UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) |
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x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007. |
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OR |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE |
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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) |
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Washington |
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91-1691604 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification Number) |
10 South First Avenue, Walla Walla, Washington 99362 |
(Address of principal executive offices and zip code) |
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Registrants telephone number, including area code: (509) 527-3636 |
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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 such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (check one)
Large accelerated filer o |
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Accelerated filer x |
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Title of class: |
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As of July 31, 2007 |
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Common Stock, $.01 par value per share |
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15,723,880 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. |
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BANNER CORPORATION AND SUBSIDIARIES
Table of Contents
PART I - FINANCIAL INFORMATION |
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Item 1 - Financial Statements. The Consolidated Financial Statements of Banner Corporation and Subsidiaries filed as a part of the report are as follows: |
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Consolidated Statements of Financial Condition as of June 30, 2007 and December 31, 2006 |
3 |
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Consolidated Statements of Income for the Quarters and Six Months Ended June 30, 2007 and 2006 |
4 |
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5 |
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6 |
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Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006 |
8 |
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10 |
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Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations |
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22 |
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22 |
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Comparison of Financial Condition at June 30, 2007 and December 31, 2006 |
23 |
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Comparison of Results of Operations for the Quarters and Six Months Ended June 30, 2007 and 2006 |
26 |
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32 |
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33 |
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34 |
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34 |
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Item 3 - Quantitative and Qualitative Disclosures About Market Risk |
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36 |
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36 |
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40 |
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41 |
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41 |
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Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds |
41 |
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41 |
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Item 4 - Submission of Matters to a Vote of Security Holders |
41 |
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41 |
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42 |
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44 |
2
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
June 30, 2007 and December 31, 2006
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June 30 |
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December 31 |
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ASSETS |
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Cash and due from banks |
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$ |
106,803 |
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$ |
73,385 |
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Securities at fair value, cost $186,625 and $0, respectively; encumbered $0 and $0, respectively |
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182,969 |
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Securities available for sale, cost $0 and $230,189, respectively; encumbered $0 and $27,107, respectively |
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226,153 |
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Securities held to maturity, fair value $48,928 and $49,008, respectively |
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48,196 |
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47,872 |
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Federal Home Loan Bank stock |
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37,291 |
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35,844 |
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Loans receivable: |
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Held for sale, fair value $8,269 and $5,136 |
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8,178 |
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5,080 |
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Held for portfolio |
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3,610,174 |
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2,960,910 |
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Allowance for loan losses |
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(43,248 |
) |
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(35,535 |
) |
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3,575,104 |
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2,930,455 |
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Accrued interest receivable |
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24,885 |
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23,272 |
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Real estate owned, held for sale, net |
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1,700 |
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918 |
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Property and equipment, net |
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87,327 |
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58,003 |
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Goodwill and other intangibles, net |
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129,126 |
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36,287 |
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Deferred income tax asset, net |
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4,764 |
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7,533 |
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Bank-owned life insurance |
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50,441 |
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38,527 |
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Other assets |
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20,443 |
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17,317 |
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$ |
4,269,049 |
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$ |
3,495,566 |
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LIABILITIES |
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Deposits: |
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Non-interest-bearing |
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$ |
455,628 |
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$ |
332,372 |
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Interest-bearing transactions and savings accounts |
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1,307,680 |
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905,746 |
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Interest-bearing certificates |
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1,829,473 |
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1,556,474 |
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3,592,781 |
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2,794,592 |
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Advances from Federal Home Loan Bank |
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177,430 |
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Advances from Federal Home Loan Bank at fair value |
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33,826 |
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Other borrowings |
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71,926 |
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103,184 |
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Junior subordinated debentures (issued in connection with Trust Preferred Securities) |
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123,716 |
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Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities) |
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98,419 |
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Accrued expenses and other liabilities |
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51,792 |
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36,888 |
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Deferred compensation |
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10,497 |
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7,025 |
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Income taxes payable |
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7,501 |
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2,504 |
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3,866,742 |
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3,245,339 |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS EQUITY |
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Preferred stock - $0.01 par value, 500,000 shares authorized, none issued |
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Common stock - $0.01 par value per share, 25,000,000 shares authorized, 13,201,418 shares issued: |
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15,440,105 shares and 12,073,889 shares outstanding at June 30, 2007 and December 31, 2006, respectively |
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278,447 |
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135,149 |
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Retained earnings |
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126,249 |
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120,206 |
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Accumulated other comprehensive income (loss): |
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Unrealized loss on securities available for sale and/or transferred to held to maturity |
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(202 |
) |
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(2,852 |
) |
Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust at cost: |
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240,381 and 240,381 restricted shares outstanding at June 30, 2007 and December 31, 2006, respectively |
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(1,987 |
) |
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(1,987 |
) |
Carrying value of shares held in trust for stock related compensation plans |
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(7,699 |
) |
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(7,262 |
) |
Liability for common stock issued to deferred, stock related, compensation plans |
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7,499 |
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6,973 |
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(200 |
) |
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(289 |
) |
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402,307 |
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250,227 |
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$ |
4,269,049 |
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$ |
3,495,566 |
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See selected notes to consolidated financial statements
3
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (In thousands except for per share amounts)
For the Quarters and Six Months Ended June 30, 2007 and 2006
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Quarters Ended |
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Six Months Ended |
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2007 |
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2006 |
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2007 |
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2006 |
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INTEREST INCOME: |
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Loans receivable |
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$ |
71,047 |
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$ |
55,088 |
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$ |
132,875 |
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$ |
104,214 |
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Mortgage-backed securities |
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1,535 |
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2,011 |
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3,310 |
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4,094 |
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Securities and cash equivalents |
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1,829 |
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1,834 |
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3,672 |
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3,612 |
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74,411 |
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58,933 |
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139,857 |
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111,920 |
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INTEREST EXPENSE: |
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Deposits |
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32,378 |
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20,828 |
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59,988 |
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|
38,259 |
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Federal Home Loan Bank advances |
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1,164 |
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4,141 |
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3,441 |
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|
7,267 |
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Other borrowings |
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|
790 |
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|
766 |
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1,718 |
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|
1,464 |
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Junior subordinated debentures |
|
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1,969 |
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1,973 |
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4,423 |
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|
3,801 |
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|
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36,301 |
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27,708 |
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69,570 |
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50,791 |
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Net interest income before provision for loan losses |
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38,110 |
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31,225 |
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70,287 |
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|
61,129 |
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PROVISION FOR LOAN LOSSES |
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1,400 |
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2,300 |
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2,400 |
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3,500 |
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Net interest income |
|
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36,710 |
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28,925 |
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67,887 |
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|
57,629 |
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OTHER OPERATING INCOME: |
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Deposit fees and other service charges |
|
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4,090 |
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|
2,891 |
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7,053 |
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5,383 |
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Mortgage banking operations |
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1,808 |
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1,454 |
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3,163 |
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|
2,606 |
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Loan servicing fees |
|
|
373 |
|
|
334 |
|
|
748 |
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|
724 |
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Miscellaneous |
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|
592 |
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|
321 |
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1,053 |
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|
789 |
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|
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6,863 |
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5,000 |
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|
12,017 |
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9,502 |
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Net change in valuation of financial instruments carried at fair value |
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(1,877 |
) |
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|
|
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(697 |
) |
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Total other operating income |
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4,986 |
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5,000 |
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11,320 |
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9,502 |
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OTHER OPERATING EXPENSES: |
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|
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Salary and employee benefits |
|
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19,635 |
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16,553 |
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36,103 |
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32,042 |
