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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
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EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
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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
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91-1691604
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(State
or other jurisdiction of incorporation
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(I.R.S. Employer
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or
organization)
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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
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The
Nasdaq Stock Market LLC
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(Title
of Each Class)
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(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
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Yes
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No
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X
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Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act
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Yes
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No
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X
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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
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such
filing requirements for the past 90 days.
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Yes
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X
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No
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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
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or
any amendment to this Form 10-K.
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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 (Check One):
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Large
accelerated filer
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Accelerated
filer
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X
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Non-accelerated
filer
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Smaller
reporting company
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act)
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Yes
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No
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X
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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,
2007, was:
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Common
Stock - $534,077,353
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(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.)
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The
number of shares outstanding of the registrant’s classes of common stock
as of February 29, 2008:
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Common
Stock, $.01 par value – 16,041,875 shares
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Documents
Incorporated by Reference
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Portions
of Proxy Statement for Annual Meeting of Shareholders to be held April 22,
2008 are incorporated by reference into Part III.
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BANNER
CORPORATION AND SUBSIDIARIES
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Table
of Contents
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PART
I
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Comparison
of Results of Operations
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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; changes in general economic conditions, either
nationally or in our market areas; changes in the levels of general 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; 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 judgements; 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 for 2008 and beyond 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.
3
Item
1 – Business
Banner
Corporation (BANR or the Company) is a bank holding company incorporated in the
State of Washington. We are primarily engaged in the business of planning,
directing and coordinating the business activities of our wholly owned
subsidiaries, Banner Bank and, subsequent to May 1, 2007, Islanders Bank, a
recent acquisition, as explained below. Banner Bank is a
Washington-chartered commercial bank that conducts business from its main office
in Walla Walla, Washington and, as of December 31, 2007, its 81 branch offices
and 12 loan production offices located in 28 counties 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, 2007, we had total consolidated assets of $4.5 billion, total
deposits of $3.6 billion and total stockholders’ equity of $438
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, Federal Home Loan Bank
(FHLB) advances, repurchase agreements 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 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 2007,
our net income was also significantly impacted by a substantial net change in
the value of financial instruments carried at fair value. 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 $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 in accordance with the adoption of Statement
of Financial Accounting Standards (SFAS) No. 159 and SFAS No.
157. Our net income for the year ended December 31, 2006, as
restated, was $31.5 million, or $2.58 per share on a fully diluted basis, which
included a $5.5 million insurance settlement. The net amount of the
settlement after costs contributed approximately $3.4 million, or $0.28 per
share, to earnings for the year ended December 31, 2006. 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.
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 21 new
branches and relocated eight others in the last three 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, we plan to open only three additional branches in 2008, a normal level
of growth for a bank of our size.
On May 1,
2007, we completed the acquisition of F&M Bank (F&M) Spokane,
Washington, in a stock and cash transaction valued at approximately $98.3
million, with $19.4 million of cash and 1,773,402 shares of Banner Corporation
common stock, for 100% of the outstanding common shares of
F&M. F&M was merged into Banner Bank and the results of its
operations are included in those of Banner Bank starting in the quarter ended
June 30, 2007. 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.
On May 1,
2007, we also completed the acquisition of San Juan Financial Holding Company
(SJFHC), the parent company of Islanders Bank, Friday Harbor, Washington, in a
stock and cash transaction valued at approximately $41.6 million, with $6.2
million of cash and 819,209 shares of Banner Corporation common stock, for 100%
of the outstanding common shares of SJFHC. SJFHC was merged into
Banner Corporation and Islanders Bank has continued to operate as a separate
subsidiary of Banner Corporation. The results of its operations are
included in Banner’s consolidated operations beginning in the quarter ended June
30, 2007. 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.
On
October 10, 2007, we completed the acquisition of NCW Community Bank (NCW),
Wenatchee, Washington, in a transaction valued at approximately $18.5 million,
with $6.5 million of cash and 339,860 shares of Banner Corporation common stock
being exchanged for all of the outstanding common shares and stock options of
NCW. NCW operated one branch in Wenatchee, Washington and had another
branch under construction in East Wenatchee. NCW merged into Banner
Bank in connection with this transaction during the fourth quarter of
2007. The
4
merger
added to Banner’s 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 Note
5 of the Notes to the Consolidated Financial Statements contained in Item 8 for
more detailed information with respect to our acquisitions.
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 significant percentage of assets in
the loan portfolio with 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. 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. 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 has been particularly
significant over the past three years, although our origination of new
construction and land loans did slow appreciably during the second half of 2007
as market conditions became much less favorable. At December 31,
2007, construction and land loans represent nearly one third of our loan
portfolio. Our lending activities have also included the origination
of multifamily and commercial real estate loans. Commercial 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 construction and residential lending, we expect commercial lending
(including commercial real estate, commercial business and agricultural lending)
and consumer lending to become increasingly important activities for
us.
At
December 31, 2007, our net loan portfolio totaled $3.76 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, 2007 and 2006—Loans/Lending.” See also Table 5
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 and Pasco (Tri Cities), Washington market areas. As
noted above, we have not engaged in any sub-prime lending and we have not
experienced a material increase in delinquencies on our residential loans
despite clearly weakening housing market conditions. At December 31,
2007, $464 million, or 12.2% 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%. These 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. Generally, ARM loans held in our portfolio do not allow for
interest-only payments nor 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 higher interest-only option ARM products. As a
result, ARM loans have represented only a small portion of 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 generally 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. Generally, we 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 usually require private mortgage insurance on
residential loans with a loan-to-value ratio at origination exceeding
80%.
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 invest 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. Residential
5
construction
and land development lending is a core competency of Banner Bank and the primary
focus of its subsidiary, CFC. Our largest concentration of
construction and development loans is in the Portland/Vancouver market
area. We also have a significant amount of construction loans for
properties in the Puget Sound region and to a much smaller extent in the greater
Boise and certain eastern Washington and eastern Oregon markets. At
December 31, 2007, construction and land loans totaled $1.221 billion (including
$498 million of land or land development loans and $109 million of commercial
and multifamily real estate construction loans), or 32% of total loans of the
Company.
Construction
and land lending affords 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, are generally
considered to 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.
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 ensure 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 chosen 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.
Loans for
the construction of one- to four-family residences are generally made for a term
of twelve 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. 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. Although
certainly better than other parts of the country, housing markets in most areas
of the Pacific Northwest have clearly weakened over the past six to twelve
months and our origination of new construction loans has declined. 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 slower housing market conditions have resulted in an increase
of delinquencies in our construction and land loan
portfolios. While construction and land loans represent 32% of
our portfolio and approximately 80% of our non-performing assets, they are
significantly diversified with respect to geography and sub-markets, price
ranges and borrowers. The vast majority of these loans are performing
as agreed and we are experiencing continuing loan payoffs and portfolio
turnover.
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. At December 31,
2007, our loan portfolio included $166 million in multifamily and
$883 million in commercial real estate loans which together comprised 28% 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 all multifamily and commercial real estate lending, 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 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, 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 or location.
Commercial Business
Lending: We are active in small- to medium-sized business
lending, including the origination of loans guaranteed by the Small Business
Administration (SBA), 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
middle market 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
6
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.
