Unassociated Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
  
  [ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED   March 31, 2010.
 
 
OR
 
 [    ] 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
  ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________   to   _______________
 
 
Commission File Number 0-26584
 
BANNER CORPORATION
(Exact name of registrant as specified in its charter)
 
 Washington 91-1691604
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
 
 
10 South First Avenue, Walla Walla, Washington 99362
(Address of principal executive offices and zip code)
 
Registrant's telephone number, including area code:  (509) 527-3636
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
  Yes     [X]  No     [   ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for  such
shorter period that the registrant was required to submit and post such files).
Yes 
 [   ]
No
   [   ]  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer     [   ]
 Accelerated filer     [X]
Non-accelerated filer     [   ]
 Smaller reporting company     [   ]   
 
 
           
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
  [   ]
No
  [X]  
 
APPLICABLE ONLY TO CORPORATE ISSUERS
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Title of class:
Common Stock, $.01 par value per share
  
As of  April 30, 2010
23,539,984 shares*
 
 
*  Includes 240,381 shares held by the Employee Stock Ownership Plan that have not been released, committed to be released, or allocated to participant accounts.
 
 
 
 
 
 
 
BANNER CORPORATION AND SUBSIDIARIES
Table of Contents

PART I - FINANCIAL INFORMATION
 
Item 1 - Financial Statements.  The Consolidated Financial Statements of Banner Corporation and Subsidiaries filed as a part of the report are as follows:
 
Consolidated Statements of Financial Condition as of March 31, 2010 and December 31, 2009
3
   
Consolidated Statements of Operations for the Quarters Ended March 31, 2010 and 2009
4
   
Consolidated Statements of Comprehensive Income (Loss) for the Quarters Ended March 31, 2010 and 2009
5
   
Consolidated Statements of Changes in Stockholders’ Equity for the Quarters Ended March 31, 2010 and 2009
6
   
Consolidated Statements of Cash Flows for the Quarters Ended March 31, 2010 and 2009
9
   
Selected Notes to Consolidated Financial Statements
11
   
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
  
   
Special Note Regarding Forward-Looking Statements
32
   
Executive Overview
32
   
Comparison of Financial Condition at March 31, 2010 and December 31, 2009
36
   
Comparison of Results of Operations for the Quarters Ended March 31, 2010 and 2009
37
   
Asset Quality
41
   
Liquidity and Capital Resources
45
   
Capital Requirements
46
   
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
  
   
Market Risk and Asset/Liability Management
47
   
Sensitivity Analysis
47
   
Item 4 - Controls and Procedures
51
   
PART II - OTHER INFORMATION
  
   
Item 1 - Legal Proceedings
52
   
Item 1A - Risk Factors
52
   
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
53
   
Item 3 - Defaults upon Senior Securities
53
   
Item 4 – [Removed and Reserved]
  
   
Item 5 - Other Information
53
   
Item 6 - Exhibits
54
   
SIGNATURES
56
 

 
 
2 
 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
March 31, 2010 and December 31, 2009

   
March 31
    
December 31
  
ASSETS
    
2010
    
2009
  
               
Cash and due from banks
  
$
277,752
  
$
323,005
  
               
Securities—trading, cost $162,997 and $192,853, respectively
    
138,659
    
147,151
  
Securities—available-for-sale, cost $95,376 and $95,174, respectively
    
96,718
    
95,667
  
Securities—held-to-maturity, fair value $76,390 and $76,489, respectively
    
73,555
    
74,834
  
               
Federal Home Loan Bank (FHLB) stock
    
37,371
    
37,371
  
Loans receivable:
              
Held for sale, fair value $4,472 and $4,534, respectively
    
4,398
    
4,497
  
Held for portfolio
    
3,684,459
    
3,785,624
  
Allowance for loan losses
    
(95,733
)
  
(95,269
)
     
3,593,124
    
3,694,852
  
               
Accrued interest receivable
    
18,501
    
18,998
  
Real estate owned, held for sale, net
    
95,074
    
77,743
  
Property and equipment, net
    
101,541
    
103,542
  
Other intangibles, net
    
10,426
    
11,070
  
Deferred income tax asset, net
    
14,470
    
14,811
  
Income taxes receivable, net
    
18,844
    
17,436
  
Bank-owned life insurance (BOLI)
    
55,125
    
54,596
  
Other assets
    
50,551
    
51,145
  
   
$
4,581,711
  
$
4,722,221
  
LIABILITIES
              
Deposits:
              
Non-interest-bearing
  
$
549,291
  
$
582,480
  
Interest-bearing transaction and savings accounts
    
1,404,301
    
1,341,145
  
Interest-bearing certificates
    
1,896,186
    
1,941,925
  
     
3,849,778
    
3,865,550
  
               
Advances from FHLB at fair value
    
62,108
    
189,779
  
Other borrowings
    
177,244
    
176,842
  
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
    
48,147
    
47,694
  
Accrued expenses and other liabilities
    
24,049
    
24,020
  
Deferred compensation
    
13,661
    
13,208
  
     
4,174,987
    
4,317,093
  
COMMITMENTS AND CONTINGENCIES (Note 16)
              
               
STOCKHOLDERS’ EQUITY
              
Preferred stock - $0.01 par value, 500,000 shares authorized; Series A – liquidation preference
              
$1,000 per share, 124,000 shares issued and outstanding
    
117,805
    
117,407
  
Common stock and paid in capital - $0.01 par value per share, 75,000,000 shares authorized, 21,101,149 shares issued:
22,860,768 shares and 21,299,209 shares outstanding at March 31, 2010 and December 31, 2009, respectively
    
335,877
    
331,538
  
Retained earnings (accumulated deficit)
    