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Less capitalized loan origination costs |
|
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(3,175 |
) |
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(3,228 |
) |
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(5,769 |
) |
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(5,820 |
) |
Occupancy and equipment |
|
|
5,106 |
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3,938 |
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|
9,458 |
|
|
7,732 |
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Information/computer data services |
|
|
1,767 |
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1,285 |
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|
3,136 |
|
|
2,585 |
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Professional services |
|
|
723 |
|
|
534 |
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1,282 |
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|
1,066 |
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Advertising |
|
|
1,867 |
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|
2,074 |
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3,724 |
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|
3,516 |
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Insurance recovery, net proceeds |
|
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|
|
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(5,350 |
) |
|
|
|
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(5,350 |
) |
Miscellaneous |
|
|
5,376 |
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|
4,205 |
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|
9,436 |
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7,438 |
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|
|
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Total other operating expenses |
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31,299 |
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|
20,011 |
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|
57,370 |
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|
43,209 |
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|
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|
|
|
|
|
|
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Income before provision for income taxes |
|
|
10,397 |
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|
13,914 |
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|
21,837 |
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|
23,922 |
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PROVISION FOR INCOME TAXES |
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|
3,286 |
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|
4,555 |
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|
6,913 |
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|
7,775 |
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|
|
|
|
|
|
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NET INCOME |
|
$ |
7,111 |
|
$ |
9,359 |
|
$ |
14,924 |
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$ |
16,147 |
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Earnings per common share (see Note 7): |
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Basic |
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$ |
0.49 |
|
$ |
0.79 |
|
$ |
1.11 |
|
$ |
1.36 |
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Diluted |
|
$ |
0.48 |
|
$ |
0.77 |
|
$ |
1.09 |
|
$ |
1.33 |
|
Cumulative dividends declared per common share: |
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$ |
0.19 |
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$ |
0.18 |
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$ |
0.38 |
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$ |
0.36 |
|
See selected notes to consolidated financial statements
4
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) (In thousands)
For the Quarters and Six Months Ended June 30, 2007 and 2006
|
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Quarters Ended |
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Six Months Ended |
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2007 |
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2006 |
|
2007 |
|
2006 |
|
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NET INCOME |
|
$ |
7,111 |
|
$ |
9,359 |
|
$ |
14,924 |
|
$ |
16,147 |
|
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES: |
|
|
|
|
|
|
|
|
|
|
|
|
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Unrealized holding gain (loss) during the period, net of deferred income tax (benefit) of $0, $(625), $0 and $(1,518), respectively |
|
|
|
|
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(1,161 |
) |
|
|
|
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(2,819 |
) |
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|
|
|
|
|
|
|
|
|
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Less adjustment for (gains) losses included in net income, net of income tax (benefit) of $0, $0, $0 and $0, respectively |
|
|
|
|
|
|
|
|
|
|
|
|
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Amortization of unrealized gain (loss) on securities transferred from available-for-sale to held-to-maturity net of deferred income tax of $0, $0, $0 and $0, respectively |
|
|
13 |
|
|
13 |
|
|
27 |
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
13 |
|
|
(1,148 |
) |
|
27 |
|
|
(2,796 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
|
$ |
7,124 |
|
$ |
8,211 |
|
$ |
14,951 |
|
$ |
13,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See selected notes to consolidated financial statements
5
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited) (In thousands, except per share amounts)
For the Six Months Ended June 30, 2007 and 2006
|
|
Common |
|
Retained |
|
Accumulated |
|
Unearned |
|
Carrying Value, Net of Liability, Of Shares Held in Trust for Stock-Related Compensation Plans |
|
Stockholders |
|
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|
|
|
|
|
|
|
|
|
BALANCE, January 1, 2006 |
|
$ |
130,573 |
|
$ |
96,783 |
|
$ |
(2,736 |
) |
$ |
(2,480 |
) |
$ |
(475 |
) |
$ |
221,665 |
|
Net income |
|
|
|
|
|
16,147 |
|
|
|
|
|
|
|
|
|
|
|
16,147 |
|
Change in valuation of securities available for sale, net of income taxes |
|
|
|
|
|
|
|
|
(2,796 |
) |
|
|
|
|
|
|
|
(2,796 |
) |
Cash dividend on common stock ($.36/share cumulative) |
|
|
|
|
|
(4,304 |
) |
|
|
|
|
|
|
|
|
|
|
(4,304 |
) |
Purchase and retirement of common stock |
|
|
(2,346 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,346 |
) |
Proceeds from issuance of common stock for exercise of stock options |
|
|
3,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,720 |
|
Net issuance of stock through employers stock plans, including tax benefit |
|
|
28 |
|
|
|
|
|
|
|
|
(14 |
) |
|
|
|
|
14 |
|
Accrual of compensation expense related to stock options |
|
|
309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
309 |
|
Accrual of compensation expense related to MRP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93 |
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, June 30, 2006 |
|
$ |
132,284 |
|
$ |
108,626 |
|
$ |
(5,532 |
) |
$ |
(2,494 |
) |
$ |
(382 |
) |
$ |
232,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, January 1, 2007 |
|
$ |
135,149 |
|
$ |
120,206 |
|
$ |
(2,852 |
) |
$ |
(1,987 |
) |
$ |
(289 |
) |
$ |
250,227 |
|
Net income |
|
|
|
|
|
14,924 |
|
|
|
|
|
|
|
|
|
|
|
14,924 |
|
Cumulative effect of early adoption of SFAS Nos. 157 & 159 Fair Value Option |
|
|
|
|
|
(3,520 |
) |
|
2,623 |
|
|
|
|
|
|
|
|
(897 |
) |
Amortization of discount on securities transferred from available for sale to held to maturity, net of income taxes |
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
27 |
|
Cash dividend on common stock ($.38/share cumulative) |
|
|
|
|
|
(5,361 |
) |
|
|
|
|
|
|
|
|
|
|
(5,361 |
) |
Purchase and retirement of common stock |
|
|
(430 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(430 |
) |
Proceeds from issuance of common stock for exercise of stock options |
|
|
991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
991 |
|
Proceeds from issuance of common stock for stockholder reinvestment program |
|
|
29,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,368 |
|
Acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to the shareholders of F&M Bank (F&M) |
|
|
78,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,006 |
|
Shares issued to the shareholders of San Juan Financial Holding Company (SJFHC) |
|
|
35,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,149 |
|
Recognition of tax benefit related to the release of MRP shares |
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58 |
|
Accrual of compensation expense related to stock options |
|
|
156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156 |
|
Accrual of compensation expense related to MRP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89 |
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, June 30, 2007 |
|
$ |
278,447 |
|
$ |
126,249 |
|
$ |
(202 |
) |
$ |
(1,987 |
) |
$ |
(200 |
) |
$ |
402,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Six Months Ended June 30, 2007 and 2006
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
|
Common stock, shares issued, beginning of period |
|
|
12,314 |
|
|
12,082 |
|
Purchase and retirement of common stock |
|
|
(11 |
) |
|
(63 |
) |
Issuance of common stock for bank acquisitions |
|
|
2,593 |
|
|
|
|
Issuance of common stock for exercised stock options and/or employee stock plans |
|
|
57 |
|
|
251 |
|
Issuance of common stock for stockholder reinvestment program |
|
|
727 |
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares (retired) issued during the period |
|
|
3,366 |
|
|
188 |
|
|
|
|
|
|
|
|
|
SHARES ISSUED AND OUTSTANDING, END OF PERIOD |
|
|
15,680 |
|
|
12,270 |
|
|
|
|
|
|
|
|
|
UNEARNED, RESTRICTED ESOP SHARES: |
|
|
|
|
|
|
|
Number of shares, beginning of period |
|
|
(240 |
) |
|
(300 |
) |
Adjustment of earned shares |
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
Number of shares, end of period |
|
|
(240 |
) |
|
(302 |
) |
|
|
|
|
|
|
|
|
NET SHARES OUTSTANDING |
|
|
15,440 |
|
|
11,968 |
|
|
|
|
|
|
|
|
|
See selected notes to consolidated financial statements
7
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Six Months Ended June 30, 2007 and 2006
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
Net income |
|
$ |
14,924 |
|
$ |
16,147 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation |
|
|
3,629 |
|
|
2,925 |
|
Deferred income and expense, net of amortization |
|
|
(526 |
) |
|
864 |
|
Loss (gain) on sale of securities |
|
|
|
|
|
|
|
Net change in valuation of financial instruments carried at fair value |
|
|
697 |
|
|
|
|
Deferred taxes |
|
|
(2,887 |
) |
|
(656 |
) |
Equity-based compensation |
|
|
89 |
|
|
93 |
|
Stock options compensation |
|
|
156 |
|
|
309 |
|
Equity-based long term incentive plan |
|
|
49 |
|
|
|
|
Tax benefits realized from equity-based compensation |
|
|
(58 |
) |
|
(61 |
) |
Increase in cash surrender value of bank-owned life insurance |
|
|
(937 |
) |
|
(779 |
) |
Gain on sale of loans, excluding capitalized servicing rights |
|
|
(2,853 |
) |
|
(2,046 |
) |
Loss (gain) on disposal of real estate held for sale and property and equipment |
|
|
(75 |
) |
|
(47 |
) |
Provision for losses on loans and real estate held for sale |
|
|
2,400 |
|
|
3,500 |
|
Net change in: |
|
|
|
|
|
|
|
Loans held for sale |
|
|
(3,098 |
) |
|
(929 |
) |
Other assets |
|
|
(46 |
) |
|
(1,271 |
) |
Other liabilities |
|
|
8,302 |
|
|
5,733 |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
19,766 |
|
|
23,782 |
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
Purchases of securities at fair value |
|
|
(125 |
) |
|
|
|
Principal repayments and maturities of securities at fair value |
|
|
14,219 |
|
|
|
|
Proceeds from sales of securities at fair value |
|
|
61,364 |
|
|
|
|
Principal repayments and maturities of securities available for sale |
|
|
|
|
|
15,269 |
|
Purchases of securities held to maturity |
|
|
(661 |
) |
|
|
|
Principal repayments and maturities of securities held to maturity |
|
|
297 |
|
|
1,255 |
|
Origination of loans, net of principal repayments |
|
|
(331,296 |
) |
|
(539,491 |
) |
Purchases of loans and participating interest in loans |
|
|
(2,354 |
) |
|
(4,091 |
) |
Proceeds from sales of loans and participating interest in loans |
|
|
198,957 |
|
|
160,545 |
|
Purchases of property and equipment, net |
|
|
(14,660 |
) |
|
(4,917 |
) |
Proceeds from sale of real estate held for sale, net |
|
|
74 |
|
|
179 |
|
Acquisition of F&M and SJFHC net of cash acquired |
|
|
(6,839 |
) |
|
|
|
Other |
|
|
(9 |
) |
|
(525 |
) |
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(81,033 |
) |
|
(371,776 |
) |
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
Increase in deposits |
|
|
325,103 |
|
|
256,144 |
|
Proceeds from FHLB advances |
|
|
116,500 |
|
|
1,043,900 |
|
Repayment of FHLB advances |
|
|
(295,486 |
) |
|
(940,000 |
) |
Repayment of repurchase agreement borrowings |
|
|
(24,524 |
) |
|
(1,748 |
) |
Increase (decrease) in other borrowings, net |
|
|
(26,359 |
) |
|
(17,979 |
) |
Repayment of trust securities |
|
|
(25,774 |
) |
|
|
|
Cash dividends paid |
|
|
(4,710 |
) |
|
(4,244 |
) |
Repurchases of stock, net of forfeitures |
|
|
(430 |
) |
|
(2,346 |
) |
Tax benefits realized from equity-based compensation |
|
|
58 |
|
|
61 |
|
ESOP shares earned (returned) |
|
|
|
|
|
(47 |
) |
Issuance of stock-net of costs |
|
|
29,316 |
|
|
|
|
Exercise of stock options |
|
|
991 |
|
|
3,720 |
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
94,685 |
|
|
337,461 |
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS |
|
|
33,418 |
|
|
(10,533 |
) |
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD |
|
|
73,385 |
|
|
116,448 |
|
|
|
|
|
|
|
|
|
CASH AND DUE FROM BANKS, END OF PERIOD |
|
$ |
106,803 |
|
$ |
105,915 |
|
|
|
|
|
|
|
|
|
(Continued on next page)
8
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Six Months Ended June 30, 2007 and 2006
|
|
2007 |
|
2006 |
|
||
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
Interest paid in cash |
|
$ |
63,169 |
|
$ |
48,239 |
|
Taxes paid in cash |
|
|
388 |
|
|
3,481 |
|
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 |
|
|
864 |
|
|
42 |
|
Net change in accrued dividends payable |
|
|
651 |
|
|
60 |
|
Change in other assets/liabilities |
|
|
1,075 |
|
|
1,436 |
|
Cash paid out in acquisitions |
|
|
(26,481 |
) |
|
|
|
Fair value of assets acquired |
|
|
690,571 |
|
|
|
|
Liabilities assumed in acquisition |
|
|
550,883 |
|
|
|
|
Stock based consideration issued for acquisition |
|
|
(113,207 |
) |
|
|
|
Adoption of SFAS Nos. 157 and 159: |
|
|
|
|
|
|
|
Securities available for sale transferred to fair value |
|
|
226,153 |
|
|
|
|
FHLB advances adjustment to fair value |
|
|
678 |
|
|
|
|
Junior subordinated debentures including unamortized origination costs adjustment to fair value |
|
|
2,079 |
|
|
|
|
Deferred tax asset related to fair value adjustments |
|
|
(504 |
) |
|
|
|
See selected notes to consolidated financial statements
9
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, 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 June 30, 2007, its 77 branch offices and 13 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 are subject to regulation by the Washington State Department of Financial Institutions, Division of Banks and the Federal Deposit Insurance Corporation (FDIC). The consolidated financial statements and results of operation presented in this report on Form 10-Q include financial information for Islanders Bank and our other recent acquisition, F&M Bank, Spokane, Washington (F&M) which was merged into Banner Bank, subsequent to our acquisition of those banks on May 1, 2007. (See Note 3 of the Selected Notes to the Consolidated Financial Statements for additional information with respect to these acquisitions.)
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 reclassifications 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 the judgments, estimates and assumptions are described in greater detail below in Managements Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2006 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, given the sensitivity of the financial statements to these critical accounting policies, the use of different judgments, estimates and assumptions could result in material differences in our 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 SFAS No. 157 and 159 (for additional information, see Notes 2 and 6 of the Selected Notes to the Consolidated Financial Statements).
Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the rules and regulations of the SEC. Certain reclassifications have been made to the 2006 Consolidated Financial Statements and/or schedules to conform to the 2007 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, 2006 filed with the SEC. Interim results are not necessarily indicative of results for a full year.
Note 2: Recent Developments and Significant Events
Sale of $25 Million of Trust Preferred Securities: On July 31, 2007, the Company completed the issuance of $25 million of Trust Preferred Securities in a private placement. The Trust Preferred Securities were issued by Banner Capital Trust VII, a special purpose business trust formed by Banner Corporation, and sold to pooled investment vehicles sponsored by various investment banking firms. The Trust Preferred Securities will be recorded as a liability on the consolidated statement of financial condition but are expected to qualify as Tier 1 capital for regulatory capital purposes. The proceeds from this offering are expected to be used primarily to fund growth, including acquisitions, or may also be used to fund the Companys stock repurchase program and other general corporate purposes as necessary. Under the terms of the transaction, the Trust Preferred Securities have a maturity of 30 years and are redeemable after five years with certain exceptions. The holders of the Trust Preferred Securities will be entitled to receive cumulative cash distributions at a variable annual rate, with a current interest rate of 6.7375%, reset quarterly equal to three month LIBOR plus 1.38%.
Proposed Acquisition of NCW Community Bank: On June 28, 2007, Banner announced the signing of a definitive merger agreement with NCW Community Bank, Wenatchee, Washington, in a transaction valued at approximately $18.5 million in cash and common stock for all of the outstanding common shares and stock options of NCW Community Bank. According to the terms of the definitive agreement and assuming all outstanding NCW Community Bank options are exercised, NCW Community Bank shareholders will receive 0.7425 shares of Banner Corporation common stock and $14.19 in cash for each NCW Community Bank share. The acquisition, which has been approved by the Boards of Directors of both companies, is subject to, among other contingencies, approval by regulators and NCW Community Bank shareholders. Founded in 1999, NCW Community Bank is a state chartered commercial community bank with $101 million in assets, $88 million in loans, $91 million in deposits and shareholders equity of $9 million as of June 30, 2007. NCW Community Bank operates one branch in Wenatchee, Washington and has another branch under construction in East Wenatchee. NCW Community Bank will merge into Banner Bank in connection
10
with this transaction, which is expected to close during the fourth quarter of 2007 subject to regulatory and shareholder approval. The merger will significantly add to Banners customer base and market share in the North Central Washington area.
Adoption of SFAS Nos. 157 and 159: Banner Corporation elected early adoption of Statement of Financial Accounting Standards (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.
