferred stock; however, the amount of term subordinated debt and intermediate term preferred stock (original maturity of at least five years but less than 20 years) that may in included in Tier 2 capital is limited to 50% of Tier 1 capital.
The FDIC currently measures an institution’s capital using a leverage limit together with certain risk-based ratios. The FDIC’s minimum leverage capital requirement specifies a minimum ratio of Tier 1 capital to average total assets. Most banks are required to maintain a minimum leverage ratio of at least 4% to 5% of total assets. At December 31, 2008, Banner Bank and Islanders Bank had Tier 1 leverage capital ratios of 9.40% and 10.74%, respectively. The FDIC retains the right to require a particular institution to maintain a higher capital level based on an institution’s particular risk profile.
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FDIC regulations also establish a measure of capital adequacy based on ratios of qualifying capital to risk-weighted assets. Assets are placed in one of four categories and given a percentage weight based on the relative risk of the category. In addition, certain off-balance-sheet items are converted to balance-sheet credit equivalent amounts, and each amount is then assigned to one of the four categories. Under the guidelines, the ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8%, and the ratio of Tier 1 capital to risk-weighted assets must be at least 4%. In evaluating the adequacy of a bank’s capital, the FDIC may also consider other factors that may affect the bank’s financial condition. Such factors may include interest rate risk exposure, liquidity, funding and market risks, the quality and level of earnings, concentration of credit risk, risks arising from nontraditional activities, loan and investment quality, the effectiveness of loan and investment policies, and management’s ability to monitor and control financial operating risks. At December 31, 2008, Banner Bank and Islanders Bank had Tier 1 risk-based capital ratios of 10.76% and 12.51%, respectively, and total risk-based capital ratios of 12.02% and 13.27%, respectively.
FDIC capital requirements are designated as the minimum acceptable standards for banks whose overall financial condition is fundamentally sound, which are well-managed and have no material or significant financial weaknesses. The FDIC capital regulations state that, where the FDIC determines that the financial history or condition, including off-balance-sheet risk, managerial resources and/or the future earnings prospects of a bank are not adequate and/or a bank has a significant volume of assets classified substandard, doubtful or loss or otherwise criticized, the FDIC may determine that the minimum adequate amount of capital for the bank is greater than the minimum standards established in the regulation.
The Washington Department of Financial Institutions requires that net worth equal at least 5% of total assets. Intangible assets must be deducted from net worth and assets when computing compliance with this requirement. At December 31, 2008, Banner Bank had a net worth of 9.43% of total assets under this standard, while Islanders Bank had a similarly calculated net worth of 10.47%.
We believe that, under the current regulations, Banner Bank and Islanders Bank exceed their minimum capital requirements. However, events beyond the control of the Banks, such as weak or depressed economic conditions in areas where they have most of their loans, could adversely affect future earnings and, consequently, the ability of the Banks to meet their capital requirements. For additional information concerning Banner Bank’s and Islanders Bank’s capital, see Note 20 of the Notes to the Consolidated Financial Statements.
Emergency Economic Stabilization Act of 2008: In October 2008, the EESA was enacted. The EESA authorizes the U.S. Treasury Department to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies in a troubled asset relief program (“TARP”). The purpose of TARP is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other. Under the TARP Capital Purchase Program (“CPP”), the Treasury may purchase debt or equity securities from participating institutions. The TARP also allows direct purchases or guarantees of troubled assets of financial institutions. Participants in the CPP are subject to executive compensation limits and are encouraged to expand their lending and mortgage loan modifications. Banner completed its TARP CPP transaction in the fourth quarter, receiving $124 million in funding on November 21, 2008. For additional information regarding the TARP CPP transaction, see “Recent Developments – Participation in the U.S. Treasury Capital Purchase Program” and “Risk Factors – Risks Related to our Business—Risks specific to our participation in TARP.”
EESA also increased Federal Deposit Insurance Corporation deposit insurance on most accounts from $100,000 to $250,000. This increase expires at the end of 2009 and is not covered by deposit insurance premiums paid by the banking industry.
The American Recovery and Reinvestment Act of 2009: On February 17, 2009, President Obama signed The American Recovery and Reinvestment Act of 2009 (“ARRA”) into law. The ARRA is intended to revive the US economy by creating millions of new jobs and stemming home foreclosures. For financial institutions that have received or will receive financial assistance under TARP or related programs, the ARRA significantly rewrites the original executive compensation and corporate governance provisions of Section 111 of the EESA. Among the most important changes instituted by the ARRA are new limits on the ability of TARP recipients to pay incentive compensation to up to 20 of the next most highly-compensated employees in addition to the “senior executive officers,” a restriction on termination of employment payments to senior executive officers and the five next most highly-compensated employees and a requirement that TARP recipients implement “say on pay” shareholder votes. Further legislation is anticipated to be passed with respect to the economic recovery. For additional information regarding the effects of the ARRA on Banner’s senior executive officers as a result of Banner’s participation in TARP, see “Risk Factors – Risks Related to our Business—Risks specific to our participation in TARP.”
The Financial Stability Plan and Homeowners Affordability and Stability Plan. In February 2008, the Administration announced its Financial Stability Plan (“FSP”) and Homeowners Affordability and Stability Plan (“HASP”). Many details of these plans have not been finalized. The FSP is administrated by the U.S. Treasury and includes the following four key elements:
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the development of a public/private investment fund essentially structured as a government sponsored enterprise with the mission to purchase troubled assets from banks with an initial capitalization from government funds; |
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the Capital Assistance Program, under which the Treasury will purchase additional preferred stock, available only for banks that have undergone a new stress test given by their regulator; |
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an expansion of the Federal Reserve’s term asset-backed liquidity facility to support the purchase of up to $1 trillion in AAA–rated asset-backed securities backed by consumer, student and small business loans and possibly other types of loans; and |
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the establishment of a mortgage loan modification program further detailed in the HASP. |
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The HASP is a program developed to help seven to nine million families restructure their mortgages to avoid foreclosure. The plan also develops guidance for loan modifications nationwide. HASP provides programs and funding for eligible refinancing of loans, along with incentives to lenders, mortgage servicers, and borrowers to modify mortgages of “responsible” homeowners who are at risk of defaulting on their mortgage. The goals of HASP are to assist in the prevention of home foreclosures and to help stabilize falling home prices.
Although Banner was a recipient of TARP CPP funds, it is unclear what effect these programs will have on its operations. Future recipients of TARP funds will be expected to comply with the loan modification guidance that the federal banking regulators establish in connection with HASP.
Standards for Safety and Soundness: The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository institutions relating to internal controls, information systems and internal audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. Each insured depository institution must implement a comprehensive written information security program that includes administrative, technical, and physical safeguards appropriate to the institution’s size and complexity and the nature and scope of its activities. The information security program also must be designed to ensure the security and confidentiality of customer information, protect against any unanticipated threats or hazards to the security or integrity of such information, protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer, and ensure the proper disposal of customer and consumer information. Each insured depository institution must also develop and implement a risk-based response program to address incidents of unauthorized access to customer information in customer information systems. If the FDIC determines that an institution fails to meet any of these guidelines, it may require an institution to submit to the FDIC an acceptable plan to achieve compliance. We believe that at December 31, 2008, Banner Bank and Islanders Bank met all of the FDIC guidelines.
Guidance on Subprime Mortgage Lending: In response to the recent subprime mortgage crisis, federal and state regulatory agencies have focused attention on subprime and nontraditional mortgage products both with an aim toward enhancing the regulation of such loans and providing relief to adversely affected borrowers. On July 10, 2007, the federal banking agencies issued guidance on subprime mortgage lending to address issues related to certain mortgage products marketed to subprime borrowers, particularly adjustable rate mortgage products that can involve “payment shock” and other risky characteristics. Although the guidance focuses on subprime borrowers, the banking agencies note that institutions should look to the principles contained in the guidance when offering such adjustable rate mortgages to non-subprime borrowers. The guidance prohibits predatory lending programs; provides that institutions should underwrite a mortgage loan on the borrower’s ability to repay the debt by its final maturity at the fully-indexed rate, assuming a fully amortizing repayment schedule; encourages reasonable workout arrangements with borrowers who are in default; mandates clear and balanced advertisements and other communications; encourages arrangements for the escrowing of real estate taxes and insurance; and states that institutions should develop strong control and monitoring systems. The guidance recommends that institutions refer to the Real Estate Lending Standards (discussed above) which provide underwriting standards for all real estate loans.
The federal banking agencies announced their intention to carefully review the risk management and consumer compliance processes, policies and procedures of their supervised financial institutions and their intention is to take action against institutions that engage in predatory lending practices, violate consumer protection laws or fair lending laws, engage in unfair or deceptive acts or practices, or otherwise engage in unsafe or unsound lending practices.
Guidance on Loss Mitigation Strategies for Servicers of Residential Mortgages: In September 2007, the federal banking agencies issued a statement encouraging regulated institutions and state-supervised entities that service residential mortgages to pursue strategies to mitigate losses while preserving homeownership to the extent possible and appropriate. The guidance recognizes that many mortgage loans, including subprime loans, have been transferred into securitization trusts and servicing for such loans is governed by contract documents. The guidance advises servicers to review governing documentation to determine the full extent of their authority to restructure loans that are delinquent or are in default or are in imminent risk of default.
The guidance encourages that servicers take proactive steps to preserve homeownership in situations where there are heightened risks to homeowners losing their homes to foreclosures. Such steps may include loan modification; deferral of payments; extensions of loan maturities; conversion of adjustable rate mortgages into fixed rate or fully indexed, fully amortizing adjustable rate mortgages; capitalization of delinquent amounts; or any combination of these actions. Servicers are instructed to consider the borrower’s ability to repay the modified obligation to final maturity according to its terms, taking into account the borrower’s total monthly housing-related payments as a percentage of the borrower’s gross monthly income, the borrower’s other obligations, and any additional tax liabilities that may result from loan modifications. Where appropriate, servicers are encouraged to refer borrowers to qualified non-profit and other homeownership counseling services and/or to government programs that are able to work with all parties and avoid unnecessary foreclosures. The guidance states that servicers are expected to treat consumers fairly and to adhere to all applicable legal requirements.
Relief for Homeowners: In October 2007, the Treasury helped facilitate the creation of the HOPE NOW Alliance, a private sector coalition formed to encourage mortgage servicers, mortgage counselors, government officials and non-profit groups to coordinate their efforts to help struggling borrowers restructure their mortgage payments and stay in their homes. HOPE NOW is aimed at coordinating and improving outreach to borrowers, developing best practices for mortgage counselors across the country and ensuring that groups able to help homeowners work out new loan arrangements with lenders have adequate resources to carry out this mission. Treasury has worked with other agencies and HOPE NOW to create a streamlined loan modification program. In October 2003, HUD implemented Hope for Homeowners, a voluntary FHA program for refinancing affordable home mortgages.
Housing and Economic Recovery Act of 2008: The Housing and Economic Recovery Act of 2008, signed by President Bush on July 30, 2008, was designed to address a variety of issues relating to the subprime mortgage crises. This act established a new conforming loan limit for Fannie Mae and Freddie Mac in high cost areas to 150% of the conforming loan limit, to take effect after December 31, 2008. The FHA’s
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conforming loan limit was increased from 95% to 110% of the area median home price up to 150% of the Fannie Mae/Freddie Mac conforming loan limit, to take effect at the same time. Among other things, the Housing and Economic Recovery Act of 2008 enhanced the regulation of Fannie Mae, Freddie Mac and Federal Housing Administration loans; established a new Federal Housing Finance Agency to replace the prior Federal Housing Finance Board and Office of Federal Housing Enterprise Oversight; required enhanced mortgage disclosures; and initiated a comprehensive licensing, supervisory, and tracking system for mortgage originators. Using its new powers, on September 7, 2008, the Federal Housing Finance Agency announced that it had put Fannie Mae and Freddie Mac under conservatorship. The Housing and Economic Recovery Act of 2008 also established the HOPE for Homeowners program, which is a new, temporary, voluntary program to back Federal Housing Administration-insured mortgages to distressed borrowers. The new mortgages offered by Federal Housing Administration-approved lenders will refinance distressed loans at a significant discount for owner-occupants at risk of losing their homes to foreclosure.
New Regulations Establishing Protections for Consumers in the Residential Mortgage Market: The Federal Reserve Board has issued new regulations under the federal Truth-in-Lending Act and the Home Ownership and Equity Protection Act. For mortgage loans governed by the Home Ownership and Equity Protection Act, the new regulations further restrict prepayment penalties, and enhance the standards relating to the consumer’s ability to repay. For a new category of closed-end “higher-priced” mortgage loans, the new regulations restrict prepayment penalties, and require escrows for property taxes and property-related insurance for most first lien mortgage loans. For all closed-end loans secured by a principal dwelling, the new regulations prohibit the coercion of appraisers; require the prompt crediting of payments; prohibit the pyramiding of late fees; require prompt responses to requests for payoff figures; and require the delivery of transaction-specific Truth in Lending Act disclosures within three business days following the receipt of an application for a closed-end home loan. The new regulations also impose new restrictions on mortgage loan advertising for both open-end and closed-end products. In general, the new regulations are effective October 1, 2009, but the rules governing escrows for higher-priced mortgages are effective on April 1, 2010, and for higher-priced mortgage loans secured by manufactured housing, on October 1, 2010.
Pending Legislation and Regulatory Proposals: As a result of the subprime mortgage crisis and current financial conditions, federal and state legislatures and agencies are considering a broad variety of legislative and regulatory proposals covering mortgage loan products, loan terms and underwriting standards, risk management practices and consumer protection. It is unclear which, if any, of these initiatives will be adopted, what effect they will have on Banner, Banner Bank or Islanders Bank and whether any of these initiatives will change the competitive landscape in the mortgage industry.
Guidance on Nontraditional Mortgage Product Risks: On September 29, 2006, the federal banking agencies issued guidance to address the risks posed by nontraditional residential mortgage products, that is, mortgage products that allow borrowers to defer repayment of principal or interest. The guidance instructs institutions to ensure that loan terms and underwriting standards are consistent with prudent lending practices, including consideration of a borrower’s ability to repay the debt by final maturity at the fully indexed rate and assuming a fully amortizing repayment schedule; requires institutions to recognize, for higher risk loans, the necessity of verifying the borrower’s income, assets and liabilities; requires institutions to address the risks associated with simultaneous second-lien loans, introductory interest rates, lending to subprime borrowers, nonowner occupied investor loans, and reduced documentation loans; requires institutions to recognize that nontraditional mortgages, particularly those with risk-layering features, are untested in a stressed environment; requires institutions to recognize that nontraditional mortgage products warrant strong controls and risk management standards, capital levels commensurate with that risk, and allowances for loan and lease losses that reflect the collectability of the portfolio; and ensure that consumers have sufficient information to clearly understand loan terms and associated risks prior to making product and payment choices. The guidance recommends practices for addressing the risks raised by nontraditional mortgages, including enhanced communications with consumers, beginning when the consumer is first shopping for a mortgage; promotional materials and other product descriptions that provide information about the costs, terms, features and risks of nontraditional mortgages, including with respect to payment shock, negative amortization, prepayment penalties, and the cost of reduced documentation loans; more informative monthly statements for payment option adjustable rate mortgages; and specified practices to avoid. Subsequently, the federal banking agencies produced model disclosures that are designed to provide information about the costs, terms, features and risks of nontraditional mortgages.
Guidance on Real Estate Concentrations: On December 6, 2006, the federal banking agencies issued guidance on sound risk management practices for concentrations in commercial real estate lending. The particular focus is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is not to limit a bank’s commercial real estate lending but to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance directs the Federal Deposit Insurance Corporation and other bank regulatory agencies to focus their supervisory resources on institutions that may have significant commercial real estate loan concentration risk. A bank that has experienced rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk:
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Total reported loans for construction, land development and other land represent 100% or more of the bank’s capital; or |
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Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total capital and the outstanding balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. |
The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in supervisory evaluation of capital adequacy.
On March 17, 2008, the Federal Deposit Insurance Corporation issued a release to re-emphasize the importance of strong capital and loan loss allowance levels and robust credit risk management practices for institutions with concentrated commercial real estate exposures. The Federal Deposit Insurance Corporation suggested that institutions with significant construction/land development and commercial real estate loan concentrations increase or maintain strong capital levels; ensure that loan loss allowances are appropriately strong; manage construction and
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development and commercial real estate loan portfolios closely; maintain updated financial and analytical information on their borrowers and collateral; and bolster the loan workout infrastructure.
Temporary Liquidity Guaranty Program: Following a systemic risk determination, the Federal Deposit Insurance Corporation established a Temporary Liquidity Guarantee Program (“TLGP”) on October 14, 2008. The TLGP includes the Transaction Account Guarantee Program, which provides unlimited deposit insurance coverage through December 31, 2009 for noninterest-bearing transaction accounts (typically business checking accounts) and certain funds swept into noninterest-bearing savings accounts (“TAGP”). Institutions participating in the TAGP pay a 10 basis points fee (annualized) on the balance of each covered account in excess of $250,000, while the extra deposit insurance is in place. The TLGP also includes the Debt Guarantee Program (“DGP”), under which the Federal Deposit Insurance Corporation guarantees certain senior unsecured debt of Federal Deposit Insurance Corporation-insured institutions and their holding companies. The unsecured debt must be issued on or after October 14, 2008 and not later than June 30, 2009, and the guarantee is effective through the earlier of the maturity date or June 30, 2012. The DGP coverage limit is generally 125% of the eligible entity’s eligible debt outstanding on September 30, 2008 and scheduled to mature on or before June 30, 2009 or, for certain insured institutions, 2% of their liabilities as of September 30, 2008. Depending on the term of the debt maturity, the nonrefundable DGP fee ranges from 50 to 100 basis points (annualized) for covered debt outstanding until the earlier of maturity or June 30, 2012. The TAGP and DGP are in effect for all eligible entities, unless the entity opted out on or before December 5, 2008. Banner and Islanders Bank did not opt out of the program. The TLGP has been amended to allow participants to seek approval of applications to issue guaranteed convertible debt.
Activities and Investments of Insured State-Chartered Financial Institutions: Federal law generally limits the activities and equity investments of FDIC insured, state-chartered banks to those that are permissible for national banks. An insured state bank is not prohibited from, among other things, (1) acquiring or retaining a majority interest in a subsidiary, (2) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (3) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (4) acquiring or retaining the voting shares of a depository institution if certain requirements are met.
Washington State has enacted a law regarding financial institution parity. Primarily, the law affords Washington-chartered commercial banks the same powers as Washington-chartered savings banks. In order for a bank to exercise these powers, it must provide 30 days notice to the Director of the Washington Department of Financial Institutions and the Director must authorize the requested activity. In addition, the law provides that Washington-chartered commercial banks may exercise any of the powers that the Federal Reserve has determined to be closely related to the business of banking and the powers of national banks, subject to the approval of the Director in certain situations. The law also provides that Washington-chartered savings banks may exercise any of the powers of Washington-chartered commercial banks, national banks and federally-chartered savings banks, subject to the approval of the Director in certain situations. Finally, the law provides additional flexibility for Washington-chartered commercial and savings banks with respect to interest rates on loans and other extensions of credit. Specifically, they may charge the maximum interest rate allowable for loans and other extensions of credit by federally-chartered financial institutions to Washington residents.