(45,775
)
  
(42,077
)
Accumulated other comprehensive income:
              
Unrealized gain on securities available for sale and/or transferred to held to maturity
    
804
    
249
  
Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust at cost:
              
240,381 restricted shares outstanding at March 31, 2010 and December 31, 2009
    
(1,987
)
  
(1,987
)
               
Carrying value of shares held in trust for stock related compensation plans
    
(8,888
)
  
(9,045
)
Liability for common stock issued to deferred, stock related, compensation plans
    
8,888
    
9,043
  
     
--
    
(2
)
     
406,724
    
405,128
  
   
$
4,581,711
  
$
4,722,221
  

See selected notes to consolidated financial statements

 
3 
 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands except for per share amounts)
For the Quarters Ended March 31, 2010 and 2009

         
Quarters Ended
  
         
March 31
  
               
2010 
   
2009
  
INTEREST INCOME:
                        
Loans receivable
            
$
52,759
  
$
56,347
  
Mortgage-backed securities
              
1,126
    
1,801
  
Other securities and cash equivalents
              
2,085
    
2,183
  
               
55,970
    
60,331
  
INTEREST EXPENSE:
                        
Deposits
              
15,798
    
23,092
  
FHLB advances
              
361
    
720
  
Other borrowings
              
634
    
227
  
Junior subordinated debentures
              
1,027
    
1,333
  
               
17,820
    
25,372
  
                         
Net interest income before provision for loan losses
              
38,150
    
34,959
  
                         
PROVISION FOR LOAN LOSSES
              
14,000
    
22,000
  
Net interest income
              
24,150
    
12,959
  
                         
OTHER OPERATING INCOME:
                        
Deposit fees and other service charges
              
5,169
    
4,936
  
Mortgage banking operations
              
948
    
2,715
  
Loan servicing fees (expense)
              
313
    
(270
)
Miscellaneous
              
617
    
520
  
               
7,047
    
7,901
  
Other-than-temporary impairment losses
              
(1,231
)
  
--
  
Net change in valuation of financial instruments carried at fair value
              
1,908
    
(3,253
)
Total other operating income
              
7,724
    
4,648
  
                         
OTHER OPERATING EXPENSES:
                        
Salary and employee benefits
              
16,559
    
17,601
  
Less capitalized loan origination costs
              
(1,605
)
  
(2,116
)
Occupancy and equipment
              
5,604
    
6,054
  
Information/computer data services
              
1,506
    
1,534
  
Payment and card processing expenses
              
1,424
    
1,453
  
Professional services
              
1,287
    
1,194
  
Advertising and marketing
              
1,950
    
1,832
  
Deposit insurance
              
2,132
    
1,497
  
State/municipal business and use taxes
              
480
    
540
  
REO operations
              
3,058
    
623
  
Amortization of core deposit intangibles
              
644
    
690
  
Miscellaneous
              
2,376
    
2,891
  
Total other operating expenses
              
35,415
    
33,793
  
                         
Income (loss) before provision for (benefit from) income taxes
              
(3,541
)
  
(16,186
)
                         
PROVISION FOR (BENEFIT FROM) INCOME TAXES
              
(2,024
)
  
(6,923
)
                         
NET INCOME (LOSS)
              
(1,517
)
  
(9,263
)
                         
PREFERRED STOCK DIVIDEND AND DISCOUNT ACCRETION
                        
Preferred stock dividend
              
1,550
    
1,550
  
Preferred stock discount accretion
              
398
    
373
  
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
            
$
(3,465
)
$
(11,186
)
                         
Earnings (loss) per common share:
                        
Basic
            
$
(0.16
)
$
(0.65
)
Diluted
            
$
(0.16
)
$
(0.65
)
Cumulative dividends declared per common share:
            
$
0.01
  
$
0.01
  

See selected notes to consolidated financial statements

 
4 
 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) (In thousands)
For the Quarters Ended March 31, 2010 and 2009


         
Quarters Ended
March 31
  
         
               
2010 
   
2009 
 
NET INCOME (LOSS)
            
$
(1,517 
)
$
(9,263 
)
                         
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
                        
Unrealized holding gain (loss) during the period, net of deferred
income tax (benefit) of $306 and $150, respectively
              
543 
    
264 
 
                         
Amortization of unrealized loss on tax exempt securities transferred from available-for-sale to held-to-maturity
                        
               
12 
   
14 
 
Other comprehensive income (loss)
              
555 
   
278 
 
                         
COMPREHENSIVE INCOME (LOSS)
            
$
(962 
)
$
(8,985 
)

See selected notes to consolidated financial statements



 
5 
 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited) (In thousands)
For the Quarters Ended March 31, 2010 and 2009

 
Preferred
Stock
  
Common
Stock and
Paid in
Capital
  
Retained
Earnings
(Accumulated Deficit)
  
Accumulated Other Comprehensive
Income
  
Unearned
Restricted ESOP Shares
  
Carrying Value, Net of Liability, Of Shares Held in Trust for Stock-Related Compensation Plans
  
Stockholders’
Equity
  
Balance, January 1, 2010
$
117,407
  
$
331,538
  
$
(42,077
)
$
249
  
$
(1,987
)
$
(2
)
$
405,128
  
                                           
Net income (loss)               (1,517 )                     (1,517 )
                                           
Change in valuation of securities—available-for-
         sale, net of income tax
                    
543
                
543
  
                                           
Amortization of unrealized loss on tax exempt
        securities transferred from available-for-sale to
        held-to-maturity, net of income taxes
                    
12
                
12
  
                                           
    Accretion of preferred stock discount
  
398
          
(398
)
                    
