FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended.................. September 30, 2000
-------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- --------------
Commission File Number 0-26584
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Banner Corporation
------------------
(Exact name of registrant as specified in its charter)
Washington 91-1691604
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 S. First Avenue Walla Walla, Washington 99362
-------------------------------------------------------
(Address of principal executive offices and zip code)
(509) 527-3636
---------------
(Registrant's telephone number, including area code)
First Washington Bancorp, Inc.
------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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.
(1) Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of class: As of October 31, 2000
--------------- ----------------------
Common stock, $.01 par value 12,118,845 shares *
* Includes 745,631 shares held by employee stock ownership plan (ESOP)
that have not been released, committed to be released, or allocated to
participant accounts and is adjusted for 10% stock dividend awarded to
stockholders of record on October 31, 2000.
Banner Corporation and Subsidiaries
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements. The Consolidated Financial Statements of
Banner Corporation and Subsidiaries filed as a part of the report are as
follows:
Consolidated Statements of Financial Condition
as of September 30, 2000 and December 31, 1999............................ 2
Consolidated Statements of Income
for the Quarters and Nine Months Ended September 30, 2000 and 1999........ 3
Consolidated Statements of Comprehensive Income
for the Quarters and Nine Months Ended September 30, 2000 and 1999........ 4
Consolidated Statements of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2000 and 1999..................... 5
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2000 and 1999..................... 7
Selected Notes to Consolidated Financial Statements....................... 9
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operation
General................................................................... 15
Recent Developments and Significant Events................................ 16
Comparison of Financial Condition at September 30, 2000 and
December 31, 1999......................................................... 16
Comparison of Results of Operations for the Quarters and Nine
Months Ended September 30, 2000 and 1999................................. 16
Asset Quality............................................................ 21
Market Risk and Asset/Liability Management............................... 23
Liquidity and Capital Resources.......................................... 26
Capital Requirements..................................................... 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................ 28
Item 2. Changes in Securities............................................ 28
Item 3. Defaults upon Senior Securities.................................. 28
Item 4. Submission of Matters to a Vote of Stockholders.................. 28
Item 5. Other Information................................................ 28
Item 6. Exhibits and Reports on Form 8-K................................. 28
SIGNATURES............................................................... 29
1
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except shares)
September 30, 2000 and December 31, 1999
(Unaudited)
September 30 December 31
ASSETS 2000 1999
------------ -----------
Cash and due from banks $ 72,038 $ 44,769
Securities available for sale, cost $330,900
and $356,617 324,381 348,347
Securities held to maturity, fair value
$18,630 and $13,716 18,259 13,770
Federal Home Loan Bank stock 28,047 24,543
Loans receivable:
Held for sale, fair value $10,338 and $9,519 10,277 9,519
Held for portfolio 1,469,691 1,312,186
Allowance for loan losses (15,024) (13,541)
------------ -----------
1,464,944 1,308,164
Accrued interest receivable 13,207 10,732
Real estate held for sale, net 3,420 3,293
Property and equipment, net 17,337 16,637
Costs in excess of net assets acquired
(goodwill), net 35,410 37,733
Deferred income tax asset, net 4,041 5,338
Other assets 6,710 6,784
------------ -----------
$ 1,987,794 $ 1,820,110
============ ===========
LIABILITIES
Deposits:
Non-interest-bearing $ 130,956 $ 114,252
Interest-bearing 1,041,184 963,900
------------ -----------
1,172,140 1,078,152
Advances from Federal Home Loan Bank 530,298 466,524
Other borrowings 77,396 81,655
Accrued expenses and other liabilities 16,723 10,524
Deferred compensation 2,180 1,944
Income taxes payable 1,520 2,138
------------ -----------
1,800,257 1,640,937
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value, 500,000
shares authorized, no shares issued -- --
Common stock - $0.01 par value, 25,000,000
shares authorized, 13,201,718 shares issued: *
12,156,786 shares and 12,337,332 shares
outstanding *
at September 30, 2000 and December 31, 1999,
respectively. 120,654 123,204
Retained earnings 78,146 69,170
Accumulated other comprehensive income:
Unrealized gain (loss) on securities
available for sale (4,200) (5,331)
Unearned shares of common stock issued to
Employee Stock Ownership Plan (ESOP) trust:
745,631 and 745,631 restricted shares outstanding *
at September 30, 2000 and December 31, 1999,
respectively, at cost (6,162) (6,162)
Carrying value of shares held in trust for
stock related compensation plans (3,364) (4,041)
Liability for common stock issued to deferred,
stock related, compensation plan 2,463 2,333
------------ -----------
(901) (1,708)
------------ -----------
187,537 179,173
------------ -----------
$ 1,987,794 $ 1,820,110
============ ===========
* Adjusted for stock dividend, see note 2
See notes to consolidated financial statements
2
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (in thousands except for per share amounts)
Quarters Ended Nine Months Ended
September 30 September 30
-------------------- -----------------------
2000 1999 2000 1999
INTEREST INCOME: -------- -------- ---------- ---------
Loans receivable $ 34,060 $ 27,244 $ 96,206 $ 77,733
Mortgage-backed securities 3,826 4,039 11,732 10,983
Securities and deposits 3,037 2,312 8,723 7,522
-------- -------- ---------- ---------
40,923 33,595 116,661 96,238
INTEREST EXPENSE:
Deposits 13,986 10,455 38,676 29,829
Federal Home Loan Bank
advances 8,412 6,076 23,142 17,721
Other borrowings 1,292 1,078 3,634 3,144
-------- -------- ---------- ---------
23,690 17,609 65,452 50,694
-------- -------- ---------- ---------
Net interest income before
provision for loan losses 17,233 15,986 51,209 45,544
PROVISION FOR LOAN LOSSES 651 510 2,015 1,851
-------- -------- ---------- ---------
Net interest income 16,582 15,476 49,194 43,693
OTHER OPERATING INCOME:
Loan servicing fees 264 229 744 699
Other fees and service
charges 1,297 1,147 3,676 3,264
Gain on sale of loans 558 396 1,027 1,687
Gain (loss) on sale of
securities 44 -- 59 6
Miscellaneous 62 147 172 221
-------- -------- ---------- ---------
Total other operating
income 2,225 1,919 5,678 5,877
OTHER OPERATING EXPENSES:
Salary and employee
benefits 6,822 6,101 19,604 17,487
Less capitalized loan
origination costs (874) (738) (2,566) (2,419)
Occupancy and equipment 1,764 1,566 5,208 4,507
Information/computer data
services 623 582 1,824 1,608
Advertising 220 124 549 491
Deposit insurance 57 85 166 248
Amortization of goodwill 793 788 2,377 2,259
Miscellaneous 2,281 2,086 6,619 5,547
-------- -------- ---------- ---------
Total other operating
expenses 11,686 10,594 33,781 29,728
-------- -------- ---------- ---------
Income before provision
for income taxes 7,121 6,801 21,091 19,842
PROVISION FOR INCOME TAXES 2,515 2,594 7,517 7,549
-------- -------- ---------- ---------
NET INCOME $ 4,606 $ 4,207 $ 13,574 $ 12,293
======== ======== ========== =========
Net income per common share,
see Note 5: *
Basic $ .41 $ .37 $ 1.20 $ 1.06
Diluted $ .40 $ .36 $ 1.18 $ 1.02
Cumulative dividends declared
per common share: * $ .13 $ .11 $ .38 $ .33
* Adjusted for stock dividend, see note 2
3
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (in thousands)
Quarters Ended Nine Months Ended
September 30 September 30
-------------------- -----------------------
2000 1999 2000 1999
-------- -------- ---------- ---------
NET INCOME: $ 4,606 $ 4,207 $ 13,574 $ 12,293
OTHER COMPREHENSIVE INCOME
(LOSS), NET OF INCOME TAXES:
Unrealized holding gain
(loss) during the period,
net of deferred income
tax (benefit) of $706,
$(1,495), $639 and 1,267 (2,725) 1,729 (4,597)
respectively.