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 generally tied to
various prime rate and London Inter-Bank Offering Rate or LIBOR
indices. At December 31, 2007, commercial loans totaled $696 million,
or 18% 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, 2007, agricultural business loans,
including collateral secured loans to purchase farm land and equipment, totaled
$186 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 generally
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 as published in The Wall Street Journal, 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 up to 50% to 75% of the tax
assessed or appraised value of the property at terms ranging from five to 20
years. These loans have interest rates that generally adjust at least
every five years based typically upon a U.S. Treasury index plus a negotiated
margin. Fixed-rate loans are granted on terms generally 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 but
are generally 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 can 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 primarily 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 year. At December 31, 2007,
we had $193 million, or 5% of our loans receivable, in consumer related loans,
an increase of $75 million or 64% from December 31, 2006.
7
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 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 amd 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.
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, 2007, 2006 and 2005, we
originated loans, net of repayments, of $607 million, $921 million and $722
million, respectively. The decline in originations, net of
repayments, in the current year is primarily the result of a decrease in the
production of new construction and land loans.
In recent
years, we generally 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, 2007, 2006 and 2005, totaled $393 million, $442 million and $397 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 and increase liquidity. 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, 2007, we had $4.6 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, 2007, 2006 and 2005, we purchased $23 million, $45
million and $23 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, 2007, we were servicing $362 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, 2007, we held $3.1 million in escrow for our portfolio of loans
serviced for others. The loan servicing portfolio at December 31,
2007 was composed of $178 million of Freddie Mac residential mortgage loans, $52
million of Fannie Mae residential mortgage loans and $132 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, 2007, $1.8 million of loan servicing fees, net of $758,000 of
servicing rights amortization, was recognized in 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, 2007, 2006 and 2005, we
capitalized $781,000, $1.6 million, and $502,000, 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, 2007, 2006
and 2005, was $758,000, $518,000, and $507,000,
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, 2007, MSRs
were carried at a value of $2.8 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
8
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.
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, 2007 and 2006—Asset
Quality,” and Table 10 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, 2007,
we had an allowance for loan losses of $46 million, which represented 1.20% of
net loans and 108% of non-performing loans compared to 1.20% and 253%,
respectively, at December 31, 2006. 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, 2007 and 2006—Provision and Allowance for Loan Losses,”
and Tables 11 and 12 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 meaningful exposure to sub-prime
mortgages. However, 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, 2007, our consolidated investment portfolio totaled $256 million
and consisted principally of U.S. Government agency obligations, mortgage-backed
securities, municipal bonds, corporate debt obligations, and stock of Fannie Mae
and Freddie Mac. 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, 2007, investments and securities decreased by $18
million. (See Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operation; Recent Developments and
Significant Events.”) During the year ended December 31, 2007,
holdings of mortgage-backed securities decreased $50 million to $100 million,
U.S. Treasury and agency obligations increased $3 million to $30 million,
corporate and other securities increased $23 million to $72 million, and
municipal bonds decreased $7 million to $54 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, 2007 and 2006—Investments,” and Tables 1, 2, 3 and 4 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 ($20.4
million as of December 31, 2007) 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, 2007, we recorded an asset of
$8,000 and a liability of $8,000, representing the estimated market value of
those commitments. On December 31, 2007, we had no other investment
related off-balance-sheet derivatives.
General: Deposits,
FHLB advances (or other borrowings) and loan repayments are the major sources of
our 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.
9
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, and we have enjoyed strong deposit
growth in recent years. In addition, our electronic banking
activities including debit card and automated teller machine (ATM) programs,
online Internet banking services and, most recently, customer remote deposit
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 strategies.
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, 2007, we had $3.6 billion of deposits,
including $1.8 billion of transaction and savings accounts and $1.8 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, 2007 and
2006—Deposit Accounts.” See also Table 7 contained therein, which
sets forth the balances of deposits in the various types of accounts offered by
us, and Table 8, which sets forth the amount of our certificates of deposit
greater than $100,000 by time remaining until maturity as of December 31,
2007.
Borrowings: While
deposits are the primary source of funds for our lending and investment
activities and for its 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, 2007, we had $167 million of
combined borrowings from the FHLB-Seattle at a weighted average rate of
4.20%. At that date, Banner Bank had been authorized by the
FHLB-Seattle to borrow up to $781 million under a blanket floating lien security
agreement, while Islanders Bank was approved to borrow up to $23 million under a
similar agreement. The Banks also have access to additional
short-term funds through $115 million in commercial bank credit
lines. At December 31, 2007, there was no outstanding balance on
these commercial banking credit lines. For additional information
concerning our borrowings from the FHLB-Seattle, see Item 7, “Management’s
Discussion and Analysis of Financial Condition—Comparison of Financial Condition
at December 31, 2007 and 2006—Borrowings,” Table 9 contained therein, and Note
15 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, 2007, we had issued
retail repurchase agreements totaling $92 million, with a weighted average
interest rate of 3.34%, which were secured by a pledge of certain
mortgage-backed securities with a market value of $96 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, 2007. In these instances, the broker holds
our investment securities while we continue to receive the principal and
interest payments from the securities.
In
addition to our borrowings, we have also issued $120 million of trust preferred
securities (TPS). The TPS were issued in 2002, 2003, 2004, 2005, 2006
and 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 on our Consolidated Statements of Financial Condition; however, at
December 31, 2007, all of the TPS qualify 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 14, 15 and
16 of the Notes to the Consolidated Financial Statements contained in Item
8.
As of
December 31, 2007, we had 1,092 full-time and 86 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 17 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
10
(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 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, 2007. 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 $2.0 million, $1.5 million and $1.3 million for the years ended
December 31, 2007, 2006 and 2005, 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 $740,000, $587,000 and $98,000 (net
of federal tax benefit) for the years ended December 31, 2007, 2006 and 2005,
respectively. For 2005, corporate income taxes for Oregon were
reduced approximately $51,000 due to a one-time biannual state credit that is
not guaranteed to be repeated. In addition, for 2005 our Oregon and
Idaho taxes also decreased as a result of the overall decrease in pre-tax book
income due to balance-sheet restructuring transactions. 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.
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.
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
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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
examination, 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.
Under
regulations effective January 1, 2007, the FDIC adopted a new risk-based premium
system that provides for quarterly assessments based on an insured institution’s
ranking in one of four risk categories based upon supervisory and capital
evaluations. Well-capitalized institutions (generally those with
capital adequacy, asset quality, management, earnings, liquidity and sensitivity
to market risk, or “CAMELS,” composite ratings of 1 or 2) are grouped in Risk
Category I and assessed for deposit insurance at an annual rate between five and
seven basis points. The assessment rate for an individual institution
is determined according to a formula based on a weighted average of the
institution’s individual CAMELS component ratings and either five financial
ratios or, in the case of an institution with assets of $10.0 billion or more,
the average ratings of its long-term debt. Institutions in Risk
Categories II, III and IV are assessed at annual rates of 10, 28, and 43 basis
points, respectively. Further, the FDIC issued one-time assessment
credits that could be used to offset this new risk-based
expense. Banner Bank’s total credits were utilized against 2007
assessments and covered the majority of those assessments. Banner
Bank does not have any remaining credits to offset assessments in
2008. Islanders Bank’s total credits covered all of its 2007
assessments and are expected to cover one additional quarter in
2008. Absent those credits for most of 2008, even without any
increases in the assessment rate, the Company’s earnings will be materially
affected by the addition of FDIC expenses.