--
  
    Accrual of dividends on preferred stock
              
(1,550
)
                    
(1,550
)
Accrual of dividends on common stock
        ($.01/share cumulative)
              
(233
)
                    
(233
)
                                           
Proceeds from issuance of common stock for
         stockholder reinvestment program, net of
         registration expenses
        
4,322
                            
4,322
  
                                           
    Amortization of compensation related to MRP
                                
2
    
2
  
                                           
Amortization of compensation related to stock options
        
17
                            
17
  
                                           
BALANCE, March 31, 2010
$
117,805
  
$
335,877
  
$
(45,775
)
$
804
  
$
(1,987
)
$
--
  
$
406,724
  

See selected notes to consolidated financial statements

 
6 
 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)
(Unaudited) (In thousands)
For the Quarters Ended March 31, 2010 and 2009

 
Preferred
Stock
  
Common
Stock and
Paid in
Capital
  
Retained
Earnings
  
Accumulated Other Comprehensive
Income
  
Unearned
Restricted ESOP Shares
  
Carrying Value, Net of Liability, Of Shares Held in Trust for Stock-Related Compensation Plans
  
Stockholders’
Equity
  
Balance, January 1, 2009
$
115,915
  
$
316,740
  
$
2,150
  
$
572
  
$
(1,987
)
$
(42
)
$
433,348
  
                                           
Net income (loss)
              
(9,263
)
                    
(9,263
)
                                           
Change in valuation of securities—available-for-
    sale, net of income tax
                    
264
                
264
  
                                           
Amortization of unrealized loss on tax exempt
    securities transferred from available-for-sale to
    held-to-maturity, net of income taxes
                    
14
                
14
  
                                           
Additional registration costs for issuance of
    preferred stock
        
(42
)
                          
(42
)
                                           
Accretion of preferred stock discount
  
373
          
(373
)
                    
--
  
                                           
Accrual of dividends on preferred stock
              
(1,550
)
                    
(1,550)
  
                                           
Accrual of dividends on common stock ($.01/share
    cumulative)
              
(174
)
                    
(174
)
                                           
Proceeds from issuance of common stock for
    stockholder reinvestment program, net of
    registration expenses
        
1,897
                            
1,897
  
                                           
Amortization of compensation related to MRP
                                
16
    
16
  
                                           
Amortization of compensation related to stock
    options
        
33
                            
33
  
                                           
                                           
BALANCE, March 31, 2009
$
116,288
  
$
318,628
  
$
(9,210
)
$
850
  
$
(1,987
)
$
(26
)
$
424,543
  

See selected notes to consolidated financial statements


 
7 
 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)
(Unaudited) (In thousands)
For the Quarters Ended March 31, 2010 and 2009

               
Quarters Ended
March 31
  
               
2010
    
2009 
 
                         
COMMON STOCK—SHARES ISSUED AND OUTSTANDING:
                        
Common stock, shares issued, beginning of period
              
21,539
    
17,152
  
                         
Purchase and retirement of common stock
              
--
    
--
  
Issuance of common stock for exercised stock options and/or
    employee stock plans
              
--
    
--
  
Issuance of common stock for stockholder reinvestment program
              
1,562
    
493
  
Net number of shares issued during the period
              
1,562
    
493
  
                         
COMMON SHARES ISSUED AND OUTSTANDING, END OF PERIOD
              
23,101
    
17,645
  
                         
UNEARNED, RESTRICTED ESOP SHARES:
                        
Number of shares, beginning of period
              
(240
)
  
(240
)
Issuance/adjustment of earned shares
              
--
    
--
  
Number of shares, end of period
              
(240
)
  
(240
)
                         
NET COMMON STOCK—SHARES OUTSTANDING
              
22,861
    
17,405
  

See selected notes to consolidated financial statements

 
8 
 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Quarters Ended March 31, 2010 and 2009

               
Quarters Ended
March 31
  
               
2010
    
2009
  
OPERATING ACTIVITIES:
                        
Net income (loss)
            
$
(1,517
)
$
(9,263
)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
                        
Depreciation
              
2,319
    
2,538
  
Deferred income and expense, net of amortization
              
609
    
(937
)
Amortization of core deposit intangibles
              
644
    
690
  
Other-than-temporary impairment losses
              
1,231
    
1,078
  
Net change in valuation of financial instruments carried at fair value
              
(1,908
)
  
2,175
  
Purchases of securities—trading
              
--
    
(23,785
)
Principal repayments and maturities of securities—trading
              
9,394
    
53,965
  
Deferred taxes
              
35
    
(1,171
)
Equity-based compensation
              
19
    
49
  
Increase in cash surrender value of bank-owned life insurance
              
(529
)
  
(483
)
Gain on sale of loans, excluding capitalized servicing rights
              
(692
)
  
(1,205
)
Loss (gain) on disposal of real estate held for sale and property
and equipment
              
708
    
(70
)
Provision for losses on loans and real estate held for sale
              
15,067
    
22,050
  
Origination of loans held for sale
              
(67,132
)
  
(152,985
)
Proceeds from sales of loans held for sale
              
67,231
    
149,327
  
Net change in:
                        
Other assets
              
(326
)
  
(5,216
)
Other liabilities
              
408
    
(2,051
)
Net cash provided from operating activities
              
25,561
    
34,706
  
                         
INVESTING ACTIVITIES:
                        
Purchases of securities available for sale
              
(5,022
)
  
(18,672
)
Principal repayments and maturities of securities available for sale
              
2,778
    
5,389
  
Proceeds from sales of securities available for sale
              
1,965
    
--
  
Purchases of securities held to maturity
              
--
    
(7,649
)
Principal repayments and maturities of securities held to maturity
              
1,269
    
25
  
Principal repayments of loans, net of originations
              
59,807
    
14,401
  
Purchases of loans and participating interest in loans
              
(12
)
  