Upon adoption of SFAS No. 159, we selected fair value measurement for all of our available for sale investment securities, Federal Home Loan Bank advances and junior subordinated debentures, which had fair values of approximately $226.2 million, $176.8 million and $124.4 million, respectively, on January 1, 2007. The initial fair value measurement of these instruments resulted in a $3.5 million adjustment for the cumulative effect, net of tax, as a result of the change in accounting, which was recorded as a reduction in retained earnings as of January 1, 2007, and which under SFAS No. 159 has not been recognized in current earnings. While the adjustment to retained earnings is permanent, approximately $2.6 million of the amount was previously reported as accumulated other comprehensive loss at December 31, 2006, so the reduction in total stockholders equity was $897,000 on January 1, 2007. Following the initial election, changes in the value of financial instruments recorded at fair value are recognized as gains or losses in subsequent financial reporting periods. As a result of the adoption of SFAS No. 159 and changes in the fair value measurement of the financial assets and liabilities noted above, we recorded a net gain of $1.2 million ($755,000 after tax) in the quarter ended March 31, 2007 and a net loss of $1.9 million ($1.2 million after tax) in the quarter ended June 30, 2007, resulting in a cumulative loss of $697,000 ($446,000 after tax) for the six months ended June 30, 2007. (For further information, see Note 6 of the Selected Notes to the Consolidated Financial Statements.)
Early redemption of $25 million of Trust Preferred Securities: Effective April 22, 2007, we repaid $26 million of junior subordinated debentures (debentures) issued in connection with Banner Capital Trust I as provided for under the early redemption provisions of the governing indenture at a price of 100% of the outstanding principal balance. Prior to repayment, the interest rate on the debentures supporting Banner Capital Trust I was 9.09% during the quarter ended June 30, 2007. The adjustable rate provisions of these debentures provided for changes in the interest rate every six months such that the rate would be equal to six month LIBOR plus 3.70%. The cash required to redeem these debentures came from our general operating funds.
Sale of $25 Million of Trust Preferred Securities: In December 2006, we completed the issuance of $25.8 million of junior subordinated debentures (debentures) in connection with a private placement of pooled trust preferred securities. The trust preferred securities were issued by Banner Capital Trust VI, a special purpose business trust formed by Banner Corporation. The debentures have been recorded as a liability on the Consolidated Statement of Financial Condition and, subject to limitation under current Federal Reserve guidelines, a portion of the trust preferred securities qualify as Tier 1 capital for regulatory capital purposes. The proceeds from this offering were retained by us to provide future flexibility with respect to regulatory capital requirements. Under the terms of the transaction, the trust preferred securities and debentures have a maturity of 30 years and are redeemable after five years, with certain exceptions. The holders of the trust preferred securities and debentures are entitled to receive cumulative cash distributions at a variable annual rate. The interest rate is fixed at 6.56% until March 1, 2012 and subsequent to that date will reset quarterly to equal the three month London Interbank Offered Rate Index (LIBOR) plus 1.62%. Our previously issued trust preferred securities have similar reset provisions but carry different spreads to LIBOR and interest rates than this issuance. At June 30, 2007, the interest rates on the other trust preferred securities ranged from 6.94% to 8.71%. In accordance with Financial Interpretation No. (FIN) 46, the trusts are not consolidated with our financial statements. Effective January 1, 2007, our junior subordinated debentures are being recorded at fair value.
Issuance of Shares through Dividend Reinvestment and Direct Stock Purchase and Sale Plan and Exercise of Options: During the six months ended June 30, 2007, we added to our capital structure by issuing 727,260 new shares of our common stock at an average net price of $40.38 through our Dividend Reinvestment and Direct Stock Purchase and Sale Plan. In addition, we issued a net 46,345 shares in connection with the exercise of vested stock options. This combined stock issuance provided $29.9 million in capital during the six months ended June 30. 2007. The additional capital will be available to support our continued growth initiatives and the acquisitions of F&M Bank, San Juan Financial Holding Company and NCW Community Bank.
Branch Expansion: Over the past four years, we have invested significantly in expanding Banner Banks branch and distribution systems with a primary emphasis on the greater Boise, Idaho and Portland, Oregon markets, the Puget Sound region of Washington and, more recently, with the acquisition of F&M Bank, Spokane, Washington. This branch expansion is 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, management believes that over time these new branches should help improve profitability by providing low cost core deposits which will allow Banner Bank to proportionately reduce higher cost borrowings as a source of funds. Since July 2003, Banner Bank has opened 23 new branch offices, relocated 7 additional branch offices and significantly refurbished its main office in Walla Walla. We have also added 16 branches through the acquisitions of F&M Bank and Islanders Bank as explained in other sections of this report.
Long-Term Incentive Plan: In June 2006, the Board of Directors adopted the Banner Corporation Long-Term Incentive Plan (Plan) effective July 1, 2006. The Plan is an account-based type of benefit, the value of which is indirectly related to changes in the value of Banner Corporation stock and changes in Banner Banks average earnings rate. The primary objective of the Plan is for key employees who remain with the Company or the Bank for a sufficient period of time to share in the increases in the value of our stock. Although the Plan benefits are tied to the value of Banner Corporation stock, the Plan benefit is paid in cash rather than shares of our stock. Detailed information with respect
11
to the plan was disclosed on a Form 8-K filed with SEC on July 19, 2006. We recorded $49,000 of compensation cost relating to this Plan for the six months ended June 30, 2007. There was no expense related to this plan for the six months ended June 30, 2006.
Recently Issued Accounting Pronouncements: We elected early adoption of Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, and SFAS No. 157, Fair Value Measurements, effective January 1, 2007. (See the earlier discussion above and Note 6 of the Selected Notes to the Consolidated Financial Statements for further information.)
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.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainties in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. On January 1, 2007, we adopted FIN 48. Currently, we are subject to U.S. federal income tax and income tax of the States of Idaho and Oregon. The years 2003 through 2005 remain open to examination for federal income taxes, and years 2003 through 2006 remain open for State examination. As of January 1, 2007 and June 30, 2007, 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 June 30, 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 six months ended June 30, 2007 was immaterial. The adoption of this accounting standard did not have a material impact on our Consolidated Financial Statements.
Note 3: Acquisitions of F&M Bank and San Juan Financial Holding Company
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 $98.1 million with $20.1 million of cash and 1,773,402 shares of Banner common stock for 100% of the outstanding common shares of F&M Bank. F&M Bank 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 Bank allowed us to immediately expand Banner Banks franchise in the Spokane, Washington area, the fourth largest metropolitan market in the Pacific Northwest, by the addition of 13 branches and one loan office.
The acquisition was accounted for as a purchase in accordance with SFAS 141. Accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the acquisition date as summarized in the following table:
|
|
May 1, 2007 |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Cash paid to F&Ms shareholders |
|
$ |
19,404 |
|
|
|
|
Total value of the Banners common stock exchanged with F&Ms Shareholders |
|
|
78,030 |
|
|
|
|
Transaction closing costs |
|
|
665 |
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price |
|
|
|
|
$ |
98,099 |
|
Allocation of purchase price: |
|
|
|
|
|
|
|
F&M shareholders equity |
|
$ |
33,379 |
|
|
|
|
Estimated adjustments to adjust assets and liabilities to fair value |
|
|
|
|
|
|
|
Loans |
|
|
(195 |
) |
|
|
|
Premises and equipment |
|
|
3,315 |
|
|
|
|
Core deposit intangible |
|
|
10,867 |
|
|
|
|
Deposits |
|
|
(336 |
) |
|
|
|
Deferred taxes-net |
|
|
(4,916 |
) |
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value of net assets acquired |
|
|
|
|
|
42,114 |
|
|
|
|
|
|
|
|
|
Goodwill resulting from acquisition |
|
|
|
|
$ |
55,985 |
|
|
|
|
|
|
|
|
|
12
Additional adjustments to the purchase price allocation may be required, specifically related to other assets and taxes. The core deposit intangible asset shown in the table above represents the value ascribed to the long-term deposit relationships acquired. This intangible asset is being amortized on a straight-line basis over an estimated useful life of eight years. The core deposit intangible asset is not estimated to have a significant residual value. Goodwill represents the excess of the total purchase price paid for F&M Bank over the fair values of the assets acquired, net of the fair values of the liabilities assumed. Goodwill is not amortized, but is evaluated for possible impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired. No impairment losses were recognized in connection with core deposit intangible or goodwill assets during the period from acquisition on May 1, 2007 to the end of the current reporting period.
|
|
May 1, 2007 |
|
|
|
|
|
|
|
The fair value of the assets and liabilities of F&M Bank at the date of acquisition |
|
|
|
|
Cash |
|
$ |
12,056 |
|
Securities available for sale |
|
|
6,768 |
|
Federal funds sold |
|
|
137 |
|
Loans-net of allowance for loan losses of $4,528 |
|
|
389,137 |
|
Premises and equipment-net |
|
|
12,466 |
|
Bank-owned life insurance (BOLI) |
|
|
8,662 |
|
Other assets |
|
|
18,112 |
|
Goodwill |
|
|
55,985 |
|
|
|
|
|
|
Total assets acquired |
|
|
503,323 |
|
|
|
|
|
|
Deposits |
|
|
(348,822 |
) |
Advances from Federal Home Loan Bank |
|
|
(20,000 |
) |
Federal funds purchased and other borrowings |
|
|
(19,625 |
) |
Other liabilities |
|
|
(16,777 |
) |
|
|
|
|
|
Total liabilities assumed |
|
|
(405,224 |
) |
|
|
|
|
|
Net assets acquired |
|
$ |
98,099 |
|
|
|
|
|
|
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 in $6.4 million of cash and 819,209 shares of Banner 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 Banners 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 Banner Corporations presence in the North Puget Sound region.
The acquisition was accounted for as a purchase in accordance with SFAS 141. Accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the acquisition date as summarized in the following table.
|
|
May 1, 2007 |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Cash paid to SJFHC shareholders |
|
$ |
6,159 |
|
|
|
|
Total value of the Banners common stock exchanged with SJFHC shareholders |
|
|
35,177 |
|
|
|
|
Closing costs |
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price |
|
|
|
|
$ |
41,589 |
|
Allocation of purchase price |
|
|
|
|
|
|
|
SJFHC shareholders equity |
|
$ |
16,782 |
|
|
|
|
Estimated adjustments to adjust assets and liabilities to fair value |
|
|
|
|
|
|
|
Loans |
|
|
(604 |
) |
|
|
|
Premises and equipment |
|
|
1,800 |
|
|
|
|
Core deposit intangible-net increase |
|
|
6,147 |
|
|
|
|
Deposits |
|
|
37 |
|
|
|
|
Deferred taxes-net |
|
|
(2,659 |
) |
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value of net assets acquired |
|
|
|
|
|
21,503 |
|
|
|
|
|
|
|
|
|
Goodwill resulting from acquisition |
|
|
|
|
$ |
20,086 |
|
|
|
|
|
|
|
|
|
Additional adjustments to the purchase price allocation may be required, specifically related to other assets and taxes. The core deposit intangible asset shown in the table above represents the value ascribed to the long-term deposit relationships acquired. This intangible asset is being amortized on a straight-line basis over an estimated useful life of eight years. The core deposit intangible asset is not estimated to have a significant residual value. Goodwill represents the excess of the total purchase price paid for SJFHC over the fair values of the assets acquired, net of the fair values of the liabilities assumed. Goodwill is not amortized, but is evaluated for possible impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired. No impairment losses were recognized in connection with core deposit intangible or goodwill assets during the period from acquisition on May 1, 2007 to the end of the current reporting period.