Less adjustment for gains
included in net income,
net of income tax of $15,
$--, $20 and $2; (29) -- (618) (4)
-------- -------- ---------- ---------
Other comprehensive income
(loss) 1,238 (2,725) 1,131 (4,601)
-------- -------- ---------- ---------
COMPREHENSIVE INCOME $ 5,844 $ 1,482 $ 14,705 $ 7,692
======== ======== ========== =========
4
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited) ( in thousands)
For the Nine Months Ended September 30, 2000 and 1999
2000 1999
--------- ---------
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period $ 123,204 $ 122,049
Adjustment of and/or issuance of stock
in connection with acquisitions 53 11,516
Assumption of options in connection with
acquisitions -- 527
Release of earned ESOP shares -- --
Recognition of tax benefit due to vesting
of MRP shares 2 188
Issuance of shares to MRP 62 52
Repurchase of forfeited shares from MRP (25) (34)
Net proceeds (cost) of treasury stock
reissued for exercised stock options 139 84
Purchase and retirement of treasury stock (2,780) (10,693)
Net issuance of stock through the employees'
stock plan -- 601
--------- ---------
Balance, end of period 120,655 124,290
RETAINED EARNINGS:
Balance, beginning of period 69,170 57,273
Net income 13,574 12,293
Cash dividends (4,591) (4,011)
Adjustment of stock issued and related stock
dividend in connection with acquisitions (7) --
--------- ---------
Balance, end of period 78,146 65,555
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance, beginning of period (5,331) 2,440
Other comprehensive income (loss), net of
related income taxes 1,131 (4,601)
--------- ---------
Balance, end of period (4,200) (2,161)
UNEARNED, RESTRICTED ESOP SHARES AT COST:
Balance, beginning of period (6,162) (6,781)
Release of earned ESOP shares -- --
--------- ---------
Balance, end of period (6,162) (6,781)
CARRYING VALUE OF SHARES HELD IN TRUST FOR
STOCK-RELATED COMPENSATION PLANS, NET OF LIABILITY:
Balance, beginning of period (1,708) (4,098)
Issuance of treasury stock for MRP grant (62) --
Cumulative effect of change in accounting for
Rabbi Trust, see Note 2 -- 1,095
Net change in number and/or valuation of
shares held in trust 25 20
Amortization of compensation related to MRP 844 992
--------- ---------
Balance, end of period (901) (1,991)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY $ 187,538 $ 178,912
========= =========
5
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited) (continued) (in thousands)
For the Nine Months Ended September 30, 2000 and 1999
2000 1999
--------- ---------
COMMON STOCK, SHARES ISSUED: *
Number of shares, beginning of period 13,202 13,202
--------- ---------
Number of shares, end of period 13,202 13,202
--------- ---------
LESS STOCK RETIRED/REPURCHASED: *
Number of shares, beginning of period (864) (770)
Repurchase of stock (212) (556)
Reissuance of retired stock to deferred
compensation plan and/or exercised
stock options 31 22
Shares reissued in connection with
acquisitions 2 559
Repurchase of shares forfeited from MRP (2) (2)
Number of shares retired/repurchased, end --------- ---------
of period (1,045) (747)
--------- ---------
Shares issued and outstanding, end of period 12,157 12,455
========= =========
UNEARNED, RESTRICTED ESOP SHARES: *
Number of shares, beginning of period (746) (821)
Release of earned shares -- --
--------- ---------
Number of shares, end of period (746) (821)
========= =========
* Adjusted for stock dividend, see note 2
6
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
For the Nine Months Ended September 30, 2000 and 1999
2000 1999
--------- ---------
OPERATING ACTIVITIES
Net income $ 13,574 $ 12,293
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred taxes 678 (203)
Depreciation 2,013 1,841
Loss (gain) on sale of securities (59) (6)
Net amortization of premiums and discounts
on investments 72 618
Amortization of costs in excess of net assets
acquired 2,377 2,259
Amortization of MRP compensation liability 844 992
Loss (gain) on sale of loans (990) (1,332)
Net changes in deferred loan fees, premiums
and discounts 961 1,155
Loss (gain) on disposal of real estate held
for sale 52 (1)
Loss (gain) on disposal of property and
equipment 8 (6)
Capitalization of mortgage servicing rights from
sale of mortgages with servicing retained (37) (355)
Amortization of mortgage servicing rights 186 237
Provision for losses on loans and real estate
held for sale 2,036 1,851
FHLB stock dividend (1,247) (1,283)
Cash provided (used) in operating assets and
liabilities:
Loans held for sale (758) (7,193)
Accrued interest receivable (2,475) (1,872)
Other assets (63) 2,854
Deferred compensation 192 391
Accrued expenses and other liabilities 6,137 1,478
Income taxes payable (616) 1,402
--------- ---------
Net cash provided by operating activities 22,885 15,120
--------- ---------
INVESTING ACTIVITIES:
Purchase of securities available for sale (11,351) (111,497)
Principal payments and maturities of securities
available for sale 32,908 97,500
Proceeds from sales of securities available
for sale 4,131 6,229
Purchase of securities held to maturity (4,662) --
Principal payments and maturities of securities
held to maturity 188 299
Sale (purchase) of FHLB stock (2,257) 388
Loans originated and closed - net (632,708) (723,040)
Purchase of loans and participating interest
in loans (10,382) (35,824)
Proceeds from sales of loans and participating
interest in loans 71,402 119,270
Principal repayments on loans 412,241 478,077
Purchase of property and equipment (2,731) (2,009)
Proceeds from sale of property and equipment 10 9
Additional capitalized costs of real estate
held for sale net of insurance proceeds (62) (230)
Proceeds from sale of real estate held for sale 1,301 2,719
Funds transferred to deferred compensation
plan trusts (101) (483)
Acquisitions, net cash (used) acquired (6) (794)
--------- ---------
Net cash used by investing activities (142,079) (169,386)
--------- ---------
(Continued on next page)
7
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
For the Nine Months Ended September 30, 2000 and 1999
(Continued from prior page)
2000 1999
--------- ---------
FINANCING ACTIVITIES
Increase (decrease) in deposits $ 93,988 $ 117,345
Proceeds from FHLB advances 724,479 336,153
Repayment of FHLB advances (660,705) (306,059)
Proceeds from reverse repurchase borrowings 935 4,500
Repayments of reverse repurchase borrowings (2,929) (11,470)
Increase (decrease) in other borrowings (2,265) (11)
Compensation expense recognized for shares
released for allocation to participants of
the ESOP:
Original basis of shares -- --
Excess of fair value of released shares
over basis -- (1)
Cash dividends paid (4,398) (3,691)
Net (cost) proceeds of exercised stock options 139 84
Purchase of treasury stock (2,781) (10,693)
--------- ---------
Net cash provided by financing activities 146,463 126,157
--------- ---------
NET INCREASE (DECREASE) IN CASH AND DUE FROM
BANKS 27,269 (28,109)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 44,769 74,233
--------- ---------
CASH AND DUE FROM BANKS, END OF PERIOD $ 72,038 $ 46,124
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 64,848 $ 50,738
Taxes paid $ 7,455 $ 5,777
Non-cash transactions:
Loans, net of discounts, specific loss
allowances and unearned income transferred
to real estate owned $ 1,439 $ 1,581
Net change in accrued dividends payable $ 195 $ 320
Net change in unrealized gain (loss) in deferred
compensation trust and related liability $ 47 $ 2,115
Treasury stock forfeited by MRP $ 35 $ 34
Treasury stock issued to MRP $ 62 $ 653
Tax benefit of vested MRP shares $ 2 $ 188
Fair value of stock issued and options
assumed in connection with acquisitions $ 48 $ 12,043
8
BANNER CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
Name Change/Consolidation of Banking Operations
- -----------------------------------------------
On October 30, 2000 the Company changed its name from First Washington
Bancorp, Inc. (FWWB) to Banner Corporation (BANR or the Company) in
conjunction with a consolidation of banking operations affecting its banking
subsidiaries. Towne Bank merged with First Savings Bank, First Savings Bank
converted from a Washington state-chartered savings bank to a Washington
state-chartered commercial bank, and First Savings Bank changed its name,
along with the names of its divisions, Whatcom State Bank and Seaport Citizens
Bank, to Banner Bank. At the same time, Inland Empire Bank changed its name
to Banner Bank of Oregon. Because the changes occurred after the effective
date of the current financial presentation, the names First Savings Bank of
Washington (FSBW), Inland Empire Bank (IEB), Towne Bank (TB), Whatcom State
Bank (WSB), and Seaport Citizens Bank (SCB) continue to be used in this
document.
Basis of Presentation:
- ----------------------
The unaudited consolidated financial statements of Banner Corporation (BANR or
the Company) included herein reflect all adjustments, which are, in the
opinion of management, necessary to present fairly the statement of financial
position and the results of operations for the interim periods presented. All
such adjustments are of a normal, recurring nature. The consolidated
financial statements include BANR's wholly owned subsidiaries, which, as of
September 30, 2000 were First Savings Bank of Washington (FSBW), Inland Empire
Bank (IEB) and Towne Bank (TB) (together, the Banks). The balance sheet data
at December 31, 1999, is derived from BANR's (formerly FWWB) audited financial
statements. Certain information and note disclosures normally included in
financial statements have been omitted pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC). It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in BANR's (FWWB's) Annual
Report on Form 10-K for the nine months ended December 31, 1999 (File No.
0-26584).
Changes in Fiscal Year End:
- ---------------------------
During May of 1999, the Company announced its decision to change its fiscal
year from April 1 through March 31 to January 1 through December 31. For
discussion and analysis purposes, the quarter and nine months ended September
30, 2000 is compared to the unaudited quarter and nine months ended September
30, 1999.
Certain amounts in the prior periods' financial statements and/or schedules
have been reclassified to conform to the current period's presentation. These
reclassifications affected certain ratios for the prior periods. The effect
of such reclassifications is immaterial.
Note 2: Recent Developments and Significant Events
Declaration of 10% Stock Dividend:
- ----------------------------------
On October 19, 2000 BANR's Board of Directors declared a 10% stock dividend
payable November 10, 2000 to shareholders of record on October 31, 2000. All
earnings per share and share data have been adjusted to reflect the 10% stock
dividend.
Mortgage Lending Subsidiary:
- ----------------------------
On April 1, 2000 FSBW opened a new mortgage lending subsidiary, Community
Financial Corporation (CFC), located in the Lake Oswego area of Portland,
Oregon, with John Satterberg as President. Primary lending activities for CFC
are in the area of construction and permanent financing for one-to four-family
residential dwellings. CFC, an Oregon corporation, functions as a wholly
owned subsidiary of First Savings Bank of Washington. FSBW has capitalized
CFC with $2 million of equity capital and provides funding support for CFC's
lending operations.
Consolidation of Banking Operations:
- ------------------------------------
On October 30, 2000 the Company changed its name from First Washington
Bancorp, Inc. (FWWB) to Banner Corporation (BANR or the Company) in
conjunction with a consolidation of banking operations affecting its banking
subsidiaries. Towne Bank merged with First Savings Bank, First Savings Bank
converted from a Washington state-chartered savings bank to a Washington
state-chartered commercial bank, and First Savings Bank changed its name,
along with the names of its divisions, Whatcom State Bank and Seaport Citizens
Bank, to Banner Bank (BB). At the same time, Inland Empire Bank changed its
name to Banner Bank of Oregon (BBO).