Federal Reserve System: The Federal Reserve Board requires, under Regulation D, reserves on all depository institutions that maintain transaction accounts or nonpersonal time deposits. These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve Bank. NOW accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to Regulation D reserve requirements, as are any nonpersonal time deposits at a bank. Under Regulation D, at the end of 2008, the Banks were each required to establish reserves equal to 3% of the first $34.6 million of transaction accounts, of which the first $9.3 million was exempt, and 10% of the remainder. Currently there is no reserve requirement on nonpersonal time deposits. As of December 31, 2008, the Banks met their reserve requirements.
Affiliate Transactions: Banner Corporation, Banner Bank and Islanders Bank are separate and distinct legal entities. Various legal limitations restrict the Banks from lending or otherwise supplying funds to us (an “affiliate”), generally limiting such transactions with the affiliate to 10% of the Bank’s capital and surplus and limiting all such transactions to 20% of the Bank’s capital and surplus and requiring eligible collateral to secure a loan to an affiliate. Such transactions, including extensions of credit, sales of securities or assets and provision of services, also must be on terms and conditions consistent with safe and sound banking practices, including credit standards that are substantially the same or at least as favorable to Banner Bank or Islanders Bank as those prevailing at the time for transactions with unaffiliated companies.
Federally insured banks are subject, with certain exceptions, to certain restrictions on extensions of credit to their parent holding companies or other affiliates, on investments in the stock or other securities of affiliates and on the taking of such stock or securities as collateral from any borrower. In addition, such banks are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or the providing of any property or service.
Community Reinvestment Act: Banner Bank and Islanders Bank are also subject to the provisions of the Community Reinvestment Act of 1977, which requires the appropriate federal bank regulatory agency to assess a bank’s record in meeting the credit needs of the community serviced by the bank, including low and moderate income neighborhoods. The regulatory agency’s assessment of the bank’s record is made available to the public. Further, a bank’s performance under the CRA must be considered in connection with a bank’s application to, among other things, to establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. Both Banner Bank and Islanders Bank received a “satisfactory” rating during their most recent examinations.
Dividends: Dividends from Banner Bank and Islanders Bank constitute the major source of funds for dividends paid by us to our shareholders. The amount of dividends payable by the Banks to us will depend upon their earnings and capital position, and is limited by federal and state laws, regulations and policies. Federal law further provides that no insured depository institution may make any capital distribution (which includes a cash dividend) if, after making the distribution, the institution would be “undercapitalized,” as defined in the prompt corrective action
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regulations. Moreover, the federal bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments should be deemed to constitute an unsafe and unsound practice.
Privacy Standards: The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLBA”) modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. Banner Bank and Islanders Bank are subject to FDIC regulations implementing the privacy protection provisions of the GLBA. These regulations require the Banks to disclose their privacy policy, including identifying with whom it shares “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter.
The regulations also require the Banks to provide their customers with initial and annual notices that accurately reflect their privacy policies and practices. In addition, the Banks are required to provide customers with the ability to “opt-out” of having the Banks share their non-public personal information with unaffiliated third parties before they can disclose such information, subject to certain exceptions.
The Banks are subject to regulatory guidelines establishing standards for safeguarding customer information. These regulations implement certain provisions of the GLBA. The guidelines describe the agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to insure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer.
Anti-Money Laundering and Customer Identification: In response to the terrorist events of September 11, 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) was signed into law on October 26, 2001. The USA Patriot Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Bank Holding Company Act and Bank Merger Act applications. Banner Bank’s and Islanders Bank’s policies and procedures have been updated to reflect the requirements of the USA Patriot Act.
Banner Corporation
General: Banner Corporation, as sole shareholder of Banner Bank and Islanders Bank, is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA), and the regulations of the Federal Reserve. We are required to file quarterly reports with the Federal Reserve and such additional information as the Federal Reserve may require and is subject to regular examinations by the Federal Reserve. The Federal Reserve also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.
The Bank Holding Company Act: Under the BHCA, we are supervised by the Federal Reserve. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, the Federal Reserve provides that bank holding companies should serve as a source of strength to its subsidiary banks by being prepared to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligation to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve’s regulations or both. We are required to file quarterly and periodic reports with the Federal Reserve and provide additional information as the Federal Reserve may require. The Federal Reserve may examine us, and any of our subsidiaries, and charge us for the cost of the examination. Banner Corporation and any subsidiaries that it may control are considered “affiliates” within the meaning of the Federal Reserve Act, and transactions between Banner Bank and affiliates are subject to numerous restrictions. With some exceptions, Banner Corporation, and its subsidiaries, are prohibited from tying the provision of various services, such as extensions of credit, to other services offered by Banner Corporation, or by its affiliates.
Acquisitions: The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. Under the BHCA, the Federal Reserve may approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. These activities include: operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers’ checks and U.S. Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers.
Sarbanes-Oxley Act of 2002: The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act) was signed into law on July 30, 2002 in response to public concerns regarding corporate accountability in connection with various accounting scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the Securities and Exchange Commission (SEC), under the Securities Exchange Act of 1934 (Exchange Act).
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The Sarbanes-Oxley Act includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees. Our policies and procedures have been updated to comply with the requirements of the Sarbanes-Oxley Act.
Interstate Banking and Branching: The Federal Reserve must approve an application of a bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than the holding company’s home state, without regard to whether the transaction is prohibited by the laws of any state. The Federal Reserve may not approve the acquisition of a bank that has not been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the host state. Nor may the Federal Reserve approve an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch. Federal law does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit contained in the federal law.
The federal banking agencies are authorized to approve interstate merger transactions without regard to whether the transaction is prohibited by the law of any state, unless the home state of one of the banks adopted a law prior to June 1, 1997 which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches and de novo branching will be permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions will also be subject to the nationwide and statewide insured deposit concentration amounts described above.
Dividends: The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses its view that although there are no specific regulations restricting dividend payments by bank holding companies other than state corporate laws, a bank holding company must maintain an adequate capital position and generally should not pay cash dividends unless the company’s net income for the past year is sufficient to fully fund the cash dividends and that the prospective rate of earnings appears consistent with the company’s capital needs, asset quality, and overall financial condition. The Federal Reserve policy statement also indicates that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends.
Capital Requirements: The Federal Reserve has established capital adequacy guidelines for bank holding companies that generally parallel the capital requirements of the FDIC for the Banks, although the Federal Reserve regulations provide for the inclusion of certain trust preferred securities for up to 25% of Tier 1 capital in determining compliance with the guidelines. The Federal Reserve regulations provide that capital standards will be applied on a consolidated basis in the case of a bank holding company with $500 million or more in total consolidated assets. The guidelines require that a company’s total risk-based capital must equal 8% of risk-weighted assets and one half of the 8% (4%) must consist of Tier 1 (core) capital. As of December 31, 2008, Banner Corporation’s total risk-based capital was 13.11% of risk-weighted assets and its Tier 1 (core) capital was 11.86% of risk-weighted assets.
Stock Repurchases: A bank holding company, except for certain “well-capitalized” and highly rated bank holding companies, is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding twelve months, is equal to 10% or more of its consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or any condition imposed by, or written agreement with, the Federal Reserve. For information concerning our repurchase activities during the 2008 fiscal year and for the quarter ended December 31, 2008, see Item 5.
Executive Officers
The following table sets forth information with respect to the executive officers of Banner Corporation and Banner Bank as of December 31, 2008
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Name |
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Age |
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Position with Banner Corporation |
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Position with Banner Bank |
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D. Michael Jones |
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66 |
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President, Chief Executive Officer, |
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President, Chief Executive Officer, |
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Director |
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Director |
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Lloyd W. Baker |
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60 |
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Executive Vice President, |
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Executive Vice President, |
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Chief Financial Officer |
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Chief Financial Officer |
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Cynthia D. Purcell |
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51 |
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Executive Vice President, |
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Chief Operating Officer |
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Richard B. Barton |
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65 |
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Executive Vice President, |
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Chief Lending Officer |
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Paul E. Folz |
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54 |
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Executive Vice President, |
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Community Banking |
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Steven W. Rust |
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61 |
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Executive Vice President, |
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Chief Information Officer |
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Douglas M. Bennett |
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56 |
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Executive Vice President, |
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Real Estate Lending Operations |
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Tyrone J. Bliss |
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51 |
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Executive Vice President, |
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Risk Management and Compliance Officer |
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Gary W. Wagers |
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48 |
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Executive Vice President |
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Consumer Lending Administration |
Biographical Information
Set forth below is certain information regarding the executive officers of Banner Corporation and Banner Bank. There are no family relationships among or between the directors or executive officers.
D. Michael Jones joined Banner Bank in 2002 following an extensive career in banking, finance and accounting. Mr. Jones served as President and Chief Executive Officer from 1996 to 2001 for Source Capital Corporation, a lending company in Spokane, Washington. From 1987 to 1995, Mr. Jones served as President of West One Bancorp, a large regional banking franchise based in Boise, Idaho.
Lloyd W. Baker joined First Savings Bank of Washington (now Banner Bank) in 1995 as Asset/Liability Manager and has served as its Chief Financial Officer since 2000. His banking career began in 1972.
Cynthia D. Purcell was formerly the Chief Financial Officer of Inland Empire Bank (now Banner Bank), which she joined in 1981, and has served in her current position as Executive Vice President since 2000. Ms. Purcell was named Chief Operating Officer in 2008.
Richard B. Barton joined Banner Bank in 2002 as Chief Credit Officer. Mr. Barton’s banking career began in 1972 with Seafirst Bank and Bank of America, where he served in a variety of commercial lending and credit risk management positions. In his last positions at Bank of America before joining Banner Bank, he served as the senior real estate risk management executive for the Pacific Northwest and as the credit risk management executive for the west coast home builder division. Mr. Barton was named Chief Lending Officer in 2008.
Paul E. Folz joined Banner Bank in 2002. Mr. Folz has 30 years of commercial lending experience and, prior to joining Banner, served as Washington Mutual’s Senior Vice President in charge of commercial banking operations in the State of Oregon.
Steven W. Rust joined Banner Bank in October 2005. Mr. Rust brings over 31 years of relevant industry experience to Banner Bank’s management team. Prior to joining Banner Bank he was founder and president of InfoSoft Technology, through which he worked for nine years as a technology consultant and interim Chief Information Officer for banks and insurance companies. He worked 19 years with US Bank/West One Bancorp as Senior Vice President & Manager of Information Systems.
Douglas M. Bennett, who joined Banner Bank in 1974, has over 33 years of experience in real estate lending. He has served as a member of Banner Bank’s executive management committee since 2004.
Tyrone J. Bliss joined Banner Bank in 2002. Mr. Bliss is a Certified Regulatory Compliance Manager with more than 30 years of commercial banking experience. Prior to joining Banner Bank, his career included senior risk management and compliance positions with Bank of America’s Consumer Finance Group, Barnett Banks, Inc., and Florida-based community banks.
Gary W. Wagers joined Banner Bank as Senior Vice President and Consumer Lending Administration in 2002 and was named to his current position in January 2008. Mr. Wagers began his banking career in 1982 at Idaho First National Bank. Prior to joining Banner Bank, his career included senior management positions in retail lending and branch banking operations with West One Bank and US Bank.
Our principal executive offices are located at 10 South First Avenue, Walla Walla, Washington 99362. Our telephone number is (509) 527-3636. We maintain a website with the address www.bannerbank.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own Internet access charges, we make available free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the Securities and Exchange Commission.
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An investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations. The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose all or part of your investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. This report is qualified in its entirety by these risk factors.
Risks Related to the U.S. Financial Industry
Difficult economic and market conditions have adversely affected our industry.
We are particularly exposed to downturns in the U.S. housing market and general economic conditions. Dramatic declines in the housing market over the past year, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities, major commercial and investment banks, and regional financial institutions such as our Company. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets have adversely affected our business, financial condition and results of operations. We do not expect that the difficult conditions in the economy and financial markets are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry. In particular, we may face the following risks in connection with these events:
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We potentially face increased regulation of our industry. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities. |
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Continued economic weakness may result in increased delinquencies and defaults in our loan portfolio, which would adversely affect our operating results. |
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The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. The level of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates which may, in turn, impact the reliability of the process. |
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Competition in our industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions. |
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We may be required to pay significantly higher FDIC premiums because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. |
Recently enacted legislation and other measures undertaken by the U.S. Treasury, the Federal Reserve and other governmental agencies may not be successful in stabilizing the U.S. financial system or improving the housing markets. For further information, see “Business—Regulation.”
Current levels of market volatility are unprecedented.
The capital and credit markets have been experiencing volatility and disruption for more than a year. In recent months, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of market disruption and volatility continue or worsen, our ability to access capital and our business, financial condition and results of operations may be materially adversely affected.
Risks Related to our Business
Our business is subject to general economic risks that could adversely impact our results of operations and financial condition.
Our profitability depends significantly on economic conditions in the states of Washington, Oregon and Idaho.
Our success depends primarily on the general economic conditions of the States of Washington, Oregon and Idaho and the specific local markets in which we operate. Unlike larger national or other regional banks that are more geographically diversified, we provide banking and financial services to customers located primarily in these three states. The local economic conditions in our market areas have a significant impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. Adverse economic conditions unique to these Northwest markets could have a material adverse effect on our financial condition and results of operations. Further, a significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets,
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increases in credit costs or other factors could impact these state and local markets and, in turn, also have a material adverse effect on our financial condition and results of operations.
Beginning in 2007 and throughout 2008, the housing market in the United States has experienced significant adverse trends, including accelerated price depreciation in some markets and rising delinquency and default rates. As a result of these trends, we experienced an increase in delinquency and default rates particularly on construction and land loans in our primary market areas. These trends if they continue or worsen could cause further credit losses and loan loss provisioning and could adversely affect our earnings and financial condition.
Weakness in the Washington, Oregon or Idaho real estate markets has hurt our business. Our business activities and credit exposure are primarily concentrated in parts of Washington, Oregon and Idaho and, as of December 31, 2008, substantially all of our real estate loan portfolio consisted of loans secured by properties located in these states. While we did not participate in any sub-prime loan programs, our construction and land loan portfolios, our commercial and multifamily loan portfolios and certain of our other loans have been affected by the downturn in the residential real estate market. During 2008, evidence of this downturn became more apparent in certain of the Washington, Oregon and Idaho markets we serve. If real estate values continue to decline, especially in Washington, Oregon or Idaho, the collateral for our loans will provide less security. As a result, our ability to recover on defaulted loans by selling the underlying real estate will be diminished, and we would be more likely to suffer losses on defaulted loans. The events and conditions described in this risk factor could therefore have a material adverse effect on our business, results of operations and financial condition.
We may be required to make further increases in our provisions for loan losses and to charge off additional loans in the future, which could adversely affect our results of operations.
As noted in other sections of this Annual Report on Form 10-K, we are experiencing increasing loan delinquencies and credit losses and we substantially increased our provision for loan losses in 2008, which adversely affected our results of operations. With the exception of residential construction and land development loans, non performing loans and assets generally reflect unique operating difficulties for individual borrowers rather than weakness in the overall economy of the Pacific Northwest; however, more recently the deteriorating pace of economic activity has become a significant contributing factor. Slower sales and excess inventory in certain housing markets have been the primary cause of the increase in delinquencies and foreclosures for residential construction and land development loans, which represent 82% of our non-performing assets at December 31, 2008. Further, our portfolio is concentrated in construction and land loans and commercial and multifamily loans, all of which have a higher risk of loss than residential mortgage loans. If current trends in the housing and real estate markets continue, we expect that we will continue to experience higher than normal delinquencies and credit losses. Moreover, if a prolonged recession occurs we expect that it could severely impact economic conditions in our market areas and that we could experience significantly higher delinquencies and credit losses. As a result, we may be required to make further increases in our provision for loan losses and to charge off additional loans in the future, which could adversely affect our results of operations.
We could face future assessments to guarantee public funds in Washington State.
We accept state and local municipality deposits from Washington State public treasurers as a Qualified Public Depositary under the State’s Public Deposit Protection Act administered by the Public Deposit Protection Commission. As of December 31, 2008 we held $303.7 million in Washington public funds. Washington law requires qualified banks and thrifts to pledge eligible collateral into a collateral pool administered by the Commission to mutually guarantee with other members of the pool against a loss of funds suffered by a public treasurer as a result of a failure by a member of the pool. Generally, our maximum liability should any member(s) of the collateral pool default on their uninsured public funds is limited to 10% of public funds we hold. We meet the minimum standards under the law and historically were only required to pledge collateral at least equal to 10% of the public deposits we hold. However, in February 2009, the Commission notified us that it was adjusting the collateral requirement for all Qualified Depositaries to 100%, effective July 1, 2009. We also accept public fund deposits in the State of Oregon subject to a similar arrangement, including a 10% collateralization requirement and loss sharing provision. As of December 31, 2008, we held $21.9 million in Oregon public funds.
In Washington, the “Bank Collateral Pool,” of which we are a member, had its first assessment for a loss of uninsured public deposits by any member of the pool in the first quarter of 2009 and our proportionate charge was $637,000, which we remitted and expensed in February 2009. While we have not had any such charges in Oregon, should additional bank failures occur in the future in either state, we may be liable for additional assessments. Legislation has been introduced in both states to address concerns raised by recent bank failures and the FDIC’s actions with respect to uninsured deposits of public entities. There can be no assurances that any changes in these programs will be beneficial to us.
Our ability to foreclose on single family home loans may be restricted.
New legislation proposed by Congress may give bankruptcy judges the power to reduce the increasing number of home foreclosures. Bankruptcy judges would be given the authority to restructure mortgages and reduce a borrower’s payments. Property owners would be allowed to keep their property while working out their debts. Further, the proposal provides for government subsidies for reducing a borrower’s interest rate, which a lender would have to match with its own money. This legislation would restrict our collection efforts on one-to-four family loans.
We may suffer losses in our loan portfolio despite our underwriting practices.
We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices. Although we believe that our underwriting criteria are appropriate for the various kinds of loans we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our allowance for loan losses.
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Risks specific to our participation in TARP.
Impact on executive compensation. As a participant in the Treasury’s CPP, we became subject to the executive compensation requirements under the CPP, the EESA and Treasury regulations. The requirements that apply to us and our named executive officers are as follows:
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incentive compensation arrangements may not encourage officers to take unnecessary risks; |
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any bonus or incentive compensation paid to an officer based on statements of earnings, gains or other criteria that are later proved to be materially inaccurate must be repaid (known as “clawback”); and |
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payments to an officer upon termination of employment may not exceed 2.99 times the officer’s base amount (as defined in Section 280G of the Internal Revenue Code of 1986) (known as a “golden parachute payment”). |
In addition, our Compensation Committee must identify the features in the named executive officers’ compensation arrangements that could lead officers to take unnecessary and excessive risks that could threaten Banner’s value. The Committee must also have a meeting at least annually with Banner’s senior risk officers to discuss and review the relationship between Banner’s risk management policies and practices and named executive officer compensation arrangements.