13
|
|
May 1, 2007 |
|
|
|
|
|
|
|
The fair value of the assets and liabilities of SJFHC at the date of acquisition |
|
|
|
|
Cash |
|
$ |
7,449 |
|
Securities available for sale |
|
|
26,263 |
|
Loans-net of allowance for loan losses of $1,429 |
|
|
116,999 |
|
Premises and equipment-net |
|
|
5,756 |
|
BOLI |
|
|
2,315 |
|
Other assets |
|
|
8,380 |
|
Goodwill |
|
|
20,086 |
|
|
|
|
|
|
Total assets acquired |
|
|
187,248 |
|
|
|
|
|
|
Deposits |
|
|
(124,264 |
) |
Advances from Federal Home Loan Bank |
|
|
(15,726 |
) |
Other liabilities |
|
|
(5,669 |
) |
|
|
|
|
|
Total liabilities assumed |
|
|
(145,659 |
) |
|
|
|
|
|
Net assets acquired |
|
$ |
41,589 |
|
|
|
|
|
|
The following tables present unaudited pro forma condensed results of operations for the quarters and six months ended June 30, 2007 and 2006 prepared as if the acquisitions of F&M Bank and SJFHC had occurred on January 1, 2006. Any cost savings realized as a result of the acquisitions are not reflected in the pro forma condensed statements of income as no assurance can be given with respect to the final amount of such cost savings. The pro forma results have been prepared for comparison purposes only and are not necessarily indicative of the results that would have been obtained had the acquisitions actually occurred on January 1, 2006.
14
Pro Forma Financial Information Unaudited
(in thousands except per share data)
|
|
Quarter Ended June 30, 2007 |
|
||||||||||||||||
|
|
|
|
||||||||||||||||
|
|
|
|
|
One Month Ended |
|
F&M Pro |
|
SJFHC Pro |
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|||||||||
|
|
Banner |
|
F&M |
|
SJFHC |
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before provision for loan losses |
|
$ |
38,110 |
|
$ |
1,498 |
|
$ |
439 |
|
$ |
87 |
(A) |
$ |
44 |
(A) |
$ |
40,178 |
|
Provision for loan losses |
|
|
1,400 |
|
|
853 |
|
|
5 |
|
|
|
|
|
|
|
|
2,258 |
|
Other operating income |
|
|
4,986 |
|
|
600 |
|
|
290 |
|
|
|
|
|
(22 |
) (B) |
|
5,854 |
|
Other operating expense |
|
|
31,299 |
|
|
9,649 |
|
|
1,880 |
|
|
(6,905 |
) (C) |
|
(1,207 |
) (D) |
|
34,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
10,397 |
|
|
(8,404 |
) |
|
(1,156 |
) |
|
6,992 |
|
|
1,229 |
|
|
9,058 |
|
Provision for income taxes (benefits) |
|
|
3,286 |
|
|
(2,963 |
) |
|
75 |
|
|
2,517 |
(E) |
|
443 |
(E) |
|
3,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,111 |
|
$ |
(5,441 |
) |
$ |
(1,231 |
) |
$ |
4,475 |
|
$ |
786 |
|
$ |
5,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.37 |
|
Diluted earning per share |
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.36 |
|
Basic weighted average shares outstanding |
|
|
14,520 |
|
|
687 |
|
|
120 |
|
|
584 |
(F) |
|
270 |
(F) |
|
15,374 |
|
Diluted weighted average shares outstanding |
|
|
14,791 |
|
|
687 |
|
|
120 |
|
|
584 |
(F) |
|
270 |
(F) |
|
15,645 |
|
|
|
(A) |
Consists of net accretion of fair value adjustments related to the acquisitions of F&M and SJFHC assuming acquired January 1, 2006. |
(B) |
Reversal of effects of equity in earnings of San Juan Title Company not acquired in acquisition |
(C) |
Reversal of merger related expenses of $7.0 million, offset by additional core deposit amortization of $113,000 assuming acquired January 1, 2006. |
(D) |
Reversal of merger related expenses of $1.3 million, offset by additional core deposit amortization of $50,000 assuming acquired January 1, 2006. |
(E) |
Income tax effect of pro forma adjustments at 36% |
(F) |
Additional shares issued at an exchange rate of 0.85 to 1 for F&M and 2.2503 to 1 for SJFHC |
|
|
Six Months Ended June 30, 2007 |
|
||||||||||||||||
|
|
|
|
||||||||||||||||
|
|
|
|
|
Four Months Ended
|
|
F&M Pro |
|
SJFHC Pro |
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
Pro Forma |
|
|||||||||
|
|
Banner |
|
F&M |
|
SJFHC |
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before provision for loan losses |
|
$ |
70,287 |
|
$ |
5,803 |
|
$ |
2,074 |
|
$ |
33 |
(A) |
$ |
(10 |
) (A) |
$ |
78,187 |
|
Provision for loan losses |
|
|
2,400 |
|
|
1,028 |
|
|
20 |
|
|
|
|
|
|
|
|
3,448 |
|
Other operating income |
|
|
11,320 |
|
|
1,375 |
|
|
599 |
|
|
|
|
|
(22 |
) (B) |
|
13,272 |
|
Other operating expense |
|
|
57,370 |
|
|
13,425 |
|
|
3,109 |
|
|
(6,610 |
) (C) |
|
(1,026 |
) (D) |
|
66,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
21,837 |
|
|
(7,275 |
) |
|
(456 |
) |
|
6,643 |
|
|
994 |
|
|
21,743 |
|
Provision for income taxes (benefits) |
|
|
6,913 |
|
|
(2,612 |
) |
|
270 |
|
|
2,391 |
(E) |
|
358 |
(E) |
|
7,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
14,924 |
|
$ |
(4,663 |
) |
$ |
(726 |
) |
$ |
4,252 |
|
$ |
636 |
|
$ |
14,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
1.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.95 |
|
Diluted earning per share |
|
$ |
1.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.93 |
|
Basic weighted average shares outstanding |
|
|
13,427 |
|
|
1,383 |
|
|
241 |
|
|
1,176 |
(F) |
|
542 |
(F) |
|
15,145 |
|
Diluted weighted average shares outstanding |
|
|
13,728 |
|
|
1,383 |
|
|
241 |
|
|
1,176 |
(F) |
|
542 |
(F) |
|
15,446 |
|
|
|
(A) |
Consists of net accretion of fair value adjustments related to the acquisitions of F&M and SJFHC assuming acquired January 1, 2006. |
(B) |
Reversal of effects of equity in earnings of San Juan Title Company not acquired in acquisition |
(C) |
Reversal of merger related expenses of $7.1 million, offset by additional core deposit amortization of $453,000 assuming acquired January 1, 2006. |
(D) |
Reversal of merger related expenses of $1.3 million, offset by additional core deposit amortization of $231,000 assuming acquired January 1, 2006 |
(E) |
Income tax effect of pro forma adjustments at 36% |
(F) |
Additional shares issued at an exchange rate of 0.85 to 1 for F&M and 2.2503 to 1 for SJFHC |
15
Pro Forma Financial Information Unaudited
(in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30, 2006 |
|
||||||||||||||||
|
|
|
|
||||||||||||||||
|
|
Banner |
|
F&M |
|
SJFHC |
|
F&M Pro |
|
SJFHC Pro |
|
Pro Forma |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before provision for loan losses |
|
$ |
31,225 |
|
$ |
4,065 |
|
$ |
1,724 |
|
$ |
(52 |
) (A) |
$ |
(23 |
) (A) |
$ |
36,939 |
|
Provision for loan losses |
|
|
2,300 |
|
|
112 |
|
|
6 |
|
|
|
|
|
|
|
|
2,418 |
|
Other operating income |
|
|
5,000 |
|
|
1,197 |
|
|
394 |
|
|
|
|
|
(44 |
) (B) |
|
6,547 |
|
Other operating expense |
|
|
20,011 |
|
|
3,567 |
|
|
1,289 |
|
|
339 |
(C) |
|
181 |
(D) |
|
25,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
13,914 |
|
|
1,583 |
|
|
823 |
|
|
(391 |
) |
|
(248 |
) |
|
15,681 |
|
Provision for income taxes (benefits) |
|
|
4,555 |
|
|
478 |
|
|
275 |
|
|
(141 |
) (E) |
|
(89 |
) (E) |
|
5,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,359 |
|
$ |
1,105 |
|
$ |
548 |
|
$ |
(250 |
) |
$ |
(159 |
) |
$ |
10,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.74 |
|
Diluted earning per share |
|
$ |
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.72 |
|
Basic weighted average shares outstanding |
|
|
11,882 |
|
|
2,026 |
|
|
364 |
|
|
1,722 |
(F) |
|
819 |
(F) |
|
14,423 |
|
Diluted weighted average shares outstanding |
|
|
12,196 |
|
|
2,134 |
|
|
364 |
|
|
1,814 |
(F) |
|
819 |
(F) |
|
14,829 |
|
|
|
(A) |
Consists of net accretion of fair value adjustments related to the acquisitions of F&M and SJFHC assuming acquired January 1, 2006. |
(B) |
Reversal of effects of equity in earnings of San Juan Title Company not acquired in acquisition |
(C) |
Core deposit amortization assuming acquired January 1, 2006. |
(D) |
Additional core deposit amortization assuming acquired January 1, 2006 |
(E) |
Income tax effect of pro forma adjustments at 36% |
(F) |
Additional shares issued at an exchange rate of 0.85 to 1 for F&M and 2.2503 to 1 for SJFHC |
|
|
Six Months Ended June 30, 2006 |
|
||||||||||||||||
|
|
|
|
||||||||||||||||
|
|
Banner |
|
F&M |
|
SJFHC |
|
F&M Pro |
|
SJFHC Pro |
|
Pro Forma |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before provision for loan losses |
|
$ |
61,129 |
|
$ |
7,944 |
|
$ |
3,436 |
|
$ |
(202 |
) (A) |
$ |
(124 |
) (A) |
$ |
72,183 |
|
Provision for loan losses |
|
|
3,500 |
|
|
315 |
|
|
12 |
|
|
|
|
|
|
|
|
3,827 |
|
Other operating income |
|
|
9,502 |
|
|
2,240 |
|
|
745 |
|
|
|
|
|
(73 |
) (B) |
|
12,414 |
|
Other operating expense |
|
|
43,209 |
|
|
7,288 |
|
|
2,569 |
|
|
679 |
(C) |
|
362 |
(D) |
|
54,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
23,922 |
|
|
2,581 |
|
|
1,600 |
|
|
(881 |
) |
|
(559 |
) |
|
26,663 |
|
Provision for income taxes (benefits) |
|
|
7,775 |
|
|
779 |
|
|
522 |
|
|
(317 |
) (E) |
|
(201 |
) (E) |
|
8,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
16,147 |
|
$ |
1,802 |
|
$ |
1,078 |
|
$ |
(564 |
) |
$ |
(358 |
) |
$ |
18,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
1.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.26 |
|
Diluted earning per share |
|
$ |
1.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.23 |
|
Basic weighted average shares outstanding |
|
|
11,836 |
|
|
2,029 |
|
|
364 |
|
|
1,725 |
(F) |
|
819 |
(F) |
|
14,380 |
|
Diluted weighted average shares outstanding |
|
|
12,161 |
|
|
2,077 |
|
|
364 |
|
|
1,765 |
(F) |
|
819 |
(F) |
|
14,745 |
|
|
|
(A) |
Consists of net accretion of fair value adjustments related to the acquisitions of F&M and SJFHC assuming acquired January 1, 2006. |
(B) |
Reversal of effects of equity in earnings of San Juan Title Company not acquired in acquisition |
(C) |
Core deposit amortization assuming acquired January 1, 2006. |
(D) |
Core deposit amortization assuming acquired January 1, 2006 |
(E) |
Income tax effect of pro forma adjustments at 36% |
(F) |
Additional shares issued at an exchange rate of 0.85 to 1 for F&M and 2.2503 to 1 for SJFHC |
16
Note 4: Business Segments
We are managed by legal entity and not by lines of business; however, both of our primary subsidiaries are engaged in the same line of business, commercial banking. Banner Bank and Islanders Bank (together the Banks) are community oriented commercial banks chartered in the State of Washington. The Banks primary business is that of traditional banking institutions, gathering deposits and originating loans for their portfolios in their primary market areas. The Banks offer a wide variety of deposit products to their consumer and commercial customers. Lending activities include the origination of real estate, commercial and agricultural business and consumer loans. The Banks do not engage and have not engaged in any sub-prime lending programs. 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 Banner Corporations executive management and Board of Directors on a monthly basis. All of the executive officers of Banner Corporation are members of the Banner Bank executive management team and one director of Banner Corporation and one executive officer of Banner Bank are members of the Board of Directors of Islanders Bank. None of the officers of Islanders Bank are officers or directors of Banner Corporation.