--
  
Purchases of property and equipment, net
              
(318
)
  
(2,735
)
Proceeds from sale of real estate held for sale, net
              
9,078
    
2,056
  
Other
              
(40
)
  
(139
)
Net cash provided from (used by) investing activities
              
69,505
    
(7,324
)
                         
FINANCING ACTIVITIES:
                        
Decrease in deposits
              
(15,772
)
  
(151,346
)
Proceeds from FHLB advances
              
--
    
91,200
  
Repayment of FHLB advances
              
(127,502
)
  
(30,002
)
Increase in other borrowings, net
              
400
    
35,964
  
Cash dividends paid
              
(1,767
)
  
(2,293
)
Cash proceeds from issuance of stock, net of registration costs
              
4,322
    
1,855
  
Net cash used by financing activities
              
(140,319
)
  
(54,622
)
                         
NET DECREASE IN CASH AND DUE FROM BANKS
              
(45,253
)
  
(27,240
)
                         
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD
              
323,005
    
102,750
  
CASH AND DUE FROM BANKS, END OF PERIOD
            
$
277,752
  
$
75,510
  

(Continued on next page)

 
9 
 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Quarters Ended March 31, 2010 and 2009

               
Quarters Ended
March 31
  
               
2010
    
2009
  
                         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
                        
Interest paid in cash
            
$
18,868
  
$
25,600
  
Taxes paid (received) in cash
              
(561
)
  
173
  
                         
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
                        
Loans, net of discounts, specific loss allowances and unearned income,
transferred to real estate owned and other repossessed assets
              
28,218
    
19,262
  
Net decrease in accrued dividends payable
              
(16
)
  
(569
)
Change in other assets/liabilities
              
213
    
179
  

See selected notes to consolidated financial statements

 
10 
 

BANNER CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1:  BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES

Banner Corporation (Banner 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 Islanders Bank.  Banner Bank is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington and, as of March 31, 2010, its 86 branch offices and seven loan production offices located in Washington, Oregon and Idaho.  Islanders Bank is also a Washington-chartered commercial bank that conducts business from three locations in San Juan County, Washington.  Banner Corporation is subject to regulation by the Board of Governors of the Federal Reserve System.  Banner Bank and Islanders Bank (the Banks) are subject to regulation by the Washington State Department of Financial Institutions, Division of Banks and the Federal Deposit Insurance Corporation (FDIC).

In the opinion of management, the accompanying consolidated statements of financial condition and related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows reflect all adjustments (which include reclassifications and normal recurring adjustments) that are necessary for a fair presentation in conformity with U.S. Generally Accepted Accounting Principles (GAAP).  The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and the disclosure of contingent assets and liabilities as of the date of the statement of financial condition in the accompanying notes.  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 the financial statements.  These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for loan and lease losses, (iii) the valuation of financial assets and liabilities recorded at fair value, including other-than-temporary impairment losses (OTTI), (iv) the valuation of intangibles, such as goodwill, core deposit intangibles and mortgage servicing rights, (v) the valuation of real estate held for sale and (vi) deferred tax assets and liabilities.  These policies and the judgments, estimates and assumptions are described in greater detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations (Critical Accounting Policies) in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (SEC).  Management believes that the judgments, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate based on the factual circumstances at the time.  However, because of the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition.  Further, subsequent changes in economic or market conditions could have a material impact on these estimates and the Company’s financial condition and operating results in future periods.  

The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) became effective on July 1, 2009.  At that date, the ASC became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature.  Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  All other accounting literature is considered non-authoritative.  The implementation of the ASC affects the way companies refer to GAAP standards in financial statements and accounting policies, but it has not had a material effect on the Company’s Consolidated Financial Statements.

Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.  Certain reclassifications have been made to the 2009 Consolidated Financial Statements and/or schedules to conform to the 2010 presentation.  These reclassifications may have affected certain ratios for the prior periods. The effect of these reclassifications is considered immaterial.  All significant intercompany transactions and balances have been eliminated.

The information included in this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC.  Interim results are not necessarily indicative of results for a full year.


Note 2:  RECENT DEVELOPMENTS AND SIGNIFICANT EVENTS

Regulatory Actions: On March 23, 2010, Banner Bank entered into a Memorandum of Understanding (MOU) with the FDIC and Washington DFI.  The Company also entered into a similar MOU with the Federal Reserve Bank of San Francisco on March 29, 2010.  Under its MOU, Banner Bank is required, among other things, to develop and implement plans to reduce commercial real estate concentrations; to improve asset quality and reduce classified assets; to improve profitability; and to increase Tier 1 leverage capital to equal or exceed 10% of average assets.  In addition, Banner Bank will not be able to pay cash dividends to Banner Corporation without prior approval from the FDIC and Washington DFI and the Company and Banner Bank must obtain prior regulatory approval before adding any new director or senior executive officer or changing the responsibilities of any current senior executive officer.  Further, the Company may not pay any dividends on common or preferred stock, pay interest or principal on the balance of its junior subordinated debentures or repurchase our common stock without the prior written non-objection of the Federal Reserve Bank.  See Item 1A, Risk Factors—“We are required to comply with the terms of memoranda of understanding issued by the FDIC and DFI and the Federal Reserve and lack of compliance could result in additional regulatory actions.”