Banner became subject to the additional executive compensation limitations in connection with the enactment of ARRA on February 17, 2009. The ARRA amends, among other things, the TARP legislation by directing the Treasury Department to issue regulations implementing strict limitations on compensation paid or accrued by financial institutions, such as Banner, participating in the TARP. These limitations are to include:
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a prohibition on any compensation plan that would encourage manipulation of reported earnings; |
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subjecting bonus, incentive and retention payments made to the named executive officers and the next 20 most highly compensated employees to recovery if based on statements of earnings, revenues, gains or other criteria that are later found to be materially inaccurate; |
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a prohibition on making golden parachute payments (in any amount) to the named executive officers and the next five most highly compensated employees for departure from Banner other than compensation earned for services rendered or accrued benefits; and |
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a prohibition on paying bonus, incentive or retention compensation to the named executive officers, other than certain awards of long-term restricted stock or bonuses payable under existing employment agreements. |
In addition, the Board of Directors must adopt a policy regarding excessive or luxury expenditures, such as entertainment or events, office renovations and other activities that are not reasonable expenditures for staff development. Banner is also required to submit a “say-on-pay” proposal to a non-biding vote of shareholders at future annual meetings, whereby shareholders vote to approve the compensation of executives as disclosed pursuant to the executive compensation disclosures included in the proxy statement. This proposal will be presented at the 2009 Annual Meeting of Shareholders and is described in our proxy statement under “Proposal 2 – Advisory Vote on Executive Compensation.” In addition, there are a number of certifications by the Chief Executive Officer, Chief Financial Officer and Compensation Committee that will be required in connection with these regulations. Finally, the Treasury Department is required to review any bonus, retention awards or other compensation paid to our named executive officers and the next 20 most highly compensated employees prior to February 17, 2009 to determine if these payments were excessive and negotiate for the reimbursement of any such excess payments.
The ARRA directs the Treasury Department to issue regulations implementing the executive compensation restrictions. Many questions remain regarding the scope of the limitations and the requirements of the ARRA because none of the regulations mandated by the law have been issued to date. Pending the issuance of regulations, we are reviewing the requirements of the ARRA, its impact on compensation, and the effect of its requirements on our compensation arrangements. Actions required by the ARRA and consideration of competitive factors may include changes to the form and amount of compensation paid to our executive officers, including adjustments to base salaries, the reduction or elimination of bonus compensation, issuance of long-term restricted stock awards and modifications to existing agreements.
The securities purchase agreement between us and Treasury limits our ability to pay dividends on and repurchase our common stock. The securities purchase agreement between us and Treasury provides that prior to the earlier of (i) November 21, 2011 and (ii) the date on which all of the shares of the Series A Preferred Stock have been redeemed by us or transferred by Treasury to third parties, we may not, without the consent of Treasury, (a) increase the cash dividend on our common stock or (b) subject to limited exceptions, redeem, repurchase or otherwise acquire shares of our common stock or preferred stock other than the Series A Preferred Stock or trust preferred securities. In addition, we are unable to pay any dividends on our common stock unless we are current in our dividend payments on the Series A Preferred Stock. These restrictions, together with the potentially dilutive impact of the warrant described in the next risk factor, could have a negative effect on the value of our common stock. Moreover, holders of our common stock are entitled to receive dividends only when, as and if declared by our Board of Directors. Although we have historically paid cash dividends on our common stock, we are not required to do so and our Board of Directors could reduce or eliminate our common stock dividend in the future.
The Series A Preferred Stock impacts net income available to our common shareholders and earnings per common share and the warrant we issued to Treasury may be dilutive to holders of our common stock. The dividends declared on the Series A Preferred Stock will reduce the net income available to common shareholders and our earnings per common share. The Series A Preferred Stock will also receive preferential treatment in the event of liquidation, dissolution or winding up of Banner Corporation. Additionally, the ownership interest of the existing holders of our common stock will be diluted to the extent the warrant we issued to Treasury in conjunction with the sale of the Series A Preferred Stock is exercised. The shares of common stock underlying the warrant represent approximately 9.1% of the shares of our common stock outstanding as of December 31, 2008 (including the shares issuable upon exercise of the warrant in total shares outstanding). Although Treasury has agreed not to vote any of the shares of common stock it receives upon exercise of the warrant, a transferee of any portion of the warrant or of any shares of common stock acquired upon exercise of the warrant is not bound by this restriction.
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The federal banking laws limit the ownership of our common stock. Because we are a bank holding company, purchasers of 10% or more of our common stock may be required to obtain approvals under the Change in Bank Control Act of 1978, as amended, or Bank Holding Company Act of 1956, as amended (and in certain cases such approvals may be required at a lesser percentage of ownership). Specifically, under regulations adopted by the Federal Reserve, (a) any other bank holding company may be required to obtain the approval of the Federal Reserve to acquire or retain 5% or more of the common stock and (b) any person other than a bank holding company may be required to obtain the approval of the Federal Reserve to acquire or retain 10% or more of the common stock.
Recent negative developments in the financial industry and credit markets may continue to adversely impact our financial condition and results of operations.
Negative developments beginning in the latter half of 2007 in the sub-prime mortgage market and the securitization markets for such loans, together with other factors, have resulted in uncertainty in the financial markets in general and a related general economic downturn, throughout 2008 and into 2009. Many lending institutions, including us, have experienced substantial declines in the performance of their loans, including construction and land loans, multifamily loans, commercial loans and consumer loans. Moreover, competition among depository institutions for deposits and quality loans has increased significantly. In addition, the values of real estate collateral supporting many construction and land, commercial and multifamily and other commercial loans and home mortgages have declined and may continue to decline. Bank and bank holding company stock prices have been negatively affected, as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets compared to recent years. These conditions may have a material adverse effect on our financial condition and results of operations. In addition, as a result of the foregoing factors, there is a potential for new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations, including the expected issuance of formal enforcement orders. Further negative developments in the financial industry and the impact of new legislation in response to those developments could restrict our business operations, including our ability to originate or sell loans, and adversely impact our results of operations and financial condition.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or the terms of which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the Washington, Oregon or Idaho markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets. In addition, recent changes in the collateralization requirements and other provisions of the Washington and Oregon public funds deposit programs have changed the economic benefit associated with accepting public funds deposits, which may affect our need to utilize alternative sources of liquidity.
Uninsured deposits.
In the fourth quarter of 2008, the Federal Deposit Insurance Corporation increased the federal insurance of deposits accounts from $100,000 to $250,000 and provided 100% insurance coverage for noninterest-bearing transaction accounts for participating members, including Banner Bank. These increases in coverage, with the exception of IRA and certain retirement accounts are set to expire at the end of 2009. Congress is considering the extension of these deposit insurance increases. With the increase of bank failures, depositors are reviewing deposit relationships to maximize federal deposit insurance coverage. We may see outflows of uninsured deposits as customers restructure their banking relationships in setting up multiple accounts in multiple banks to maximize federal deposit insurance coverage.
We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise additional capital to support our business or to finance acquisitions, if any, or we may otherwise elect or to raise additional capital. In that regard, a number of financial institutions have recently raised considerable amounts of capital as a result of a deterioration in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic conditions, declines in real estate values and other factors. Should we be required by regulatory authorities to raise additional capital, we may seek to do so through the issuance of, among other things, our common stock or preferred stock, which could dilute your ownership interest in the Company.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. If we cannot raise additional capital when needed, it may have a material adverse effect on our financial condition, results of operations and prospects.
There are regulatory and contractual limitations that may limit or prevent us from paying dividends on the common stock and we may limit or eliminate our dividends to shareholders.
As a Washington corporation, under Washington law we are subject to restrictions on the payment of dividends. In addition, as a bank holding company, Banner Corporation’s ability to declare and pay dividends is dependent on certain federal regulatory considerations. Banner Corporation is an entity separate and distinct from its principal subsidiaries, Banner Bank and Islanders Bank, and derives substantially all of its revenue in the form of dividends from those subsidiaries. Accordingly, Banner Corporation is and will be dependent upon dividends from Banner Bank and Islanders Bank to pay the principal of and interest on its indebtedness, to satisfy its other cash needs and to pay dividends on its common stock. Banner Bank’s and Islanders Bank’s ability to pay dividends is subject to their ability to earn net income and to meet certain regulatory requirements. In the event the Banks are unable to pay dividends to Banner Corporation, it may not be able to service its debt, pay its
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obligations or pay dividends on Banner Corporation’s common stock. See “Regulations–Dividends” and Note 20 of the Notes to Consolidated Financial Statements. Also, Banner Corporation’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.
Banner Corporation is also subject to certain contractual restrictions that could prohibit it from declaring or paying dividends or making liquidation payments on its common stock. See “If we defer payments of interest on our outstanding junior subordinated debentures or if certain defaults relating to those debentures occur, we will be prohibited from declaring or paying dividends or distributions on, and from making liquidation payments with respect to, our common stock” below. For information regarding our participation in TARP and its effective on the payment of dividends, see “Risks specific to our participation in TARP” included herein.
Our board of directors regularly reviews our dividend policy in light of current economic conditions for financial institutions as well as our capital needs and any applicable contractual restrictions. On a quarterly basis, the board of directors determines whether a dividend will be paid and in what amount, if any.
If we defer payments of interest on our outstanding junior subordinated debentures or if certain defaults relating to those debentures occur, we will be prohibited from declaring or paying dividends or distributions on, and from making liquidation payments with respect to, our common stock.
We have issued a significant amount of junior subordinated debentures issued in connection with the sale of trust preferred securities by certain of our subsidiaries that are statutory business trusts. We have also guaranteed those trust preferred securities. There are currently six separate series of these junior subordinated debentures outstanding, each series having been issued under a separate indenture and with a separate guarantee. Each of these indentures, together with the related guarantee, prohibits us, subject to limited exceptions, from declaring or paying any dividends or distributions on, or redeeming, repurchasing, acquiring or making any liquidation payments with respect to, any of our capital stock at any time when (i) there shall have occurred and be continuing an event of default under such indenture or any event, act or condition that with notice or lapse of time or both would constitute an event of default under such indenture; or (ii) we are in default with respect to payment of any obligations under such guarantee; or (iii) we have deferred payment of interest on the junior subordinated debentures outstanding under that indenture. In that regard, we are entitled, at our option but subject to certain conditions, to defer payments of interest on the junior subordinated debentures of each series from time to time for up to five years.
Events of default under each indenture generally consist of our failure to pay interest on the junior subordinated debentures outstanding under that indenture under certain circumstances, our failure to pay any principal of or premium on such junior subordinated debentures when due, our failure to comply with certain covenants under such indenture, and certain events of bankruptcy, insolvency or liquidation relating to us or, in the case of certain of these indentures, any of our “significant subsidiaries” (as defined) that is a depository institution.
As a result of these provisions, if we were to elect to defer payments of interest on any series of junior subordinated debentures, or if any of the other events described in clause (i) or (ii) of the first paragraph of this risk factor were to occur, we would be prohibited from declaring or paying any dividends on the common stock, from repurchasing or otherwise acquiring any such common stock, and from making any payments to holders of common stock in the event of our liquidation, which would likely have a material adverse effect on the market value of our common stock. Moreover, without notice to or consent from the holders of our common stock, we may issue additional series of junior subordinated debentures in the future with terms similar to those of our existing junior subordinated debentures or enter into other financing agreements that limit our ability to purchase or to pay dividends or distributions on our capital stock, including our common stock.
The maturity and repricing characteristics of our assets and liabilities are mismatched and subject us to interest rate risk which could adversely affect our net earnings and economic value.
Our financial condition and operations are influenced significantly by general economic conditions, including the absolute level of interest rates as well as changes in interest rates and the slope of the yield curve. Our profitability is dependent to a large extent on our net interest income, which is the difference between the interest received from our interest-earning assets and the interest expense incurred on our interest-bearing liabilities. Significant changes in market interest rates or errors or misjudgments in our interest rate risk management procedures could have a material adverse effect on our net earnings and economic value. We currently believe that declining interest rates will adversely affect our near-term net earnings.
Our activities, like all financial institutions, inherently involve the assumption of interest rate risk. Interest rate risk is the risk that changes in market interest rates will have an adverse impact on our earnings and underlying economic value. Interest rate risk is determined by the maturity and repricing characteristics of our assets, liabilities and off-balance-sheet contracts. Interest rate risk is measured by the variability of financial performance and economic value resulting from changes in interest rates. Interest rate risk is the primary market risk affecting our financial performance.
We believe that the greatest source of interest rate risk to us results from the mismatch of maturities or repricing intervals for our rate sensitive assets, liabilities and off-balance-sheet contracts. This mismatch or gap is generally characterized by a substantially shorter maturity structure for interest-bearing liabilities than interest-earning assets. Additional interest rate risk results from mismatched repricing indices and formulae (basis risk and yield curve risk), and product caps and floors and early repayment or withdrawal provisions (option risk), which may be contractual or market driven, that are generally more favorable to customers than to us.
Our primary monitoring tool for assessing interest rate risk is asset/liability simulation modeling, which is designed to capture the dynamics of balance sheet, interest rate and spread movements and to quantify variations in net interest income and net market value of equity resulting from those movements under different rate environments. We update and prepare our simulation modeling at least quarterly for review by senior management and our directors. We believe the data and assumptions are realistic representations of our portfolio and possible outcomes under the various interest rate scenarios. Nonetheless, the interest rate sensitivity of our net interest income and net market value of our equity could
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vary substantially if different assumptions were used or if actual experience differs from the assumptions used and, as a result, our interest rate risk management strategies may prove to be inadequate.
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Market Risk and Asset/Liability Management” for additional information concerning interest rate risk.
Our loan portfolio includes loans with a higher risk of loss.
We originate construction and land loans, commercial and multifamily mortgage loans, commercial business loans, consumer loans, agricultural mortgage loans and agricultural loans as well as residential mortgage loans primarily within our market areas. Generally, the types of loans other than the residential mortgage loans have a higher risk of loss than the residential mortgage loans. We had approximately $3.4 billion outstanding in these types of higher risk loans at December 31, 2008 which is an amount relatively unchanged from December 31, 2007. These loans have greater credit risk than residential real estate for the reasons discussed under Item 1, “Business-Lending Activities” and for the following reasons:
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Construction and Land Loans. This type of lending contains the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost (including interest) of the project. If the estimate of construction cost proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value upon completion proves to be inaccurate, we may be confronted at, or prior to, the maturity of the loan with a project the value of which is insufficient to assure full repayment. In addition, speculative construction loans to a builder are often associated with homes that are not pre-sold, and thus pose a greater potential risk to us than construction loans to individuals on their personal residences. Loans on land under development or held for future construction also poses additional risk because of the lack of income being produced by the property and the potential illiquid nature of the security. These risks can be significantly impacted by supply and demand conditions. As a result, this type of lending often involves the disbursement of substantial funds with repayment dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. During the years ended December 31, 2006 and 2005, we significantly increased our origination of construction and land loans. While new construction loan originations decreased by approximately 35% in 2007 and an additional 59% in 2008, we continue to have a significant investment in construction loan balances. Most of our construction loans are for the construction of single family residences. |
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Commercial and Multifamily Mortgage Loans. These loans typically involve higher principal amounts than other types of loans, and repayment is dependent upon income being generated from the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions. Commercial and multifamily mortgage loans may expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans may not be sold as easily as residential real estate. In addition, many of our commercial and multifamily real estate loans are not fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment, which risk is exacerbated in this current economic environment. |
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Commercial Business Loans. Our commercial loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrowers’ cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Most often, this collateral is accounts receivable, inventory, equipment or real estate. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Other collateral securing loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. |
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Agricultural Loans. Repayment is dependent upon the successful operation of the business, which is greatly dependent on many things outside the control of either us or the borrowers. These factors include weather, commodity prices, and interest rates among others. Collateral securing these loans may be difficult to evaluate, manage or liquidate and may not provide an adequate source of repayment. |
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Consumer Loans. Consumer loans (such as personal lines of credit) are collateralized, if at all, with assets that may not provide an adequate source of payment of the loan due to depreciation, damage, or loss. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. |
For additional information, see Item I, “Business—Lending” and Item 7, “Management’s Discussion of Financial Condition and Results of Operations—Asset Quality.”
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could be reduced.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and the loss and delinquency experience, and evaluate economic conditions. Management recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner. If our assumptions are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for additions to our allowance through an increase in the provision for loan losses. Material additions to the allowance or increases in our provision for loan losses could have a material
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adverse effect on our financial condition and results of operations. Our allowance for loan losses was 1.90% of total loans, and 40% of nonperforming loans, less loans in process, at December 31, 2008.
In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our financial condition and results of operations.
We may face risks with respect to our recent acquisitions and future expansion.
We completed three acquisitions in 2007 and may acquire other financial institutions or parts of those institutions in the future. We also plan to continue to engage in additional de novo branch expansion although at a slower pace than in 2007. We may also consider and enter into new lines of business or offer new products or services. These activities involve a number of risks, including:
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the time and costs associated with identifying and evaluating potential acquisitions and merger partners; |
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the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution may not be accurate; |
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the time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion; |
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our ability to finance an acquisition and possible dilution to our existing shareholders; |
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the diversion of our management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combining businesses; |
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entry into new markets where we lack experience; |
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the introduction of new products and services into our business; |
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the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and |
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the risk of loss of key employees and customers. |
We may incur substantial costs to acquire other companies, businesses or assets in the future, and the results of any such acquisition may not meet our expectations or enhance our results of operations. We may also incur substantial expenses integrating the operations of any acquired company, business or assets with our existing operations. In that regard, although we have no current integration plans, Islanders Bank, which we acquired in 2007, is currently utilizing the same accounting and financial systems that it had in place prior to the time of the acquisition, and we will incur expenses, which could be substantial, should we choose to migrate Islanders Bank to our accounting and financial systems. Also, we may issue equity securities, including common stock and securities convertible into shares of our common stock in connection with future acquisitions, which could cause ownership and economic dilution to our current shareholders and to investors purchasing common stock.
If we are not able to achieve profitability on new branches it will negatively affect our results of operations.
We have expanded our presence throughout the market area, and although the pace of our de novo branch expansion slowed considerably in 2008, we intend to pursue further expansion by opening additional new branches. The success of our expansion strategy will depend on whether the revenue that we generate from the new branches will offset the increased expenses resulting from operating these branches. Largely as a result of this de novo branching strategy, our operating expenses have increased significantly, adversely affecting our operating efficiency. As a result, the efficiency ratio, which is the ratio of non-interest expense to net interest income and other income, is higher than many of our competitor institutions. We expect that it may take a period of time before certain of these branches can become profitable, especially in areas in which we do not have an established presence and it is possible that some of these branches may not achieve profitability. As a result, the expense of operating these branches may negatively affect our results of operations.