Generally accepted accounting principles establish standards to report information about operating segments in annual financial statements and require reporting of selected information about operating segments in interim reports to shareholders. We have determined that our current business and operations consist of a single business segment.
Note 5: Additional Information Regarding Interest-Bearing Deposits and Securities
Encumbered Securities: Securities labeled Encumbered are pledged securities that are subject to certain agreements which may allow the secured party to either sell and replace them with similar but not the same security or otherwise pledge the securities. In accordance with SFAS No. 140, the amounts have been separately identified in the Consolidated Statements of Financial Condition as encumbered.
The following table sets forth additional detail on our interest-bearing deposits and securities at the dates indicated (at carrying value) (in thousands):
|
|
June 30 |
|
December 31 |
|
June 30 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits included in Cash and due from banks |
|
$ |
25,437 |
|
$ |
5,068 |
|
$ |
32,547 |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
116,873 |
|
|
150,166 |
|
|
160,733 |
|
Other securitiestaxable |
|
|
63,677 |
|
|
77,332 |
|
|
82,365 |
|
Other securitiestax exempt |
|
|
48,102 |
|
|
42,817 |
|
|
43,609 |
|
Equity securities with dividends |
|
|
2,513 |
|
|
3,710 |
|
|
3,439 |
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
|
231,165 |
|
|
274,025 |
|
|
290,146 |
|
FHLB stock |
|
|
37,291 |
|
|
35,844 |
|
|
35,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
293,893 |
|
$ |
314,937 |
|
$ |
358,537 |
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides additional detail on income from deposits and securities for the periods indicated (in thousands):
|
|
Quarters Ended |
|
Six Months Ended |
|
||||||||
|
|
|
|
|
|
||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities interest |
|
$ |
1,535 |
|
$ |
2,011 |
|
$ |
3,310 |
|
$ |
4,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable interest income |
|
|
1,244 |
|
|
1,285 |
|
|
2,546 |
|
|
2,553 |
|
Tax-exempt interest income |
|
|
503 |
|
|
488 |
|
|
968 |
|
|
981 |
|
Other stockdividend income |
|
|
27 |
|
|
61 |
|
|
67 |
|
|
78 |
|
FHLB stock dividends |
|
|
55 |
|
|
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,829 |
|
|
1,834 |
|
|
3,672 |
|
|
3,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,364 |
|
$ |
3,845 |
|
$ |
6,982 |
|
$ |
7,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Note 6: Fair Value Accounting and Measurement
Banner 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 (FV) at specified election dates. Upon adoption of SFAS No. 159, we selected fair value measurement for all of our available for sale investment securities, FHLB advances and junior subordinated debentures, which had fair values of approximately $226.2 million, $176.8 million and $124.4 million, respectively, on January 1, 2007. The initial fair value measurement of these instruments resulted in a $3.5 million adjustment for the cumulative effect, net of tax, as a result of the change in accounting, which was recorded as a reduction in retained earnings as of January 1, 2007, and which under SFAS No. 159 has not been recognized in current earnings. While the adjustment to retained earnings is permanent, approximately $2.6 million of the amount was previously reported as accumulated other comprehensive loss at December 31, 2006, so the reduction in the January 1, 2007 opening stockholders equity was $897,000 when SFAS No. 159 was adopted.
The following table details the financial instruments carried at fair value to the dates indicated (in thousands)
|
|
Cumulative Adjustment on Adoption of SFAS 159 |
|
|
June 30, 2007 |
|
|||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||
|
|
Amortized Cost |
|
Fair Market Valuation Adjustment |
|
Fair Value |
|
Related Taxes |
|
Cumulative Effect of Adoption |
|
Amortized Cost |
|
Fair Market Valuation Adjustment |
|
Fair Value |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale reclassified to fair value |
|
$ |
230,189 |
|
$ |
(4,036 |
) |
$ |
226,153 |
|
$ |
1,413 |
|
$ |
(2,623 |
) |
$ |
186,625 |
|
$ |
(3,656 |
) |
$ |
182,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from FHLB |
|
$ |
177,430 |
|
$ |
(678 |
) |
$ |
176,752 |
|
$ |
244 |
|
$ |
434 |
|
$ |
34,170 |
|
$ |
(344 |
) |
$ |
33,826 |
|
Junior subordinated debentures, net of unamortized deferred origination costs |
|
|
122,287 |
|
|
2,079 |
|
|
124,366 |
|
|
(748 |
) |
|
(1,331 |
) |
|
97,092 |
|
|
1,327 |
|
|
98,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
299,717 |
|
$ |
1,401 |
|
$ |
301,118 |
|
$ |
(504 |
) |
$ |
(897 |
) |
$ |
131,262 |
|
$ |
983 |
|
$ |
132,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3,520 |
) |
|
|
|
|
|
|
|
|
|
Less transfer from accumulated other comprehensive loss to retained earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,623 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative reduction of opening stockholders equity at January 1, 2007 upon adoption of SFAS No. 159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(897 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Note 6: Fair Value Accounting and Measurement (continued)
SFAS No. 157 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS No. 157, among other things, requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
We hold fixed and variable rate interest bearing securities, investments in marketable equity securities and certain other financial instruments, which are carried at fair value. Fair value is determined based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available.
We also carry our FHLB advances and junior subordinated debentures at fair value. In determining the fair value of our obligations, various factors are considered including: price activity for equivalent or similar instruments, discounting the expected cash flows using market interest rates and our own credit standing.
These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own market assumptions. These two types of inputs create the following fair value hierarchy:
|
|
Level 1 - Quoted prices for identical instruments in active markets |
|
|
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
|
|
Level 3 - Instruments whose significant value drivers are unobservable. |
Fair values are determined as follows:
|
|
Securities at fair value are priced using matrix pricing based on the securities relationship to other benchmark quoted prices and under the provisions of SFAS No. 157 are considered a Level 2 input method. |
|
|
Advances from FHLB are priced using discounted cash flows to the date of maturity based on the FHLB of Seattles current rate sheet for member bank advances on the date of valuation and is considered a Level 2 input method. |
|
|
Junior subordinated debentures are priced using discounted cash flows to the next available redemption date on the date of valuation based on recent issuances or quotes from brokers for comparable bank holding companies and are considered a Level 2 input method. |
The following table outlines the net change in fair values recorded at the dates indicated (in thousands):
|
|
Quarters Ended |
|
Six Months Ended |
|
||||||||
|
|
|
|
|
|
||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale reclassified as carried at fair value |
|
$ |
(1,619 |
) |
$ |
|
|
$ |
(533 |
) |
$ |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from FHLB |
|
|
(155 |
) |
|
|
|
|
(334 |
) |
|
|
|
Junior subordinated debentures net of unamortized deferred issuance costs |
|
|
(103 |
) |
|
|
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value |
|
$ |
(1,877 |
) |
$ |
|
|
$ |
(697 |
) |
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have elected to continue to recognize the interest income and dividends from the securities reclassified to fair value as a component of interest income as was done in prior years when they were classified as available for sale. Interest expense related to the FHLB advances and junior subordinated debentures continues to be measured based on contractual interest rate and reported in interest expense. The change in fair market value of these financial instruments has been recorded as a component of other operating income.
19
Note 7: Calculation of Weighted Average Shares Outstanding for Earnings Per Share (EPS)
The following table reconciles basic to diluted weighted shares outstanding used to calculate earnings per share data (in thousands):
|
|
Quarters Ended |
|
Six Months Ended |
|
||||||||
|
|
|
|
|
|
||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
14,520 |
|
|
11,882 |
|
|
13,427 |
|
|
11,836 |
|
Plus unvested MRP and stock option incremental shares considered outstanding for diluted EPS calculations |
|
|
271 |
|
|
314 |
|
|
301 |
|
|
325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
14,791 |
|
|
12,196 |
|
|
13,728 |
|
|
12,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8: Stock Based Compensation Plans
Banner Corporation operates the following stock-based compensation plans as approved by the shareholders: the 1996 Management Recognition and Development Plan (MRP), a restricted stock plan; and the 1996 Stock Option Plan, the 1998 Stock Option Plan and the 2001 Stock Option Plan (collectively, SOPs).
MRP Stock Grants: Under the MRP, Banner was authorized to grant up to 528,075 shares of restricted stock to its directors, officers and employees. On July 26, 2006, this stock program expired with 522,660 shares having been granted and no additional shares eligible to be granted. Shares granted under the MRP vest ratably over a five-year period from the date of grant. The Consolidated Statements of Income for the quarters and six months ended June 30, 2007 and 2006 reflect accruals of $43,000 and $46,000, and $89,000 and $93,000, respectively, for these grant awards. The MRP stock grants fair value equals their intrinsic value on the date of grant.
A summary of unvested MRP share activity during the six months ended June 30, 2007 follows:
|
|
Shares |
|
Weighted- |
|
||
|
|
|
|
|
|
|
|
Unvested at December 31, 2006 |
|
|
19,360 |
|
$ |
22.07 |
|
Granted |
|
|
|
|
|
|
|
Vested |
|
|
8,020 |
|
|
20.29 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at June 30, 2007 |
|
|
11,340 |
|
$ |
23.34 |
|
|
|
|
|
|
|
|
|
Stock Options: Under the SOPs, we reserved 2,284,186 shares for issuance pursuant to the exercise of stock options to be granted to directors and employees. Authority to grant additional options under the 1996 Stock Option Plan terminated on July 26, 2006. As of June 30, 2007, there were 53,747 options eligible for grants under the 1998 and 2001 plans. The exercise price of the stock options is set at 100% of the fair market value of the stock price on the date of grant. Such options have graded vesting of 20% per year from the date of grant and any unexercised incentive stock options will expire ten years after date of grant or 90 days after employment or service ends.
We did not grant any stock options during the six months ended June 30, 2007 and 2006. Also, there were no significant modifications made to any stock option grants during the period. The fair values of stock options granted are amortized as compensation expense on a straight-line basis over the vesting period of the grant.
Stock-based compensation costs related to the SOPs were $72,000 and $129,000, and $156,000 and $309,000 for the quarters and six months ended June 30, 2007 and 2006, respectively. The SOPs stock option grant compensation costs are generally based on the fair value calculated from the Black-Scholes option pricing on the date of the grant award. Assumptions used in the Black-Scholes model are an expected volatility based on the six-month historical volatility at the date of the grant. The expected term is based on the remaining contractual life of the vesting period. We base the estimate of risk-free interest rate on the U.S. Treasury Constant Maturities Indices in effect at the time of the grant. The dividend yield is based on the current quarterly dividend in effect at the time of the grant.
As part of the provisions of SFAS 123(R), Share-Based Payment, we are required to estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.
20
A summary of our SOP stock compensation activity for the six months ended June 30, 2007 follows (in thousands, except shares and per share data):
|
|
Shares |
|
Weighted- |
|
Weighted- |
|
Aggregate |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
713,460 |
|
$ |
20.49 |
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(56,955 |
) |
|
17.40 |
|
|
|
|
$ |
1,264 |
|
Forfeited |
|
|
(600 |
) |
|
31.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007 |
|
|
655,905 |
|
$ |
20.75 |
|
|
5.1 |
|
$ |
8,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at June 30, 2007 and expected to vest |
|
|
649,556 |
|
$ |
20.70 |
|
|
5.1 |
|
$ |
8,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2007 |
|
|
511,565 |
|
$ |
19.25 |
|
|
4.6 |
|
$ |
7,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of stock options is calculated as the amount by which the market price of our common stock exceeds the exercise price of the stock option.
A summary of our unvested stock option activity with respect to the six months ended June 30, 2007 follows:
|
|
Shares |
|
Weighted- |
|
||
|
|
|
|
|
|
|
|
Unvested at December 31, 2006 |
|
|
211,810 |
|
$ |
7.57 |
|
Granted |
|
|
|
|
|
|
|
Vested |
|
|
(66,870 |
) |
|
7.17 |
|
Forfeited |
|
|
(600 |
) |
|
9.26 |
|
|
|
|
|
|
|
|
|
Unvested at June 30, 2007 |
|
|
144,340 |
|
$ |
7.75 |
|
|
|
|
|
|
|
|
|
No options were granted during the six months ended June 30, 2007 and 2006. During the six months ended June 30, 2007 and 2006, the total intrinsic value of stock options exercised was $1.3 million and $5.3 million, respectively.