9
The combination was designed to strengthen the Company's commitment to
community banking by more effectively sharing the resources of the existing
subsidiaries, improving operating efficiency and developing a broader regional
brand identity. Final integration of all data processing into a common system
is scheduled for completion by December 31, 2001. In light of the new
Gramm-Leach-Bliley financial modernization legislation, the Company chose to
retain a separate charter for IEB (now Banner Bank of Oregon) and to operate
two banking subsidiaries. That recent legislation enacts Federal Home Loan
Bank System reforms that impact community financial institutions. A community
financial institution is defined as a "member of the Federal Home Loan Bank
(FHLB) System, the deposits of which are insured by the Federal Deposit
Insurance Corporation (FDIC) and that has average total assets (over the
preceding three years) of less than $500 million." One provision of the
reforms provides community financial institutions with the ability to obtain
long-term FHLB advances to fund small business, small farm and small
agribusiness loans. In addition, community financial institutions will be
able to offer these loans as collateral for such borrowings. This provision,
which represents a change in policy from the previous requirement that these
funds be securitized primarily by residential mortgage loans, will be
available only to community financial institutions. As an independent
subsidiary, IEB (now Banner Bank of Oregon) currently qualifies as a community
financial institution. Merging BBO into BB would disqualify it and remove
this favorable status. On the other hand, consolidation of support operations
continues and the Company expects to receive long-term benefits from the
proposed efficiencies. BB and BBO operate under the direction of the same
Board of Directors and Executive Management.
Stock Compensation Plan:
- ------------------------
In July 1998, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board (FASB) reached a consensus on the accounting
treatment for deferred compensation arrangements where amounts earned are held
in a Rabbi Trust and invested. The consensus position (EITF 97-14) was
applied as of September 30, 1998 for all awards granted, and existing plans
were required to be amended prior to September 30, 1998. Application of the
consensus is reflected as a change in accounting principle under which the
Company stock purchased for a Rabbi Trust obligation and the related liability
for deferred compensation are recorded at acquisition cost. Prior to this
change the stock was recorded at fair market value. The effect of this change
in accounting increased equity by $1.1 million and reduced the related
liability for deferred compensation by the same amount.
Seaport Citizens Bank
- ---------------------
On April 1, 1999, BANR and FSBW completed the acquisition of Seaport Citizens
Bank (SCB). FSBW paid $10.1 million in cash for all the outstanding common
shares of SCB, which was headquartered in Lewiston, Idaho. As a result of the
merger of SCB into FSBW, SCB became a division of FSBW. The acquisition was
accounted for as a purchase in the current period and resulted in the
recording of $6.1 million of costs in excess of the fair value of SCB's net
assets acquired (goodwill). Goodwill assets are being amortized over a 14-
year period and resulted in a current charge to earnings of $108,100 per
quarter, beginning in the first quarter of the current period, or $433,000 per
year. Founded in 1979, SCB was a commercial bank, which had, before recording
of purchase accounting adjustments, approximately $45 million in total assets,
$41 million in deposits, $27 million in loans, and $4.1 million in
shareholders' equity at March 31, 1999. At September 30, 2000 SCB operated
two full service branches in Lewiston, Idaho. SCB's results of operations are
included in the Company's consolidated results of operations (or financial
statements) for the quarter and nine months ended September 30, 1999 and
September 30, 2000.
Recent Accounting Standard Not Yet Adopted
- ------------------------------------------
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued in September 1998
and establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. BANR will implement this statement on January 1, 2001.
At this time the Company does not anticipate the adoption of this standard
will have a material impact on its financial position or results of operation.
Note 3: BUSINESS SEGMENTS
The Company presently is managed by legal entity or Bank, not by lines of
business. Each Bank is managed by its management team that is responsible for
its own lending, deposit operations, information systems and administration.
Marketing support, sales training assistance, credit card administration and
human resource services are provided from a central source at FSBW, and costs
are allocated to the individual Banks using appropriate methods based on
usage. In addition, corporate overhead and centralized administrative costs
are allocated to each Bank.
10
Note 3: Business Segments, continued:
As of September 30, 2000 FSBW (now Banner Bank) was a community oriented
savings bank which has traditionally offered a wide variety of deposit
products to its retail customers while concentrating its lending activities on
real estate loans. Lending activities have been focused primarily on the
origination of loans secured by one- to four-family residential dwellings,
including an emphasis on loans for construction of residential dwellings. To a
lesser extent, lending activities also have included the origination of
multi-family, commercial real estate and consumer loans. More recently, FSBW
has increased its non-residential lending, has begun making non-mortgage
commercial and agribusiness loans to small businesses and farmers and has
expanded its consumer lending activities. FSBW's primary business is
originating loans for portfolio in its primary market areas, which consists of
southeast, central, north central, and western Washington state and northwest
Idaho and providing deposit services to customers in the areas of eastern
Washington and western Idaho where it has full service branch offices. FSBW's
wholly owned subsidiary, Northwest Financial Corporation, (NWFC), provides
trustee services for FSBW, is engaged in real estate sales and receives
commissions from the sale of annuities. FSBW's wholly owned subsidiary, CFC,
is engaged primarily in origination of construction loans in the Portland
metropolitan and surrounding areas.
IEB (now Banner Bank of Oregon) is a community oriented commercial bank
chartered in the State of Oregon which historically has offered a wide variety
of deposits and loan products to its consumer and commercial customers.
Lending activities have included origination of consumer, commercial,
agribusiness and real estate loans. IEB also has engaged in mortgage banking
activity with respect to residential lending within its local markets and
originating loans for sale generally on a servicing released basis. IEB
operates a division, Inland Financial Services, which offers insurance and
brokerage services to its customers.
Prior to merging with FSBW on October 30, 2000, TB was a community oriented
commercial bank chartered in the State of Washington. TB's lending activities
consisted of granting commercial loans, including commercial real estate, land
development and construction loans, and consumer loans to customers throughout
King and Snohomish counties in western Washington. As a "Preferred Lender"
with the Small Business Administration (SBA), TB generated SBA guaranteed
loans for portfolio and for resale.
The performance of each Bank is reviewed by the Company's executive management
team and the Board of Directors on a monthly basis.
Financial highlights by legal entity were as follows:
September 30, 2000
---------------------------------------------------------
(dollars in thousands)
FSBW IEB TB Other * Total
----------- --------- --------- --------- -----------
Total Assets $ 1,401,479 $ 224,800 $ 360,650 $ 865 $ 1,987,794
=========== ========= ========= ========= ===========
September 30, 1999
---------------------------------------------------------
(dollars in thousands)
FSBW IEB TB Other * Total
----------- --------- --------- --------- -----------
Total Assets $ 1,265,337 $ 217,233 $ 273,280 $ (1,794) $ 1,754,056
=========== ========= ========= ========= ===========
Quarter Ended September 30, 2000
---------------------------------------------------------
(dollars in thousands)
Condensed Income
Statement
FSBW IEB TB Other * Total
----------- --------- --------- --------- -----------
Net interest income
(loss) $ 9,969 $ 2,688 $ 4,565 $ 11 $ 17,233
Provision for loan
losses 456 45 150 -- 651
Other income 1,355 508 380 (18) 2,225
Other expenses 6,517 1,784 2,890 495 11,686
Income (loss) ----------- --------- --------- --------- -----------
before income
taxes 4,351 1,367 1,905 (502) 7,121
Income taxes
(benefit) 1,309 617 765 (176) 2,515
----------- --------- --------- --------- -----------
Net income (loss) $ 3,042 $ 750 $ 1,140 $ (326) $ 4,606
=========== ========= ========= ========= ===========
11
Note 3: Business Segments, continued:
Quarter Ended September 30, 1999
---------------------------------------------------------
(dollars in thousands)
Condensed Income
Statement
FSBW IEB TB Other * Total
----------- --------- --------- --------- -----------
Net interest income
(loss) $ 9,862 $ 2,766 $ 3,319 $ 39 $ 15,986
Provision for loan
losses 200 45 265 -- 510
Other income 1,059 547 324 (11) 1,919
Other expenses 6,055 1,789 2,232 518 10,594
Income (loss) ----------- --------- --------- --------- -----------
before income
taxes 4,666 1,479 1,146 (490) 6,801
Income taxes
(benefit) 1,575 662 531 (174) 2,594
----------- --------- --------- --------- -----------
Net income (loss) $ 3,091 $ 817 $ 615 $ (316) $ 4,207
=========== ========= ========= ========= ===========
Nine Months Ended September 30, 2000
---------------------------------------------------------
(dollars in thousands)
Condensed Income
Statement
FSBW IEB TB Other * Total
----------- --------- --------- --------- -----------
Net interest income
(loss) $ 30,226 $ 8,031 $ 12,914 $ 38 $ 51,209
Provision for loan
losses 1,130 185 700 -- 2,015
Other income 3,141 1,446 1,143 (52) 5,678
Other expenses 18,714 5,329 8,277 1,461 33,781
Income (loss) ----------- --------- --------- --------- -----------
before income
taxes 13,523 3,963 5,080 (1,475) 21,091
Income taxes
(benefit) 4,098 1,805 2,125 (511) 7,517
----------- --------- --------- --------- -----------
Net income (loss) $ 9,425 $ 2,158 $ 2,955 $ (964) $ 13,574
=========== ========= ========= ========= ===========
Nine Months Ended September 30, 1999
---------------------------------------------------------
(dollars in thousands)
Condensed Income
Statement
FSBW IEB TB Other * Total
----------- --------- --------- --------- -----------
Net interest income
(loss) $ 28,093 $ 7,955 $ 9,377 $ 119 $ 45,544
Provision for loan
losses 817 124 910 -- 1,851
Other income (loss) 3,342 1,723 861 (49) 5,877
Other expenses 16,572 5,404 6,454 1,298 29,728
Income (loss) ----------- --------- --------- --------- -----------
before income
taxes 14,046 4,150 2,874 (1,228) 19,842
Income taxes
(benefit) 4,727 1,878 1,376 (432) 7,549
----------- --------- --------- --------- -----------
Net income (loss) $ 9,319 $ 2,272 $ 1,498 $ (796) $ 12,293
=========== ========= ========= ========= ===========
* Includes intercompany eliminations and holding company amounts.