If external funds were not available, this could adversely impact our growth and prospects.
We rely on deposits and advances from the FHLB of Seattle and other borrowings to fund our operations. Although we have historically been able to replace maturing deposits and advances if desired, we might not be able to replace such funds in the future if our financial condition or the financial condition of the FHLB of Seattle or market conditions were to change. While we consider such sources of funds adequate for our liquidity needs, we may be compelled or elect to seek additional sources of financing in the future. Likewise, we may seek additional debt in the future to achieve our long-term business objectives, in connection with future acquisitions or for other reasons. Additional borrowings, if sought, may not be available to us or, if available, may not be on reasonable terms. If additional financing sources are unavailable or not available on reasonable terms, our financial condition, results of operations and future prospects could be materially adversely affected.
Our deposit insurance assessments will increase substantially, which will adversely affect our profits.
Our FDIC deposit insurance assessments expense for the year ended December 31, 2008 was $4.0 million. Deposit insurance assessments will increase in 2009 as a result of recent strains on the FDIC deposit insurance fund resulting from the cost of recent bank failures and an increase in the number of banks likely to fail over the next few years. The current rates for FDIC assessments range from 5 to 43 basis points, depending on the financial health of the insured institution. On December 16, 2008, the FDIC issued a final rule increasing that assessment range to 12 to 50 basis points for the first quarter of 2009. For the remainder of 2009, the FDIC has proposed a range of 10 to 45 basis points for institutions that do not trigger the brokered deposits adjustment, the secured liability adjustment, or the unsecured debt adjustment. For institutions that are subject to those adjustments, the FDIC proposes rate assessments in the range of eight to 77.5 basis points. In this regard, the brokered deposit adjustment can range from 0 to ten basis points, the secured liability adjustment (which includes, among others, FHLB advances, securities sold under repurchase agreements, secured federal funds purchased, and certain other secured borrowings) can range from 0 to 22.5 basis points, and the unsecured debt adjustment can range from minus two to 0 basis points. The FDIC has stated that it may need to set a higher base rate schedule at the time of the issuance of its final assessment rate rule, depending upon the information available at that time including, without
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limitation, on its updated bank failure and loss projections. The FDIC’s proposal would continue to allow it to adopt actual assessment rates that are higher or lower than the total base assessment rates without the necessity of further notice and comment rulemaking, although this power is subject to several limitations.
On February 27, 2009, the Federal Deposit Insurance Corporation adopted an interim rule imposing a 20 basis point emergency special assessment on Federal Deposit Insurance Corporation-insured institutions on June 30, 2009. The assessment is to be collected on September 30, 2009. The interim rule would also permit the Federal Deposit Insurance Corporation to impose an emergency special assessment after June 30, 2009, of up to 10 basis points if necessary to maintain public confidence in federal deposit insurance. It is expected that our assessment for the initial 20 basis point charge provided under this new interim rule would be approximately $7.5 million and no assurances can be made with respect to possible future assessments.
Strong competition within our market areas may limit our growth and adversely affect our operating results.
Competition in the banking and financial services industry is intense. We compete in our market areas with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of these competitors have substantially greater resources and lending limits than we do, have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do. Our results of operations depend upon our continued ability to successfully compete in our market areas. The greater resources and deposit and loan products offered by some of our competitors may limit our ability to increase or maintain our interest-earning assets. In that regard, the negative economic conditions that began in 2007 and that have continued in 2008 have significantly reduced our origination of new loans, and we cannot assure you that our total loans or assets will increase or not decline in 2009. For additional information see Item 1, “Business—Competition.”
The loss of key members of our senior management team could adversely affect our business.
We believe that our success depends largely on the efforts and abilities of our senior management. Their experience and industry contacts significantly benefit us. The competition for qualified personnel in the financial services industry is intense, and the loss of any of our key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect our business.
We are subject to extensive government regulation which could adversely affect our business.
Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Because our business is highly regulated, the laws, rules and regulations applicable to it are subject to regular modification and change. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in this regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations or otherwise materially and adversely affect our business, financial condition, prospects or profitability. See “Item 1. Business – Regulation – Banner Bank and Islanders Bank.”
The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.
The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency, have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under the guidance, a financial institution actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors, (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multifamily and non-farm residential properties, loans for construction, land development and other land and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. Management should also employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. While we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with the guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance which could result in additional costs to us.
Our business is affected from time to time by federal and state laws and regulations relating to hazardous substances.
Under the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), owners and operators of properties containing hazardous substances may be liable for the costs of cleaning up the substances. CERCLA and similar state laws can affect us both as an owner of branches and other properties used in our business and as a lender holding a security interest in property which is found to contain hazardous substances. While CERCLA contains an exemption for holders of security interests, the exemption is not available if the holder participates in the management of a property, and some courts have broadly defined what constitutes participation in management of property. Moreover, CERCLA and similar state statutes can affect our decision whether or not to foreclose on a property. Before foreclosing on commercial real estate, our general policy is to obtain an environmental report, thereby increasing the costs of foreclosure. In addition, the existence of hazardous substances on a property securing a troubled loan may cause us to elect not to foreclose on the property, thereby reducing our flexibility in handling the loan.
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Our information systems may experience an interruption or breach in security.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
We rely on dividends from subsidiaries for most of our revenue.
Banner Corporation is a separate and distinct legal entity from its subsidiaries. We receive substantially all of our revenue from dividends from our subsidiaries. These dividends are the principal source of funds to pay dividends on our common stock and interest and principal on our debt. Various federal and/or state laws and regulations limit the amount of dividends that Banner Bank, Islanders Bank and certain non-bank subsidiaries may pay to Banner Corporation. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event the Banks are unable to pay dividends to Banner Corporation, we may not be able to service debt, pay obligations or pay dividends on Banner Corporation’s common stock. The inability to receive dividends from the Banks could have a material adverse effect on our business, financial condition and results of operations. See Item 1, “Business-Regulation.”
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud, and, as a result, investors and depositors could lose confidence in our financial reporting, which could adversely affect our business, the trading price of our stock and our ability to attract additional deposits.
In connection with the enactment of the Sarbanes-Oxley Act of 2002 (“Act”) and the implementation of the rules and regulations promulgated by the SEC, we document and evaluate our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Act. This requires us to prepare an annual management report on our internal control over financial reporting, including among other matters, management’s assessment of the effectiveness of internal control over financial reporting and an attestation report by our independent auditors addressing these assessments. If we fail to identify and correct any significant deficiencies in the design or operating effectiveness of our internal control over financial reporting or fail to prevent fraud, current and potential shareholders and depositors could lose confidence in our internal controls and financial reporting, which could adversely affect our business, financial condition and results of operations, the trading price of our stock and our ability to attract additional deposits.
Item 1B – Unresolved Staff Comments
None.
Banner Corporation maintains its administrative offices and main branch office, which is owned by us, in Walla Walla, Washington. In total, as of December 31, 2008, we have 86 branch offices located in Washington, Oregon and Idaho. Three of those 86 are Islanders Bank branches and 83 are Banner Bank branches. Sixty-two branches are located in Washington, fifteen in Oregon and nine in Idaho. Of those offices, approximately half are owned and the other half are leased facilities. We also have ten leased locations for loan production offices spread throughout the same three-state area. The lease terms for our branch and loan production offices are not individually material. Lease expirations range from one to 25 years. Administrative support offices are primarily in Washington, where we have 11 facilities, of which we own four and lease seven. Additionally we have one leased administrative support office in Idaho and two in Oregon. In the opinion of management, all properties are adequately covered by insurance, are in a good state of repair and are appropriately designed for their present and future use.
In the normal course of business, we have various legal proceedings and other contingent matters outstanding. These proceedings and the associated legal claims are often contested and the outcome of individual matters is not always predictable. These claims and counter-claims typically arise during the course of collection efforts on problem loans or with respect to action to enforce liens on properties in which we hold a security interest. We are not a party to any pending legal proceedings that they believe would have a material adverse effect on our financial condition or operations.
Item 4 – Submission of Matters to a Vote of Security Holders
None.
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Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Stock Listing
Our common stock is traded on The Nasdaq Global Select Market under the symbol “BANR” and newspaper stock tables list us as “Banner Corp.” Stockholders of record at December 31, 2008 totaled 1,384 based upon securities position listings furnished to us by our transfer agent. This total does not reflect the number of persons or entities who hold stock in nominee or “street” name through various brokerage firms. The following tables show the reported high and low closing sale prices of our common stock and dividends declared for the years ended December 31, 2008, 2007 and 2006.
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Year Ended December 31, 2008 |
|
High |
|
Low |
|
Cash |
|
|||
|
|
|
|
|
|||||||
|
First quarter |
|
$ |
28.45 |
|
$ |
20.44 |
|
$ |
0.20 |
|
|
Second quarter |
|
|
24.60 |
|
|
8.86 |
|
|
0.20 |
|
|
Third quarter |
|
|
17.51 |
|
|
7.18 |
|
|
0.05 |
|
|
Fourth quarter |
|
|
13.00 |
|
|
8.50 |
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
High |
|
Low |
|
Cash |
|
|||
|
|
|
|
|
|||||||
|
First quarter |
|
$ |
45.06 |
|
$ |
39.38 |
|
$ |
0.19 |
|
|
Second quarter |
|
|
41.68 |
|
|
34.06 |
|
|
0.19 |
|
|
Third quarter |
|
|
36.39 |
|
|
28.37 |
|
|
0.19 |
|
|
Fourth quarter |
|
|
35.83 |
|
|
27.38 |
|
|
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
High |
|
Low |
|
Cash |
|
|||
|
|
|
|
|
|||||||
|
First quarter |
|
$ |
35.16 |
|
$ |
31.05 |
|
$ |
0.18 |
|
|
Second quarter |
|
|
39.62 |
|
|
33.50 |
|
|
0.18 |
|
|
Third quarter |
|
|
41.80 |
|
|
37.59 |
|
|
0.18 |
|
|
Fourth quarter |
|
|
46.63 |
|
|
39.58 |
|
|
0.19 |
|
Dividends
Dividend payments by us depend primarily on dividends we receive from Banner Bank and Islanders Bank. Under federal regulations, the dollar amount of dividends the Banks may pay depends upon their capital position and recent net income. Generally, if the Bank satisfies its regulatory capital requirements, it may make dividend payments up to the limits prescribed under state law and FDIC regulations. Under Washington law, we are prohibited from paying a dividend if, as a result of its payment, we would be unable to pay our debts as they become due in the normal course of business, or if our total liabilities would exceed our total assets. Our ability to pay dividends is also limited by contractual restrictions under the agreements related to our subordinated debentures (issued in connection with trust preferred securities) and our participation in Treasury’s CPP.
Issuer Purchases of Equity Securities
The following table sets forth information for the three months ended December 31, 2008 with respect to repurchases of our outstanding common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
Average Price Paid |
|
Total Number of |
|
Maximum |
|
|||||||
|
|
|
|
||||||||||||||
|
|
|
|
||||||||||||||
|
Period |
|
|
||||||||||||||
|
|
|
|||||||||||||||
|
Beginning |
|
Ending |
|
|
||||||||||||
|
|
|
|
|
|
||||||||||||
|
October 1, 2008 |
|
|
October 31, 2008 |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
November 1, 2008 |
|
|
November 30, 2008 |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
December 1, 2008 |
|
|
December 31, 2008 |
|
|
— |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Total |
|
|
|
|
|
— |
|
$ |
|
|
|
— |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
(1) |
On July 26, 2007, our Board of Directors authorized the repurchase of up to 750,000 shares of our outstanding common stock over the next twelve months. The Company purchased 663,600 shares pursuant to that program, which expired on July 26, 2008. |
30
Equity Compensation Plan Information
The equity compensation plan information presented under Part III, Item 12 of this report is incorporated herein by reference.
Performance Graph. The following graph compares the cumulative total shareholder return on Banner Corporation common stock with the cumulative total return on the Nasdaq (U.S. Stock) Index, a peer group of the SNL $1 Billion to $5 Billion Asset Bank Index and a peer group of the SNL Nasdaq Bank Index. Total return assumes the reinvestment of all dividends.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended |
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|||||||||||||||||
|
Index |
|
12/31/03 |
|
12/31/04 |
|
12/31/05 |
|
12/31/06 |
|
12/31/07 |
|
12/31/08 |
|
||||||
|
|
|||||||||||||||||||
|
Banner Corporation |
|
|
100.00 |
|
|
126.75 |
|
|
129.96 |
|
|
188.10 |
|
|
124.64 |
|
|
42.47 |
|
|
NASDAQ Composite |
|
|
100.00 |
|
|
108.59 |
|
|
110.08 |
|
|
120.56 |
|
|
132.39 |
|
|
78.72 |
|
|
SNL Bank $1B-$5B |
|
|
100.00 |
|
|
123.42 |
|
|
121.31 |
|
|
140.38 |
|
|
102.26 |
|
|
84.81 |
|
|
SNL Bank NASDAQ |
|
|
100.00 |
|
|
114.61 |
|
|
111.12 |
|
|
124.75 |
|
|
97.94 |
|
|
71.13 |
|
*Assumes $100 invested in Company common stock and each index at the close of business on December 31, 2003 and that all dividends were reinvested. Information for the graph was provided by SNL Financial L. C. © 2009.
31
Item 6 – Selected Financial Data
The following condensed consolidated statements of operations and financial condition and selected performance ratios as of December 31, 2008, 2007, 2006, 2005, and 2004 and for the years then ended have been derived from our audited consolidated financial statements. Certain information for prior years has been restated in accordance with the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 108 which addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. See Note 2 to the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K.
The information below is qualified in its entirety by the detailed information included elsewhere herein and should be read along with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statement and Supplementary Data.”
FINANCIAL CONDITION DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31 |
|||||||||||||
|
|
|
||||||||||||||
|
(In thousands) |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|||||
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
Restated |
|
Restated |
|
Restated |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total assets |
|
$ |
4,584,368 |
|
$ |
4,492,658 |
|
$ |
3,495,566 |
|
$ |
3,040,555 |
|
$ |
2,897,067 |
|
Loans receivable, net |
|
|
3,886,211 |
|
|
3,763,790 |
|
|
2,930,455 |
|
|
2,408,833 |
|
|
2,063,238 |
|
Cash and securities (1) |
|
|
419,718 |
|
|
354,809 |
|
|
347,410 |
|
|
427,681 |
|
|
649,516 |
|
Deposits |
|
|
3,778,850 |
|
|
3,620,593 |
|
|
2,794,592 |
|
|
2,323,313 |
|
|
1,925,909 |
|
Borrowings |
|
|
318,421 |
|
|
372,039 |
|
|
404,330 |
|
|
459,821 |
|
|
723,842 |
|
Common stockholders’ equity |
|
|
317,433 |
|
|
437,846 |
|
|
250,607 |
|
|
220,857 |
|
|
214,924 |
|
Stockholders’ equity |
|
$ |
433,348 |
|
$ |
437,846 |
|
$ |
250,607 |
|
$ |
220,857 |
|
$ |
214,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding |
|
|
17,152 |
|
|
16,266 |
|
|
12,314 |
|
|
12,082 |
|
|
11,857 |
|
Shares outstanding excluding unearned, restricted shares held in ESOP |
|
|
16,912 |
|
|
16,026 |
|
|
12,074 |
|
|
11,782 |
|
|
11,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31 |
|||||||||||||
|
|
|
||||||||||||||
|
(In thousands) |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|||||
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
Restated |
|
Restated |
|
Restated |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
272,898 |
|
$ |
295,309 |
|
$ |
243,019 |
|
$ |
190,160 |
|
$ |
156,230 |
|
Interest expense |
|
|
125,345 |
|
|
145,690 |
|
|
116,114 |
|
|
81,377 |
|
|
59,915 |
|
|
|
|
|
|
|
||||||||||
|
Net interest income before provision loan losses |
|
|
147,553 |
|
|
149,619 |
|
|
126,905 |
|
|
108,783 |
|
|
96,315 |
|
Provision for loan losses |
|
|
62,500 |
|
|
5,900 |
|
|
5,500 |
|
|
4,903 |
|
|
5,644 |
|
|
|
|
|
|
|
||||||||||
|
Net interest income |
|
|
85,053 |
|
|
143,719 |
|
|
121,405 |
|
|
103,880 |
|
|
90,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking operations |
|
|
6,045 |
|
|
6,270 |
|
|
5,824 |
|
|
5,647 |
|
|
5,522 |
|
Gain (loss) on sale of securities |
|
|
— |
|
|
— |
|
|
65 |
|
|
(7,302 |
) |
|
141 |
|
Net increase in valuation of financial instruments carried at fair value |
|
|
9,156 |
|
|
11,574 |
|
|
— |
|
|
— |
|
|
— |
|
Other operating income |
|
|
24,688 |
|
|
20,739 |
|
|
14,686 |
|
|
12,199 |
|
|
11,305 |
|
Insurance recovery, net proceeds |
|
|
— |
|
|
— |
|
|
(5,350 |
) |
|
— |
|
|
— |
|
FHLB prepayment penalties |
|
|
— |
|
|
— |
|
|
— |
|
|
6,077 |
|
|
— |
|
Goodwill write-off |
|
|
121,121 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Other operating expenses |
|
|
138,899 |
|
|
127,489 |
|
|
99,731 |
|
|
91,471 |
|
|
79,714 |
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income tax (benefit) expense |
|
|
(135,078 |
) |
|
54,813 |
|
|
47,599 |
|
|
16,876 |
|
|
27,925 |
|
Provision for income tax (benefit) expense |
|
|
(7,085 |
) |
|
17,890 |
|
|
16,055 |
|
|
4,896 |
|
|
8,911 |
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(127,993 |
) |
$ |
36,923 |
|
$ |
31,544 |
|
$ |
11,980 |
|
$ |
19,014 |
|
|
|
|
|
|
|
||||||||||
32
PER COMMON SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
At or for the Years Ended December 31 |
|
||||||||||||||||
|
|
|
|
|||||||||||||||||
|
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
||||||||
|
|
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|
|
|
Restated |
|
Restated |
|
Restated |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Basic |
|
$ |
(7.94 |
) |
$ |
2.53 |
|
$ |
2.65 |
|
$ |
1.04 |
|
$ |
1.71 |
|
|||
|
Diluted |
|
|
(7.94 |
) |
|
2.49 |
|
|
2.58 |
|
|
1.00 |
|
|
1.62 |
|
|||
|
Common stockholders’ equity per share (2) |
|
|
18.77 |
|
|
27.32 |
|
|
20.76 |
|
|
18.74 |
|
|
18.72 |
|
|||
|
Common stockholders’ tangible equity per share (2) |
|
|
17.96 |
|
|
18.73 |
|
|
17.75 |
|
|
15.67 |
|
|
15.53 |
|
|||
|
Cash dividends |
|
|
0.50 |
|
|
0.77 |
|
|
0.73 |
|
|
0.69 |
|
|
0.65 |
|
|||
|
Dividend payout ratio (basic) |
|
|
(6.30 |
)% |
|
30.43 |
% |
|
27.55 |
% |
|
66.35 |
% |
|
38.01 |
% |
|||
|
Dividend payout ratio (diluted) |
|
|
(6.30 |
)% |
|
30.92 |
% |
|
28.29 |
% |
|
69.00 |
% |
|
40.12 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
(footnotes follow tables) |
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
OTHER DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
At December 31 |
|
||||||||||||||||
|
|
|
|
|||||||||||||||||
|
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
||||||||
|
|
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Full time equivalent employees |
|
|
1,095 |
|
|
1,139 |
|
|
898 |
|
|
856 |
|
|
778 |
|
|||
|
Number of branches |
|
|
86 |
|
|
84 |
|
|
58 |
|
|
57 |
|
|
49 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
KEY FINANCIAL RATIOS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
At or For the Years Ended December 31 |
|
||||||||||||||||
|
|
|
|
|||||||||||||||||
|
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
||||||||
|
|
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|
|
|
Restated |
|
Restated |
|
Restated |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Performance Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Return on average assets (3) |
|
|
(2.78 |
)% |
|
0.91 |
% |
|
0.96 |
% |
|
0.39 |
% |
|
0.69 |
% |
|||
|
Return on average common equity (4) |
|
|
(30.90 |
) |
|
10.07 |
|
|
13.29 |
|
|
5.43 |
|
|
9.10 |
|
|||
|
Average common equity to average assets |
|
|
8.99 |
|
|
9.06 |
|
|
7.19 |
|
|
7.23 |
|
|
7.59 |
|
|||
|
Interest rate spread (5) |
|
|
3.35 |
|
|
3.85 |
|
|
3.97 |
|
|
3.72 |
|
|
3.65 |
|
|||
|
Net interest margin (6) |
|
|
3.45 |
|
|
3.99 |
|
|
4.08 |
|
|
3.79 |
|
|
3.71 |
|
|||
|
Non-interest income to average assets |
|
|
0.87 |
|
|
0.95 |
|
|
0.62 |
|
|
0.35 |
|
|
0.62 |
|
|||
|
Non-interest expense to average assets |
|
|
5.65 |
|
|
3.15 |
|
|
2.86 |
|
|
3.20 |
|
|
2.90 |
|
|||
|
Efficiency ratio (7) |
|
|
138.72 |
|
|
67.74 |
|
|
64.00 |
|
|
81.75 |
|
|
70.37 |
|
|||
|
Average interest-earning assets to interest-bearing liabilities |
|
|
103.21 |
|
|
103.52 |
|
|
102.81 |
|
|
102.66 |
|
|
102.92 |
|
|||
|
|
|
|
|
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Selected Financial Ratios: |
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Allowance for loan losses as a percent of total loans at end of period |
|
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1.90 |
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1.20 |
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1.20 |
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1.27 |
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1.41 |
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Net charge-offs as a percent of average outstanding loans during the period |
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0.84 |
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0.08 |
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0.03 |
|
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0.16 |
|
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0.11 |
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Non-performing assets as a percent of total assets |
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4.56 |
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0.99 |
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0.43 |
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0.36 |
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0.60 |
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Allowance for loan losses as a percent of non-performing loans (8) |
|
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0.40 |
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1.08 |
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2.53 |
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2.96 |
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1.86 |
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Tangible common stockholders’ equity to tangible assets |
|
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6.64 |
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6.89 |
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6.20 |
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6.14 |
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6.24 |
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Consolidated Capital Ratios: |
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Total capital to risk-weighted assets |
|
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13.11 |
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11.72 |
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11.80 |
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12.29 |
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|
12.24 |
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Tier 1 capital to risk-weighted assets |
|
|
11.86 |
|
|
10.58 |
|
|
9.53 |
|
|
10.17 |
|
|
10.94 |
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Tier 1 leverage capital to average assets |
|
|
10.32 |
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10.04 |
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8.76 |
|
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8.59 |
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|
8.93 |
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(1) |
Includes securities available for sale and held to maturity. |
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(2) |
Calculated using shares outstanding excluding unearned restricted shares held in ESOP. |
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(3) |
Net income divided by average assets |
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(4) |
Net income divided by average equity |
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(5) |
Difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. |
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(6) |
Net interest income before provision for loan losses as a percent of average interest-earning assets. |
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(7) |
Other operating expenses divided by the total of net interest income before loan losses and other operating income (non-interest income). |
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(8) |
Non-performing loans consist of nonaccrual and 90 days past due loans. |
33
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of results of operations is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K.