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 semi-annual period ended December 31, 2007, the
Financing Corporation assessment equaled 1.14 basis points for each $100 in
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 2007, the Banks incurred $398,000 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
Bank to comply with applicable capital requirements would, if unremedied, result
in restrictions on its 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. 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, 2007, 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
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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, 2007, Banner
Bank and Islanders Bank had Tier 1 leverage capital ratios of 8.87% and 11.01%,
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.
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, 2007, Banner Bank and Islanders Bank
had Tier 1 risk-based capital ratios of 9.30% and 12.57%, respectively, and
total risk-based capital ratios of 10.44% and 13.59%, respectively.
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, 2007, Banner Bank had a net worth of 8.47% of total assets under
this standard, while Islanders Bank had a similarly calculated net worth of
10.97%.
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.
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 21 of the Notes to the Consolidated Financial
Statements.
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. 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, 2007, Banner Bank
and Islanders Bank met all of the FDIC guidelines.
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 2007, an institution was required to establish reserves equal
to 3% of the first $43.9 million of transaction accounts, of which the
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first
$9.3 million was exempt, and 10% of the remainder. Similarly,
Islanders Bank was also required to establish reserves equal to 3% of the first
$45.8 million of transaction accounts, of which the first $8.5 million was
exempt, and 10% of the remainder. Currently there is no reserve
requirement on nonpersonal time deposits. As of December 31, 2007,
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 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: On November 12, 1999, the Gramm-Leach-Bliley
Financial Services Modernization Act of 1999 (“GLBA”) was signed into
law. The purpose of this legislation is to modernize 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. The Bank Secrecy Act, Title III of the USA Patriot Act,
takes measures intended to encourage information sharing among bank regulatory
agencies and law enforcement bodies. Further, certain provisions of
Title III impose affirmative obligations on a broad range of financial
institutions. Title III of the USA Patriot Act and the related FDIC
regulations impose the following requirements with respect to financial
institutions:
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establishment
of anti-money laundering programs;
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·
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establishment
of a program specifying procedures for obtaining identifying information
from customers seeking to open new accounts, including verifying the
identity of customers within a reasonable period of time; establishment of
enhanced due diligence policies, procedures and controls designed to
detect and report money
laundering; and
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prohibitions
on correspondent accounts for foreign shell banks and compliance with
record keeping obligations with respect to correspondent accounts of
foreign banks.
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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.
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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).
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 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
15
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 $150 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, 2007,
Banner Corporation’s total risk-based capital was 11.72% of risk-weighted assets
and its Tier 1 (core) capital was 10.58% 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 2007 fiscal year and for the quarter ended December 31, 2007, 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, 2007.
|
Name
|
Age
|
Position with Banner
Corporation
|
Position with Banner
Bank
|
|
D.
Michael Jones
|
65
|
President,
Chief Executive Officer,
|
President,
Chief Executive Officer,
|
|
Director
|
Director
|
||
|
Lloyd
W. Baker
|
59
|
Executive
Vice President,
|
Executive
Vice President,
|
|
Chief
Financial Officer
|
Chief
Financial Officer
|
||
|
Michael
K. Larsen
|
65
|
President,
|
|
|
Mortgage
Division
|
|||
|
Cynthia
D. Purcell
|
50
|
Executive
Vice President,
|
|
|
Bank
Operations
|
|||
|
Richard
B. Barton
|
64
|
Executive
Vice President,
|
|
|
Chief
Credit Officer
|
|||
|
Paul
E. Folz
|
53
|
Executive
Vice President,
|
|
|
Community
Banking
|
|||
|
Steven
W. Rust
|
60
|
Executive
Vice President,
|
|
|
Chief
Information Officer
|
|||
|
Douglas
M. Bennett
|
55
|
Executive
Vice President,
|
|
|
Real
Estate Lending Operations
|
|||
|
Tyrone
J. Bliss
|
50
|
Executive
Vice President,
|
|
|
Risk
Management and Compliance Officer
|
|||
|
Gary
W. Wagers
|
47
|
Executive
Vice President
|
|
|
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.
16
Michael K. Larsen joined
First Savings Bank of Washington (now Banner Bank) in 1981 and has been Banner
Bank’s senior real estate lending officer since 1982. He serves as
President of the Mortgage Division and as Chairman of the Board of Directors of
Community Financial Corporation, a subsidiary of Banner Bank.
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 since
2000.
Richard B. Barton joined
Banner Bank in 2002. 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.
Paul E. Folz joined Banner
Bank in 2002. Mr. Folz, who has 29 years of commercial lending
experience, served in his last position before joining Banner Bank as Washington
Mutual’s Senior Vice President for new market planning and development for the
commercial banking division, where he spearheaded the expansion of business
banking into new markets. Prior to that position, he served from 1989
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 30 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 32 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 29 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.
17
Item 1A – Risk Factors
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.
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.
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 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 $3.3 billion outstanding in
these types of higher risk loans at December 31, 2007, which is a significant
increase since December 31, 2006. These loans have greater credit
risk than residential real estate for the following reasons and the reasons
discussed under Item 1, “Business-Lending Activities”:
|
·
|
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, we continue to have a significant investment in
construction loan balances.
|
|
·
|
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
|
18
|
|
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.
|
|
·
|
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.
|
|
·
|
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.
|
|
·
|
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 Decrease.
We make
various assumptions and judgments about the collectibility of our loan
portfolio, including the creditworthiness of or 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. 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. Material additions to the allowance could materially
decrease our net income.
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 have
recently completed three acquisitions 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. We
may also consider and enter into new lines of business or offer new products or
services. Acquisitions and mergers involve a number of risks,
including:
|
·
|
the
time and costs associated with identifying and evaluating potential
acquisitions and merger partners;
|
|
·
|
the
estimates and judgments used to evaluate credit, operations, management
and market risks with respect to the target institution may not be
accurate;
|
|
·
|
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;
|
|
·
|
our
ability to finance an acquisition and possible dilution to our existing
shareholders;
|
|
·
|
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;
|
|
·
|
entry
into new markets where we lack
experience;
|
|
·
|
the
introduction of new products and services into our
business;
|
|
·
|
the
incurrence and possible impairment of goodwill associated with an
acquisition and possible adverse short-term effects on our results of
operations; and
|
|
·
|
the
risk of loss of key employees and
customers.
|
We may
incur substantial costs to expand, and we can give no assurance such expansion
will result in the levels of profits we seek. There can be no
assurance integration efforts for any future mergers or acquisitions will be
successful. 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. There is no assurance that, following any future mergers or
acquisition, our integration efforts will be successful or our Company, after
giving effect to the acquisition, will achieve profits comparable to or better
than our historical experience.
19
There
Is No Assurance that the Change in the Mix of Our Assets and Liabilities Will
Improve Our Operating Results.
In
addition to lending and deposit gathering activities, we previously emphasized
investments in government agency and mortgage-backed securities, funded with
wholesale borrowings. This policy was designed to enhance profitability by
allowing asset growth with low overhead expense, although securities generally
have lower yields than loans, resulting in a lower interest rate spread and
lower interest income. In recent years, we have pursued a strategy to
change the mix of our assets and liabilities to have proportionately more loans
and fewer securities and more customer deposits, particularly transaction and
savings deposits, and fewer borrowings. Our implementation of this
strategy has included significant loan and deposit growth and was accelerated by
a series of balance-sheet restructuring transactions which we executed in the
fourth quarter of 2005. While the objective of this strategy,
including the balance-sheet restructuring, is to improve our net interest income
and net income in future periods through an enhanced net interest margin, there
is no assurance that this strategy will succeed. See Item 7,
“Management Discussion and Analysis of Financial Condition and Results of
Operations,” for additional information concerning implementation of this
strategy.