12
Note 4: Additional Information Regarding Interest-Bearing Deposits and
Securities
The following table sets forth additional detail on FWWB's interest-bearing
deposits and securities at the dates indicated (at carrying value) (in
thousands):
September 30 December 31
2000 1999
------------ -----------
Interest-bearing deposits included
in cash and due from banks $ 22,485 $ 2,960
------------ -----------
Mortgage-backed securities 212,707 230,006
Other securities-taxable 95,324 95,992
Other securities-tax exempt 30,506 32,350
Other stocks with dividends 4,103 3,769
------------ -----------
Total securities 342,640 362,117
Federal Home Loan Bank (FHLB) stock 28,047 24,543
------------ -----------
$ 393,172 $ 389,620
============ ===========
The following table provides additional detail on income from deposits and
securities for the periods indicated (in thousands):
Quarters Ended Nine Months Ended
September 30 September 30
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
Mortgage-backed securities $ 3,826 $ 4,039 $ 11,732 $ 10,983
-------- -------- -------- --------
Taxable interest and dividends 2,134 1,378 6,043 4,698
Tax-exempt interest 458 504 1,411 1,541
Federal Home Loan Bank stock-
dividends 445 430 1,269 1,283
-------- -------- -------- --------
3,037 2,312 8,723 7,522
-------- -------- -------- --------
$ 6,863 $ 6,351 $ 20,455 $ 18,505
======== ======== ======== ========
13
Note 5: Calculation of Weighted Average Shares Outstanding for Earnings Per
Share (EPS) and Calculation of Outstanding Shares
Calculation of
Weighted Average Shares Outstanding
for Earnings Per Share *
------------------------
(in thousands)
Quarters Ended Nine Months Ended
September 30 September 30
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Total shares originally issued 13,202 13,202 13,202 13,202
Less retired shares plus
unvested shares allocated
to MRP (1,143) (952) (1,128) (763)
Less unallocated shares held
by the ESOP (746) (821) (746) (821)
-------- -------- -------- --------
Basic weighted average shares
outstanding 11,313 11,429 11,328 11,618
Plus unvested MRP and stock
option incremental shares
considered outstanding for
diluted EPS calculations 147 342 181 443
Diluted weighted average -------- -------- -------- --------
shares outstanding 11,460 11,771 11,509 12,061
======== ======== ======== ========
Calculation of
Outstanding Shares at *
-----------------------
(in thousands)
September 30 December 31
2000 1999
-------- --------
Total shares issued 13,202 13,202
Less retired shares (1,045) (865)
-------- --------
Outstanding shares issued 12,157 12,337
======== ========
* Adjusted for stock dividend, see note 2
14
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Special Note Regarding Forward-Looking Statements
Management's Discussion and Analysis (MD&A) and other portions of this report
contain certain "forward-looking statements" concerning the future operations
of Banner Corporation. Management desires to take advantage of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995 and
is including this statement for the express purpose of availing the Company of
the protections of such safe harbor with respect to all "forward-looking
statements" contained in this report and our Annual Report. We have used
"forward-looking statements" to describe future plans and strategies,
including our expectations of the Company's future financial results.
Management's ability to predict results or the effect of future plans or
strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the Company's
market area and the country as a whole, the ability of the Company to control
costs and expenses, the ability of the Company to efficiently incorporate
acquisitions into its operations, competitive products and pricing, loan
delinquency rates, and changes in federal and state regulation. These factors
should be considered in evaluating the "forward-looking statements," and undue
reliance should not be placed on such statements.
General
Banner Corporation (the Company or BANR), a Washington corporation, is
primarily engaged in the business of planning, directing and coordinating the
business activities of its wholly owned subsidiaries which, prior to the
consolidation which occurred on October 30, 2000, included First Savings Bank
of Washington (FSBW), Inland Empire Bank (IEB) and Towne Bank (TB) (together,
the Banks). As of September 30, 2000, FSBW (now Banner Bank) was a
Washington- chartered savings bank the deposits of which were insured by the
Federal Deposit Insurance Corporation (FDIC) under the Savings Association
Insurance Fund (SAIF). As of September 30, 2000, FSBW conducted business from
its main office in Walla Walla, Washington and its 24 branch offices and four
loan production offices located in Washington, Idaho and Oregon. Effective
April 1, 1999, FSBW completed the acquisition of Seaport Citizens Bank (SCB).
SCB was merged with FSBW and its two branches in Lewiston, Idaho, together
with FSBW's Clarkston, Washington, branch operated as a division of FSBW.
Effective January 1, 1999, BANR completed the acquisition of Whatcom State
Bancorp whose wholly-owned subsidiary, Whatcom State Bank (WSB), was merged
with FSBW and operated as Whatcom State Bank, a Division of First Savings Bank
of Washington. As of September 30, 2000 WSB, based in Bellingham, operated
five full service branches and a loan office in northwest Washington.
Effective April 1, 2000, FSBW opened a new lending subsidiary, Community
Financial Corporation, located in the Lake Oswego area of Portland, Oregon
(see Note 2: Recent Developments and Significant Events). IEB (now Banner
Bank of Oregon) is an Oregon-chartered commercial bank whose deposits are
insured by the FDIC under the Bank Insurance Fund (BIF). IEB conducts
business from its main office in Hermiston, Oregon and its six branch offices
and one loan production office located in northeast Oregon. Prior to merging
with FSBW on October 30, 2000, TB was a Washington-chartered commercial bank
whose deposits were insured by the FDIC under BIF. As of September 30, 2000,
TB conducted business from seven full service branches in the Seattle,
Washington, metropolitan area. TB has approval for an eighth location in
Seattle, Washington which is scheduled to open in November 2000.
During May 1999, the Company announced its decision to change its fiscal year
from April 1 through March 31 to January 1 through December 31. For
discussion and analysis purposes, the quarter and nine months ended September
30, 2000 is compared to the unaudited quarter and nine months ended September
30, 1999.
The operating results of BANR depend primarily on its 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 savings deposits and
Federal Home Loan Bank (FHLB) advances. Net interest income is primarily a
function of BANR's 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 balance of interest-earning
assets as compared to the average balance of interest-bearing liabilities. As
more fully explained below, BANR's net interest income significantly increased
for the quarter and nine months ended September 30, 2000, when compared to the
same periods for the prior year. This increase in net interest income was due
to the significant asset and liability growth which occurred at BANR. The
increase in net interest income occurred despite 27 basis point and 11 basis
point reductions of the interest rate spreads for these periods, which
resulted from changes in the mix of assets and liabilities and changes in the
levels of various market interest rates. The net interest margins also
declined (24 basis points for the quarter and 11 basis points for the nine
month period) reflecting the reduced spreads and the increased use of
interest-bearing liabilities relative to interest-earning assets as the
Company continued to leverage its equity capital. BANR's net income also is
affected by provisions for loan losses and the level of its 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 its non-
interest operating expenses and income tax provisions.
15
Management's discussion and analysis of results of operations is intended to
assist in understanding the financial condition and results of operations of
the Company. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements and accompanying
Selected Notes to Consolidated Financial Statements.
Recent Developments and Significant Events
See Note 2 to Financial Statements.
Comparison of Financial Condition at September 30, 2000 and December 31, 1999
Total assets increased $167.7 million, or 9.2%, from $1.820 billion at
December 31, 1999, to $1.988 billion at September 30, 2000. The growth of
$167.7 million occurred most significantly at FSBW and TB and was funded
primarily with deposit growth and advances from the FHLB. This growth
represented a continuation of management's plans to further leverage BANR's
capital and reflects the solid economic conditions in the markets where BANR
operates. Net loans receivable (gross loans less loans in process, deferred
fees and discounts, and allowance for loan losses) grew $156.8 million, or
12.0%, from $1.308 billion at December 31, 1999, to $1.465 billion at
September 30, 2000. The increase in net loans consisted of $15.6 million of
residential mortgages, $40.9 million of mortgages secured by commercial and
multifamily real estate, $66.8 million of construction and land loans and
$34.9 million of non-mortgage loans such as commercial, agricultural and
consumer loans. These balances reflect the Company's continuing effort to
increase the portion of its assets invested in loans and more specifically the
portion of loans invested in commercial real estate, construction and land
development, and non-mortgage loans. While these loans are inherently higher
risk than residential mortgages, management believes they can produce higher
credit adjusted returns to the Company and provide better opportunities to
develop comprehensive banking relationships with the borrowers than most
residential mortgages. The majority of the increase in assets was funded by a
net increase of $153.5 million in deposits and borrowings. Asset growth was
also funded by net income from operations. Deposits grew $94.0 million, or
8.7%, from $1.078 billion at December 31, 1999, to $1.172 billion at September
30, 2000. FHLB advances increased $63.8 million from $466.5 million at
December 31, 1999, to $530..3 million at September 30, 2000. Other
borrowings, primarily reverse repurchase agreements with securities dealers,
decreased $4.3 million, from $81.7 million at December 31, 1999, to $77.4
million at September 30, 2000. Securities available for sale and held to
maturity decreased $19.5 million, or 5.4%, from $362.1 million at December 31,
1999, to $342.6 million at September 30, 2000. FHLB stock increased $3.5
million, as BANR was required to purchase more stock as a result of its
increased use of FHLB advances.