We are a bank holding company incorporated in the State of Washington and own two subsidiary banks, Banner Bank and, subsequent to May 1, 2007, Islanders Bank. Banner Bank is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington and, as of December 31, 2008, its 83 branch offices and 10 loan production offices located in Washington, Oregon and Idaho. Islanders Bank is also a Washington-chartered commercial bank and conducts its business from three locations in San Juan County, Washington. As of December 31, 2008, we had total consolidated assets of $4.6 billion, total loans of $3.9 billion, total deposits of $3.8 billion and total stockholders’ equity of $433 million.
Banner Bank is a regional bank which offers a wide variety of commercial banking services and financial products to individuals, businesses and public sector entities in its primary market areas. Islanders Bank is a community bank which offers similar banking services to individuals, businesses and public entities located in the San Juan Islands. The Banks’ primary business is that of traditional banking institutions, accepting deposits and originating loans in locations surrounding their offices in portions of Washington, Oregon and Idaho. Banner Bank is also an active participant in the secondary market, engaging in mortgage banking operations largely through the origination and sale of one- to four-family residential loans. Lending activities include commercial business and commercial real estate loans, agriculture business loans, construction and land development loans, one- to four-family residential loans and consumer loans. (See Item 1—Business.)
Branch expansion has been a significant element in our strategy to grow loans, deposits and customer relationships. Over the past several years, we have invested significantly in expanding our branch and distributions systems with a primary emphasis on expanding our presence in the four largest areas of commerce in the Northwest: the Puget Sound region of Washington and the greater Boise, Idaho, Portland, Oregon, and Spokane, Washington markets. As a result of our franchise expansion, we have added 18 new branches through acquisitions, opened 23 new branches and relocated eight others since March, 2004. In 2007 alone, we opened ten branches, relocated five others and closed three acquisitions; and in 2008, we opened two additional branches. In large part because of this expansion activity, we have experienced loan growth of $1.8 billion and deposit growth of $1.9 billion over the last four-year period. The acquisitions and new branches have increased our presence within desirable markets and allow us to better serve existing and future customers. This emphasis on growth has resulted in an elevated level of operating expenses; however, we believe that over time these new branches should help improve profitability by providing lower cost core deposits which will allow us to proportionately reduce higher cost borrowings as a source of funds. We have reached our goal in terms of the number of branches we believe are needed to generate deposit growth sufficient to fund our expected loan growth and produce significant fee generating opportunities. As a result, we plan a more moderate pace of branch expansion going forward.
We completed the acquisitions of F&M Bank and San Juan Financial Holding Company effective May 1, 2007, and NCW Community Bank effective October 10, 2007. SJFHC was merged into Banner and its wholly owned subsidiary, Islanders Bank, has continued operations as a subsidiary of Banner. F&M and NCW were merged into Banner Bank upon acquisition and now operate under the Banner Bank name. The financial results for the year ended December 31, 2008 include the assets, liabilities and results of operations for all three of the recently acquired companies. The financial results for the year ended December 31, 2007 include the assets, liabilities and results of operations for the three acquired companies from their respective acquisition dates.
Deteriorating economic conditions and ongoing strains in the financial and housing markets which accelerated throughout 2008 presented an unusually challenging environment for banks and their holding companies, including Banner Corporation. This was particularly evident in our need to provide for credit losses at a significantly higher level than our historical experience. We had a net loss of $128.0 million, or $(7.94) per diluted share available to common shareholders, for the year ended December 31, 2008, compared to net income of $36.9 million, or $2.49 per diluted share, for the year ended December 31, 2007. The provision for loan losses was $62.5 million for the year ended December 31, 2008, an increase of $56.6 million compared to the year ended December 31, 2007. The increase in the provision for loan losses in the current year reflects material increases in delinquencies, non-performing loans and net charge-offs, particularly for loans for the construction of one- to four-family homes and for acquisition and development of land for residential properties. The current year’s results were also adversely affected by a $121.1 million write-off of goodwill, as well as by a substantially narrower net interest margin.
The challenging environment and faltering equity markets also caused us to take a hard look at the carrying value of goodwill and to conclude that it was appropriate to record a non-cash write-off of that asset. At least annually, and more often if appropriate, all companies are required to determine the value of goodwill as an asset. We initially recorded a $50.0 million impairment charge during the quarter ended June 30, 2008. We subsequently recorded an additional $71.1 million charge in the quarter ended December 31, 2008, resulting in the complete elimination of goodwill from our balance sheet and a total $121.1 million goodwill write-off for the year ended December 31, 2008. While there is currently a great deal of uncertainty with respect to the market valuation of certain assets, declining stock prices for financial service companies clearly indicate that the value of goodwill for the industry has been severely diminished. As a result of the significant reduction in most banks’ stock prices, including BANR’s, and the lack of merger transactions in recent months, measuring the value of goodwill has become difficult and imprecise at best; however, we concluded that continuing to record it as an asset would be inappropriate. The write-off of goodwill was a non-cash charge that did not affect our liquidity or operations. Also, since goodwill is excluded from regulatory capital, the impairment charge (which was not deductable for tax purposes) did not have an adverse effect on the regulatory capital ratios of the Company or either of our subsidiary banks, each of which continues to remain “well capitalized” under the regulatory requirements. (See Note 20 of Notes to the Consolidated Financial Statements.)
34
Our results for the year ended December 31, 2008 included a net gain of $9.2 million ($5.9 million after tax), compared to a net gain of $11.6 million ($7.4 million after tax) in the year ended December 31, 2007, for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value in accordance with the adoption of Statement of Financial Accounting Standards (SFAS) Nos. 157 and 159. While the net effect of these adjustments was a gain, the valuation adjustments of certain individual assets and liabilities were substantial, particularly for those reflecting changes in the fair value of bank-issued trust preferred securities which we own, including collateralized debt obligations funded by such securities, and the junior subordinated debentures which we have issued. Unfortunately, the market for these securities has been disrupted to the point that there is no meaningful trading activity occurring nor reliable market quotations available. Nonetheless, it is apparent that the values have declined appreciably and our results of operations reflect our best estimates of changes in the value of these assets and liabilities. (See Note 24 of Notes to the Consolidated Financial Statements for additional information with respect to fair value adjustments.)
For the year ended December 31, 2008, fair value adjustments were also significantly affected by a reduction in the fair value of our investment in Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) equity securities, which were essentially rendered valueless subsequent to the U.S. Treasury’s action in September 2008 placing those institutions into conservatorship under the authority of the Federal Housing Finance Agency. As of June 30, 2008, we owned both common and preferred equity securities issued by Fannie Mae and Freddie Mac with a combined book value of $6.9 million. At December 31, 2008, the fair value of these securities had declined to approximately $227,000. The decrease in the value of these securities was included in the $9.2 million ($5.9 million after tax) net gain in fair value adjustments recorded for the year ended December 31, 2008 (see Note 24, Fair Value Accounting and Measurement). We do not anticipate a meaningful recovery with respect to the valuation of the Fannie Mae and Freddie Mac stock in future periods.
Aside from the level of loan loss provision, fair value adjustments and goodwill write-down, our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets, consisting of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of customer deposits and repurchase agreements, FHLB advances, FRBSF borrowings and junior subordinated debentures. Net interest income is primarily a function of our interest rate spread, which is the difference between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, as well as a function of the average balances of interest-earning assets and interest-bearing liabilities. As more fully explained below, our net interest income before provision for loan losses decreased by $2.1 million for the year ended December 31, 2008 to $147.6 million as compared to $149.6 million for the prior year, primarily as a result of a contraction in our net interest margin as asset yields have declined sharply over the past twelve months in response to the Federal Reserve’s action designed to dramatically lower short-term interest rates. Further, increased delinquencies and the slowdown in the sale and construction of new homes over the year have had an adverse impact on our net interest margin, as well as on the amount of our loan loss provision.
Our net income also is affected by the level of our other operating income, including deposit service charges, loan origination and servicing fees, and gains and losses on the sale of loans and securities, as well as our operating expenses and income tax provisions. Other operating income, excluding the fair value adjustments, increased by $3.7 million, or 14%, to $30.7 million for the year ended December 31, 2008 from $27.0 million for the prior year, primarily as a result of increased deposit fees and other service charges reflecting growth in our customer base and related payment processing activities. Revenues (net interest income before the provision for loan losses plus other operating income), excluding fair value adjustments, increased $1.7 million to $178.3 million for the year ended December 31, 2008, compared to $176.6 million for the year ended December 31, 2007. Other operating expenses, excluding the $121.1 million goodwill write-off, also increased by $11.4 million, or 9%, to $138.9 million for the year ended December 31, 2008 from $127.5 million for prior year. The increase from the prior year reflects the effects of new branch openings, including two added in 2008 and ten added at various times during 2007, as well as last year’s three acquisitions which, after consolidations, added another16 branches and nearly $800 million in total assets. Most significantly, the increase in expenses reflects additional occupancy expense, increased deposit insurance assessments, expanded payment processing activities, costs associated with problem loan collection activities and charges related to real estate owned, offset in part by reductions in advertising and information/computer data services.
We offer a wide range of loan products to meet the demands of our customers; however, we do not now and have not previously engaged in any sub-prime lending programs. Historically, our lending activities have been primarily directed toward the origination of real estate and commercial loans. Real estate lending activities have been significantly focused on residential construction and first mortgages on owner occupied, one- to four-family residential properties; however, over the past two years our origination of construction and land development loans has declined materially. Our total construction and land development loan originations in 2007 were $835 million, which was approximately 36% lower than in the previous year, and this trend continued as construction and land development loan originations in 2008 totaled just $345 million, approximately 59% lower than the prior year. Our real estate lending activities have also included the origination of multifamily and commercial real estate loans. Our commercial business lending has been directed toward meeting the credit and related deposit needs of various small- to medium-sized business and agri-business borrowers operating in our primary market areas. We have also increased our emphasis on consumer lending, although the portion of the loan portfolio invested in consumer loans is still relatively small. While continuing our commitment to residential lending, including our mortgage banking activities, we expect commercial lending (including commercial real estate, commercial business and agricultural loans) and consumer lending to become increasingly important activities for us. By contrast, we anticipate residential construction and land development lending will continue to be restrained by market conditions for the next two to three years.
Critical Accounting Policies
In the opinion of management, the accompanying consolidated statements of financial condition and related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows reflect all adjustments (which include reclassification and normal recurring adjustments) that are necessary for a fair presentation in conformity with Generally Accepted Accounting Principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements.
35
Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements. These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for loan and lease losses, (iii) the valuation of financial assets and liabilities recorded at fair value and (iv) the valuation of goodwill. These policies and judgments, estimates and assumptions are described in greater detail below in Management’s Discussion and Analysis and in the Notes to the Consolidated Financial Statements. 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, because of the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. Further, subsequent changes in economic or market conditions could have a material impact on these estimates and our financial condition and operating results in future periods. There have been no significant changes in our application of accounting policies since December 31, 2006, except for the adoption of Statements of Financial Accounting Standards (“SFAS”) Nos. 157 and 159 discussed below. For additional information on the adoption of this standard and the valuation of financial assets, see Notes 7 and 24 of the Notes to the Consolidated Financial Statements. For additional information concerning these critical accounting policies see Notes 1, 9, 10, 23 and 24 of the Notes to the Consolidated Financial Statements and the following:
Interest Income: (Notes 1 & 9) Interest on loans and securities is accrued as earned unless management doubts the collectability of the asset or the unpaid interest. Interest accruals on loans are generally discontinued when loans become 90 days past due for payment of interest and the loans are then placed on nonaccrual status. All previously accrued but uncollected interest is deducted from interest income upon transfer to nonaccrual status. For any future payments collected, interest income is recognized only upon management’s assessment that there is a strong likelihood that the full amount of a loan will be repaid or recovered. A loan may be put on nonaccrual status sooner than this policy would dictate if, in management’s judgment, the loan may be uncollectible. While less common, similar interest reversal and nonaccrual treatment would apply to investment securities if their ultimate collectability became questionable.
Provision and Allowance for Loan Losses: (Notes 1 & 10) The provision for loan losses reflects the amount required to maintain the allowance for losses at an appropriate level based upon management’s evaluation of the adequacy of general and specific loss reserves. We maintain an allowance for loan losses consistent in all material respects with the GAAP guidelines outlined in SFAS No. 5, Accounting for Contingencies. We have established systematic methodologies for the determination of the adequacy of our allowance for loan losses. The methodologies are set forth in a formal policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are tied to individual problem loans. We increase our allowance for loan losses by charging provisions for probable loan losses against our income and value impaired loans consistent with the guidelines in SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosure.
The allowance for losses on loans is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in the loan portfolio and upon our continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience, current and anticipated economic conditions, detailed analysis of individual loans for which full collectability may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans. Realized losses related to specific assets are applied as a reduction of the carrying value of the assets and charged immediately against the allowance for loan loss reserve. Recoveries on previously charged off loans are credited to the allowance. The reserve is based upon factors and trends identified by us at the time financial statements are prepared. Although we use the best information available, future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions beyond our control. The adequacy of general and specific reserves is based on our continuing evaluation of the pertinent factors underlying the quality of the loan portfolio, including changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience and current economic conditions, as well as individual review of certain large balance loans. Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. Loans that are collectively evaluated for impairment include residential real estate and consumer loans and, as appropriate, smaller balance non-homogeneous loans. Larger balance non-homogeneous residential construction and land, commercial real estate, commercial business loans and unsecured loans are individually evaluated for impairment. Loans are considered impaired when, based on current information and events, we determine that it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, the value of the underlying collateral and the current status of the economy. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of collateral if the loan is collateral dependent. Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported.
Our methodology for assessing the appropriateness of the allowance consists of several key elements, which include specific allowances, an allocated formula allowance and an unallocated allowance. Losses on specific loans are provided for when the losses are probable and estimable. General loan loss reserves are established to provide for inherent loan portfolio risks not specifically provided for. The level of general reserves is based on analysis of potential exposures existing in our loan portfolio including evaluation of historical trends, current market conditions and other relevant factors identified by us at the time the financial statements are prepared. The formula allowance is calculated by applying loss factors to outstanding loans, excluding those loans that are subject to individual analysis for specific allowances. Loss factors are based on our historical loss experience adjusted for significant factors including the experience of other banking organizations that, in our judgment, affect the collectability of the portfolio as of the evaluation date. The unallocated allowance is based upon our evaluation of various factors that are not directly measured in the determination of the formula and specific allowances. Beginning with the year ended December 31, 2007, we adjusted our loss factors in accordance with updated guidance from our regulators. The adjusted factors resulted in somewhat lower general and specific reserves; however, in the current economic environment, management’s judgment with respect to the appropriate level of loss provisioning and allowance resulted in a significantly greater amount of unallocated allowance than in prior periods. This methodology may result in losses or recoveries differing significantly from those provided in the financial statements.