If
We Are Not Able to Achieve Profitability on New Branches It May Negatively
Affect Our Earnings.
We have
expanded our presence throughout the market area, and intend to pursue further
expansion by opening additional new branches. The profitability of our expansion
strategy will depend on whether the income 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. During this period, the expense of operating these branches
may negatively affect our net income.
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. Although we
consider such sources of funds adequate for our liquidity needs, we may seek
additional debt in the future to achieve our long-term business
objectives. There can be no assurance additional borrowings, if
sought, would be available to us or, if available, would be on favorable
terms. If additional financing sources are unavailable or not
available on reasonable terms, our growth and future prospects could be
adversely affected.
Our
Growth May Require Us to Raise 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. We anticipate that our existing capital
resources will satisfy our capital requirements for the foreseeable
future. However, we may at some point need to raise additional
capital to support continued growth, both internally and through
acquisitions.
Our
ability to raise additional capital, if needed, will depend on conditions in the
capital markets at that time, which are outside our control, and on our
financial performance. Accordingly, we cannot assure you of our ability to raise
additional capital if needed or on terms acceptable to us. If we cannot raise
additional capital when needed, our ability to further expand our operations
through internal growth and acquisitions could be materially
impaired.
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, 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.
During
2007, the housing market in the United States began to experience significant
adverse trends, including accelerated price depreciation in some markets and
rising delinquency and default rates. As a result of these trends, we
saw 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
Strong
Competition within Our Market Areas May Limit Our Growth and
Profitability.
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 profitability depends 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 our interest-earning assets. For additional
information see Item 1, “Business-Competition.”
20
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 and Supervision.
We are
subject to extensive federal and state regulation and supervision, primarily
through Banner Bank and Islanders Bank and certain non-bank
subsidiaries. Banking regulations are primarily intended to protect
depositors’ funds, federal deposit insurance funds and the banking system as a
whole, not shareholders. These regulations affect our lending
practices, capital structure, investment practices, dividend policy and growth,
among other things. Congress and federal regulatory agencies
continually review banking laws, regulations and policies for possible
changes. Changes to statutes, regulations or regulatory policies,
including changes in interpretation or implementation of statutes, regulations
or policies, could affect us in substantial and unpredictable
ways. Such changes could subject us to additional costs, limit the
types of financial services and products we may offer and/or increase the
ability of non-banks to offer competing financial services and products, among
other things. Failure to comply with laws, regulations or policies
could result in sanctions by regulatory agencies, civil money penalties and/or
reputation damage, which could have a material adverse effect on our business,
financial condition and results of operations. While we have policies
and procedures designed to prevent any such violations, there can be no
assurance that such violations will not occur. See Item 1,
“Business-Regulation.”
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
recently 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
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.
21
Item 1B – Unresolved Staff Comments
None.
Item 2 – Properties
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, 2007, we have 84 branch offices located in Washington, Oregon and
Idaho. Three of those 84 are Islanders Bank branches and 81 are
Banner Bank branches. Sixty-two branches are located in Washington,
fourteen in Oregon and eight in Idaho. Of those offices,
approximately half are owned and the other half are leased
facilities. We also have twelve 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.
Item 3 – Legal Proceedings
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.
There
have not been any Internal Revenue Service audits of our federal income tax
returns during the past five years. We have not been required to pay
any IRS penalties for failing to make disclosures with respect to certain
transactions that have been identified by the IRS as abusive or that have a
significant tax avoidance purpose.
Item 4 – Submission of Matters to a Vote of Security
Holders
None.
22
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, 2007 totaled 1,367
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 for the years ended December 31, 2007, 2006 and
2005.
|
Year
Ended December 31, 2007
|
High
|
Low
|
Cash
Dividend Declared
|
|||||||||
|
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
Dividend Declared
|
||||||||||
|
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. However, an institution that has
converted to a stock form of ownership may not declare or pay a dividend on, or
repurchase any of, its common stock if the effect thereof would cause the
regulatory capital of the institution to be reduced below the amount required
for the liquidation account which was established in connection with the
conversion. Under Washington law, we are prohibited from paying a
dividend if, as a result of its payment, we would be unable to pay its debts as
they become due in the normal course of business, or if our total liabilities
would exceed our total assets.
Payments
of the distributions on our trust preferred securities from the special purpose
subsidiary trusts we sponsored are fully and unconditionally guaranteed by us.
The junior subordinated debentures that we have issued to our subsidiary trusts
are senior to our shares of common stock. As a result, we must make required
payments on the junior subordinated debentures before any dividends can be paid
on our common stock and, in the event of our bankruptcy, dissolution or
liquidation, the interest and principal obligations under the junior
subordinated debentures must be satisfied before any distributions can be made
on our common stock. We may defer the payment of interest on each of the junior
subordinated debentures for a period not to exceed 20 consecutive quarters,
provided that the deferral period does not extend beyond the stated maturity.
During such deferral period, distributions on the corresponding trust preferred
securities will also be deferred and we may not pay cash dividends to the
holders of shares of our common stock.
23
Issuer
Purchases of Equity Securities
The
following table sets forth information for the three months ended December 31,
2007 with respect to repurchases of our outstanding common shares:
|
Period
|
Total
Number of Shares
Purchased
(1)
|
Average
Price Paid
per
Share
|
Total
Number of Shares Purchased as Part of Publicly Announced
Plan
|
Maximum
Number of Shares that May Yet be Purchased Under the Plan
|
|||||||||||
|
Beginning
|
Ending
|
||||||||||||||
|
October
1, 2007
|
October
31, 2007
|
--
|
--
|
--
|
|||||||||||
|
November
1, 2007
|
November
30, 2007
|
57,800
|
28.68
|
--
|
|||||||||||
|
December
1, 2007
|
December
31, 2007
|
357
|
30.38
|
--
|
|||||||||||
|
Total
|
58,157
|
$
|
45.737
|
--
|
750,000
|
(2
|
)
|
||||||||
(1) Shares
indicated as purchased during the periods presented include 357 shares acquired
at current market values as consideration for the exercise of certain fully
vested options.
(2) 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. As of December 31, 2007, the Company had repurchased 57,800
shares of stock under this program.
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 the 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