FDIC Prepayment:  On November 12, 2009, the FDIC adopted a final rule that required insured depository institutions to prepay an estimate of their expected quarterly deposit insurance premiums for the fourth quarter of 2009 and for the three years ended December 31, 2010, 2011 and 2012.  Insured institutions were required to deposit funds with the FDIC in the amount of the prepaid assessment on December 30, 2009.  The
 
 
11
 
insured institutions will not receive interest on the deposited funds.  For purposes of calculating an institution’s prepaid assessment amount, for the fourth quarter of 2009 and all of 2010, that institution’s assessment rate was its total base assessment rate in effect on September 30, 2009.  That rate was then increased by three basis points for all of 2011 and 2012.  Again, for purposes of calculating the prepaid amount, an institution’s third quarter 2009 assessment base was assumed to increase quarterly by an estimated five percent annual growth rate through the end of 2012.  Each institution was directed to record the entire amount of its prepaid assessment as a prepaid expense (asset) as of December 30, 2009.  Thereafter, each institution will record an expense (charge to earnings) for its regular quarterly assessment for the quarter and an offsetting credit to the prepaid assessment until the asset is exhausted.  Once the asset is exhausted, the institution will record an expense and an accrued expense payable each quarter for its regular assessment, which would be paid in arrears to the FDIC at the end of the following quarter.  If the prepaid assessment is not exhausted by June 30, 2013, any remaining amount will be returned to the institution.  For Banner Corporation, the consolidated balance of the prepaid assessment was $27.5 million at March 31, 2010 and is recorded among “other assets” in the Consolidated Statement of Financial Condition.

FDIC Special Assessment:  On May 22, 2009, the FDIC adopted a final rule imposing a five basis point special assessment on each insured depository institution’s total assets minus Tier 1 capital as of June 30, 2009, with the maximum amount of the special assessment for any institution not to exceed ten basis points times the institution’s assessment base for the second quarter 2009 risk-based assessment.  The special assessment was collected on September 30, 2009 at the same time the regular quarterly risk based assessment for the second quarter of 2009 was collected.  For Banner Corporation, this assessment was $2.1 million, which was recognized in other operating expenses during the quarter ended June 30, 2009.  The FDIC Board may vote to impose additional special assessments if the FDIC estimates that the Deposit Insurance Fund reserve ratio will fall to a level that the Board believes would adversely affect public confidence or to a level that will be close to or below zero.

FDIC Temporary Liquidity Guarantee Program:  Banner Corporation, Banner Bank and Islanders Bank have chosen to participate in the FDIC’s Temporary Liquidity Guarantee Program (the “TLGP”), which applies to all U.S. depository institutions insured by the FDIC and all United States bank holding companies, unless they have opted out.  Under the TLGP, the FDIC guarantees certain senior unsecured debt of insured institutions and their holding companies, as well as non-interest-bearing transaction account deposits.  Under the transaction account guarantee component of the TLGP, all non-interest-bearing and certain interest-bearing transaction accounts maintained at Banner Bank and Islanders Bank are insured in full by the FDIC until December 31, 2010, regardless of the standard maximum deposit insurance amounts.  The Banks are required to pay a fee (annualized) on balances of each covered account in excess of $250,000 while the extra deposit insurance is in place.  The annualized fee for the transaction account guarantee program is 10 basis points through December 31, 2009 and will be within a range from 15 to 25 basis points from January 1 through December 31, 2010.  On March 31, 2009, Banner Bank completed an offering of $50 million of qualifying senior bank notes covered by the TLGP at a fixed rate of 2.625% which mature on March 31, 2012.  Under the debt guarantee component of the TLGP, the FDIC will pay the unpaid principal and interest on an FDIC-guaranteed debt instrument upon the uncured failure of the participating entity to make a timely payment of principal or interest.  Under the terms of the TLGP, the Bank is not permitted to use the proceeds from the sale of securities guaranteed under the TLGP to prepay any of its other debt that is not guaranteed by the FDIC.  Banner Bank is required to pay a 1.00% fee (annualized) on this debt, which will result in a total fee of $1.5 million over three years.  None of the senior notes are redeemable prior to maturity.


Note 3:  ACCOUNTING STANDARDS RECENTLY ADOPTED OR ISSUED

In December 2009, FASB issued ASU No. 2009-17, Transfers and Servicing (Topic 860)—Accounting for Transfers of Financial Assets.  This update codifies SFAS No. 166, Accounting for Transfers of Financial Assets—an Amendment of FASB Statement No. 140, which was previously issued by FASB in June 2009 but was not included in the original codification.  ASU 2009-17 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets.  This statement was effective for annual reporting periods beginning after November 15, 2009, and for interim periods therein.  This standard will primarily impact the Company’s accounting and reporting of transfers representing a portion of a financial asset for which the Company has a continuing involvement.  In order to recognize the transfer of a portion of a financial asset as a sale, the transferred portion and any portion that continues to be held by the transferor must represent a participating interest, and the transfer of the participating interest must meet the conditions for surrender of control.  To qualify as a participating interest, (i) the portions of a financial asset must represent a proportionate ownership interest in an entire financial asset, (ii) from the date of transfer, all cash flows received from the entire financial asset must be divided proportionately among the participating interest holders in an amount equal to their share of ownership, (iii) involve no recourse (other than standard representation and warranties) to, or subordination by, any participating interest holder, and  (iv) no party has the right to pledge or exchange the entire financial asset.  If the participating interest or surrender of control criteria are not met, the transfer is not accounted for as a sale and derecognition of the asset is not appropriate.  Rather, the transaction is accounted for as a secured borrowing arrangement.  The impact of certain participations being reported as secured borrowings rather than derecognizing a portion of a financial asset would increase total assets, liabilities and their respective interest income and expense.  An increase in total assets also increases regulatory risk-weighted assets and could negatively impact our capital ratios.  The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In December 2009, FASB issued ASU No. 2009-18, Consolidations (Topic 810)—Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.  This update codifies SFAS No. 167, Amendments to FASB Interpretation No. 46(R), which was previously issued by FASB in June 2009 but was not included in the original codification.  ASU 2009-18 eliminates FASB Interpretations 46(R) (FIN 46(R)) exceptions to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity (VIE). The new guidance also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity’s status as a VIE, a company’s power over a VIE, or a company’s obligation to absorb losses or its right to receive benefits of an entity
 