36
While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of the Banks’ allowance for loan losses is subject to review by bank regulators as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.
Fair Value Accounting and Measurement: (Notes 1 and 24) We use fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine fair value disclosures. We include in the Notes to the Financial Consolidated Statements information about the extent to which fair value is used to measure financial assets and liabilities, the valuation methodologies used and the impact on our results of operations and financial condition. Additionally, for financial instruments not recorded at fair value we disclose, where appropriate, our estimate of their fair value.
SFAS No. 157 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell the financial asset or paid to transfer the financial liability in an orderly transaction between willing market participants at the measurement date. SFAS No. 157, among other things, requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create the following fair value hierarchy:
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• |
Level 1 – Quoted prices for identical instruments in active markets |
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• |
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
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• |
Level 3 – Instruments whose significant value drivers are unobservable. |
In accordance with SFAF 157, it is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. However, in certain instances, when market observable inputs are not available, we are required to make judgments about assumptions market participants would use in estimating the fair value of the financial instruments. In addition, changes in market conditions may reduce the availability of quoted prices or other observable inputs, requiring a change in the method, judgments and assumptions used to estimate fair value for specific instruments from that which was used in prior periods. The disruption of certain financial markets and lack of meaningful transaction activity for certain securities in 2008 made estimating fair values more difficult and less reliable than in prior years.
Goodwill and Other Intangible Assets: (Notes 1 and 23) Goodwill and other intangible assets represent the excess of purchase price over the fair value of net assets acquired by the Company. The excess cost over fair value of net assets acquired consists of goodwill and core deposit premiums. We account for goodwill and other intangibles as provide for in SFAS No. 142, Goodwill and Other Intangible Assets. The majority of goodwill and intangibles generally arise from business combinations accounted for under the purchase method. Goodwill and other intangibles deemed to have indefinite lives generated from purchase business combinations are not subject to amortization and are instead tested for impairment no less than annually. The goodwill we have recorded has been assigned to our one reporting segment, banking.
Annually or more often if appropriate, we engage an independent valuation consultant to assist us in determining whether and to what extent our goodwill asset is impaired. The GAAP standards with respect to goodwill require that we compare the implied fair value of goodwill to the carrying amount of goodwill on the Company’s balance sheet. If the carrying amount of the goodwill is greater than the implied fair value of that goodwill, an impairment loss must be recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination is determined. The estimated fair value of the Company is allocated to all of the Company’s individual assets and liabilities, including any unrecognized identifiable intangible assets, as if the Company had been acquired in a business combination and the estimated fair value of the Company is the price paid to acquire it. The allocation process is performed only for purposes of determining the amount of goodwill impairment, as no assets or liabilities are written up or down, nor are any additional unrecognized identifiable intangible assets recorded as a part of this process. For the year ended December 31, 2008, we recorded a $121.1 million impairment charge which eliminated all of the goodwill previously carried in our Consolidated Statements of Financial Condition. An impairment charge, if necessary, has no effect on the Company’s or the Banks’ cash balances or liquidity. In addition, goodwill and core deposit intangibles, net of related deferred income taxes, are not included in regulatory capital for the purpose of calculating the Company’s or the Banks’ regulatory capital ratios.
Adoption and Pending Adoption of Recent Accounting Pronouncements
In September 2006, the Emerging Issues Task Force (EITF) issued EITF 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 implemented a change in accounting principle that required the recognition of a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to post-retirement periods. On January 1, 2008, the Company adopted EITF 06-4 and recognized the effects of this change in accounting principle through a $617,000 cumulative effect adjustment charge to opening retained earnings and an increase in benefit plan reserve liability of the same amount. The Company recorded an expense of $64,000 in 2008 from the adoption of EITF 06-4.
Banner Corporation elected early adoption of SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, and SFAS No. 157, Fair Value Measurements, effective January 1, 2007. SFAS No. 159, which was issued in February 2007, generally permits the measurement of selected eligible financial instruments at fair value at specified election dates. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurement. We made this election to allow more flexibility with respect to the management of our investment securities, wholesale borrowings and interest rate risk position in future periods.
37
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainties in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. On January 1, 2007, we adopted FIN 48. Currently, we are subject to U.S. federal income tax and income tax of the States of Idaho and Oregon. The years 2005 through 2007 remain open to examination for federal income taxes and State income taxes. As of January 1, 2008 and December 31, 2008, we believe we had insignificant unrecognized tax benefits or uncertain tax positions. In addition, we have no material accrued interest or penalties as of January 1, 2008 or December 31, 2008. It is our policy to record interest and penalties as a component of income tax expense. The amount of interest and penalties for the year ended December 31, 2008 was immaterial. The adoption of this accounting standard did not have a material impact on our Consolidated Financial Statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140, Accounting for Transfers of Financial Assets and Extinguishment of Liabilities. The statement specifies under what situations servicing assets and servicing liabilities must be recognized. It requires these assets and liabilities to be initially measured at fair value and specifies acceptable measurement methods subsequent to their recognition. Separate presentation in the financial statements and additional disclosures are also required. This statement became effective January 1, 2007. The adoption of the statement has not had a material effect on our Consolidated Financial Statements.
Comparison of Financial Condition at December 31, 2008 and 2007
General. Total assets increased $92 million, or 2%, from $4.493 billion at December 31, 2007, to $4.584 billion at December 31, 2008. Net loans receivable (gross loans less loans in process, deferred fees and discounts, and allowance for loan losses) increased $122 million, or 3%, from $3.764 billion at December 31, 2007, to $3.886 billion at December 31, 2008. Loan growth was largely due to the growth of $162 million, or 17%, in commercial real estate loans, including construction loans for commercial real estate, $154 million, or 35%, in one- to-four family residential loans and $56 million, or 26%, in consumer loans. Multifamily, including construction, real estate loans decreased by $16 million, while total commercial and agricultural business loans were essentially unchanged. We continue to maintain a significant, although decreasing, investment in construction and land loans; however, new production of these types of loans during the past two years has declined appreciably. As a result of a much slower pace of new originations and continuing payoffs on existing loans, loans to finance the construction of one- to four-family residential real estate decreased by $193 million, or 31%, since December 31, 2007. By contrast, land and development loans remained relatively unchanged, primarily reflecting a slower pace of sales for these properties than for completed homes. Given the current housing and economic environment and our reduced level of construction and land development loan originations, we anticipate that construction and land loan balances will continue to decline for another four to eight quarters.
Securities increased $61 million, or 24%, from $256 million at December 31, 2007, to $317 million at December 31, 2008, as purchases, primarily for liquidity and collateral purposes, exceeded sales and repayments. Effective January 1, 2007, we elected to reclassify most of our securities to fair value following our adoption of SFAS No. 159. Although we do not normally engage in trading activities, these securities are reported as trading securities for financial reporting purposes. At December 31, 2008, the fair value of our trading securities was $41 million less than their amortized cost. The reduction reflected in the fair value of these securities compared to their amortized cost primarily is due to a net decrease of $36.3 million in the value of single-issuer and pooled trust preferred securities issued by bank holding companies and insurance companies as well as a decrease of $6.7 million in the value of Fannie Mae and Freddie Mac common and preferred equity securities, offset by a small gain in all other securities. (See paragraph below and Note 24, Fair Value Accounting and Measurement.)
Real estate owned acquired through foreclosures increased $20 million from $2 million at December 31, 2007 to $22 million at December 31, 2008. This included $15 million in land or land development projects and $6 million in single family homes, primarily from builders’ new construction inventory. During the year ended December 31, 2008, we transferred $29 million of loans into real estate owned and sold approximately $9 million of foreclosed properties. (See “Asset Quality” discussion below.)
Deposits increased $158 million, or 4%, from $3.621 billion at December 31, 2007, to $3.779 billion at December 31, 2008. Non-interest-bearing deposits increased $25 million, or 5%, to $509 million, while interest-bearing deposits increased $133 million, or 4%, to $3.270 billion at December 31, 2008. Increasing core deposits is a key element of our expansion strategy, including the recent and planned additions and renovations of branch locations. Unfortunately, during the current year and notwithstanding growth in the number of accounts and customer relationships, growth in aggregate deposit balances was reduced by meaningful decreases in the average account balances of many of our real estate-related customers, reflecting the slowdown of home sales and other transaction closings. We also experienced a significant shift into certificate of deposit accounts as customers repositioned balances to obtain more attractive yields and additional deposit insurance coverage. Certain customers also moved a more significant portion of their funds into retail repurchase agreements to increase their earnings potential and to reduce uninsured deposit balances and benefit from the fully collateralized position that those agreements afford. As a result, the aggregate total of transaction and savings accounts, including money market accounts, decreased by $125 million, or 7%, to $1.647 billion, and transaction and savings accounts declined to 44% of total deposits at December 31, 2008, compared to 49% a year earlier. We also had strong growth in public funds balances which primarily are carried in certificate accounts and an increase of $211 million in brokered certificates of deposit compared to one year ago as we more aggressively utilized these funding sources while paying down borrowings as part of our liquidity management process.
FHLB advances decreased $58 million, excluding fair value adjustments, from $167 million at December 31, 2007, to $109 million at December 31, 2008, while other borrowings increased $54 million to $145 million at December 31, 2008. All of the change in other borrowings reflects an increase in retail repurchase agreements that are primarily related to customer cash management accounts. Junior subordinated debentures decreased by $51 million since December 31, 2007, reflecting the fair value adjustments recorded subsequent to the adoption of SFAS 159, as changes in credit market conditions had a particularly significant impact on the valuation of this type of security. The change in the fair value of the junior subordinated debentures, while significant, represents a non-cash valuation adjustment, had no effect on liquidity or our ability to fund our operations and was substantially offset by similar adjustments to certain investment securities as noted above. (See Note 24, Fair Value of Financial Instruments.)
38
During the year ended December 31, 2008, we repurchased 614,103 shares (including 8,103 shares as consideration for the exercise of stock options) of Banner Corporation common stock for an aggregate price of approximately $14 million, or $23.24 per share. All of these purchases were executed in the quarter ended March 31, 2008. In addition, we issued 1,469,381 new shares of common stock for $21 million at an average net per share price of $14.41 through our Dividend Reinvestment and Direct Stock Purchase and Sale Plan. We also issued 30,611 shares in connection with the exercise of vested stock options and grants. In addition, in the fourth quarter of 2008, our issuance of preferred stock as part of the U.S. Treasury’s TARP Capital Purchase Program contributed $124 million to our tangible equity. This stock repurchase and issuance activity, combined with the changes in retained earnings as a result of operations, including the $121 million goodwill impairment charge and net of quarterly dividend distributions, resulted in a net $4 million decrease in stockholders’ equity. However, the non-cash goodwill impairment charge did not affect tangible equity (total stockholders’ equity less goodwill and other intangible assets), which increased to $420 million at December 31, 2008 compared to $300 million at December 31, 2007. The impairment charge also had no effect on the Company’s or Banks’ regulatory capital ratios (see Capital Requirements). The capital ratios, however, were significantly strengthened by the issuance of the preferred stock. Book value per common share decreased from $27.32 at December 31, 2007 to $18.77 at December 31, 2008, and tangible book value per common share decreased from $18.73 to $17.96, respectively, for the same periods.
Investments: At December 31, 2008, our consolidated investment portfolio totaled $317 million and consisted principally of U.S. Government agency obligations, mortgage-backed and mortgage-related securities, municipal bonds, and corporate debt obligations. From time to time, our investment levels may be increased or decreased depending upon yields available on investment alternatives and management’s projections as to the demand for funds to be used in our loan origination, deposit and other activities. During the year ended December 31, 2008, investment securities increased by $61 million in response to slowing loan growth coupled with an increasing deposit base and increasing collateral requirements for retail repurchase agreements. Holdings of U.S. Treasury and agency obligations increased $40 million, mortgage-backed securities increased $35 million and municipal bonds increased $9 million. Corporate and other securities decreased $24 million, largely as a result of recent fair value accounting adjustments for trust preferred securities issued by other financial institutions.
U.S. Government and Agency Obligations: Our portfolio of U.S. Government and agency obligations had a fair value of $70 million ($70 million at amortized cost) at December 31, 2008, a weighted average maturity of 4.2 years and a weighted average coupon rate of 4.69%. Most of the U.S. Government and agency obligations we own include call features which allow the issuing agency the right to call the securities at various dates prior to the final maturity. These securities are primarily pledged as collateral for retail repurchase agreements.
Mortgage-Backed Obligations: At December 31, 2008, our mortgage-backed and mortgage-related securities totaled $134 million, or 42% of the consolidated investment portfolio. Included within this amount were collateralized mortgage obligations (CMOs) with a net carrying value of $39 million. The estimated fair value of the mortgage-backed and mortgage-related securities at December 31, 2008 was $134 million, which is $2 million more than the amortized cost of $132 million. At December 31, 2008, our portfolio of mortgage-backed and mortgage-related securities had a weighted average coupon rate of 5.13%. At that date, 83% of the mortgage-backed and mortgage-related securities pay interest at a fixed rate and 17% pay at an adjustable-interest rate. The estimated weighted average remaining life of the portfolio was 6.1 years. We do not believe that any of our mortgage-backed obligations had a meaningful exposure to sub-prime mortgages.
Municipal Bonds: Our tax-exempt municipal bond portfolio at December 31, 2008 totaled $59 million at estimated fair value ($59 million at amortized cost), and was comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by revenues from the specific project being financed) issued by cities and counties and various housing authorities, and hospital, school, water and sanitation districts located in the states of Washington, Oregon and Idaho, our primary service area. We also had taxable bonds in our municipal bond portfolio, which at December 31, 2008 totaled $5 million at estimated fair value ($5 million at amortized cost). At December 31, 2008, general obligation bonds and revenue bonds had total estimated fair values of $37 million and $28 million, respectively. Many of our qualifying municipal bonds are not rated by a nationally recognized credit rating agency due to the smaller size of the total issuance and a portion of these bonds have been acquired through direct private placement by the issuers. At December 31, 2008, our municipal bond portfolio had a weighted average maturity of approximately 11.3 years, an average coupon rate of 4.83% and an average taxable equivalent yield of 6.29%. The largest principal balance of any security in the municipal portfolio was a general obligation bond issued by the Public Hospital District No. 1, Columbia and Walla Walla Counties, Washington, with an amortized cost of $5.1 million and a fair value of $5.1 million.
Corporate Bonds: Our corporate bond portfolio, which totaled $49 million at fair value ($85 million at amortized cost) at December 31, 2008, was comprised principally of long-term fixed- and adjustable-rate capital securities issued by financial institutions, including pooled trust preferred securities. The market for these capital securities deteriorated significantly in 2008 and in our opinion is not currently functioning in a meaningful manner. As a result, the fair value estimates for many of these securities are more subjective than in previous periods. Nonetheless, it is apparent that the values have declined appreciably, which is reflected in our financial statements and results of operations. In addition to the disruption in the market for these securities, the decline in value also reflects deterioration in the financial condition of some of the issuing financial institutions. (See Critical Accounting Policies and Note 24 of the Notes to Consolidated Financial Statements.) At December 31, 2008, the portfolio had a weighted average maturity of 25.8 years and a weighted average coupon rate of 5.36%.