Ending
|
||||||
|
Index
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
|
Banner
Corporation
|
100.00
|
138.36
|
175.37
|
179.81
|
260.26
|
172.45
|
|
NASDAQ
Composite
|
100.00
|
150.01
|
162.89
|
165.13
|
180.85
|
198.60
|
|
SNL
$1B-$5B Bank Index
|
100.00
|
135.99
|
167.83
|
164.97
|
190.90
|
139.06
|
|
SNL
NASDAQ Bank Index
|
100.00
|
129.08
|
147.94
|
143.43
|
161.02
|
126.42
|
*Assumes
$100 invested in the Common Stock at the closing price per share and each index
on December 31, 2002 and that all dividends were
reinvested. Information for the graph was provided by SNL Financial
L. C. © 2008.
24
Item 6 – Selected Consolidated Financial and Other
Data
The
following condensed consolidated statements of operations and financial
condition and selected performance ratios as of December 31, 2007, 2006, 2005,
2004, and 2003 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)
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||
|
Restated
|
Restated
|
Restated
|
Restated
|
||||||||||||
|
Total
assets
|
$
|
4,495,141
|
$
|
3,495,566
|
$
|
3,040,555
|
$
|
2,897,067
|
$
|
2,635,313
|
|||||
|
Loans
receivable, net
|
3,763,790
|
2,930,455
|
2,408,833
|
2,063,238
|
1,700,865
|
||||||||||
|
Cash
and securities (1)
|
354,809
|
347,410
|
427,681
|
649,516
|
779,472
|
||||||||||
|
Deposits
|
3,620,593
|
2,794,592
|
2,323,313
|
1,925,909
|
1,670,940
|
||||||||||
|
Borrowings
|
372,039
|
404,330
|
459,821
|
723,842
|
738,699
|
||||||||||
|
Stockholders’
equity
|
$
|
437,846
|
$
|
250,607
|
$
|
220,857
|
$
|
214,924
|
$
|
202,087
|
|||||
|
Shares
outstanding
|
16,266
|
12,314
|
12,082
|
11,857
|
11,473
|
||||||||||
|
Shares
outstanding excluding unearned, restricted shares
held
in ESOP
|
16,026
|
12,074
|
11,782
|
11,482
|
11,039
|
||||||||||
|
OPERATING
DATA:
|
|||||||||||||||
|
For
the Years Ended December 31
|
|||||||||||||||
|
(In
thousands)
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||
|
Restated
|
Restated
|
Restated
|
Restated
|
||||||||||||
|
Interest
income
|
$
|
295,309
|
$
|
243,019
|
$
|
190,160
|
$
|
156,230
|
$
|
140,441
|
|||||
|
Interest
expense
|
145,690
|
116,114
|
81,377
|
59,915
|
59,848
|
||||||||||
|
Net
interest income before provision loan losses
|
149,619
|
126,905
|
108,783
|
96,315
|
80,593
|
||||||||||
|
Provision
for loan losses
|
5,900
|
5,500
|
4,903
|
5,644
|
7,300
|
||||||||||
|
Net
interest income
|
143,719
|
121,405
|
103,880
|
90,671
|
73,293
|
||||||||||
|
Mortgage
banking operations
|
6,270
|
5,824
|
5,647
|
5,522
|
9,447
|
||||||||||
|
Gain
(loss) on sale of securities
|
--
|
65
|
(7,302
|
)
|
141
|
63
|
|||||||||
|
Increase
in valuation of financial instruments carried
at
fair value
|
11,574
|
--
|
--
|
--
|
--
|
||||||||||
|
Other
operating income
|
20,739
|
14,686
|
12,199
|
11,305
|
10,071
|
||||||||||
|
Insurance
recovery, net proceeds
|
--
|
(5,350
|
)
|
--
|
--
|
--
|
|||||||||
|
FHLB
prepayment penalties
|
--
|
--
|
6,077
|
--
|
--
|
||||||||||
|
Other
operating expenses
|
127,489
|
99,731
|
91,471
|
79,714
|
69,876
|
||||||||||
|
Income
before provision for income taxes
|
54,813
|
47,599
|
16,876
|
27,925
|
22,998
|
||||||||||
|
Provision
for income taxes
|
17,890
|
16,055
|
4,896
|
8,911
|
7,129
|
||||||||||
|
Net
income
|
$
|
36,923
|
$
|
31,544
|
$
|
11,980
|
$
|
19,014
|
$
|
15,869
|
|||||
|
PER
SHARE DATA:
|
|||||||||||||||
|
At
or for the Years Ended December 31
|
|||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||
|
Restated
|
Restated
|
Restated
|
Restated
|
||||||||||||
|
Net
income:
|
|||||||||||||||
|
Basic
|
$
|
2.53
|
$
|
2.65
|
$
|
1.04
|
$
|
1.71
|
$
|
1.47
|
|||||
|
Diluted
|
2.49
|
2.58
|
1.00
|
1.62
|
1.41
|
||||||||||
|
Book
value per share (2)
|
27.32
|
20.76
|
18.74
|
18.72
|
18.31
|
||||||||||
|
Tangible
book value per share (2)
|
18.73
|
17.75
|
15.67
|
15.53
|
15.00
|
||||||||||
|
Cash
dividends
|
0.77
|
0.73
|
0.69
|
0.65
|
0.61
|
||||||||||
|
Dividend
payout ratio (basic)
|
30.43
|
%
|
27.55
|
%
|
66.35
|
%
|
38.01
|
%
|
41.50
|
%
|
|||||
|
Dividend
payout ratio (diluted)
|
30.92
|
%
|
28.29
|
%
|
69.00
|
%
|
40.12
|
%
|
43.26
|
%
|
|||||
|
(footnotes
follow tables)
|
|||||||||||||||
25
|
OTHER
DATA:
|
|||||||||||||||
|
At
December 31
|
|||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||
|
Full
time equivalent employees
|
1,139
|
898
|
856
|
778
|
705
|
||||||||||
|
Number
of branches
|
84
|
58
|
57
|
49
|
42
|
||||||||||
KEY
FINANCIAL RATIOS:
|
At
or For the Years Ended December 31
|
|||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||
|
Restated
|
Restated
|
Restated
|
Restated
|
||||||||||||||
|
Performance
Ratios:
|
|||||||||||||||||
|
Return
on average assets (3)
|
0.91
|
%
|
0.96
|
%
|
0.39
|
%
|
0.69
|
%
|
0.65
|
%
|
|||||||
|
Return
on average equity (4)
|
10.07
|
13.29
|
5.43
|
9.10
|
8.11
|
||||||||||||
|
Average
equity to average assets
|
9.06
|
7.19
|
7.23
|
7.59
|
8.00
|
||||||||||||
|
Interest
rate spread (5)
|
3.85
|
3.97
|
3.72
|
3.65
|
3.47
|
||||||||||||
|
Net
interest margin (6)
|
3.99
|
4.08
|
3.79
|
3.71
|
3.53
|
||||||||||||
|
Non-interest
income to average assets
|
0.95
|
0.62
|
0.35
|
0.62
|
0.80
|
||||||||||||
|
Non-interest
expense to average assets
|
3.15
|
2.86
|
3.20
|
2.90
|
2.86
|
||||||||||||
|
Efficiency
ratio (7)
|
67.74
|
64.00
|
81.75
|
70.37
|
69.75
|
||||||||||||
|
Average interest-earning assets to interest-bearing
liabilities
|
103.52
|
102.81
|
102.66
|
102.92
|
102.31
|
||||||||||||
|
Asset
Quality Ratios:
|
|||||||||||||||||
|
Allowance for loan losses as a percent of total loans at end
of period
|
1.20
|
1.20
|
1.27
|
1.41
|
1.51
|
||||||||||||
|
Net charge-offs as a percent of average outstanding
loans
during the
period
|
0.08
|
0.03
|
0.16
|
0.11
|
0.47
|
||||||||||||
|
Non-performing
assets as a percent of total assets
|
0.98
|
0.43
|
0.36
|
1.20
|
1.20
|
||||||||||||
|
Ratio
of allowance for loan losses to non-performing loans (8)
|
1.08
|
2.53
|
2.96
|
1.86
|
0.92
|
||||||||||||
|
Consolidated
Capital Ratios:
|
|||||||||||||||||
|
Total
capital to risk-weighted assets
|
11.72
|
11.80
|
12.29
|
12.24
|
12.77
|
||||||||||||
|
Tier
1 capital to risk-weighted assets
|
10.58
|
9.53
|
10.17
|
10.94
|
11.48
|
||||||||||||
|
Tier
1 leverage capital to average assets
|
10.04
|
8.76
|
8.59
|
8.93
|
8.73
|
||||||||||||
|
(1)
|
Includes
securities available for sale and held to maturity.