We had $313,000 of total unrecognized compensation expense related to stock options at June 30, 2007 that is expected to be recognized over a period of 2.8 years.
During the six months ended June 30, 2007, we received $991,000 from the exercise of stock options. Cash was not used to settle any equity instruments previously granted. Upon the exercise of stock options, we issue shares from authorized but unissued shares. We do not currently expect to repurchase shares from any source to satisfy our obligations under the SOPs.
The following are the stock-based compensation costs we recognized in our Condensed Consolidated Statements of Income (in thousands):
|
|
Quarters Ended |
|
Six Months Ended |
|
||||||||
|
|
|
|
|
|
||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and employee benefits |
|
$ |
115 |
|
$ |
175 |
|
$ |
245 |
|
$ |
402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total decrease in income before income taxes |
|
|
115 |
|
|
175 |
|
|
245 |
|
|
402 |
|
Decrease in provision for income taxes |
|
|
(20 |
) |
|
(31 |
) |
|
(45 |
) |
|
(58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in net income |
|
$ |
95 |
|
$ |
144 |
|
$ |
200 |
|
$ |
344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
ITEM 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
Managements Discussion and Analysis and other portions of this report on Form 10-Q 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 and our Annual Report on Form 10-K for the year ended December 31, 2006. 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; 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 2007 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 our consolidated subsidiaries.
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 June 30, 2007, its 77 branch offices and 13 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 are subject to regulation by the Washington State Department of Financial Institutions, Division of Banks and the FDIC. As of June 30, 2007, we had total consolidated assets of $4.3 billion, total deposits of $3.6 billion and total stockholders equity of $402 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. A portion of Banner Banks 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 16 new branches through acquisition, opened 23 new branches and relocated seven others in less than four years. Most recently, we opened branches in Beaverton, Oregon and Bellingham, Washington, and on May 1, 2007, closed our acquisitions of F&M Bank and San Juan Financial Holding Company. F&M Bank was a 13-branch commercial bank in the Spokane, Washington market and Islanders Bank is a three-branch commercial bank in the north Puget Sound region. Both acquisitions increase our presence within desirable marketplaces and allow us to better serve existing and future customers. This branch expansion is 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 are rapidly reaching a size in terms of number of branches that will generate deposit growth sufficient to fund our expected loan growth and payoff FHLB borrowings. When this occurs, we expect to decelerate our de novo branch expansion to a more moderate pace.
We completed the acquisitions of F&M Bank and San Juan Financial Holding Company effective May 1, 2007. On that date, San Juan Financial Holding Company was merged into Banner Corporation and its wholly owned subsidiary, Islanders Bank, will continue operations as a subsidiary of Banner Corporation. On the same date, F&M Bank merged into Banner Corporation and Banner Bank and now operates under
22
the Banner Bank name. The financial results for the quarter and six months ended June 30, 2007 include the assets, liabilities and results of operations for both of the acquired companies from the date of acquisition on May 1, 2007.
For the quarter ended June 30, 2007, we had net income of $7.1 million, or $0.48 per share (diluted), compared to $9.4 million, or $0.77 per share (diluted), for the quarter ended June 30, 2006. Our net income for the quarter ended June 30, 2006 was substantially increased as a result of an insurance recovery which contributed $3.4 million, or $0.28 per share, to the results for that period. Additionally, in the quarter ended June 30, 2007, our net income was significantly affected by the net decrease in the valuation of the selected financial assets and liabilities we record at fair value pursuant to the early adoption of SFAS No. 159. These fair value adjustments resulted in a reduction of $1.2 million, or $0.08 per share (diluted), to net income reported for the quarter ended June 30, 2006. Excluding the net fair value adjustments in the current quarter and the insurance recovery in the second quarter of 2006, net income from recurring operations increased 40% to $8.3 million, or $0.56 per share (diluted), for the quarter ended June 30, 2007, from $5.9 million, or $0.49 per share (diluted) for the quarter ended June 30, 2006.
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 $6.9 million for the quarter ended June 30, 2007, 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 two 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 $1.4 million for the quarter ended June 30, 2007, a decrease of $900,000 compared to the quarter ended June 30, 2006. Other operating income, excluding fair value adjustments, increased by $1.9 million, or 37%, to $6.9 million for the quarter ended June 30, 2007 from $5.0 million for the quarter ended June 30, 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 fair value adjustments, increased 24% to $45 million for the quarter ended June 30, 2007 compared to $36.2 million for the quarter ended June 30, 2006. Other operating expenses increased $11.3 million to $31.3 million for the quarter ended June 30, 2007 from $20.0 million ($25.4 million excluding the insurance recovery) for the same period in 2006, an increase of 56% (23% excluding the effect of the insurance recovery) from a year earlier, largely reflecting our continued growth and the effect of our acquisitions.
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, 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. To an increasing extent in recent years, 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, agricultural and consumer lending, to become increasingly important activities for us.
Deposits, FHLB advances, other borrowings 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.
Managements Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in an understanding of 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 Selected Notes to Consolidated Financial Statements included in this Form 10-Q.
Comparison of Financial Condition at June 30, 2007 and December 31, 2006
General: For the first six months of the year, total assets increased $773 million, or 22%, from $3.496 billion at December 31, 2006, to $4.269 billion at June 30, 2007. Recent acquisitions contributed $691 million in assets (as of May 1, 2007), 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 $645 million, or 22%, from $2.930 billion at December 31, 2006, to $3.575 billion at June 30, 2007. Internal loan growth was meaningful and broad-based; however, the portfolio growth largely reflects the $506 million addition in net loans from recent acquisitions. Reflecting continued demand for and sales of new homes in many of the markets we
23
served as well as a strength and core competency of Banner Bank, the most significant internally generated growth occurred in construction and land loans. Including the effect of the acquisitions, loans to finance the construction of one- to four-family residential real estate increased by $84 million, or 15%, and land and development loans increased by $55 million, or 14%, since December 31, 2006. In addition, and largely reflecting the acquisitions, loans to finance commercial real estate increased by $215 million, or 36%. Loan growth also included commercial business loans, which increased by $128 million, or 27%, consumer loans, which increased by $57 million, or 49%, and loans to finance existing one- to four-family residential properties, which increased by $84 million, or 23%, compared to December 31, 2006. By contrast, loans to finance commercial construction decreased by $10 million, or 11%, and multi-family construction decreased $4 million, or 11%, from December 31, 2006.
Securities decreased $43 million, or 16%, from $274 million at December 31, 2006, to $231 million at June 30, 2007, primarily as a result of scheduled principal reductions and prepayments on mortgage-backed securities. Effective January 1, 2007, we elected to reclassify all our securities available for sale to fair value following our adoption of SFAS No. 159. Property and equipment increased by $29 million to $87 million at June 30, 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 $18 million added through recent acquisitions. We also had an increase of $12 million in bank-owned life insurance, with $937,000 coming from the growth of cash surrender values on existing policies and the remainder due to acquisition.
Deposits increased $798 million, or 29%, from $2.795 billion at December 31, 2006, to $3.593 billion at June 30, 2007. The acquisitions of F&M Bank and Islanders Bank resulted in the addition of $473 million in total deposits as of May 1, 2007. Non-interest-bearing deposits increased $123 million, or 37%, to $456 million, while interest-bearing deposits increased $675 million, or 27%, to $3.137 billion from the December 31, 2006 amounts. The aggregate total of transaction and savings accounts, including money market accounts, increased by $525 million, or 42%, to $1.763 billion, reflecting Banner Banks 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 as explained in more detail below. Reflecting internally generated growth and the effects of the acquisitions, transaction and savings accounts represent 49.1% of total deposits at June 30, 2007, compared to 46.2% a year earlier. FHLB advances decreased $144 million from $177 million at December 31, 2006, to $34 million at June 30, 2007, while other borrowings decreased $31 million to $72 million at June 30, 2007. The decrease in other borrowings reflects a decrease of $7 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 $25 million, primarily reflecting the early redemption of debentures issued five years ago. On July 31, 2007, we replaced these called debentures with a new issuance which, reflecting current market conditions, will have a much more favorable interest cost in future periods.
During the six months ended June 30, 2007, we increased our capital by issuing 727,260 new shares of Banner Common Stock at an average net price of $40.38 through our Dividend Reinvestment and Direct Stock Purchase and Sale Plan. In addition, we issued a net 46,345 shares in connection with the exercise of vested stock options and 2,592,611 shares were issued in the acquisition of F&M Bank and San Juan Financial Holding Company. 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 $152.1 million increase in stockholders equity. The additional capital will be available to support our continued growth initiatives and the just-completed acquisitions of F&M Bank and San Juan Financial Holding Company.
24
The following tables provide additional detail on our loans and deposits (dollars in thousands):
|
|
June 30 |
|
December 31 |
|
June 30 |
|
||||||||||||
|
|
|
|
|
|
|
|
||||||||||||
Loan Portfolio: |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (including loans held for sale): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
$ |
811,072 |
|
|
22.4 |
% |
$ |
596,488 |
|
|
20.1 |
% |
$ |
595,513 |
|
|
21.1 |
% |
Multifamily real estate |
|
|
174,315 |
|
|
4.8 |
|
|
147,311 |
|
|
5.0 |
|
|
141,996 |
|
|
5.0 |
|
Commercial construction |
|
|
87,821 |
|
|
2.4 |
|
|
98,224 |
|
|
3.3 |
|
|
95,277 |
|
|
3.4 |
|
Multifamily construction |
|
|
35,552 |
|
|
1.0 |
|
|
39,908 |
|
|
1.3 |
|
|
56,857 |
|
|
2.0 |
|
One- to four-family construction |
|
|
654,558 |
|
|
18.1 |
|
|
570,501 |
|
|
19.2 |
|
|
489,187 |
|
|
17.3 |
|
Land and land development |
|
|
457,264 |
|
|
12.6 |
|
|
402,665 |
|
|
13.6 |
|
|
310,369 |
|
|
11.0 |
|
Commercial business |
|
|
595,250 |
|
|
16.5 |
|
|
467,745 |
|
|
15.8 |
|
|
472,061 |
|
|
16.7 |
|
Agricultural business, including secured by farmland |
|
|
181,505 |
|
|
5.0 |
|
|
163,518 |
|
|
5.5 |
|
|
155,744 |
|
|
5.5 |
|
One-to four-family real estate |
|
|
445,585 |
|
|
12.4 |
|
|
361,625 |
|
|
12.2 |
|
|
397,648 |
|
|
14.1 |
|
Consumer |
|
|
87,395 |
|
|
2.4 |
|
|
50,826 |
|
|
1.7 |
|
|
47,534 |
|
|
1.7 |
|
Consumer secured by one-to four-family |
|
|
88,035 |
|
|
2.4 |
|
|
67,179 |
|
|
2.3 |
|
|
61,847 |
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer |
|
|
175,430 |
|
|
4.8 |
|
|
118,005 |
|
|
4.0 |
|
|
109,381 |
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans outstanding |
|
|
3,618,352 |
|
|
100.00 |
% |
|
2,965,990 |
|
|
100.00 |
% |
|
2,824,033 |
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Less allowance for loan losses |
|
|
(43,248 |
) |
|
|
|
|
(35,535 |
) |
|
|
|
|
(33,618 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loans outstanding at end of period |
|
$ |
3,575,104 |
|
|
|
|
$ |
2,930,455 |
|
|
|
|
$ |
2,790,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
December 31 |
|
June 30 |
|
||||||||||||
|
|
|
|
|
|
|
|
||||||||||||
Deposits: |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing accounts |
|
$ |
455,628 |
|
|
12.7 |
% |
$ |
332,372 |
|
|
11.9 |
% |
$ |
317,515 |
|
|
12.3 |
% |
Interest-bearing checking |
|
|
461,749 |
|
|
12.9 |
|
|
327,836 |
|
|
11.7 |
|
|
338,128 |
|
|
13.1 |
|
Regular savings accounts |
|
|
570,117 |
|
|
15.9 |
|
|
364,957 |
|
|
13.1 |
|
|
265,942 |
|
|
10.3 |
|
Money market accounts |
|
|
275,814 |
|
|
7.6 |
|
|
212,953 |
|
|
7.6 |
|
|
268,949 |
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total transaction and saving accounts |
|
|
1,763,308 |
|
|
49.1 |
|
|
1,238,118 |
|
|
44.3 |
|
|
1,190,534 |
|
|
46.2 |
|
Certificates which mature or reprice: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
1,597,463 |
|
|
44.5 |
|
|
1,351,922 |
|
|
48.4 |
|
|
1,118,596 |
|
|
43.4 |
|
After 1 year, but within 3 years |
|
|
182,039 |
|
|
5.1 |
|
|
152,306 |
|
|
5.5 |
|
|
218,814 |
|
|
8.5 |
|
After 3 years |
|
|
49,971 |
|
|
1.3 |
|
|
52,246 |
|
|
1.8 |
|
|
51,513 |
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total certificate accounts |
|
|
1,829,473 |
|
|
50.9 |
|
|
1,556,474 |
|
|
55.7 |
|
|
1,388,923 |
|
|
53.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,592,781 |
|
|
100.00 |
% |
$ |
2,794,592 |
|
|
100.00 |
% |
$ |
2,579,457 |
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
Comparison of Results of Operations for the Quarters and Six Months Ended June 30, 2007 and 2006
General. For the quarter ended June 30, 2007, we had net income of $7.1 million, or $0.48 per share (diluted), compared to net income of $9.4 million, or $0.77 per share (diluted), for the quarter ended June 30, 2006. Further, our operating results for the quarter ended June 30, 2007 include a $1.2 million net after-tax charge as a result of changes in the valuation of financial instruments carried at fair value pursuant to the early adoption of fair value accounting under SFAS No. 159. Our operating results for the quarter ended June 30, 2006 were significantly affected by a $5.5 million ($3.4 million net after tax) insurance recovery relating to a loss incurred in 2001. Excluding the net fair value adjustments in the current quarter and the insurance recovery in the second quarter of 2006, net income from recurring operations increased 40% to $8.3 million, or $0.56 per share (diluted), for the quarter ended June 30, 2007, from $5.9 million, or $0.49 per share (diluted) for the quarter ended June 30, 2006. Our improved net income from recurring operations reflects continued growth of loans and deposits, including growth from acquisitions, as well as changes in the mix of those assets and liabilities. Our operating results also included substantial increases in other operating expenses, particularly compensation, occupancy, information services, advertising and miscellaneous expenses, reflecting the recent acquisitions, growth in locations, operations and staff as we continue to expand. In addition to the 16 branches added on May 1, 2007 as a result of the acquisitions of F&M Bank and Islanders Bank, new or relocated offices that contributed to the higher level of operating expenses during the six months as compared to the same period a year ago include: Boise (2) and Meridian, Idaho, Baker City, Beaverton, La Grande and Portland, Oregon, plus Bellingham and Redmond, Washington.