Comparison of Results of Operations for the Quarters and Nine Months Ended
September 30, 2000 and 1999
General. Net income for the quarter ended September 30, 2000 was $4.6 million,
or $.40 per share (diluted), compared to net income of $4.2 million, or $.36
per share (diluted), for the quarter ended September 30, 1999. Net income for
the quarter ended September 30, 2000 increased $399,000 from the comparable
quarter ended September 30, 1999. Net income for the first nine months of the
current period was $13.6 million, an increase of $1.3 million from the nine
months ended September 30, 1999. BANR's improved operating results primarily
reflect the significant growth of assets and liabilities which was offset
somewhat by the decline in net interest margin, and increased operating
expenses and amortization of goodwill. Compared to levels a year ago, total
assets increased 13.3% to $1.988 billion at September 30, 2000, total loans
rose 17.4% to $1.465 billion, deposits grew 11.4% to $1.172 billion and
borrowings increased 19.5% to $607.7 million. Net interest margin declined 24
basis points for the quarter and 11 basis points for the nine month period
reflecting changes in the level of market rates and the increased use of
interest-bearing liabilities relative to interest-earning assets as the
Company continued to leverage its equity capital. Average equity was 9.43% of
average assets for the quarter ended September 30, 2000, compared to 10.38% of
average assets for the quarter ended September 30, 1999. The modest changes
in net interest spread and net interest margin for the nine month period are
notable in light of the significant changes in the level of market interest
rates over the past twelve months. However, margin compression was
significant for the most recent quarter, as liability costs increased 18 basis
points more than asset yields during that period. Continued pressure on
funding cost appears likely in the current market environment.
Interest Income. Interest income for the quarter ended September 30, 2000 was
$40.9 million compared to $33.6 million for the quarter ended September 30,
1999, an increase of $7.3 million, or 21.8%. The increase in interest income
was a result of a $245.3 million, or 15.1%, growth in average balances of
interest-earning assets, and a 50 basis point increase in the average yield on
those assets. The yield on average interest-earning assets increased to 8.72%
for the quarter ended September 30, 2000 compared to 8.22% for the same period
a year earlier. Average loans receivable for the quarter ended September 30,
2000 increased by $231.7 million, or 18.8%, when compared to the quarter ended
September 30, 1999, reflecting the Banks' significant internal growth.
Interest income on loans increased by $6.8 million, or 25.0%, compared to the
prior year, reflecting the impact of the increase in
16
average loan balances and a 32 basis point increase in the average yield. The
increase in average loan yield largely resulted from the significant increase
in market interest rates, including a 175 basis point increase in the prime
rate from the second calendar quarter of 1999 to the end of the most recent
period. Adding to this effect were changes in the mix of the loan portfolio
and the impact on adjustable and floating rate loans and new loan originations
of significantly rising levels of market interest rates over the past eighteen
months. Although certain market rates declined modestly in the most recent
quarter they remain significantly higher than twelve to eighteen months
earlier. Loans yielded 9.27% for the quarter ended September 30, 2000
compared to 8.78% for the quarter ended September 30, 1999. The average
balance of mortgage- backed securities, investment securities, daily
interest-bearing deposits and FHLB stock increased by $13.6 million for the
quarter ended September 30, 2000, while the interest and dividend income from
those investments increased $512,000 compared to the quarter ended September
30, 1999. The average yield on mortgage-backed securities increased from
6.50% for the quarter ended September 30, 1999, to 6.80% for the comparable
period in 2000. Yields on mortgage-backed securities were lower in the 1999
period reflecting the adverse impact of higher prepayments on the amortization
of purchase premiums on those securities as well as the impact of lower market
rates on the interest rates paid on the significant portion of those
securities that have adjustable interest rates. In the quarter ended
September 30, 2000 prepayments had diminished and market rates had increased
reversing both of those effects on mortgage-backed securities yields. The
average yield on investment securities and short term cash investments
increased from 6.12% for the quarter ended September 30, 1999 to 6.67% for the
comparable quarter in 2000, also reflecting the rise in interest rates during
1999 and early 2000. Earnings on FHLB stock increased by $14,000, resulting
from an increase of $3.7 million in the average balance of FHLB stock for the
quarter ended September 30, 2000, and despite a 75 basis point decrease in the
dividend yield on that stock. Dividends on FHLB stock are established on a
quarterly basis by vote of the Directors of the FHLB.
Interest income for the nine months ended September 30, 2000 increased $20.4
million, or 21.2%, from the comparable period in 1999. Interest income from
loans increased $18.5 million, or 23.8%, from the comparable period in 1999.
The majority of the increase from loan interest income reflected the impact of
a $237.7 million growth in average loans receivable balances and a 25 basis
point increase in the yield on the loan balances. Interest income from
mortgage-backed and investment securities and FHLB stock for the nine months
ended September 30, 2000, increased $2.0 million, from $18.5 million in 1999,
to $20.5 million in the current period. This increase reflects an $8.3
million increase in average balances and an 51 basis point increase in the
aggregate yield on those investments, however the yield on the FHLB stock
actually declined 91 basis points from the prior years nine month period. The
yield on average earning assets increased from 8.23% for the nine months ended
September 30, 1999, to 8.62% for the nine months ended September 30, 2000.
Yield increases for the nine month period were somewhat less than those
reported for the most recent quarter; however, they generally reflect the same
balance sheet and interest rate market dynamics explained above.
Interest Expense. Interest expense for the quarter ended September 30, 2000
was $23.7 million compared to $17.6 million for the comparable period in 1999,
an increase of $6.1 million, or 34.5%. The increase in interest expense was
due to the $235.0 million growth in average interest-bearing liabilities and
the increase in the average cost of all interest-bearing liabilities from
4.56% to 5.33%. The $127.5 million increase in average interest-bearing
deposits for the quarter ended September 30, 2000 reflects the solid deposit
growth throughout the Company over the past twelve months. Deposit interest
expense increased $3.5 million for the quarter ended September 30, 2000.
Average deposit balances increased from $1.033 billion for the quarter ended
September 30, 1999, to $1.161 billion for the quarter ended September 30,
2000, while, at the same time, the average rate paid on deposit balances
increased 78 basis points. The increase in the rate paid on deposits reflects
the significant increase in market interest rates over the level that
prevailed a year earlier. Average FHLB advances totaled $530.9 million during
the quarter ended September 30, 2000, compared to $421.6 million during the
quarter ended September 30, 1999, an increase of $109.3 million that combined
with a 58 basis point increase in average cost of advances resulted in a $2.3
million increase in related interest expense. The average rate paid on those
advances increased to 6.30% for the quarter ended September 30, 2000 from
5.72% for the quarter ended September 30, 1999. Other borrowings consist of
retail repurchase agreements with customers and repurchase agreements with
investment banking firms secured by certain investment securities. The
average balance for other borrowings decreased $1.8 million from $78.2 million
for the quarter ended September 30, 1999, to $76.4 million for the same period
in 2000, while the related interest expense increased $214,000 from $1.1
million to $1.3 million for the respective periods. The average rate paid on
other borrowings was 6.73% in the quarter ended September 30, 2000 compared to
5.47% for the same quarter in 1999 also reflecting the increase in market
interest rates.
A comparison of total interest expense for the nine months ended September 30,
2000, shows an increase of $14.8 million, or 29.1%, from the comparable period
in September 1999. The increase in interest expense reflects an increase in
average deposits of $151.5 million combined with a $90.2 million increase in
average FHLB advances and other borrowings. The effect on interest expense of
the $241.6 million increase in average interest-bearing liabilities was
augmented by a 50 basis point increase in the interest rate paid on those
liabilities over the year earlier nine month period. The increased cost of
interest bearing liabilities was particularly significant in the most recent
quarter.