 
12
 
must be disregarded in applying the previous provisions.  The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments.  This statement requires additional disclosures regarding an entity’s involvement in a VIE.  This statement was effective for annual reporting periods beginning after November 15, 2009, and for interim periods therein.  The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

In January 2010, the Board of Governors of the Federal Reserve System issued final risk-based capital rules related to the adoption of FASB ASC Topic 860-10 and FASB ASC Topic 810-10.  Banking organizations affected by these recent pronouncements generally will be subject to higher regulatory capital requirements intended to better align risk-based capital levels with the actual risks of certain exposures.  The adoption of the new risk-based capital rules in relation to these new pronouncements did not have a material impact on the Company’s consolidated financial statements.

In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements.  ASU No. 2010-06 requires:

·  
fair value disclosures by each class of assets and liabilities (generally a subset within a line item as presented in the statement of financial position) rather than major category,
·  
for items measured at fair value on a recurring basis, the amounts of significant transfers between Levels 1 and 2, and transfers into and out of Level 3, and the reasons for those transfers, including separate discussion related to the transfers into each level apart from transfers out of each level, and
·  
gross presentation of the amounts of purchases, sales, issuances, and settlements in the Level 3 recurring measurement reconciliation.

Additionally, the ASU clarifies that a description of the valuation techniques(s) and inputs used to measure fair values is required for both recurring and nonrecurring fair value measurements.  Also, if a valuation technique has changed, entities should disclose that change and the reason for the change.  Disclosures other than the gross presentation changes in the Level 3 reconciliation are effective for the first reporting period beginning after December 15, 2009.  The requirement to present the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis will be effective for fiscal years beginning after December 15, 2010.  The sections of this ASU already adopted did not have a material impact on the Company’s consolidated financial statements.  The further adoption of the requirement to present the Level 3 reconciliation differently is not expected to have a material effect on the Company’s consolidated financial statements.

In February 2010, FASB issued ASU No. 2010-09, Subsequent Events (Topic 855)—Amendments to Certain Recognition and Disclosure Requirements.  ASU No. 2010-09 establishes separate subsequent event recognition criteria and disclosure requirements for SEC filers.  SEC filers are defined in this update as entities that are required to file or to furnish their financial statements with either the SEC or another appropriate agency, (such as the Federal Deposit Insurance Corporation or Office of Thrift Supervision) under Section 12(i) of the Securities and Exchange Act of 1934, as amended.  Effective with the release date, the financial statements of SEC filers will no longer disclose either the date through with subsequent events were reviewed or that subsequent events were evaluated through the date the financial statements were issued.  The requirement to evaluate subsequent events through the date of issuance is still in place; only the disclosure is affected.  This ASU also removes the requirement to make those disclosures in financial statements revised for either a correction of an error or a retrospective application of an accounting change.  The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.


Note 4:  BUSINESS SEGMENTS

The Company is managed by legal entity and not by lines of business.  Each of the Banks is a community oriented commercial bank chartered in the State of Washington.  The Banks’ primary business is that of a traditional banking institution, gathering deposits and originating loans for its portfolio in its respective primary market areas.  The Banks offer a wide variety of deposit products to its consumer and commercial customers.  Lending activities include the origination of real estate, commercial/agriculture business and consumer loans.  Banner Bank is also an active participant in the secondary market, originating residential loans for sale on both a servicing released and servicing retained basis.  In addition to interest income on loans and investment securities, the Banks receive other income from deposit service charges, loan servicing fees and from the sale of loans and investments.  The performance of the Banks is reviewed by the Company’s executive management and Board of Directors on a monthly basis.  All of the executive officers of the Company are members of Banner Bank’s management team.

GAAP establishes standards to report information about operating segments in annual financial statements and require reporting of selected information about operating segments in interim reports to stockholders.  We have determined that the Company’s current business and operations consist of a single business segment and have presented our financial statements accordingly.


 
13 
 

Note 5:  INTEREST-BEARING DEPOSITS AND SECURITIES

The following table sets forth additional detail regarding our interest-bearing deposits and securities at the dates indicated (includes securities—trading, available-for-sale and held-to-maturity, all at carrying value) (in thousands):

 
March 31
  
December 31
  
March 31
  
 
2010
  
2009
  
2009
  
             
Interest-bearing deposits included in cash and due from banks
$
236,629
  
$
244,641
  
$
2,699
  
                   
Mortgage-backed or related securities
                  
GNMA
  
17,514
    
18,458
    
32,139
  
FHLMC
  
40,106
    
43,469
    
59,576
  
FNMA
  
35,907
    
37,549
    
44,548
  
Private issuer
  
3,881
    
6,465
    
8,836
  
Total mortgage-backed securities
  
97,408
    
105,941
    
145,099
  
                   
U.S. Agency obligations
  
95,247
    
94,367
    
44,446
  
Taxable municipal bonds
  
3,243
    
3,717
    
4,651
  
Corporate bonds
  
43,366
    
43,267
    
35,758
  
Total other taxable securities
  
141,856
    
141,351
    
84,855
  
                   
Tax-exempt municipal bonds
  
69,287
    
70,018
    
66,170
  
                   
Equity securities (excludes FHLB stock)
  