|
|
(2)
|
Calculated
using shares outstanding excluding unearned restricted shares held in
ESOP.
|
|
(3)
|
Net
income divided by average assets
|
|
(4)
|
Net
income divided by average equity
|
|
(5)
|
Difference
between the average yield on interest-earning assets and the average cost
of interest-bearing liabilities.
|
|
(6)
|
Net
interest income before provision for loan losses as a percent of average
interest-earning assets.
|
|
(7)
|
Other
operating expenses divided by the total of net interest income before loan
losses and other operating income (non-interest
income).
|
|
(8)
|
Non-performing
loans consist of nonaccrual and 90 days past due
loans.
|
26
Item 7 - Management’s Discussion and Analysis of Financial
Condition and Results of Operations
We are 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, a recent acquisition, as explained
below. Banner Bank is a Washington-chartered commercial bank that
conducts business from its main office in Walla Walla, Washington and, as of
December 31, 2007, its 81 branch offices and 12 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. As of December 31, 2007, we had
total consolidated assets of $4.5 billion, total loans of $3.8 billion, total
deposits of $3.6 billion and total stockholders’ equity of $438
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.
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 aggressive franchise expansion, we have
added 18 new branches through acquisitions, opened 21 new branches and relocated
eight others in the last three years. In 2007 alone, we opened ten
branches, relocated five others and closed three acquisitions. In
large part because of this expansion activity, we have experienced loan growth
of $1.7 billion and deposit growth of $1.7 billion over the last three-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 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, we plan to open only three additional branches in 2008, a normal level
of growth for a bank of our size.
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. San Juan Financial Holding Company was merged into Banner
Corporation and its wholly owned subsidiary, Islanders Bank, has continued
operations as a subsidiary of Banner Corporation. F&M Bank and
NCW Community Bank were merged into Banner Bank upon acquisition and now operate
under the Banner Bank name. The financial results for the year ended
December 31, 2007 include the assets, liabilities and results of operations for
all three of the acquired companies from their respective acquisition dates of
May 1, 2007 and October 10, 2007.
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, FHLB advances, other
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
increased $22.7 million for the year ended December 31, 2007 to $149.6 million
as compared to the prior year, primarily as a result of significant growth in
interest-earning assets and interest-bearing liabilities, including growth
resulting from the three acquisitions, and as a result of changes in the mix of
both interest-earning assets and interest-bearing liabilities.
Our net
income also is affected by provisions for loan losses and the level of our other
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. The provision for loan
losses was $5.9 million for the year ended December 31, 2007, an increase of
$400,000 compared to the year ended December 1, 2006. The increase in
the provision for loan losses in the current year reflects an increase in
delinquencies and non-performing loans, balanced against slower growth in the
size of the loan portfolio, excluding the effects of the mergers, continuing
changes in the loan mix and a modest level of net charge-offs. Other
operating income, excluding the fair value adjustments, increased by $6.5
million, or 32%, to $27.0 million for the year ended December 31, 2007 from
$20.6 million for the year ended December 31, 2006, primarily as a result of
increased deposit fees and other service charges reflecting in part the recent
acquisitions. Revenues (net interest income before the provision for
loan losses plus other operating income), excluding the gain on sale of
securities and fair value adjustments, increased 20% to $176.6 million for the
year ended December 31, 2007, compared to $147.4 million for the year ended
December 31, 2006. Other operating expenses increased $33.1 million
to $127.5 million for the year ended December 31, 2007 from $94.4 million for
2006, an increase of 35% from a year earlier, largely reflecting our continued
growth and the effect of our acquisitions. Other operating expenses
in the prior year were reduced by a $5.4 million (net of costs) insurance
recovery. Without the recovery, those expenses would have been $99.7
million for the year ended December 31, 2006. Excluding the insurance
recovery, recurring other operating expenses for the year ended December 31,
2007 would have increased by $27.8 million from $99.7 million in 2006, a 28%
increase that was largely driven by the franchise expansion strategy, including
the effect of the acquisitions.
Net
income increased by $5.4 million to $36.9 million for the year ended December
31, 2007, while earnings from recurring operations (see following paragraph),
exclusive of the change in valuation of financial instruments carried at fair
value and the 2006 insurance recovery, increased by $1.4 million to $29.5
million, compared to $28.1 million for the year ended December 31,
2006. The modest increase in earnings
27
from
recurring operations despite a much larger earning asset base primarily reflects
a moderately narrower net interest margin and a higher level of operating
expenses as a result of the new branches and integration activities associated
with the acquisitions.
Earnings
from recurring operations and other earnings information excluding the change in
valuation of financial instruments carried at fair value and the insurance
recovery represent non-GAAP (Generally Accepted Accounting Principles) financial
measures. Management has presented these non-GAAP financial measures
in this discussion and analysis because it believes that they provide more
useful and comparative information to assess trends in our core
operations. Where applicable, we have also presented comparable
earnings information using GAAP financial measures.
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. 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. Our 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 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
construction and residential lending, we expect commercial lending (including
commercial real estate, commercial business and agricultural loans) and consumer
lending to become increasingly important activities for us.
Deposits,
including customer retail repurchase agreements, and loan repayments are the
major sources of our funds for lending and other investment
purposes. 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.
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,
matching deposit and loan products, and customer preferences and
concerns.
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.
Critical
Accounting Policies
In the
opinion of management, the accompanying consolidated statements of financial
condition and related interim 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.
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 and (iii) the valuation of financial assets
and liabilities recorded at fair value, goodwill, mortgage servicing rights and
real estate held for sale. These policies and judgments, estimates
and assumptions are described in greater detail below in Management’s Discussion
and Analysis and in Note 1 of 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 the results of operations or financial
condition. 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, see Notes 4 and 9 of the Notes to
the Consolidated Financial Statements.
Adoption
and Pending Adoption of Recent Accounting Pronouncements
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.
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
28
income
tax and income tax of the States of Idaho and Oregon. The years 2004
through 2006 remain open to examination for federal income taxes and State
income taxes. As of January 1, 2007 and December 31, 2007, 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, 2007 or December 31, 2007. 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, 2007 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.
General: Total
assets increased $1 billion, or 29%, from $3.496 billion at December 31, 2006,
to $4.495 billion at December 31, 2007. Recent acquisitions on May 1,
2007 and October 10, 2007 contributed $800 million in assets, while the
remaining increase largely resulted from growth in the loan portfolio and was
funded primarily by deposit growth. Net loans receivable (gross loans
less loans in process, deferred fees and discounts, and allowance for loan
losses) increased $833 million, or 28%, from $2.931 billion at December 31,
2006, to $3.764 billion at December 31, 2007. Internal loan growth
was substantial and broad-based; however, the portfolio growth largely reflects
the $596 million of loans acquired (as of the closing dates of May 1 and October
10, 2007) through the purchases of F&M, SJFHC and NCW. Although
internally generated production of new loans declined appreciably in the second
half of 2007, we continue to maintain a significant investment in construction
and land loans, reflecting a core competency of Banner
Bank. Including the effect of the acquisitions, loans to finance the
construction of one- to four-family residential real estate increased by $43
million, or 8%, and land and development loans increased by $95 million, or 24%,
since December 31, 2006. In addition, and largely reflecting the
acquisitions, loans to finance commercial real estate increased by $286 million,
or 48%, while loans secured by multi-family real estate increased by $19
million, or 13%. Loan growth also included commercial business loans,
which increased by $229 million, or 49%, consumer loans, which increased by $75
million, or 64%, and loans to finance existing one- to four-family residential
properties, which increased by $102 million, or 28%, at December 31, 2007
compared to December 31, 2006. By contrast, at December 31, 2007
loans to finance commercial and multifamily construction decreased by $29
million, or 21%, from December 31, 2006.