39
The following tables set forth certain information regarding carrying values and percentage of total carrying values of our portfolio of securities—trading and securities available for sale, both carried at estimated fair market value, and held to maturity, carried at amortized cost (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 1: Securities—Trading |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
2008 |
|
2007 |
|
||||||||
|
|
|
|
|
||||||||||
|
|
|
Carrying |
|
Percent of |
|
Carrying |
|
Percent of |
|
||||
|
|
|
|
|
|
|
||||||||
|
U.S. Government Treasury and agency obligations |
|
$ |
70,389 |
|
|
34.5 |
% |
$ |
30,015 |
|
|
14.7 |
% |
|
Municipal bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
2,041 |
|
|
1.0 |
|
|
2,043 |
|
|
1.0 |
|
|
Tax exempt |
|
|
9,988 |
|
|
4.9 |
|
|
7,180 |
|
|
3.5 |
|
|
Corporate bonds |
|
|
40,220 |
|
|
19.7 |
|
|
56,125 |
|
|
27.7 |
|
|
Mortgage-backed or related securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
|
— |
|
|
— |
|
|
2,732 |
|
|
1.4 |
|
|
FHLMC |
|
|
28,702 |
|
|
14.1 |
|
|
32,380 |
|
|
16.0 |
|
|
FNMA |
|
|
32,606 |
|
|
16.0 |
|
|
41,377 |
|
|
20.4 |
|
|
Other |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
||||||||
|
Total mortgage-backed securities |
|
|
61,308 |
|
|
30.1 |
|
|
76,489 |
|
|
37.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMOs–agency backed |
|
|
19,722 |
|
|
9.7 |
|
|
23,285 |
|
|
11.5 |
|
|
CMOs–non-agency |
|
|
— |
|
|
— |
|
|
— |
|
|
0.0 |
|
|
|
|
|
|
|
|
||||||||
|
Total mortgage-related securities |
|
|
19,722 |
|
|
9.7 |
|
|
23,285 |
|
|
11.5 |
|
|
|
|
|
|
|
|
||||||||
|
Total |
|
|
81,030 |
|
|
39.8 |
|
|
99,775 |
|
|
49.3 |
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
234 |
|
|
0.1 |
|
|
7,726 |
|
|
3.8 |
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities—trading |
|
$ |
203,902 |
|
|
100.0 |
% |
$ |
202,863 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
||||||||
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 2: Securities—Available-for-Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||||
|
|
|
Carrying |
|
Percent of |
|
Carrying |
|
Percent of |
|
Carrying |
|
Percent of |
|
Carrying |
|
Percent of |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
U.S. Government Treasury and agency obligations |
|
$ |
— |
|
|
— |
% |
$ |
— |
|
|
— |
% |
$ |
27,295 |
|
|
12.1 |
% |
$ |
24,921 |
|
|
9.6 |
% |
|
Municipal bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
4,555 |
|
|
2.0 |
|
|
5,334 |
|
|
2.0 |
|
|
Tax exempt |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3,044 |
|
|
1.4 |
|
|
3,323 |
|
|
1.3 |
|
|
Corporate bonds |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
37,382 |
|
|
16.5 |
|
|
44,115 |
|
|
17.0 |
|
|
Mortgage-backed or related securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
|
33,729 |
|
|
63.3 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
FHLMC |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
37,412 |
|
|
16.5 |
|
|
43,613 |
|
|
16.8 |
|
|
FNMA |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
42,943 |
|
|
19.0 |
|
|
50,054 |
|
|
19.2 |
|
|
Other |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Total mortgage-backed securities |
|
|
33,729 |
|
|
63.3 |
|
|
— |
|
|
— |
|
|
80,355 |
|
|
35.5 |
|
|
93,667 |
|
|
36.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMOs–agency backed |
|
|
10,005 |
|
|
18.8 |
|
|
— |
|
|
— |
|
|
43,998 |
|
|
19.5 |
|
|
54,936 |
|
|
21.0 |
|
|
CMOs–non-agency |
|
|
9,538 |
|
|
17.9 |
|
|
— |
|
|
— |
|
|
25,814 |
|
|
11.4 |
|
|
30,303 |
|
|
11.6 |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Total mortgage-related securities |
|
|
19,543 |
|
|
36.7 |
|
|
— |
|
|
— |
|
|
69,812 |
|
|
30.9 |
|
|
85,239 |
|
|
32.6 |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Total |
|
|
53,272 |
|
|
100.0 |
|
|
— |
|
|
— |
|
|
150,167 |
|
|
66.4 |
|
|
178,906 |
|
|
68.6 |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3,710 |
|
|
1.6 |
|
|
3,685 |
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
$ |
53,272 |
|
|
100.0 |
% |
$ |
— |
|
|
— |
% |
$ |
226,153 |
|
|
100.0 |
% |
$ |
260,284 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 3: Securities—Held-to-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
2,925 |
|
|
4.9 |
% |
$ |
2,565 |
|
|
4.8 |
% |
$ |
99 |
|
|
0.2 |
% |
$ |
1,611 |
|
|
3.2 |
% |
|
Tax exempt |
|
|
48,619 |
|
|
81.3 |
|
|
42,701 |
|
|
79.8 |
|
|
39,773 |
|
|
83.1 |
|
|
41,521 |
|
|
81.5 |
|
|
Corporate bonds |
|
|
8,250 |
|
|
13.8 |
|
|
8,250 |
|
|
15.4 |
|
|
8,000 |
|
|
16.7 |
|
|
7,750 |
|
|
15.2 |
|
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC certificates |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
FNMA certificates |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
67 |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Total mortgage-backed securities |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
67 |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Total |
|
$ |
59,794 |
|
|
100.0 |
% |
$ |
53,516 |
|
|
100.0 |
% |
$ |
47,872 |
|
|
100.0 |
% |
$ |
50,949 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Estimated market value |
|
$ |
60,530 |
|
|
|
|
$ |
54,721 |
|
|
|
|
$ |
49,008 |
|
|
|
|
$ |
52,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
41
The following table shows the maturity or period to repricing of our consolidated portfolio of securities—trading at fair value (dollars in thousands):
Table 4: Securities–Trading Maturity/Repricing and Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities—Trading at December 31, 2008 |
|
||||||||||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||
|
|
|
One Year or Less |
|
Over One to Five Years |
|
Over Five to Ten Years |
|
Over
Ten to Twenty |
|
Over Twenty Years |
|
Total |
|
||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
|
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
U.S. Government Treasury and agency obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate |
|
$ |
5,505 |
|
|
4.10 |
% |
$ |
53,397 |
|
|
4.31 |
% |
$ |
10,000 |
|
|
3.49 |
% |
$ |
1,487 |
|
|
5.20 |
% |
$ |
— |
|
|
— |
% |
$ |
70,389 |
|
|
4.20 |
% |
|
Adjustable-rate |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
5,505 |
|
|
4.10 |
|
|
53,397 |
|
|
4.31 |
|
|
10,000 |
|
|
3.49 |
|
|
1,487 |
|
|
5.20 |
|
|
— |
|
|
— |
|
|
70,389 |
|
|
4.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
606 |
|
|
7.14 |
|
|
100 |
|
|
6.29 |
|
|
284 |
|
|
7.03 |
|
|
— |
|
|
— |
|
|
1,051 |
|
|
6.37 |
|
|
2,041 |
|
|
6.69 |
|
|
Tax exempt |
|
|
3,438 |
|
|
6.00 |
|
|
984 |
|
|
6.03 |
|
|
5,156 |
|
|
5.76 |
|
|
410 |
|
|
5.92 |
|
|
— |
|
|
— |
|
|
9,988 |
|
|
5.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
4,044 |
|
|
6.17 |
|
|
1,084 |
|
|
6.05 |
|
|
5,440 |
|
|
5.83 |
|
|
410 |
|
|
5.92 |
|
|
1,051 |
|
|
6.37 |
|
|
12,029 |
|
|
6.01 |
|
|
Corporate bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3,925 |
|
|
7.65 |
|
|
— |
|
|
— |
|
|
3,925 |
|
|
7.65 |
|
|
Adjustable-rate |
|
|
36,295 |
|
|
5.14 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
36,295 |
|
|
5.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
36,295 |
|
|
5.14 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3,925 |
|
|
7.65 |
|
|
— |
|
|
— |
|
|
40,220 |
|
|
5.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
6,008 |
|
|
4.92 |
|
|
20,752 |
|
|
4.81 |
|
|
11,669 |
|
|
5.36 |
|
|
38,429 |
|
|
4.99 |
|
|
Adjustable-rate |
|
|
— |
|
|
— |
|
|
22,879 |
|
|
4.11 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
22,879 |
|
|
4.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
— |
|
|
— |
|
|
22,879 |
|
|
4.11 |
|
|
6,008 |
|
|
4.92 |
|
|
20,752 |
|
|
4.81 |
|
|
11,669 |
|
|
5.36 |
|
|
61,308 |
|
|
4.66 |
|
|
Mortgage-related obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3,709 |
|
|
4.40 |
|
|
6,769 |
|
|
4.78 |
|
|
9,244 |
|
|
4.24 |
|
|
19,722 |
|
|
4.46 |
|
|
Adjustable-rate |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3,709 |
|
|
4.40 |
|
|
6,769 |
|
|
4.78 |
|
|
9,244 |
|
|
4.24 |
|
|
19,722 |
|
|
4.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Total mortgage-backed or related obligations |
|
|
— |
|
|
— |
|
|
22,879 |
|
|
4.11 |
|
|
9,717 |
|
|
4.72 |
|
|
27,521 |
|
|
4.80 |
|
|
20,913 |
|
|
4.86 |
|
|
81,030 |
|
|
4.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
234 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
234 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities—trading—carrying value |
|
$ |
46,078 |
|
|
5.11 |
|
$ |
77,360 |
|
|
4.28 |
|
$ |
25,157 |
|
|
4.47 |
|
$ |
33,343 |
|
|
5.17 |
|
$ |
21,964 |
|
|
4.94 |
|
$ |
203,902 |
|
|
4.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities—trading—amortized cost |
|
$ |
81,891 |
|
|
|
|
$ |
82,599 |
|
|
|
|
$ |
25,100 |
|
|
|
|
$ |
33,961 |
|
|
|
|
$ |
21,723 |
|
|
|
|
$ |
245,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
(1) Yields on tax-exempt municipal bonds are not calculated as tax equivalent.
42
The following table shows the maturity or period to repricing of our consolidated portfolio of securities—available for sale at fair value (dollars in thousands):
Table 5: Securities–Available-for-Sale Maturity/Repricing and Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale at December 31, 2008 |
|
||||||||||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||||||||
|
|
|
|
|
||||||||||||||||||||||||||||||||||
|
|
|
One Year or Less |
|
Over One to Five Years |
|
Over Five to Ten Years |
|
Over
Ten to Twenty |
|
Over Twenty Years |
|
Total |
|
||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
|
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Mortgage-backed obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate |
|
$ |
— |
|
|
— |
% |
$ |
— |
|
|
— |
% |
$ |
— |
|
|
— |
% |
$ |
— |
|
|
— |
% |
$ |
33,729 |
|
|
5.63 |
% |
$ |
33,729 |
|
|
5.63 |
% |
|
Adjustable-rate |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
33,729 |
|
|
5.63 |
|
|
33,729 |
|
|
5.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
16,858 |
|
|
5.61 |
|
|
2,685 |
|
|
10.20 |
|
|
19,543 |
|
|
6.24 |
|
|
Adjustable-rate |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
16,858 |
|
|
5.61 |
|
|
2,685 |
|
|
10.20 |
|
|
19,543 |
|
|
6.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed or related obligations: |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
16,858 |
|
|
5.61 |
|
|
36,414 |
|
|
5.97 |
|
|
53,272 |
|
|
5.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale—carrying value |
|
$ |
— |
|
|
— |
|
$ |
— |
|
|
— |
|
$ |
— |
|
|
— |
|
$ |
16,858 |
|
|
5.61 |
|
$ |
36,414 |
|
|
5.97 |
|
$ |
53,272 |
|
|
5.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale—amortized cost |
|
$ |
— |
|
|
— |
|
$ |
— |
|
|
— |
|
$ |
— |
|
|
— |
|
$ |
16,698 |
|
|
|
|
$ |
35,492 |
|
|
|
|
$ |
52,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
(1) Yields on tax-exempt municipal bonds are not calculated as tax equivalent.
43
The following table shows the maturity or period to repricing of our consolidated portfolio of securities held to maturity (dollars in thousands):
Table 6: Securities–Held-to-Maturity Maturity/Repricing and Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity at December 31, 2008 |
|
||||||||||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||||||||
|
|
|
|
|
||||||||||||||||||||||||||||||||||
|
|
|
One Year or Less |
|
Over One to Five Years |
|
Over Five to Ten Years |
|
Over
Ten to Twenty |
|
Over Twenty Years |
|
Total |
|
||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
|
|
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
Carrying |
|
Weighted |
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
Municipal bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
— |
|
|
— |
% |
$ |
1,846 |
|
|
5.75 |
% |
$ |
— |
|
|
— |
% |
$ |
— |
|
|
— |
% |
$ |
1,079 |
|
|
5.73 |
% |
$ |
2,925 |
|
|
5.74 |
% |
|
Tax exempt |
|
|
3,323 |
|
|
5.62 |
|
|
8,505 |
|
|
5.66 |
|
|
13,433 |
|
|
5.94 |
|
|
22,400 |
|
|
7.01 |
|
|
958 |
|
|
7.66 |
|
|
48,619 |
|
|
6.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
|
|
|
|
3,323 |
|
|
5.62 |
|
|
10,351 |
|
|
5.68 |
|
|
13,433 |
|
|
5.94 |
|
|
22,400 |
|
|
7.01 |
|
|
2,037 |
|
|
6.64 |
|
|
51,544 |
|
|
6.36 |
|
|
Corporate bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate |
|
|
— |
|
|
— |
|
|
250 |
|
|
2.00 |
|
|
1,000 |
|
|
3.00 |
|
|
— |
|
|
— |
|
|
7,000 |
|
|
10.36 |
|
|
8,250 |
|
|
9.21 |
|
|
|
|||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity—carrying value |
|
$ |
3,323 |
|
|
5.62 |
|
$ |
10,601 |
|
|
5.59 |
|
$ |
14,433 |
|
|
5.74 |
|
$ |
22,400 |
|
|
7.01 |
|
$ |
9,037 |
|
|
7.49 |
|
$ |
59,794 |
|
|
6.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity—estimated market value |
|
$ |
3,334 |
|
|
|
|
$ |
10,812 |
|
|
|
|
$ |
14,561 |
|
|
|
|
$ |
22,694 |
|
|
|
|
$ |
9,129 |
|
|
|
|
$ |
60,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
(1)Yields on tax-exempt municipal bonds are not calculated as tax equivalent.
44
Loans/Lending: Our net loan portfolio increased $122 million, or 3%, during the year ended December 31, 2008, compared to an increase of $833 million, or 28% ($597 million was added through acquisitions), during the year ended December 31, 2007 and an increase of $522 million, or 22%, in the year ended December 31, 2006. While we originate a variety of loans, our ability to originate each type of loan is dependent upon the relative customer demand and competition in each market we serve. In 2006 and the first half of 2007, readily available financing and increasing real estate values led to very strong demand for new real estate loans, including construction loans; however, starting in the summer of 2007, sales of new homes in the markets we serve slowed appreciably, which significantly reduced the demand for new construction and land development loans and slowed our portfolio growth compared to prior years. By contrast, demand for and our production of commercial business loans strengthened during the second half of 2007. However, as 2008 progressed very clear signs of accelerating distress in the housing market and decelerating general economic activity led to weakening loan demand, particularly in the quarter ended December 31, 2008. As a result, loan growth slowed considerably in 2008. For the years ended December 31, 2008, 2007 and 2006, we originated, net of repayments, $562 million, $607 million and $921 million of loans, respectively.
We generally sell a significant portion of our newly originated one- to four-family residential mortgage loans to secondary market purchasers. Proceeds from sales of loans for the years ended December 31, 2008, 2007 and 2006 totaled $366 million, $393 million and $442 million, respectively. We sell loans on both a servicing-retained and a servicing-released basis. See “Loan Servicing Portfolio” below. The decision to hold or sell loans is based on asset/liability management goals and policies and market conditions. Loans held for sale increased to $7 million at December 31, 2008, compared to $5 million at December 31, 2007.
At various times, we also purchase whole loans and participation interests in loans. During the years ended December 31, 2008, 2007 and 2006, we purchased $13 million, $23 million and $45 million, respectively, of loans and loan participation interests.
One- to Four-Family Residential Real Estate Lending: At December 31, 2008, $599 million, or 15.1% of our loan portfolio, consisted of permanent loans on one- to four-family residences. We are active originators of one- to four-family residential loans in communities where we have established offices in Washington, Oregon and Idaho. Despite slowing economic activity, continued in-migration and the unprecedented low mortgage interest rate environment in 2008 supported demand for residential loans, permitting us to originate a combined total of $579 million of one- to four-family residential loans for the year ended December 31, 2008. The loan sales noted above, coupled with principal repayments, offset much of the increase from current year origination activity; however, in 2008 we had a $154 million increase in the balance of loans on one- to four-family residences compared to the prior year.
Construction and Land Lending: A significant proportion of our loan portfolio consists of residential construction loans to professional home builders, as well as land loans and loans for the construction of commercial and multifamily real estate. As home sales slowed in the second half of 2007 and the housing market weakened even further in 2008, we significantly reduced our origination of new construction and land development loans. Although slower in the fourth quarter of 2008, home sales and restructuring opportunities were sufficient to reduce our portfolio of one- to-four-family construction loans by $193 million compared to the prior year-end and by $234 million compared to their peak quarter-end balance at June 30, 2007. By contrast, land development loans remained relatively unchanged and we believe they represent the most significant source of risk in our loan portfolio. At December 31, 2008, construction and land loans totaled $1.045 billion (including $486 million of land or land development loans and $138 million of commercial and multifamily real estate construction loans), or 26.3% of total loans, compared to $1.221 billion, or 32.0%, at December 31, 2007. Construction and land development loan originations totaled $345 million for the year ended December 31, 2008, a 59% decrease compared to $835 million for the year ended December 31, 2007. The geographic distribution of our construction and land development loans is approximately 30% in the greater Puget Sound market, 40% in the greater Portland, Oregon market, and 9% in the greater Boise, Idaho market, with the remaining 21% distributed in various eastern Washington, eastern Oregon, and northern Idaho markets we serve. Increased delinquencies and defaults in residential construction and land development loans had a materially adverse effect on our results of operations for the year ended December 31, 2008, and 82% of our non-performing assets at that date resulted from construction and land development lending. See “Asset Quality.”
Commercial and Multifamily Real Estate Lending: We also originate loans secured by multifamily and commercial real estate. Multifamily and commercial real estate loans originated by us are both fixed- and adjustable-rate loans generally with intermediate terms of five to ten years. Our commercial real estate portfolio consists of loans on a variety of property types with no significant concentrations by property type, borrowers or locations. We experienced reasonable demand for both multifamily and commercial real estate loans in 2008, although primarily in the first six months of the year. At December 31, 2008, our loan portfolio included $151 million in multifamily and $1.014 billion in commercial real estate loans. Multifamily and commercial real estate loans comprised 29.4% of total loans at December 31, 2008, compared to 27.6% a year earlier, while combined growth for these loan types was $117 million for the year
Commercial Business Lending: We are active in small- to medium-sized business lending. While continuing and strengthening our commitment to small business lending, we also have experienced officers and staff focused on corporate lending opportunities for borrowers with credit needs generally in a $3 million to $15 million range. We have leveraged the skills and relationships of these officers with responsive local decision making authority to continue to expand this market niche. In addition to providing earning assets, this type of lending has helped increase the deposit base. Unfortunately, as economic activity slowed in the second half of the year, demand weakened and commercial business loan growth for the first six months reversed, resulting in a decrease of $16 million, or 2% for the year. At December 31, 2008, commercial business loans totaled $680 million, or 17.2% of total loans, compared to $696 million, or 18.3%, at December 31, 2007. Loan terms, including the fixed or adjustable interest rate, the loan maturity and the collateral considerations, vary significantly and are negotiated on an individual loan basis.
Agricultural Lending: Agriculture is a major industry in many Washington, Oregon and Idaho locations in our service area. While agricultural loans are not a large part of our portfolio, we routinely make agricultural loans to borrowers with a strong capital base, sufficient management depth, proven ability to operate through agricultural cycles, reliable cash flows and adequate financial reporting. Payments on agricultural loans depend, to a large degree, on the results of operation of the related farm entity. The repayment is also subject to other economic and weather conditions as well as market prices for agricultural products, which can be highly volatile at times. Generally, in 2008, weather conditions,
45
production levels and market prices were quite good for our agricultural borrowers. At December 31, 2008, agricultural loans totaled $204 million, or 5.2% of the loan portfolio, compared to $186 million, or 4.9%, at December 31, 2007.
Consumer and Other Lending: We originate a variety of consumer loans, including home equity lines of credit, automobile loans and loans secured by deposit accounts and, although the balances are not currently significant, in 2006 we reintroduced credit card lending to our consumer loan products. While consumer lending has traditionally been a small part of our business with loans made primarily to accommodate our existing customer base, it has received renewed emphasis in recent years. This increased effort along with the impact of recent acquisitions has allowed non-real estate-related consumer loans to increase meaningfully despite continuing high levels of prepayments. At December 31, 2008, we had $93 million, or 2.4% of our loans receivable, in non-real estate-secured consumer loans, which was unchanged compared to December 31, 2007. In addition, consumer loans secured by one- to four-family real estate, including home equity lines of credit, increased by $57 million to $176 million, or 4.4% of total loans, at December 31, 2008, compared to $119 million, or 3.1%, at December 31, 2007. While consumer loans remain a relatively small portion of the loan portfolio, aggregate growth was 26% in 2008 and we anticipate increased consumer loan activity in future periods as our branch network and retail customer base continue to grow.
Loan Servicing Portfolio: At December 31, 2008, we were servicing $446 million of loans for others, compared to $362 million at December 31, 2007. The loan servicing portfolio at December 31, 2008 included $193 million of Freddie Mac mortgage loans, $100 million of Fannie Mae mortgage loans and $152 million of loans serviced for a variety of private investors. The portfolio included loans secured by property located primarily in the states of Washington and Oregon. For the year ended December 31, 2008, $2.0 million of loan servicing fees, net of $902,000 of servicing rights amortization, was recognized in operations. For the prior year, net loan servicing fees were $1.8 million. The increased servicing income for the current year primarily reflects an increase loan servicing fees, a greater level of late charge fees and growth through acquisitions.