Compared to levels a year ago, total assets increased 26% to $4.269 billion at June 30, 2007, net loans increased 28% to $3.575 billion, deposits grew 39% to $3.593 billion, while borrowings, including junior subordinated debentures, decreased $340 million, or 62%, to $204 million. The average balance of interest-earning assets was $3.716 billion for the quarter ended June 30, 2007, an increase of $669 million, or 22%, compared to $3.047 billion for the same quarter a year earlier.
Net Interest Income. Net interest income before provision for loan losses increased to $38.1 million for the quarter ended June 30, 2007, compared to $31.2 million for the prior year comparative quarter, primarily as a result of the growth in average interest-earning assets noted above and despite market pressures on the net interest margin as discussed below. The net interest margin of 4.11% in the current quarter was unchanged from the prior years comparative quarter; however, the net interest margin exceeded the preceding quarter ended March 31, 2007 by 17 basis points, largely reflecting the effects of the two acquisitions but also reflecting other changes in the mix of assets and liabilities and despite intense competition for loans and deposits. For the six months ended June 30, 2007, the net interest margin declined 13 basis points from 4.17% to 4.04% from the prior years comparative period, primarily as a result of the effect of higher deposit costs in the first quarter of 2007 compared to the first quarter of 2006. Subsequent to the Federal Reserves decision to stop increasing short-term interest rates after June 2006, and as a result of the unfavorable yield curve environment, increases in deposit costs have generally exceeded increases in loan yields in recent quarters. Mitigating in part the adverse effects of these market forces on loan and deposit pricing, our average asset mix for the quarter and six months ended June 30, 2007 reflected proportionately more loans, including more higher yielding commercial, construction and land development loans, and fewer investment securities than for the same period a year earlier. At the same time, our average funding liability base had proportionately more deposits, including more non-interest-bearing deposits, and proportionately fewer borrowings than in the prior year. Reflecting higher market interest rates as well a s these mix changes, the yield on earning assets for the quarter and six months ended June 30, 2007 increased by 27 basis points and 40 basis points, respectively, compared to the same periods a year earlier, while funding costs for the quarter and six months ended June 30, 2007 increased by 33 basis points and 59 basis points, respectively, over the same period.
Interest Income. Interest income for the quarter ended June 30, 2007 was $74.4 million, compared to $58.9 million for the same quarter a year earlier, an increase of $15.5 million, or 26%. The increase in interest income occurred as a result of a $669 million increase in the average balance of interest earning assets as well as a 27 basis point increase in the average yield on those assets. The yield on average interest-earning assets increased to 8.03% for the quarter ended June 30, 2007, compared to 7.76% for the same period a year earlier. The increase in the yield on earning assets resulted from higher loan yields and significant growth in loans coupled with a reduction in lower yielding securities balances. Average loans receivable for the quarter ended June 30, 2007 increased by $708 million, or 26%, to $3.413 billion, compared to $2.705 billion for the quarter ended June 30, 2006. Interest income on loans for the quarter increased by $16.0 million, or 29%, to $71.0 million from $55.1 million for the same period in the prior year, reflecting the impact of the increase in average loan balances combined with an 18 basis point increase in the average yield on loans. The increase in average loan yield reflects the higher average level of market interest rates during the current quarter, particularly in short-term interest rates including the prime rate and LIBOR indices which affect the yield on large portions of our construction, land development, commercial and agricultural loans. The increase in average loan yields also reflects changes in the mix of the loan portfolio. The average yield on loans was 8.35% for the quarter ended June 30, 2007, compared to 8.17% for the same period in the prior year. While the recent level of market interest rates was higher than the same quarter a year earlier, loan yields did not change to the same degree as most fixed-rate loans did not adjust upward. In addition, changes in the average credit risk profile of new borrowers and competitive pricing pressure resulted in lower spreads and yields on new loan originations. These factors were somewhat offset by changes in the loan mix, as growth has been most significant in some of the higher yielding adjustable-rate loan categories, particularly construction and land development loans.
The combined average balance of mortgage-backed securities, investment securities, daily interest-bearing deposits and FHLB stock decreased by $39 million for the quarter ended June 30, 2007, and the interest and dividend income from those investments decreased by $481,000 compared to the quarter ended June 30, 2006. The average yield on the securities portfolio and cash equivalents declined slightly to 4.45% for the quarter ended June 30, 2007, from 4.51% for the comparable quarter in 2006. While insignificant in amount, we received $55,000 in dividend income on our FHLB of Seattle stock in the second quarter of 2007, as the FHLB of Seattle received approval to resume paying its members cash dividends on a quarterly basis in the fourth quarter of 2006. The FHLB of Seattle ceased the payment of dividends beginning in the fourth quarter of 2004 through the third quarter of 2006 to improve its capital position.
26
Interest income for the six months ended June 30, 2007 increased by $27.9 million, or 25%, to $139.9 million, from $111.9 million for the comparable period in 2006. This increase in interest income is the result of the same growth, mix and market interest rate trends which affected the quarterly results explained above. Interest income from loans increased $28.7 million, or 28%, to $132.9 million for the six months ended June 30, 2007, from $104.2 million for the comparable period in 2006. The increase in loan interest income reflects the impact of $586 million of growth in the average balance of loans receivable in addition to a 33 basis point increase in the yield on the loan balances. Interest income from mortgage-backed and investment securities and FHLB stock for the six months ended June 30, 2007 decreased $724,000, to $7.0 million during the six months ended June 30, 2007, reflecting a $32 million decrease in average balances, while yields remained unchanged at 4.49% in both periods.
Interest Expense. Interest expense for the quarter ended June 30, 2007 was $36.3 million, compared to $27.7 million for the comparable period in 2006, an increase of $8.6 million, or 31%. The increase in interest expense was the result of the substantial growth in interest-bearing liabilities combined with a 33 basis point increase in the average cost of all interest-bearing liabilities to 4.07% for the quarter ended June 30, 2007, from 3.74% for the comparable period in 2006. The increased cost of interest-bearing liabilities in the current quarter reflects the higher levels of market interest rates and the maturity of certain lower-costing certificates of deposit and fixed-rate borrowings. Deposit interest expense increased $11.6 million, or 55%, to $32.4 million for the quarter ended June 30, 2007 compared to $20.8 million for the same quarter a year ago, as a result of the significant deposit growth during the past twelve months, as well as an increase in the cost of interest-bearing deposits. Reflecting the acquisitions, branch expansion and other growth initiatives, average deposit balances increased $856 million, or 35%, to $3.303 billion for the quarter ended June 30, 2007, from $2.446 billion for the quarter ended June 30, 2006, while the average rate paid on deposit balances increased 52 basis points to 3.93%. Deposit costs are significantly affected by changes in the level of market interest rates; however, changes in the average rate paid for interest-bearing deposits tend to be less severe and to lag changes in market interest rates. In addition, non-interest-bearing deposits help mitigate the effect of higher market rates on our cost of deposits. This lower degree of volatility and lag effect for deposit pricing has been evident in the modest increase in deposit costs as the Federal Reserve moved to increase short-term interest rates by 425 basis points from June 2004 to June 2006, including increases of 100 basis points from January 1, 2006 to June 30, 2006. Nonetheless, competitive pricing pressure for interest-bearing deposits has become quite intense in recent months, as many financial institutions have experienced strong loan growth and related funding needs. As a result, we expect that the cost of deposits will continue to be under pressure in the near term regardless of any changes in market interest rates.
Average FHLB advances decreased to $94 million for the quarter ended June 30, 2007, compared to $345 million during the quarter ended June 30, 2006, resulting in a $3.0 million decrease in the related interest expense. The average rate paid on FHLB advances for the quarter ended June 30, 2007 increased to 4.95%, an increase of 13 basis points compared to the same quarter a year earlier, reflecting higher market interest rates on the floating rate and short-term portions of the advances. Junior subordinated debentures which were issued in connection with trust preferred securities had an average balance of $104 million and an average cost of 7.58% (including amortization of prepaid underwriting costs) for the quarter ended June 30, 2007. Junior subordinated debentures outstanding in the same quarter of the prior year had an average balance of $98 million with a higher average rate of 8.08%. The junior subordinated debentures are adjustable-rate instruments with repricing frequencies of three to six months. The lower average cost of the junior subordinated debentures in the current quarter reflects a lower spread on the most recently issued debentures, which was partially offset by the effect of increases in short-term market interest rates on earlier issues and the early redemption of a higher costing tranche of debentures. Effective April 22, 2007, we exercised the early redemption provision with respect to approximately $26 million of the junior subordinated debentures which had an average cost of 9.09% during the six months preceding redemption. Although it had no effect on the results of operations for the six month preceding redemption, we replaced the redeemed debentures with a new $26 million tranche of junior subordinated debentures issued on July 31, 2007. Other borrowings consist of retail repurchase agreements with customers and reverse repurchase agreements with investment banking firms secured by certain investment securities. The average balance for other borrowings decreased $1.3 million to $80 million for the quarter ended June 30, 2007, from $81 million for the same period in 2006, while the related interest expense increased $24,000, to $790,000 from $766,000 for the respective periods. The average balance of customer retail repurchase agreements increased slightly by $5 million while the average balance of the wholesale borrowings from brokers decreased approximately $7 million. The average rate paid on other borrowings was 3.96% in the quarter ended June 30, 2007, compared to 3.78% for the same quarter in 2006. Other borrowings generally have relatively short terms and therefore reprice to current market levels more quickly than deposits and FHLB advances, which generally lag current market rates, although, similar to deposits, customer retail repurchase agreements have a lower degree of volatility than most market rates. During the quarter ended June 30, 2007, we repaid all of our wholesale repurchase agreements, using the proceeds from sales of certain securities, and in the near term we do not anticipate significant use of wholesale repurchase agreements as a source of funds.