Securities
decreased $18 million, or 6%, from $274 million at December 31, 2006, to $256
million at December 31, 2007, as sales and repayments exceeded purchases and the
$34 million added as a result of the acquisitions. Effective January
1, 2007, we elected to reclassify all our securities available for sale to fair
value following our adoption of SFAS No. 159. At December 31, 2007,
the amortized cost of our securities available for sale, which are carried at
fair value, exceeded their fair value by $1.4 million. Property and
equipment increased by $40 million to $98 million at December 31, 2007, from $58
million at December 31, 2006. The increase included additional site,
construction and equipment costs associated with new facilities recently opened
or in progress as part of our continuing branch expansion strategy, and $21
million added through recent acquisitions. We also had an increase of
$13 million in bank-owned life insurance, with nearly $2.0 million coming from
the growth of cash surrender values on existing policies and the remainder as a
result of the acquisitions.
Deposits
increased $826 million, or 30%, from $2.795 billion at December 31, 2006, to
$3.620 billion at December 31, 2007. The acquisitions of F&M,
SJFHC and NCW resulted in the addition of $560 million in total deposits as of
the acquisition dates. Non-interest-bearing deposits increased $152
million, or 46%, to $484 million, while interest-bearing deposits increased $674
million, or 27%, to $3.136 billion at December 31, 2007. The
aggregate total of transaction and savings accounts, including money market
accounts, increased by $534 million, or 43%, to $1.772 billion, reflecting our
focused efforts to grow these important core deposits, as well as the effects of
the acquisitions. Increasing core deposits is a key element of our
expansion strategy, including the recent and planned additions and renovations
of branch locations. Reflecting internally generated growth and the
effects of the acquisitions, transaction and savings accounts represent 49.0% of
total deposits at December 31, 2007, compared to 44.3% a year
earlier. FHLB advances decreased $10 million from $177 million at
December 31, 2006, to $167 million at December 31, 2007, while other borrowings
decreased $11 million to $92 million at December 31, 2007. The
decrease in other borrowings reflects an increase of $15 million in retail
repurchase agreements that are primarily related to customer cash management
accounts, as well as a decrease of $26 million of repurchase agreement
borrowings from securities dealers. Junior subordinated debentures
decreased by $10 million, primarily reflecting the cumulative fair value
adjustments recorded subsequent to the adoption of SFAS 159, as recent changes
in credit market conditions had a particularly significant impact on this type
of securities.
During
the year ended December 31, 2007, we increased our capital by issuing 995,590
new shares of Banner Corporation common stock at an average net price of $37.75
through our Dividend Reinvestment and Direct Stock Purchase and Sale
Plan. In addition, we issued a net 81,618 shares in connection with
the exercise and forfeiture of vested stock options and grants, and 2,932,471
shares were issued in the acquisitions of F&M, SJFNC and
NCW. This stock issuance, combined with the changes in retained
earnings as a result of operations and the effects of fair value accounting, net
of quarterly dividend distributions, resulted in a $187.2 million increase in
stockholders’ equity.
Investments: At December 31, 2007,
our consolidated investment portfolio totaled $256 million and consisted
principally of U.S. Government agency obligations, mortgage-backed and
mortgage-related securities, municipal bonds, corporate debt obligations, and
Freddie Mac stock. 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, 2007, investment securities decreased by $18 million
($52 million excluding acquisitions) as we redeployed cash flow from securities
to fund loan growth and pay down borrowings. Holdings of
mortgage-backed securities decreased $50 million and U.S. Treasury and agency
obligations increased $3 million. Ownership of corporate and other
securities increased $23 million, largely as a result of the purchase of
approximately $25 million of trust preferred securities issued by other
financial institutions, while municipal bonds increased $7 million.
29
Mortgage-Backed Obligations: At December 31, 2007, our mortgage-backed and mortgage-related securities totaled $100 million, or 39% of the consolidated investment portfolio. Included within this amount were collateralized mortgage obligations (CMOs) with a net carrying value of $23 million. The estimated fair value of the mortgage-backed and mortgage-related securities at December 31, 2007 was $100 million, which is $1 million less than the amortized cost of $101 million. At December 31, 2007, our portfolio of mortgage-backed and mortgage-related securities had a weighted average coupon rate of 4.83%. At that date, 71% of the mortgage-backed and mortgage-related securities pay interest at a fixed rate and 29% pay at an adjustable-interest rate. The estimated weighted average remaining life of the portfolio was 4.5 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,
2007 totaled $50 million at estimated fair value ($50 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, 2007 totaled $5 million at estimated fair value ($5
million at amortized cost). At December 31, 2007, general obligation
bonds and revenue bonds had total estimated fair values of $38 million and $17
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, 2007, our
municipal bond portfolio had a weighted average maturity of approximately 10.7
years, an average coupon rate of 4.78% and an average taxable equivalent yield
of 6.19%. 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 $5.4 million and a fair value of $5.4 million.
Corporate
Bonds: Our corporate bond portfolio, which totaled $65 million
at fair value ($66 million at amortized cost) at December 31, 2007, was
comprised principally of intermediate-term fixed-rate securities issued by a
finance company and long-term fixed- and adjustable-rate capital securities
issued by financial institutions. At December 31, 2007, the portfolio
had a weighted average maturity of 26.8 years and a weighted average coupon rate
of 6.73%.
U.S. Government and Agency
Obligations: Our portfolio of U.S. Government and agency
obligations had a fair value of $30 million ($30 million at amortized cost) at
December 31, 2007, a weighted average maturity of 3.5 years and a weighted
average coupon rate of 4.85%. 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.
30
The
following tables set forth certain information regarding carrying values and
percentage of total carrying values of our consolidated portfolio of securities
at fair value and securities available for sale, carried at estimated fair
market value, and held to maturity, carried at amortized cost (dollars in
thousands):
|
Table
1: Securities At Fair Value and Securities Available for
Sale
|
|||||||||||||||||||||||||
|
Securities
At Fair Value December 31
|
Securities
Available for Sale
|
||||||||||||||||||||||||
|
At
December 31
|
|||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||||||||
|
Carrying
Value
|
Percent
of Total
|
Carrying
Value
|
Percent
of Total
|
Carrying
Value
|
Percent
of Total
|
Carrying
Value
|
Percentof
Total
|
||||||||||||||||||
|
U.S.