381
    
342
    
203
  
                   
Total securities
  
308,932
    
317,652
    
296,327
  
                   
FHLB stock
  
37,371
    
37,371
    
37,371
  
                   
 
$
582,932
  
$
599,664
  
$
336,397
  

Securities—Available-for-Sale:  The amortized cost and estimated fair value of securities available for sale at March 31, 2010 and December 31, 2009 are summarized as follows (dollars in thousands):

 
March 31, 2010
  
 
Amortized
cost
  
Gross
unrealized
gains
    
Gross
unrealized
losses
    
Estimated
fair
value
    
Percent of
Total
  
                 
                 
U.S. Government and agency obligations
$
58,680
  
$
171
  
$
(96
)
$
58,755
    
60.7
%
Mortgage-backed or related securities:
                              
FHLMC collateralized mortgage obligations
  
15,961
    
607
    
--
    
16,568
    
17.2
%
GNMA certificates
  
16,652
    
862
    
--
    
17,514
    
18.1
%
Other collateralized mortgage obligations
  
4,083
    
--
    
(202
)
  
3,881
    
4.0
%
 
$
95,376
  
$
1,640
  
$
(298
)
$
96,718
    
100.0
%


 
December 31, 2009
  
 
Amortized
cost
  
Gross
unrealized
gains
    
Gross
unrealized
losses
    
Estimated
fair
value
    
Percent of
Total
  
                 
                 
U.S. Government and agency obligations
$
53,732
  
$
22
  
$
(642
)
$
53,112
    
55.5
%
Mortgage-backed or related securities:
                              
FHLMC collateralized mortgage obligations
  
17,410
    
223
    
--
    
17,633
    
18.4
%
GNMA certificates
  
17,741
    
716
    
--
    
18,457
    
19.3
%
Other collateralized mortgage obligations
  
6,291
    
174
          
6,465
    
6.8
%
 
$
95,174
  
$
1,135
  
$
(642
)
$
95,667
    
100.0
%


 
14 
 

At March 31, 2010 and December 31, 2009, an aging of unrealized losses and fair value of related securities—available-for-sale were as follows (in thousands):

 
March 31, 2010
  
 
Less than 12 months
  
12 months or more
  
Total
  
 
Fair Value
  
Unrealized
Losses
  
Fair Value
  
Unrealized
Losses
  
Fair Value
  
Unrealized
Losses
  
U.S. Government and agency obligations
$
28,916
  
$
(96
)
$
--
  
$
--
  
$
28,916
  
$
(96
)
Other collateralized mortgage obligations
  
3,881
    
(202
)
  
--
    
--
    
3,881
    
(202
)
 
$
32,797
  
$
(298
)
$
--
  
$
--
  
$
32,797
  
$
(298
)


 
December 31, 2009
  
 
Less than 12 months
  
12 months or more
  
Total
  
 
Fair Value
  
Unrealized
Losses
  
Fair Value
  
Unrealized
Losses
  
Fair Value
  
Unrealized
Losses
  
U.S. Government and agency obligations
$
48,713
  
$
(642
)
$
--
  
$
--
  
$
48,713
  
$
(642
)
 
$
48,713
  
$
(642
)
$
--
  
$
--
  
$
48,713
  
$
(642
)

Management does not believe that any individual unrealized loss as of March 31, 2010 represents an other-than-temporary impairment.  The decline in fair market value of these securities is generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase.  At March 31, 2010, there were six securities—available-for-sale with unrealized losses, compared to eight at December 31, 2009.

Securities--Held to Maturity:  The amortized cost and estimated fair value of securities held to maturity are summarized as follows (dollars in thousands):

   
March 31, 2010
  
         
Gross
    
Gross
    
Estimated
        
   
Amortized
    
unrealized
    
unrealized
    
fair
    
Percent
  
   
cost
    
gains
    
losses
    
value
    
of Total
  
Municipal bonds:
                              
Taxable
$
2,380
  
$
151
  
$
--
  
$
2,531
    
3.3
%
Tax Exempt
  
62,925
    
3,136
    
(84
)
  
65,977
    
86.4
%
   
65,305
    
3,287
    
(84
)
  
68,508
    
89.7
%
                               
Corporate bonds
  
8,250
    
8
    
(376
)
  
7,882
    
10.3
%
 
$
73,555
  
$
3,295
  
$
(460
)
$
76,390
    
100.0
%


   
December 31, 2009
  
         
Gross
    
Gross
    
Estimated
        
   
Amortized
    
unrealized
    
unrealized
    
fair
    
Percent
  
   
cost
    
gains
    
losses
    
value
    
of Total
  
Municipal bonds:
                              
Taxable
$
2,683
  
$
66
  
$
(30
)
$
2,719
    
3.6
%
Tax Exempt
  
63,901
    
2,731
    
(72
)
  
66,560
    
87.0
%
   
66,584
    
2,797
    
(102
)
  
69,279
    
90.6
%
                               
Corporate bonds
  
8,250
    
--
    
(1,040
)
  
7,210
    
9.4
%
 
$
74,834
  
$
2,797
  
$
(1,142
)
$
76,489
    
100.0
%


 
15 
 

At March 31, 2010 and December 31, 2009, an aging of unrealized losses and fair value of related securities—held-to-maturity were as follows (in thousands):

 
March 31, 2010
  
 
Less than 12 months
  
12 months or more
  
Total
  
 
Fair Value
  
Unrealized Losses
  
Fair Value
  
Unrealized Losses
  
Fair Value
  
Unrealized Losses
  
Corporate bonds
$
2,883
  
$
(167
)
$
3,791
  
$
(209
)
$
6,624
  
$
(376
)
Municipal bonds
4,481
  
(34
)
3,548
  
(50
)
8,029
  
(84
)
 