A comparison of total interest expense for the six months ended June 30, 2007 shows an increase of $18.8 million, or 37%, from the comparable period in 2006. The interest expense reflects a large increase in average deposits of $660 million, partially offset by a $161 million decrease in FHLB advances, junior subordinated debentures and other borrowings. The effect on interest expense of the $499 million increase in average interest-bearing liabilities was also accompanied by a 59 basis point increase in the interest paid on the liabilities, reflecting higher market rates during the current period. The effect of higher market rates on the cost of these funds was partially mitigated by deposit pricing characteristics noted above and as deposits, including non-interest-bearing deposits, became a proportionately larger source of funds.
27
The following tables provide additional comparative data on our operating performance (dollars in thousands):
|
|
Quarters Ended |
|
Six Months Ended |
|
||||||||
Average Balances |
|
|
|
|
|
||||||||
(in thousands) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities and cash equivalents |
|
$ |
133,901 |
|
$ |
133,843 |
|
$ |
134,885 |
|
$ |
133,896 |
|
Mortgage-backed obligations |
|
|
132,256 |
|
|
172,634 |
|
|
142,136 |
|
|
176,000 |
|
FHLB stock |
|
|
36,814 |
|
|
35,844 |
|
|
36,297 |
|
|
35,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average interest-earning securities and cash equivalents |
|
|
302,971 |
|
|
342,321 |
|
|
313,318 |
|
|
345,740 |
|
Loans receivable |
|
|
3,413,095 |
|
|
2,704,856 |
|
|
3,193,662 |
|
|
2,607,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average interest-earning assets |
|
|
3,716,066 |
|
|
3,047,177 |
|
|
3,506,980 |
|
|
2,953,483 |
|
Non-interest-earning assets |
|
|
286,725 |
|
|
191,758 |
|
|
237,133 |
|
|
191,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets |
|
$ |
4,002,791 |
|
$ |
3,238,935 |
|
$ |
3,744,113 |
|
$ |
3,144,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
3,302,750 |
|
|
2,446,316 |
|
$ |
3,043,663 |
|
|
2,384,112 |
|
Advances from FHLB |
|
|
94,251 |
|
|
344,865 |
|
|
137,025 |
|
|
317,350 |
|
Other borrowings |
|
|
79,942 |
|
|
81,251 |
|
|
84,940 |
|
|
81,160 |
|
Junior subordinated debentures |
|
|
104,173 |
|
|
97,942 |
|
|
113,891 |
|
|
97,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average interest-bearing liabilities |
|
|
3,581,116 |
|
|
2,970,374 |
|
|
3,379,519 |
|
|
2,880,564 |
|
Non-interest-bearing liabilities |
|
|
60,413 |
|
|
35,428 |
|
|
54,156 |
|
|
33,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average liabilities |
|
|
3,641,529 |
|
|
3,005,802 |
|
|
3,433,675 |
|
|
2,913,919 |
|
Equity |
|
|
361,262 |
|
|
233,133 |
|
|
310,438 |
|
|
230,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average liabilities and equity |
|
$ |
4,002,791 |
|
$ |
3,238,935 |
|
$ |
3,744,113 |
|
$ |
3,144,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Yield/Expense (rates are annualized) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Yield: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities and cash equivalents |
|
|
5.31 |
% |
|
5.50 |
% |
|
5.35 |
% |
|
5.44 |
% |
Mortgage-backed obligations |
|
|
4.66 |
% |
|
4.67 |
% |
|
4.70 |
% |
|
4.69 |
% |
FHLB stock |
|
|
0.60 |
% |
|
0.00 |
% |
|
0.51 |
% |
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest rate yield on securities and cash equivalents |
|
|
4.45 |
% |
|
4.51 |
% |
|
4.49 |
% |
|
4.49 |
% |
Loans receivable |
|
|
8.35 |
% |
|
8.17 |
% |
|
8.39 |
% |
|
8.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest rate yield on interest-earning assets |
|
|
8.03 |
% |
|
7.76 |
% |
|
8.04 |
% |
|
7.64 |
% |
Interest Rate Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
3.93 |
% |
|
3.41 |
% |
|
3.97 |
% |
|
3.24 |
% |
Advances from FHLB |
|
|
4.95 |
% |
|
4.82 |
% |
|
5.06 |
% |
|
4.62 |
% |
Other borrowings |
|
|
3.96 |
% |
|
3.78 |
% |
|
4.08 |
% |
|
3.64 |
% |
Junior subordinated debentures |
|
|
7.58 |
% |
|
8.08 |
% |
|
7.83 |
% |
|
7.83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest rate expense on interest-bearing liabilities |
|
|
4.07 |
% |
|
3.74 |
% |
|
4.15 |
% |
|
3.56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest spread |
|
|
3.96 |
% |
|
4.02 |
% |
|
3.89 |
% |
|
4.08 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin on interest earning assets |
|
|
4.11 |
% |
|
4.11 |
% |
|
4.04 |
% |
|
4.17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Key Financial Ratios (ratios are annualized) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.71 |
% |
|
1.16 |
% |
|
0.80 |
% |
|
1.04 |
% |
Return on average equity |
|
|
7.90 |
% |
|
16.10 |
% |
|
9.69 |
% |
|
14.12 |
% |
Average equity / average assets |
|
|
9.03 |
% |
|
7.20 |
% |
|
8.29 |
% |
|
7.33 |
% |
Average interest-earning assets / interest-bearing liabilities |
|
|
103.77 |
% |
|
102.59 |
% |
|
103.77 |
% |
|
102.53 |
% |
Non-interest income/average assets |
|
|
0.50 |
% |
|
0.62 |
% |
|
0.61 |
% |
|
0.61 |
% |
Non-interest (other operating) expenses / average assets |
|
|
3.14 |
% |
|
2.48 |
% |
|
3.09 |
% |
|
2.77 |
% |
Efficiency ratio |
|
|
72.63 |
% |
|
55.24 |
% |
|
70.30 |
% |
|
61.18 |
% |
Efficiency ratio |
|
|
69.60 |
% |
|
70.01 |
% |
|
69.70 |
% |
|
68.75 |
% |
28
Provision and Allowance for Loan Losses. During the quarter ended June 30, 2007, the provision for loan losses was $1.4 million compared to $2.3 million from the quarter ended June 30, 2006. As discussed in Note 1 of the Selected Notes to the Consolidated Financial Statements, the provision and allowance for loan losses is one of the most critical accounting estimates included in our Consolidated Financial Statements. The provision for loan losses reflects the amount required to maintain the allowance for losses at an appropriate level based upon managements evaluation of the adequacy of general and specific loss reserves as more fully explained below.
The provision for loan losses in the quarter ended June 30, 2007 reflects slower growth in the size of the loan portfolio, excluding the effects of the mergers, continuing changes in the loan mix and a lower level of net charge-offs, balanced against a modest increase in non-performing loans. There were net charge-offs of $408,000 for the quarter ended June 30, 2007, compared to $576,000 of net charge-offs for the same quarter a year earlier, and non-performing loans increased $2.6 million to $13 million at June 30, 2007, compared to $11 million at June 30, 2006. Generally, these non-performing loans reflect unique operating difficulties for the individual borrower rather than weakness in the overall economy of the Pacific Northwest, housing or real estate markets, or depressed farm commodity prices or adverse growing conditions. A comparison of the allowance for loan losses at June 30, 2007 and 2006 shows an increase of $9.6 million, including $6 million added through the acquisitions, to $43 million at June 30, 2007, from $34 million at June 30, 2006. The allowance for loan losses as a percentage of total loans (loans receivable excluding allowance for losses) was 1.20% and 1.19% at June 30, 2007 and 2006, respectively. The allowance as a percentage of non-performing loans increased slightly to 328% at June 30, 2007, compared to 318% a year earlier.
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 collateral for the loan. As a result, we maintain an allowance for loan losses consistent in all material respects with the GAAP guidelines outlined in SFAS No. 5, Accounting for Contingencies. We have established systematic methodologies for the determination of the adequacy of our allowance for loan losses. The methodologies are set forth in a formal policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are tied to individual problem loans. We increase our allowance for loan losses by charging provisions for probable loan losses against our income and values impaired loans consistent with the guidelines in SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a LoanIncome Recognition and Disclosure.
The allowance for losses on loans is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in the loan portfolio and upon our continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience, current and anticipated economic conditions, detailed analysis of individual loans for which full collectibility may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans. Realized losses related to specific assets are applied as a reduction of the carrying value of the assets and charged immediately against the allowance for loan loss reserve. Recoveries on previously charged off loans are credited to the allowance. The reserve is based upon factors and trends identified by us at the time financial statements are prepared. Although we use the best information available, future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions beyond our control. The adequacy of general and specific reserves is based on our continuing evaluation of the pertinent factors underlying the quality of the loan portfolio, including changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience and current economic conditions, as well as individual review of certain large balance loans. Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. Loans that are collectively evaluated for impairment include residential real estate and consumer loans and, as appropriate, smaller balance non-homogeneous loans. Larger balance non-homogeneous residential construction and land, commercial real estate, commercial business loans and unsecured loans are individually evaluated for impairment. Loans are considered impaired when, based on current information and events, we determine that it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, the financial condition of the borrower, the value of the underlying collateral and the current status of the economy. Impaired loans are measured based on the present value of expected future cash flows discounted at the loans effective interest rate or, as a practical expedient, at the loans observable market price or the fair value of collateral if the loan is collateral dependent. Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported. As of June 30, 2007, we had identified $13.0 million of impaired loans as defined by SFAS No. 114 and had established $2.4 million of loss allowances related to these loans.
Our methodology for assessing the appropriateness of the allowance consists of several key elements, which include specific allowances, an allocated formula allowance and an unallocated allowance. Losses on specific loans are provided for when the losses are probable and estimable. General loan loss reserves are established to provide for inherent loan portfolio risks not specifically provided for. The level of general reserves is based on analysis of potential exposures existing in our loan portfolio including evaluation of historical trends, current market conditions and other relevant factors identified by us at the time the financial statements are prepared. The formula allowance is calculated by applying loss factors to outstanding loans, excluding loans with specific allowances. Loss factors are based on our historical loss experience adjusted for significant factors including the experience of other banking organizations that, in our judgment, affect the collectibility of the portfolio as of the evaluation date. The unallocated allowance is based upon our evaluation of various factors that are not directly measured in the determination of the formula and specific allowances. This methodology may result in losses or recoveries differing significantly from those provided in the financial statements.
We believe that the allowance for loan losses as of June 30, 2007 was adequate to absorb the known and inherent risks of loss in the loan portfolio at that date. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and
29
results of operations. In addition, the determination of the amount of the Banks allowance for loan losses is subject to review by bank regulators as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.
The following tables provide additional detail on our allowance for loan losses (dollars in thousands):
|
|
Quarters Ended |
|
Six Months Ended |
|
||||||||
|
|
|
|
|
|
||||||||
Allowance for Loan Losses: |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of the period |
|
$ |
36,299 |
|
$ |
31,894 |
|
$ |
35,535 |
|
$ |
30,898 |
|
Allowance added through business combination |
|
|
5,957 |
|
|
|
|
|
5,957 |
|
|
|
|
Provision for loan losses |
|
|
1,400 |
|
|
2,300 |
|
|
2,400 |
|
|
3,500 |
|
Recoveries of loans previously charged off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family real estate |
|
|
|
|
|
|
|
|
337 |
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
75 |
|
Multifamily real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land |
|
|
|
|
|
3 |
|
|
|
|
|
11 |
|
Commercial business |
|
|
205 |
|
|
118 |
|
|
240 |
|
|
171 |
|
Agricultural business, including secured by farmland |
|
|
|
|
|
32 |
|
|
255 |
|
|
42 |
|
Consumer |
|
|
26 |
|
|
16 |
|
|
63 |
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231 |
|
|
169 |
|
|
895 |
|
|
325 |
|
Loans charged off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family real estate |
|
|
58 |
|
|
(27 |
) |
|
(355 |
) |
|
(62 |
) |
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily real estate |
|
|
|
|
|
|
|
|
|
|