Government Treasury and agency obligations
|
$
|
30,015
|
14.7
|
%
|
$
|
27,295
|
12.1
|
%
|
$
|
24,921
|
9.6
|
%
|
$
|
139,872
|
25.6
|
%
|
|||||||||
|
Municipal
bonds:
|
|||||||||||||||||||||||||
|
Taxable
|
2,043
|
1.0
|
4,555
|
2.0
|
5,334
|
2.0
|
5,565
|
1.0
|
|||||||||||||||||
|
Tax
exempt
|
7,180
|
3.5
|
3,044
|
1.4
|
3,323
|
1.3
|
4,526
|
0.8
|
|||||||||||||||||
|
Corporate
bonds
|
56,125
|
27.7
|
37,382
|
16.5
|
44,115
|
17.0
|
61,993
|
11.3
|
|||||||||||||||||
|
Mortgage-backed
or related securities:
|
|||||||||||||||||||||||||
|
Mortgage-backed
securities
|
|||||||||||||||||||||||||
|
GNMA
|
2,732
|
1.4
|
--
|
--
|
--
|
--
|
8,078
|
1.5
|
|||||||||||||||||
|
FHLMC
|
32,380
|
16.0
|
37,412
|
16.5
|
43,613
|
16.8
|
63,532
|
11.6
|
|||||||||||||||||
|
FNMA
|
41,377
|
20.4
|
42,943
|
19.0
|
50,054
|
19.2
|
88,967
|
16.2
|
|||||||||||||||||
|
Other
|
--
|
--
|
--
|
--
|
--
|
--
|
7,911
|
1.4
|
|||||||||||||||||
|
Total
mortgage-backed securities
|
76,489
|
37.8
|
80,355
|
35.5
|
93,667
|
36.0
|
168,488
|
30.7
|
|||||||||||||||||
|
Mortgage-related
securities
|
|||||||||||||||||||||||||
|
CMOs–agency
backed
|
23,286
|
11.5
|
43,998
|
19.5
|
54,936
|
21.0
|
111,601
|
20.4
|
|||||||||||||||||
|
CMOs–non-agency
|
--
|
0.0
|
25,814
|
11.4
|
30,303
|
11.6
|
51,853
|
9.5
|
|||||||||||||||||
|
Total
mortgage-related securities
|
23,286
|
11.5
|
69,812
|
30.9
|
85,239
|
32.6
|
163,454
|
29.9
|
|||||||||||||||||
|
Total
|
99,775
|
49.3
|
150,167
|
66.4
|
178,906
|
68.6
|
331,942
|
60.6
|
|||||||||||||||||
|
Equity
securities
|
7,725
|
3.8
|
3,710
|
1.6
|
3,685
|
1.5
|
3,937
|
0.7
|
|||||||||||||||||
|
Total
securities available for sale
|
$
|
202,863
|
100.0
|
%
|
$
|
226,153
|
100.0
|
%
|
$
|
260,284
|
100.0
|
%
|
$
|
547,835
|
100.0
|
%
|
|||||||||
|
Table
2: Securities Held to Maturity
|
|||||||||||||||||||||||||
|
Municipal
bonds:
|
|||||||||||||||||||||||||
|
Taxable
|
$
|
2,565
|
4.8
|
% |
$
|
99
|
0.2
|
%
|
$
|
1,611
|
3.2
|
%
|
$
|
1,647
|
3.3
|
%
|
|||||||||
|
Tax
exempt
|
42,701
|
79.8
|
39,773
|
83.1
|
41,521
|
81.5
|
40,276
|
80.7
|
|||||||||||||||||
|
Corporate
bonds
|
8,250
|
15.4
|
8,000
|
16.7
|
7,750
|
15.2
|
7,750
|
15.5
|
|||||||||||||||||
|
Mortgage-backed
securities:
|
|||||||||||||||||||||||||
|
FHLMC
certificates
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||
|
FNMA
certificates
|
--
|
--
|
--
|
--
|
67
|
0.1
|
241
|
0.5
|
|||||||||||||||||
|
Total
mortgage-backed securities
|
--
|
--
|
--
|
--
|
67
|
0.1
|
241
|
0.5
|
|||||||||||||||||
|
Total
|
$
|
53,516
|
100.0
|
%
|
$
|
47,872
|
100.0
|
%
|
$
|
50,949
|
100.0
|
%
|
$
|
49,914
|
100.0
|
%
|
|||||||||
|
Estimated
market value
|
$
|
54,721
|
$
|
49,008
|
$
|
52,398
|
$
|
51,437
|
|||||||||||||||||
31
The
following table shows the maturity or period to repricing of our consolidated
portfolio of securities at fair value (dollars in thousands):
Table
3: Securities–At Fair Value—Maturity/Repricing and
Rates
|
Securities
at Fair Value at December 31, 2007
|
|||||||||||||||||||||||||||||||||||||||
|
One
Year or Less
|
Over
One to Five Years
|
Over
Five to Ten Years
|
Over
Ten to Twenty Years
|
Over
Twenty Years
|
Total
|
||||||||||||||||||||||||||||||||||
|
Carrying
Value
|
Weighted
Average Yield
|
Carrying
Value
|
Weighted
Average Yield
|
Carrying
Value
|
Weighted
Average Yield
|
Carrying
Value
|
Weighted
Average Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average Yield (1)
|
||||||||||||||||||||||||||||
|
U.S.
Government Treasury
and
agency obligations:
|
|||||||||||||||||||||||||||||||||||||||
|
Fixed-rate
|
$
|
--
|
--
|
%
|
$
|
29,808
|
4.84
|
%
|
$
|
--
|
--
|
%
|
$
|
207
|
5.21
|
%
|
$
|
--
|
--
|
%
|
$
|
30,015
|
4.84
|
%
|
|||||||||||||||
|
Adjustable-rate
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||||||||||||
|
--
|
--
|
29,808
|
4.84
|
--
|
--
|
207
|
5.21
|
--
|
--
|
30,015
|
4.84
|
||||||||||||||||||||||||||||
|
Municipal
bonds:
|
|||||||||||||||||||||||||||||||||||||||
|
Taxable
|
561
|
6.35
|
773
|
6.88
|
317
|
4.57
|
392
|
5.00
|
--
|
--
|
2,043
|
6.02
|
|||||||||||||||||||||||||||
|
Tax
exempt
|
1,087
|
4.19
|
4,524
|
4.26
|
699
|
4.10
|
870
|
4.07
|
--
|
--
|
7,180
|
4.21
|
|||||||||||||||||||||||||||
|
1,648
|
4.93
|
5,297
|
4.64
|
1,016
|
4.25
|
1,262
|
4.36
|
--
|
--
|
9,223
|
4.61
|
||||||||||||||||||||||||||||
|
Corporate
bonds:
|
|||||||||||||||||||||||||||||||||||||||
|
Fixed-rate
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||||||||||||
|
Adjustable-rate
|
56,125
|
6.92
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
56,125
|
6.92
|
|||||||||||||||||||||||||||
|
56,125
|
6.92
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
56,125
|
6.92
|
||||||||||||||||||||||||||||
|
Mortgage-backed
obligations:
|
|||||||||||||||||||||||||||||||||||||||
|
Fixed-rate
|
--
|
--
|
--
|
--
|
6,841
|
4.87
|
28,045
|
4.68
|
12,805
|
5.38
|
47,691
|
4.90
|
|||||||||||||||||||||||||||
|
Adjustable-rate
|
2,732
|
4.11
|
2,515
|
5.04
|
23,551
|
4.67
|
--
|
--
|
--
|
--
|
28,798
|
4.65
|
|||||||||||||||||||||||||||
|
2,732
|
4.11
|
2,515
|
5.04
|
30,392
|
4.72
|
28,045
|
4.68
|
12,805
|
5.38
|
76,489
|
4.80
|
||||||||||||||||||||||||||||
|
Mortgage-related
obligations:
|
|||||||||||||||||||||||||||||||||||||||