17
The following tables provide additional comparative data on the Company's
operating performance:
Quarters Ended Nine Months Ended
Average Balances September 30 September 30
---------------- ----------------------- ----------------------
(in thousands) 2000 1999 2000 1999
---------- ---------- ---------- ----------
Investment securities and
deposits $ 154,646 $ 121,974 $ 149,979 $ 136,454
Mortgage-backed obligations 223,699 246,395 230,159 238,253
Loans 1,462,106 1,230,450 1,402,539 1,165,841
FHLB stock 27,231 23,560 26,063 23,149
---------- ---------- ---------- ----------
Total average interest-
earning asset 1,867,682 1,622,379 1,808,740 1,563,697
Non-interest-earning assets 96,998 100,039 95,665 96,949
---------- ---------- ---------- ----------
Total average assets $1,964,680 $1,722,418 $1,904,405 $1,660,646
========== ========== ========== ==========
Deposits $1,160,889 $1,033,383 1,130,528 $ 979,064
Advances from FHLB 530,906 421,592 504,415 412,001
Other borrowings 76,365 78,211 76,100 78,342
---------- ---------- ---------- ----------
Total average interest-
bearing liabilities 1,768,160 1,533,186 1,711,043 1,469,407
Non-interest-bearing
liabilities 11,184 10,474 10,970 10,676
---------- ---------- ---------- ----------
Total average liabilities 1,779,344 1,543,660 1,722,013 1,480,083
Equity 185,336 178,758 182,392 180,563
---------- ---------- ---------- ----------
Total average liabilities
and equity $1,964,680 $1,722,418 $1,904,405 $1,660,646
========== ========== ========== ==========
Interest Rate Yield/Expense (rates are annualized)
-------------------------------------------------
Interest Rate Yield:
Investment securities and
deposits 6.67% 6.12% 6.64% 6.11%
Mortgage-backed obligations 6.80% 6.50% 6.81% 6.16%
Loans 9.27% 8.78% 9.16% 8.91%
FHLB stock 6.49% 7.24% 6.50% 7.41%
---------- ---------- ---------- ----------
Total interest rate yield on
interest-earning assets 8.72% 8.22% 8.62% 8.23%
---------- ---------- ---------- ----------
Interest Rate Expense:
Deposits 4.79% 4.01% 4.57% 4.07%
Advances from FHLB 6.30% 5.72% 6.13% 5.75%
Other borrowings 6.73% 5.47% 6.38% 5.37%
---------- ---------- ---------- ----------
Total interest rate expense
on interest-bearing
liabilities 5.33% 4.56% 5.11% 4.61%
---------- ---------- ---------- ----------
Interest spread 3.39% 3.66% 3.51% 3.62%
========== ========== ========== ==========
Net interest margin on
interest earning assets 3.67% 3.91% 3.78% 3.89%
---------- ---------- ---------- ----------
Additional Key Financial Ratios
-------------------------------
(ratios are annualized)
-----------------------
Return on average assets 0.93% 0.97% 0.95% 0.99%
Return on average equity 9.89% 9.34% 9.94% 9.10%
Average equity / average
assets 9.43% 10.38% 9.58% 10.87%
Average interest-earning
assets / interest-bearing
liabilities 105.63% 105.82% 105.71% 106.42%
Non-interest [other
operating] income/average
assets 0.45% 0.44% 0.40% 0.47%
Non-interest [other
operating] expenses /
average assets
Excluding amortization of
costs in excess of net
assets acquired
(goodwill) 2.25% 2.31% 2.25% 2.26%
Including amortization of
costs in excess of net
assets acquired
(goodwill) 2.37% 2.44% 2.37% 2.39%
Efficiency ratio [non-interest
(other operating) expenses/
revenues]
Excluding amortization of
costs in excess of net
assets acquired
(goodwill) 55.98% 54.77% 55.20% 53.42%
Including amortization of
costs in excess of net
assets acquired
(goodwill) 60.06% 59.17% 59.38% 57.81%
18
Provision for Loan Losses. During the quarter ended September 30, 2000, the
provision for loan losses was $651,000, compared to $510,000 for the quarter
ended September 30, 1999, an increase of $141,000. A comparison of the
provision for loan losses for the nine month periods ended September 30, 2000
and 1999 shows an increase of $164,000 from $1.85 million to $2.02 million.
The increase in the provision for losses reflects the amount required to
maintain the allowance for losses at an appropriate level based upon
management's evaluation of the adequacy of general and specific loss reserves
as more fully explained in the following paragraphs. The higher provision in
the current quarter reflects changes in the portfolio mix and a higher level
of non-performing loans, although the amount of net charge-offs declined from
what occurred in the prior year's quarter. For the nine-month period net
charge offs increased modestly from $484,000 for the 1999 period to $532,000
for the nine months ended September 30, 2000. Non-performing loans increased
to $11.9 million at September 30, 2000, compared to $6.9 million at September
30, 1999. A comparison of the allowance for loan losses at September 30, 2000
and 1999 shows an increase of $1.4 million from $13.6 million at September 30,
1999 to $15.0 million at September 30, 2000. The allowance for loan losses
increased by $1.5 million, to $15.0 million at September 30, 2000, compared to
$13.5 million at December 31, 1999. The allowance for loan losses as a
percentage of net loans (loans receivable excluding allowance for losses) was
1.02% and 1.08% at September 30, 2000 and September 30, 1999, respectively.
The allowance for loan losses equaled 127% of non-performing loans at
September 30, 2000 compared to 197% of non-performing loans at September 30,
1999.
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 management's 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, 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. Additions to the allowance are charged to
earnings. Provisions for losses that are related to specific assets are
usually 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 management at the time financial
statements are prepared. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Banks'
allowance for loan losses. Such agencies may require the Banks to provide
additions to the allowance based upon judgments different from management.
Although management uses the best information available, future adjustments to
the allowance may be necessary due to economic, operating, regulatory and
other conditions beyond the Banks' control. The adequacy of general and
specific reserves is based on management's 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. Large groups of
smaller-balance homogeneous loans are collectively evaluated for impairment.
Loans that are collectively evaluated for impairment by the Banks include
residential real estate and consumer loans. Smaller balance non-homogeneous
loans also may be evaluated collectively for impairment. 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, management determines 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, value of the
underlying collateral and current status of the economy. Impaired loans are
measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or, as a practical expedient, at the
loan's observable market price or the fair value of collateral if the loan is
collateral dependent. Subsequent changes in the value of impaired loans are
included within the provision for loan losses in the same manner in which
impairment initially was recognized or as a reduction in the provision that
would otherwise be reported.
The Company's 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 the Banks' loan portfolios
including evaluation of historical trends, current market conditions and other
relevant factors identified by management 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 the Company's historical loss experience adjusted for significant
factors including the experience of other banking organizations that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date. The unallocated allowance is based upon management's
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.
19
The following tables are provided to disclose additional detail on the Banks'
loans and allowance for loan losses (in thousands):
September 30 December 31
2000 1999
------------ -----------
Loans (including loans held for sale):
Secured by real estate
One- to four-family real estate loans $ 434,742 $ 419,132
Commercial 357,020 330,258
Multifamily 80,438 66,287
Construction and land 261,448 194,625
Commercial 211,275 194,817
Agribusiness 60,850 55,052
Consumer, including credit cards 74,195 61,534
------------ -----------
$ 1,479,968 $ 1,321,705
Less allowance for loan losses 15,024 13,541
------------ -----------
Total net loans at end of period $ 1,464,944 $ 1,308,164
============ ===========
Schedules of Changes in Allowance for Loan Losses
Quarters Ended Nine Months Ended
September 30 September 30
----------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Balance, beginning of the
period $ 14,491 $ 13,305 $ 13,541 $ 10,718
Allowances added through
business combinations -- -- -- 1,554
Provision 651 510 2,015 1,851
Recoveries of loans
previously charged off:
One- to four-family
real estate loans -- -- 2 1
Commercial/multifamily
real estate 1 -- 1 --
Construction and land -- -- -- --
Commercial business 5 79 31 111
Agribusiness -- -- -- --
Consumer finance 1 1 60 9
Credit cards 25 1 67 5
---------- ---------- ---------- ----------
32 81 161 126
Loans charged off:
One- to four-family
real estate loans (4) (29) (65) (5)
Commercial/multifamily
real estate (16) -- (16) (29)
Construction and land -- -- (12) (33)
Commercial business (75) (184) (248) (333)
Agribusiness -- -- -- --
Consumer finance (5) (4) (85) (84)
Credit cards (50) (40) (267) (126)
---------- ---------- ---------- ----------
(150) (257) (693) (610)
---------- ---------- ---------- ----------
Net charge offs (118) (176) (532) (484)
---------- ---------- ---------- ----------
Balance, end of period $ 15,024 $ 13,639 $ 15,024 $ 13,639
========== ========== ========== ==========
Net charge-offs as a
percentage of average
net book value of loans
outstanding for the
period 0.01% 0.01% 0.04% 0.04%
---------- ---------- ---------- ----------
20
The following is a schedule of the Company's allocation of the allowance for
loan losses:
September 30 December 31
2000 1999
------------ -----------
Specific or allocated loss allowances:
Secured by real estate:
One- to four-family real estate loans $ 2,590 $ 2,334
Commercial and multifamily 4,796 4,273
Construction and land 2,596 1,638
Commercial/agricultural 3,350 2,830
Consumer, credit card and other 1,067 1,023
------------ -----------
Total allocated 14,399 12,098
Unallocated 625 1,443
------------ -----------
Total allowance for loan losses $ 15,024 $ 13,541
============ ===========
Allowance for loan losses as a percent
of net loans (loans receivable excluding
allowance for losses) 1.02% 1.02%
Asset Quality
The following tables are provided to disclose additional details on asset
quality (in thousands):
September 30 December 31
2000 1999
------------ -----------
Non-performing assets at end of the period:
Nonaccrual Loans:
One- to four-family real estate loans $ 1,807 $ 623
Commercial real estate 1,770 129
Multifamily real estate 2,207 --
Construction and land 3,000 2,514
Commercial business 1,601 1,203
Agricultural business 351 --
Consumer, credit card and other 179 9
------------ -----------
10,915 4,478
Loans more than 90 days delinquent, still on
accrual:
One- to four-family real estate loans -- 155
Commercial real estate -- --
Multifamily real estate -- --
Construction and land 756 --
Commercial business 15 25
Agricultural business 10 334
Consumer, credit card and other 157 79
------------ -----------
938 593
------------ -----------
Total non-performing loans 11,853 5,071
Real estate owned (REO) and repossessed assets 3,557 3,576
------------ -----------
Total non-performing assets at the end of the
period $ 15,410 $ 8,647
============ ===========
Non-performing loans as a percentage of total
net loans before allowance for loan losses at
end of the period 0.80% 0.38%
Ratio of allowance for loan losses to non-
performing loans at end of the period 127% 267%
Non-performing assets as a percentage of total
assets at end of the period. 0.78% 0.48%
Troubled debt restructuring [TDR's]
at end of the period $ 343 $ 369
------------ -----------
Troubled debt restructuring as a percentage
of:
Total gross principal of loans outstanding
at end of the period 0.02% 0.03%
Total assets at end of the period 0.02% 0.02%
21
Other Operating Income. Other operating income at $2.2 million for the
quarter ended September 30, 2000, increased by $306,000 compared to the
quarter ended September 30, 1999. This included a $162,000 increase in the
gain on sale of loans by FSBW and IEB and a $44,000 gain on sale of
securities in the current quarter. Gain on sale of loans for FSBW included
$66,000 of fees on loans brokered by CFC, which are not reflected in the
volume of loans sold. Gains on loan sales in the year earlier period also
were lower as a result of the adverse impact of rising interest rates on the
profitability of those sales. The volume of loan sales and related net gain
on sale of loans was $44.5 million and $396,000, respectively, for the quarter
ended September 30, 1999 and $32.7 million and $558,000, respectively, for the
quarter ended September 30, 2000. Other fee and service charge income
increased at FSBW, TB and IEB, reflecting deposit growth and pricing
adjustments.