$
7,364
  
$
(201
)
$
7,339
  
$
(259
)
$
14,653
  
$
(460
)


 
December 31, 2009
  
 
Less than 12 months
  
12 months or more
  
Total
  
 
Fair Value
  
Unrealized Losses
  
Fair Value
  
Unrealized Losses
  
Fair Value
  
Unrealized Losses
  
Corporate bonds
$
2,556
  
$
(444
)
$
3,404
  
$
(596
)
$
5,960
  
$
(1,040
)
Municipal bonds
2,920
  
(43
)
10,112
  
(59
)
13,032
  
(102
)
 
$
5,476
  
$
(487
)
$
13,516
  
$
(655
)
$
18,992
  
$
(1,142
)

Management does not believe that any individual unrealized losses as of March 31, 2010 or December 31, 2009 represent an other-than-temporary impairment.  The decline in fair market value of these securities is generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase.  There were nine and twelve securities held-to-maturity with unrealized losses at March 31, 2010 and December 31, 2009, respectively.

The following table presents, as of March 31, 2010, investment securities which were pledged to secure borrowings, public deposits or other obligations as permitted or required by law (in thousands):

   
Amortized Cost
    
Fair Value
  
             
Federal Reserve Bank, TT&L deposits
$
1,651
  
$
1,715
  
State and local governments public deposits
  
84,955
    
88,353
  
Pacific Coast Bankers’ Bank (PCBB) interest rate swaps
  
3,862
    
4,037
  
Retail repurchase transaction accounts
  
137,238
    
140,723
  
Other
  
4,356
    
4,390
  
             
Total pledged securities
$
232,062
  
$
239,218
  

The carrying value of investment securities pledged as of March 31, 2010 was $236.6 million.


Note 6:  FHLB STOCK

At March 31, 2010, the Company carried on its books $37.4 million in Federal Home Loan Bank of Seattle (FHLB) stock, which represents our investment in the stock at its par value.  Ownership of this stock allows the Banks access to funding for liquidity and other borrowing needs.  Ownership of FHLB stock is restricted to FHLB member institutions and can only be purchased and redeemed at par.  Shares are not publicly traded and do not have a readily determinable fair value.  FHLB stock is generally acknowledged to be a long-term investment.  Accordingly, when evaluating for impairment, the value is determined based on the ultimate recovery of the par value.

As of March 31, 2010, the FHLB was classified as "undercapitalized" by its regulator and therefore did not pay a dividend for the first quarter of 2010 and will not repurchase capital stock or pay a dividend while it is classified as undercapitalized.  The FHLB reported that it did meet all of its regulatory capital targets, including its risk-based capital requirement as of March 31, 2010.  The FHLB reported a risk-based capital surplus of $490.1 million as of March 31, 2010 compared to $531.7 million as of December 31, 2009.  The FHLB’s total capital at March 31, 2010 was $1.051 billion compared to $993.7 million at December 31, 2009.

Management periodically evaluates FHLB stock for other-than-temporary or permanent impairment.  Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on its member institutions or the FHLB itself, and (4) the liquidity position of the FHLB.

Based on the above, the Company has determined there is not an other-than-temporary impairment of its FHLB stock investment as of March 31, 2010.

 
16 
 

Note 7:  LOANS RECEIVABLE

We originate residential mortgage loans for both portfolio investment and sale in the secondary market.  At the time of origination, mortgage loans are designated as held for sale or held for investment.  Loans held for sale are stated at lower of cost or estimated fair value determined on an aggregate basis.  Net unrealized losses on loans held for sale are recognized through a valuation allowance by charges to income.  We also originate construction and land, commercial and multifamily real estate, commercial business, agricultural and consumer loans for portfolio investment.  Loans receivable not designated as held for sale are recorded at the principal amount outstanding, net of allowance for loan losses, deferred fees, discounts and premiums.  Premiums, discounts and deferred loan fees are amortized to maturity using the level-yield methodology.

Interest is accrued as earned unless management doubts the collectability of the loan or the unpaid interest.  Interest accruals are generally discontinued when loans become 90 days past due for scheduled interest payments.  All previously accrued but uncollected interest is deducted from interest income upon transfer to nonaccrual status.  Future collection of interest is included in interest income based upon an assessment of the likelihood that the loans will be repaid or recovered.  A loan may be put on nonaccrual status sooner than this policy would dictate if, in management’s judgment, the loan may be uncollectable.  Such interest is then recognized as income only if it is ultimately collected.

Our loans receivable, including loans held for sale, at March 31, 2010 and 2009 and December 31, 2009 are summarized as follows (dollars in thousands):

 
March 31
2010
  
December 31
2009
  
March 31
2009
  
 
 
Amount
  
Percent
of Total
  
 
Amount
  
Percent
of Total
  
 
Amount
  
Percent
of Total
  
                                     
Loans (including loans held for sale):
                                    
Commercial real estate
                                    
Owner occupied
$
515,542
    
14.0
%
$
509,464
    
13.4
%
$
460,569
    
11.8
%
Investment properties
  
557,134
    
15.1
    
573,495
    
15.1
    
575,716
    
14.7
  
Multifamily real estate
  
147,659
    
4.0
    
153,497
    
4.1
    
149,442
    
3.8
  
Commercial construction
  
83,879
    
2.3
    
80,236
    
2.1
    
103,643
    
2.6
  
Multifamily construction
  
61,924
    
1.7
    
57,422
    
1.5
    
46,568
    
1.2
  
One- to four-family construction
  
213,438
    
5.8