Mortgage Servicing Rights: We record mortgage servicing rights (MSRs) with respect to loans we originate and sell in the secondary market on a servicing retained basis. The cost of MSRs is capitalized and amortized in proportion to, and over the period of, the estimated future net servicing income. For the years ended December 31, 2008, 2007 and 2006, we capitalized $1.6 million, $781,000 and $1.6 million, respectively, of MSRs relating to loans sold with servicing retained. Amortization of MSRs for the years ended December 31, 2008, 2007 and 2006, was $902,000, $658,000 and $518,000, respectively. Management periodically evaluates the estimates and assumptions used to determine the carrying values of MSRs and the amortization of MSRs. These carrying values are adjusted when the valuation indicates the carrying value is impaired. MSRs generally are adversely affected by current and anticipated prepayments resulting from decreasing interest rates. At December 31, 2008 and 2007, MSRs were carried at a value, net of amortization, of $3.6 and $2.8 million, respectively.
46
Table 7: Loan Portfolio Analysis
The following table sets forth the composition of the Company’s loan portfolio, including loans held for sale, by type of loan as of the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
||||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||
|
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
|
|
Amount |
|
Percent |
|
Amount |
|
Percent of |
|
Amount |
|
Percent of |
|
Amount |
|
Percent of |
|
Amount |
|
Percent of |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
$ |
1,013,709 |
|
|
25.6 |
% |
$ |
882,523 |
|
|
23.2 |
% |
$ |
596,488 |
|
|
20.1 |
% |
$ |
555,889 |
|
|
22.8 |
% |
$ |
547,574 |
|
|
26.2 |
% |
|
Multifamily real estate |
|
|
151,274 |
|
|
3.8 |
|
|
165,886 |
|
|
4.4 |
|
|
147,311 |
|
|
5.0 |
|
|
144,512 |
|
|
5.9 |
|
|
107,745 |
|
|
5.1 |
|
|
Commercial construction |
|
|
104,495 |
|
|
2.6 |
|
|
74,123 |
|
|
1.9 |
|
|
98,224 |
|
|
3.3 |
|
|
51,931 |
|
|
2.1 |
|
|
41,911 |
|
|
2.0 |
|
|
Multifamily construction |
|
|
33,661 |
|
|
0.8 |
|
|
35,318 |
|
|
0.9 |
|
|
39,908 |
|
|
1.3 |
|
|
62,624 |
|
|
2.6 |
|
|
58,718 |
|
|
2.8 |
|
|
One- to four-family construction |
|
|
420,673 |
|
|
10.6 |
|
|
613,779 |
|
|
16.1 |
|
|
570,501 |
|
|
19.2 |
|
|
348,661 |
|
|
14.3 |
|
|
233,229 |
|
|
11.2 |
|
|
Land and land development |
|
|
486,130 |
|
|
12.3 |
|
|
497,962 |
|
|
13.1 |
|
|
402,665 |
|
|
13.6 |
|
|
228,436 |
|
|
9.4 |
|
|
172,279 |
|
|
8.2 |
|
|
Commercial business |
|
|
679,867 |
|
|
17.2 |
|
|
696,350 |
|
|
18.3 |
|
|
467,745 |
|
|
15.8 |
|
|
442,232 |
|
|
18.1 |
|
|
395,249 |
|
|
18.9 |
|
|
Agricultural business, including secured by farmland |
|
|
204,142 |
|
|
5.2 |
|
|
186,305 |
|
|
4.9 |
|
|
163,518 |
|
|
5.5 |
|
|
147,562 |
|
|
6.0 |
|
|
148,343 |
|
|
7.1 |
|
|
One- to four-family real estate |
|
|
599,169 |
|
|
15.1 |
|
|
445,222 |
|
|
11.7 |
|
|
361,625 |
|
|
12.2 |
|
|
365,903 |
|
|
15.0 |
|
|
307,986 |
|
|
14.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
92,642 |
|
|
2.4 |
|
|
93,183 |
|
|
2.4 |
|
|
50,826 |
|
|
1.7 |
|
|
42,573 |
|
|
1.8 |
|
|
36,556 |
|
|
1.8 |
|
|
Consumer secured by one- to four-family real estate |
|
|
175,646 |
|
|
4.4 |
|
|
118,966 |
|
|
3.1 |
|
|
67,179 |
|
|
2.3 |
|
|
49,408 |
|
|
2.0 |
|
|
43,258 |
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Total consumer |
|
|
268,288 |
|
|
6.8 |
|
|
212,149 |
|
|
5.5 |
|
|
118,005 |
|
|
4.0 |
|
|
91,981 |
|
|
3.8 |
|
|
79,814 |
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Total loans |
|
|
3,961,408 |
|
|
100.0 |
% |
|
3,809,617 |
|
|
100.0 |
% |
|
2,965,990 |
|
|
100.0 |
% |
|
2,439,731 |
|
|
100.0 |
% |
|
2,092,848 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Less allowance for loan losses |
|
|
(75,197 |
) |
|
|
|
|
(45,827 |
) |
|
|
|
|
(35,535 |
) |
|
|
|
|
(30,898 |
) |
|
|
|
|
(29,610 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|||||||||||||||||||||||||||||||
|
Total net loans at end of period: |
|
$ |
3,886,211 |
|
|
|
|
$ |
3,763,790 |
|
|
|
|
$ |
2,930,455 |
|
|
|
|
$ |
2,408,833 |
|
|
|
|
$ |
2,063,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
The following table sets forth the Company’s loans by geographic concentration at December 31, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Washington |
|
Oregon |
|
Idaho |
|
Other |
|
Total |
|
|||||
|
|
|
|
|
|
|
|
||||||||||
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
$ |
765,490 |
|
$ |
160,608 |
|
$ |
77,489 |
|
$ |
10,122 |
|
$ |
1,013,709 |
|
|
Multifamily real estate |
|
|
125,571 |
|
|
12,570 |
|
|
9,735 |
|
|
3,398 |
|
|
151,274 |
|
|
Commercial construction |
|
|
59,590 |
|
|
33,927 |
|
|
10,028 |
|
|
950 |
|
|
104,495 |
|
|
Multifamily construction |
|
|
20,536 |
|
|
13,125 |
|
|
— |
|
|
— |
|
|
33,661 |
|
|
One- to four-family construction |
|
|
208,699 |
|
|
193,025 |
|
|
18,949 |
|
|
— |
|
|
420,673 |
|
|
Land and land development |
|
|
247,505 |
|
|
166,721 |
|
|
71,904 |
|
|
— |
|
|
486,130 |
|
|
Commercial business |
|
|
506,864 |
|
|
75,678 |
|
|
80,566 |
|
|
16,759 |
|
|
679,867 |
|
|
Agricultural business, including secured by farmland |
|
|
79,817 |
|
|
54,918 |
|
|
69,407 |
|
|
— |
|
|
204,142 |
|
|
One-to four-family real estate |
|
|
474,774 |
|
|
87,797 |
|
|
31,664 |
|
|
4,934 |
|
|
599,169 |
|
|
Consumer |
|
|
194,990 |
|
|
54,852 |
|
|
17,938 |
|
|
508 |
|
|
268,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Total loans outstanding |
|
$ |
2,683,836 |
|
$ |
853,221 |
|
$ |
387,680 |
|
$ |
36,671 |
|
$ |
3,961,408 |
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total loans |
|
|
67.7 |
% |
|
21.5 |
% |
|
9.8 |
% |
|
1.0 |
% |
|
100.0 |
% |
|
|
|
|
|
|
|
|
||||||||||
47
The following table sets forth certain information at December 31, 2008 regarding the dollar amount of loans maturing in our portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances are net of loans in progress (undisbursed loan proceeds), unamortized premiums and discounts, include loans held for sale and exclude the allowance for loan losses (dollars in thousands):
Table 8: Loan Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing |
|
Maturing |
|
Maturing |
|
Maturing |
|
Maturing |
|
Total |
|
||||||
|
|
|
|
|
|
|
|
|
||||||||||||
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
$ |
58,959 |
|
$ |
67,798 |
|
$ |
173,147 |
|
$ |
595,678 |
|
$ |
118,127 |
|
$ |
1,013,709 |
|
|
Multifamily real estate |
|
|
7,453 |
|
|
16,309 |
|
|
32,648 |
|
|
49,946 |
|
|
44,918 |
|
|
151,274 |
|
|
Commercial construction |
|
|
88,548 |
|
|
8,626 |
|
|
237 |
|
|
5,221 |
|
|
1,863 |
|
|
104,495 |
|
|
Multifamily construction |
|
|
19,506 |
|
|
14,155 |
|
|
— |
|
|
— |
|
|
— |
|
|
33,661 |
|
|
One- to –four-family construction |
|
|
401,424 |
|
|
14,411 |
|
|
467 |
|
|
485 |
|
|
3,886 |
|
|
420,673 |
|
|
Land development and acquisition |
|
|
373,414 |
|
|
76,855 |
|
|
14,781 |
|
|
5,315 |
|
|
15,765 |
|
|
486,130 |
|
|
Commercial business |
|
|
357,832 |
|
|
102,925 |
|
|
121,084 |
|
|
86,778 |
|
|
11,248 |
|
|
679,867 |
|
|
Agricultural business, including secured by farmland |
|
|
113,317 |
|
|
26,842 |
|
|
22,394 |
|
|
37,030 |
|
|
4,559 |
|
|
204,142 |
|
|
One- to four-family real estate |
|
|
40,564 |
|
|
47,586 |
|
|
26,056 |
|
|
23,164 |
|
|
461,799 |
|
|
599,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
12,701 |
|
|
14,047 |
|
|
16,162 |
|
|
11,681 |
|
|
38,051 |
|
|
92,642 |
|
|
Consumer secured by one- to four-family real estate |
|
|
6,562 |
|
|
6,523 |
|
|
4,231 |
|
|
8,283 |
|
|
150,047 |
|
|
175,646 |
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Total consumer |
|
|
19,263 |
|
|
20,570 |
|
|
20,393 |
|
|
19,964 |
|
|
188,098 |
|
|
268,288 |
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
1,480,280 |
|
$ |
396,077 |
|
$ |
411,207 |
|
$ |
823,581 |
|
$ |
850,263 |
|
$ |
3,961,408 |
|
|
|
|
|
|
|
|
|
|
||||||||||||
Contractual maturities of loans do not necessarily reflect the actual life of such assets. The average life of loans typically is substantially less than their contractual maturities because of principal repayments and prepayments. In addition, due-on-sale clauses on certain mortgage loans generally give us the right to declare loans immediately due and payable in the event that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase, however, when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, decreases when rates on existing mortgage loans are substantially higher than current mortgage loan market rates.
The following table sets forth the dollar amount of all loans due after December 31, 2008 which have fixed interest rates and floating or adjustable interest rates (dollars in thousands):
Table 8(a): Loans Maturing after One Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rates |
|
Floating or |
|
Total |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
$ |
228,085 |
|
$ |
726,666 |
|
$ |
954,751 |
|
|
Multifamily real estate |
|
|
|
|
|
|
|
|
|
|
|
49,749 |
|
|
94,072 |
|
|
143,821 |
|
|
Commercial construction |
|
|
|
|
|
|
|
|
|
|
|
4,313 |
|
|
11,634 |
|
|
15,947 |
|
|
Multifamily construction |
|
|
|
|
|
|
|
|
|
|
|
701 |
|
|
13,453 |
|
|
14,154 |
|
|
One- to –four family construction |
|
|
|
|
|
|
|
|
1,715 |
|
|
17,535 |
|
|
19,250 |
|
|||
|
Land development and acquisition |
|
|
|
|
60,164 |
|
|
52,552 |
|
|
112,716 |
|
|||||||
|
Commercial business |
|
|
|
|
|
|
|
|
|
|
|
171,509 |
|
|
150,525 |
|
|
322,034 |
|
|
Agricultural business, including secured by farmland |
|
|
27,020 |
|
|
63,805 |
|
|
90,825 |
|
|||||||||
|
One- to- four-family real estate |
|
|
|
|
|
|
|
409,002 |
|
|
149,603 |
|
|
558,605 |
|
||||
|
One- to- four-family real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
67,494 |
|
|
12,447 |
|
|
79,941 |
|
|
Consumer secured by one- to- four-family real estate |
|
|
16,434 |
|
|
152,650 |
|
|
169,084 |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Total consumer |
|
|
|
|
|
|
|
|
|
|
|
83,928 |
|
|
165,097 |
|
|
249,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
$ |
1,036,186 |
|
$ |
1,444,942 |
|
$ |
2,481,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
48
Deposit Accounts: Deposits generally are attracted from within our primary market areas through the offering of a broad selection of deposit instruments, including demand checking accounts, NOW accounts, money market deposit accounts, regular savings accounts, certificates of deposit, cash management services and retirement savings plans. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. At December 31, 2008, we had $3.779 billion of deposits, with 44%, or $1.647 billion, in transaction and savings accounts and 56%, or $2.132 billion, in time deposits, of which $1.543 billion had remaining maturities of one year or less. Total deposits increased by $158 million, or 4%, for the year ended December 31, 2008. This includes non-interest-bearing transaction accounts, which increased by 5%, or $25 million, over the same time period. As illustrated in the following table, we have added significantly to total transaction accounts (demand, NOW, savings and money market accounts) since 2006. However, in the current year ended December 31, 2008, total transaction accounts decreased by $125 million, or 7%, as customers’ average account balances declined and customers repositioned balances to obtain more attractive yields and additional insurance coverage. By contrast, also as reflected in the table, certificates of deposit have accounted for a somewhat larger percentage of the deposit portfolio than have transaction accounts, and in 2008 certificates of deposit increased 15%. Further, although not included in deposit balances, in 2008 we had an increase of $54 million, or 58%, in retail repurchase agreements, which are customer funds that are primarily associated with sweep account arrangements tied to transaction accounts. While increased use of these cash management services has the effect of reducing transaction account balances, it contributes to increased deposit fee revenues. Deposit balances at December 31, 2008 also included $362 million of public funds owned by various counties, municipalities and other public entities predominantly located in Washington, Oregon and Idaho, compared to $338 million at December 31, 2007. Growing deposits in general and transaction accounts in particular is a core element of our business plan and is a primary focus of our recent and ongoing branch expansion, relocation and renovation activities. Unfortunately, in 2008 as interest rates declined sharply and concerns about the health of the banking industry escalated, changes in both customer and competitor behavior resulted in meaningful shifts in the mix of deposits and at times adverse deposit flows. While the increase in FDIC deposit insurance coverage in the fourth quarter of 2008 reduced safety concerns and liquidity pressures, customers remained focused significantly on certificates of deposit in an effort to earn higher yields.
49
The following table sets forth the balances of deposits in the various types of accounts offered by the Banks at the dates indicated (dollars in thousands):
Table 9: Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31 |
|
||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||
|
|
|
2008 |
|
2007 |
|
2006 |
|
||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
|
|
|
Amount |
|
Percent
of |
|
Increase |
|
Amount |
|
Percent
of |
|
Increase |
|
Amount |
|
Percent
of |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
|||||||||||||||||||||||||
|
Demand and NOW checking |
|
$ |
888,057 |
|
|
23.5 |
% |
$ |
(26,830 |
) |
$ |
914,887 |
|
|
25.3 |
% |
$ |
254,679 |
|
$ |
660,208 |
|
|
23.6 |
% |
|
Regular savings accounts |
|
|
474,885 |
|
|
12.6 |
|
|
(134,188 |
) |
|
609,073 |
|
|
16.8 |
|
|
244,116 |
|
|
364,957 |
|
|
13.1 |
|
|
Money market accounts |
|
|
284,041 |
|
|
7.5 |
|
|
35,638 |
|
|
248,403 |
|
|
6.9 |
|
|
35,450 |
|
|
212,953 |
|
|
7.6 |
|
|
Certificates which mature: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
1,542,925 |
|
|
40.8 |
|
|
(67,322 |
) |
|
1,610,247 |
|
|
44.5 |
|
|
258,325 |
|
|
1,351,922 |
|
|
48.4 |
|
|
After 1 year, but within 2 years |
|
|
421,710 |
|
|
11.2 |
|
|
268,006 |
|
|
153,704 |
|
|
4.2 |
|
|
43,814 |
|
|
109,890 |
|
|
3.9 |
|
|
After 2 years, but within 5 years |
|
|
162,959 |
|
|
4.3 |
|
|
86,469 |
|
|
76,490 |
|
|
2.1 |
|
|
(5,626 |
) |
|
82,116 |
|
|
2.9 |
|
|
After 5 years |
|
|
4,273 |
|
|
0.1 |
|
|
(3,516 |
) |
|
7,789 |
|
|
0.2 |
|
|
(4,757 |
) |
|
12,546 |
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,778,850 |
|
|
100.0 |
% |
$ |
158,257 |
|
$ |
3,620,593 |
|
|
100.0 |
% |
$ |
826,001 |
|
$ |
2,794,592 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
The following table indicates the amount of the Banks’ certificates of deposit with balances equal to or greater than $100,000 by time remaining until maturity as of December 31, 2008. (in thousands):
Table 10: Maturity Period—$100,000 or greater CDs
|
|
|
|
|
|
|
|
|
Certificates of |
|
|
|
|
|
|
||
|
Due in three months or less |
|
$ |
276,451 |
|
|
Due after three months through six months |
|
|
178,746 |
|
|
Due after six months through twelve months |
|
|
373,940 |
|
|
Due after twelve months |
|
|
262,613 |
|
|
|
|
|
||
|
|
|
|
|
|
|
Total |
|
$ |
1,091,750 |
|
|
|
|
|
||
The following table provides additional detail on geographic concentrations of our deposits at December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 11: Geographic Concentration of Deposits |
|
Washington |
|
Oregon |
|
Idaho |
|
Total |
|
||||
|
|
|
|
|
|
|||||||||
|
|
|||||||||||||
|
|
|
$ |
3,004,221 |
|
$ |
535,998 |
|
$ |
238,631 |
|
$ |
3,778,850 |
|
|
|
|
|
|
|
|
||||||||
50
The Borrowings: The FHLB-Seattle serves as our primary borrowing source. To access funds, we are required to own capital stock in the FHLB-Seattle and may apply for advances on the security of such stock and certain of our mortgage loans and securities provided certain creditworthiness standards have been met. At December 31, 2008, we had $109 million of borrowings from the FHLB-Seattle at a weighted average rate of 3.04%, a decrease of $56 million compared to a year earlier. Also at December 31, 2008, we had an investment of $37 million in FHLB-Seattle capital stock.
Table 12: FHLB Advances Outstanding at
December 31, 2008
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable-rate advances |
|
Fixed-rate advances |
|
Total advances |
|
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Rate* |
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Amount |
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Rate* |
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Amount |
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Rate* |
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Amount |
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Due in one year or less |
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none |
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3.28 |
% |
$ |
53,000 |
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3.28 |
% |
$ |
53,000 |
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Due after one year through two years |
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