Other operating income for the nine months ended September 30, 2000, decreased
$199,000 from the comparable period in 1999. The $660,000 decrease in gains
from the sale of loans and securities for the nine months ended September 30,
2000, primarily reflects the adverse impact of rising rate environments that
occurred during the first few months of the nine month period ended September
30, 2000. Loan sales declined from $119.3 million for the nine months ended
September 30, 1999 to $71.4 million for the nine months ended September 30,
2000. However, as noted in the preceding paragraph, gains on loan sales
increased in the most recent quarter as the interest rate environment improved
for mortgage banking activities.
Other Operating Expenses. Other operating expenses increased $1.1 million
from $10.6 million for the quarter ended September 30, 1999, to $11.7 million
for the quarter ended September 30, 2000. Increases in other operating
expenses reflect the overall growth in assets and liabilities, customer
relationships and complexity of operations as BANR continues to expand. The
increase in expenses reflects the inclusion of two new bank branches opened
subsequent to September 30, 1999. The increase also reflects expenses
associated with the new lending subsidiary, CFC. The increase in other
operating expenses was partially offset by a $136,000 increase in capitalized
loan origination costs. The higher operating expenses associated with BANR's
transition to more of a commercial bank profile, coupled with pressure on net
interest margin, caused BANR's efficiency ratio, excluding the amortization of
goodwill, to increase to 55.98% (60.06% including goodwill), for the quarter
ended September 30, 2000, from 54.77% (59.17% including goodwill) for the
comparable period ended September 30, 1999. Other operating expenses as a
percentage of average assets actually declined to 2.37% (2.25% excluding the
amortization of goodwill) for the quarter ended September 30, 2000, compared
to 2.44% (2.31% excluding the amortization of goodwill) for the quarter ended
September 30, 1999.
Other operating expenses for the nine months ended September 30, 2000
increased $4.1 million from $29.7 million for the first nine months of 1999 to
$33.8 million in the current period. As explained earlier, the increase is
largely due to the previously noted growth in BANR's operations for the
current nine-month period. Other operating expenses as a percentage of
average assets also declined moderately for the current nine-month period
compared to the year earlier period.
Income Taxes. Income tax expense was $2.5 million for the quarter ended
September 30, 2000, compared to $2.6 million for the comparable period in
1999. The $79,000 decrease in the provision for income taxes reflects the
higher level of income being taxed at slightly lower effective rates due to
the declining relative contribution of IEB which is subject to Oregon state
income taxes; and the fact that a declining relative portion of the expense
recorded in the release of the Employee Stock Ownership Plan (ESOP) shares is
not deductible for tax purposes. The Company's effective tax rates for the
quarter ended September 30, 2000 and 1999, were 35% and 38%, respectively.
Income tax expense for the nine months ended September 30, 2000 remained at
$7.5 million, which is the same amount as the comparable period in 1999. The
Company's effective tax rates for the nine months ended September 30, 2000 and
1999, were 36% and 38%, respectively.
22
Market Risk and Asset/Liability Management
The financial condition and operation of the Company are influenced
significantly by general economic conditions, including the absolute level of
interest rates as well as changes in interest rates and the slope of the yield
curve. The Company's profitability is dependent to a large extent on its net
interest income, which is the difference between the interest received from
its interest-earning assets and the interest expense incurred on its
interest-bearing liabilities.
The activities of the Company, like all financial institutions, inherently
involve the assumption of interest rate risk. Interest rate risk is the risk
that changes in market interest rates will have an adverse impact on the
institution's earnings and underlying economic value. Interest rate risk is
determined by the maturity and repricing characteristics of an institution's
assets, liabilities, and off-balance-sheet contracts. Interest rate risk is
measured by the variability of financial performance and economic value
resulting from changes in interest rates. Interest rate risk is the primary
market risk impacting the Company's financial performance.
The greatest source of interest rate risk to the Company results from the
mismatch of maturities or repricing intervals for rate sensitive assets,
liabilities and off-balance-sheet contracts. This mismatch or gap is
generally characterized by a substantially shorter maturity structure for
interest-bearing liabilities than interest-earning assets. Additional
interest rate risk results from mismatched repricing indices and formulae
(basis risk and yield curve risk), and product caps and floors and early
repayment or withdrawal provisions (option risk), which may be contractual or
market driven, that are generally more favorable to customers than to the
Company. The Company also incurs option risk with respect to certain
investment securities and borrowing arrangements where the security issuers or
note holders retain the exercise rights with respect to the options.
The principal objectives of asset/liability management are to evaluate the
interest-rate risk exposure of the Company; to determine the level of risk
appropriate given the Company's operating environment, business plan
strategies, performance objectives, capital and liquidity constraints, and
asset and liability allocation alternatives; and to manage the Company's
interest rate risk consistent with regulatory guidelines and approved policies
of the Board of Directors. Through such management the Company seeks to
reduce the vulnerability of its earnings and capital position to changes in
the level of interest rates. The Company's actions in this regard are taken
under the guidance of the Asset/Liability Management Committee, which is
comprised of members of the Company's senior management. The committee
closely monitors the Company's interest sensitivity exposure, asset and
liability allocation decisions, liquidity and capital positions, and local and
national economic conditions and attempts to structure the loan and investment
portfolios and funding sources of the Company to maximize earnings within
acceptable risk tolerances.
The Company's primary monitoring tool for assessing interest rate risk is
asset/liability simulation modeling which is designed to capture the dynamics
of balance sheet, interest rate and spread movements and to quantify
variations in net interest income resulting from those movements under
different rate environments. The sensitivity of net interest income to changes
in the modeled interest rate environments provides a measurement of interest
rate risk. The Company also utilizes market value analysis, which addresses
changes in estimated net market value of equity arising from changes in the
level of interest rates. The net market value of equity is estimated by
separately valuing the Company's assets and liabilities under varying interest
rate environments. The extent to which assets gain or lose value in relation
to the gains or losses of liability values under the various interest rate
assumptions determines the sensitivity of net equity value to changes in
interest rates and provides an additional measure of interest rate risk.
The interest rate sensitivity analysis performed by the Company incorporates
beginning of the period rate, balance and maturity data, using various levels
of aggregation of that data, as well as certain assumptions concerning the
maturity, repricing, amortization and prepayment characteristics of loans and
other interest-earning assets and the repricing and withdrawal of deposits and
other interest-bearing liabilities into an asset/liability computer simulation
model. The Company updates and prepares simulation modeling at least
quarterly for review by senior management and the directors. The Company
believes the data and assumptions are realistic representations of its
portfolio and possible outcomes under the various interest rate scenarios.
Nonetheless, the interest rate sensitivity of the Company's net interest
income and net market value of equity could vary substantially if different
assumptions were used or if actual experience differs from the assumptions
used.
23
Sensitivity Analysis
The table of Interest Rate Risk Indicators sets forth, as of September 30,
2000, the estimated changes in the Company's net interest income over a one
year time horizon and the estimated changes in market value of equity based on
the indicated interest rate environments.
Table of Interest Rate Risk Indicators
As of September 30, 2000
Estimated Change in
----------------------------------------------
Change (In Basis Points) Net Interest Income
in Interest Rates (1) Next 12 Months Net Market Value
------------------------ ------------------- ----------------
(Dollars in thousands)
+400 $ 419 0.6% $ (87,117) (49.1%)
+300 514 0.7% (68,841) (38.8%)
+200 614 0.9% (47,683) (26.9%)
+100 520 0.7% (23,501) (13.2%)
0 0 0 0 0
-100 (1,167) (1.7%) 19,040 10.7%
-200 (3,368) (4.8%) 19,379 10.9%
-300 (6,383) (9.1%) 10,827 6.1%
-400 (10,533) (15.0%) (6,468) (3.6%)
- --------------
(1) Assumes an instantaneous and sustained uniform change in market interest
rates at all maturities.
Another although less reliable monitoring tool for assessing interest rate
risk is "gap analysis." The matching of the repricing characteristics of
assets and liabilities may be analyzed by examining the extent to which such
assets and liabilities are "interest sensitive" and by monitoring an
institution's interest sensitivity "gap." An asset or liability is said to be
interest sensitive within a specific time period if it will mature or reprice
within that time period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets anticipated, based
upon certain assumptions, to mature or reprice within a specific time period
and the amount of interest-bearing liabilities anticipated to mature or
reprice, based upon certain assumptions, within that same time period. A gap
is considered positive when the amount of interest sensitive assets exceeds
the amount of interest sensitive liabilities. A gap is considered negative
when the amount of interest sensitive liabilities exceeds the amount of
interest sensitive assets. Generally, during a period of rising rates, a
negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would tend to
adversely affect net interest income.
Certain shortcomings are inherent in gap analysis. For example, although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in market rates.
Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market rates, while interest rates on other
types may lag behind changes in market rates. Additionally, certain assets,
such as adjustable rate mortgage (ARM) loans, have features that restrict
changes in interest rates on a short-term basis and over the life of the
asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed
in calculating the table. Finally, the ability of some borrowers to service
their debt may decrease in the event of a severe interest rate increase.
The table of Interest Sensitivity Gap presents the Company's interest
sensitivity gap between interest-earning assets and interest-bearing
liabilities at September 30, 2000. The table sets forth the amounts of
interest-earning assets and interest-bearing liabilities which are anticipated
by the Company, based upon certain assumptions, to reprice or mature in each
of the future periods shown.. At September 30, 2000, total interest-bearing
liabilities maturing or repricing within one year exceeded total
interest-earning assets maturing or repricing in the same time period by
$163.1 million, representing a one-year gap to total assets ratio of (8.21%).
24
Table of Interest Sensitivity Gap
As of September 30, 2000 6 Months
Within to One 1-3 3-5 5-10 Over 10
6 Months Year Years Years Years Years Total
-------- ---- ----- ----- ----- ----- -----
(dollars in thousands)
Interest-earning assets(1):
Construction loans $138,571 $ 53,814 $ 2,611 $ 1,280 $ -- $ -- $ 196,276
Fixed-rate mortgage loans 51,833 35,036 143,843 118,987 179,709 116,672 646,080
Adjustable-rate mortgage
loans 149,152 57,375 55,713 34,356 -- -- 296,596
Fixed-rate mortgage-backed
securities 9,359 9,213 37,936 36,281 36,745 6,779 136,313
Adjustable-rate mortgage-
backed securities 87,159 2,006 -- -- -- -- 89,165
Fixed-rate commercial/
agriculture loans 11,375 4,368 17,362 29,067 11,760 5,139 79,071
Adjustable-rate commercial/
agriculture loans 196,707 -- -- -- -- -- 196,707
Consumer and other loans 22,372 4,603 16,245 15,202 1,352 10,412 70,186
Investment securities and
interest-bearing deposits 33,521 4,545 37,080 29,570 10,110 57,580 172,406
-------- --------- --------- --------- -------- -------- ----------
Total rate-sensitive assets 700,049 170,960 310,790 264,743 239,676 196,582 1,882,800
-------- --------- --------- --------- -------- -------- ----------
Interest-bearing liabilities(2):
Regular savings and NOW
accounts 17,864 17,863 41,681 41,681 -- -- 119,089
Money market deposit accounts 70,218 42,131 28,087 -- -- -- 140,436
Certificates of deposit 362,130 228,665 164,765 17,302 8,776 21 781,659
FHLB advances 104,980 117,500 228,290 56,100 22,579 849 530,298
Other borrowings 64,704 -- -- -- -- -- 64,704
Retail repurchase agreements 8,061 -- 1,270 2,187 1,175 -- 12,693
-------- --------- --------- --------- -------- -------- ----------
Total rate-sensitive
liabilities 627,957 406,159 464,093 117,270 32,530 870 1,648,879
-------- --------- --------- --------- -------- -------- ----------
Excess (deficiency) of
interest-sensitive assets
over interest-sensitive
liabilities $ 72,092 $(235,199) $(153,303) $ 147,473 $207,146 $195,712 $ 233,921
======== ========= ========= ========= ======== ======== ==========
Cumulative excess (deficiency)
of interest-sensitive assets $ 72,092 $(163,107) $(316,410) $(168,937) $ 38,209 $233,921 $ 233,921
======== ========= ========= ========= ======== ======== ==========
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities 111.48% 84.23% 78.88% 89.54% 102.32% 114.19% 114.19%
======== ========= ========= ========= ======== ======== ==========
Interest sensitivity gap to
total assets 3.63% (11.83%) (7.71%) 7.42% 10.42% 9.85% 11.77%
======== ========= ========= ========= ======== ======== ==========
Ratio of cumulative gap to
total assets 3.63% (8.21%) (15.92%) (8.50%) 1.92% 11.77% 11.77%
======== ========= ========= ========= ======== ======== ==========
(footnotes on following page)
25
Footnotes for Table of Interest Sensitivity Gap
- -----------------------------------------------
(1) Adjustable-rate assets are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are due
to mature, and fixed-rate assets are included in the periods in which they are
scheduled to be repaid based upon scheduled amortization, in each case
adjusted to take into account estimated prepayments. Mortgage loans and other
loans are not reduced for allowances for loan losses and non-performing loans.
Mortgage loans, mortgage-backed securities, other loans, and investment
securities are not adjusted for deferred fees and unamortized acquisition
premiums and discounts.
(2) Adjustable- and variable-rate liabilities are included in the period in
which interest rates are next scheduled to adjust rather than in the period
they are due to mature. Although the Banks' regular savings, demand, NOW, and
money market deposit accounts are subject to immediate withdrawal, management
considers a substantial amount of such accounts to be core deposits having
significantly longer maturities. For the purpose of the gap analysis, these
accounts have been assigned decay rates to reflect their longer effective
maturities. If all of these accounts had been assumed to be short-term, the
one year cumulative gap of interest-sensitive assets would have been negative
$276.3 million or (14.19%) of total assets. Interest-bearing liabilities for
this table exclude certain non-interest bearing deposits which are included in
the average balance calculations in the earlier Table I, Analysis of Net
Interest Spread.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, borrowings, proceeds from
loan principal and interest payments and sales of loans, and the maturity of
and interest income on mortgage-backed and investment securities. While
maturities and scheduled amortization of loans and mortgage-backed securities
are a predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by market interest rates, economic conditions and
competition.
The primary investing activity of the Company, through its subsidiaries, is
the origination and purchase of loans. During the nine months ended September
30, 2000, the Company closed or purchased loans in the amount of $643.1
million. This activity was funded primarily by principal repayments on loans
and securities, sales of loans, increases in FHLB advances, other borrowings,
and deposit growth. For the nine months ended September 30, 2000, principal
repayments on loans totaled $412.2 million. During the nine months ended
September 30, 2000, the Company sold $71.4 million of loans. FHLB advances
increased $63.8 million for the nine months ended September 30, 2000. Other
borrowings decreased $4.3 million for the nine months ended September 30,
2000. Net deposit growth was $94.0 million for the nine months ended
September 30, 2000.
The Banks must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to accommodate deposit withdrawals, to
support loan growth, to satisfy financial commitments and to take advantage of
investment opportunities. During the nine months ended September 30, 2000,
the Banks used their sources of funds primarily to fund loan commitments, to
purchase securities, and to pay maturing savings certificates and deposit
withdrawals. At September 30, 2000, the Banks had outstanding loan
commitments including undisbursed loans in process totaling $274.1 million.
The Banks generally maintain sufficient cash and readily marketable securities
to meet short-term liquidity needs. At September 30, 2000 FSBW maintained a
credit facility with the FHLB-Seattle which provided for advances which, in
aggregate, could equal the lesser of 45% of FSBW's assets or unencumbered
qualifying collateral, which as of September 30, 2000 could give a total
credit line of $626.8 million. Advances under this credit facility totaled
$506.7 million, or 66.7% of FSBW's assets at September 30, 2000. IEB and TB
also maintained credit lines with various institutions, including the
FHLB-Seattle, that, at September 30, 2000, allowed them to borrow an
additional $33.1 million.
At September 30, 2000, savings certificates amounted to $781.7 million, or
66.7%, of the Banks' total deposits, including $589.9 million, which were
scheduled to mature by September 30, 2001. Historically, the Banks have been
able to retain a significant amount of their deposits as they mature.
Management believes it has adequate resources to fund all loan commitments
from savings deposits and FHLB-Seattle advances and sale of mortgage loans and
that it can adjust the offering rates of savings certificates to retain
deposits in changing interest rate environments.
26
Capital Requirements
Federally-insured state-chartered banks are required to maintain minimum
levels of regulatory capital. Under current FDIC regulations, insured
state-chartered banks generally must maintain (i) a ratio of Tier 1 leverage
capital to total assets of at least 3.0% (4.0% to 5.0% for all but the most
highly rated banks), (ii) a ratio of Tier 1 capital to risk weighted assets of
at least 4.0% and (iii) a ratio of total capital to risk weighted assets of at
least 8.0%. At September 30, 2000, the Company's banking subsidiaries
exceeded all current regulatory capital requirements to be classified as well
capitalized institutions, the highest regulatory standard. In order to be
categorized as a well capitalized institution, the FDIC requires banks it
regulates to maintain a leverage ratio, defined as Tier 1 capital divided by
total regulatory assets, of at least 5.00%; Tier 1 (or core) capital of at
least 6.00% of risk-weighted assets; and total capital of at least 10.00% of
risk-weighted assets.
FWWB (now BANR), as a bank holding company, is regulated by the Federal
Reserve Board (FRB). The FRB has established capital requirements for bank
holding companies that generally parallel the capital requirements of the FDIC
for banks with $150 million or more in total consolidated assets. FWWB's
total regulatory capital must equal 8% of risk-weighted assets and one half of
the 8% (4%) must consist of Tier 1 (core) capital.
The actual regulatory capital ratios calculated for BANR along with the
minimum capital amounts and ratios for capital adequacy purposes were as
follows (dollars in thousands):
Minimum for capital
Actual adequacy purposes
------------------- ---------------------
Amount Ratio Amount Ratio
September 30, 2000: ------ ----- ------ -----
FWWB-consolidated
Total capital to risk-
weighted assets $167,031 12.47% $109,017 8.00%
FWWB (now BANR)-consolidated
Total capital to risk-
weighted assets $172,440 12.26% $112,504 8.00%
Tier 1 capital to risk-
weighted assets 156,184 11.11 56,252 4.00
Tier 1 leverage capital
average assets 156,184 8.08 77,333 4.00
27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time BANR or its subsidiaries are engaged in legal proceedings in
the ordinary course of business, none of which is considered to have a
material impact on the BANR's financial position or results of operations.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Stockholders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8K
Report (s) on Form 8-K filed during the quarter ended September 30, 2000, are
as follows:
Date Filed Purpose
---------- -------
NONE
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SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Banner Corporation
November 14, 2000 /s/ Gary Sirmon
--------------------------------------
Gary Sirmon
President and Chief Executive Officer
November 14, 2000 /s/ Lloyd W. Baker
--------------------------------------
Lloyd W. Baker
Treasurer and Executive Vice President
29