FORM 10-Q/A
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
RESTATED
For the quarterly period ended ........................ MARCH 31, 2001
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-26584
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BANNER CORPORATION
------------------
(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)
(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 April 30, 2001
--------------- --------------------
Common stock, $.01 par value 11,896,226 shares *
* Includes 633,278 shares held by employee stock ownership
plan (ESOP) that have not been released, committed to be
released, or allocated to participant accounts.
Banner Corporation and Subsidiaries
This amendment on Form 10-Q/A of Banner Corporation incorporates certain
revisions to historical financial data and related descriptions but is not
intended to update other information presented in this report as originally
filed except where specifically noted. The amendment reflects the restatement
of the registrant's consolidated financial statements as of and for the three
months ended March 31, 2001 related to losses incurred as a result of a check
kiting scheme and credit manipulation activities associated with a former senior
lending officer. See Note 6 for further discussion of this matter.
1
BANNER CORPORATION AND SUBSIDIARIES
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements. The Consolidated Financial Statements of Banner
Corporation and Subsidiaries filed as a part of the report are as follows:
Consolidated Statements of Financial Condition
as of March 31, 2001, (as restated, see Note 6), and
December 31, 2000........................................................ 3
Consolidated Statements of Income
for the Quarters Ended March 31, 2001, (as restated, see
Note 6), and 2000........................................................ 4
Consolidated Statements of Comprehensive Income
for the Quarters ended March 31, 2001, (as restated, see
Note 6), and 2000........................................................ 5
Consolidated Statements of Changes in Stockholders' Equity
for the Quarters Ended March 31, 2001, (as restated, see
Note 6), and 2000.........................................................6
Consolidated Statements of Cash Flows
for the Quarters Ended March 31, 2001, (as restated, see
Note 6), and 2000........................................................ 8
Selected Notes to Consolidated Financial Statements......................10
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operation
Special note regarding Forward Looking Statements....................... 15
General................................................................. 15
Recent Developments and Significant Events.............................. 16
Comparison of Financial Condition at March 31, 2001
and December 31, 2000................................................... 16
Comparison of Results of Operations for the Quarters Ended March 31,
2001 and 2000.......................................................... 16
Asset Quality........................................................... 22
Market Risk and Asset/Liability Management.............................. 23
Sensitivity Analysis.................................................... 24
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
2
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except shares)
March 31, 2001 and December 31, 2000
(Unaudited)
(Restated,
See Note 6)
March 31 December 31
ASSETS 2001 2000
----------- ----------
Cash and due from banks $ 51,781 $ 67,356
Securities available for sale, cost $292,680
and $310,539
Encumbered 60,401 66,405
Unencumbered 233,836 242,393
----------- ----------
294,237 308,798
Securities held to maturity, fair value $17,141
and $18,269 17,064 17,717
Federal Home Loan Bank stock 29,269 28,807
Loans receivable:
Held for sale, fair value $30,161 and $8,011 29,755 7,934
Held for portfolio 1,506,630 1,479,149
Allowance for loan losses (15,980) (15,314)
----------- ----------
1,520,405 1,471,769
Accrued interest receivable 12,634 12,963
Real estate owned, held for sale, net 5,097 3,287
Property and equipment, net 17,687 17,746
Costs in excess of net assets acquired (goodwill), net 33,822 34,617
Deferred income tax asset, net 1,157 2,337
Bank owned life insurance 19,408 14,190
Other assets 4,244 3,244
----------- ----------
$ 2,006,805 $1,982,831
LIABILITIES =========== ==========
Deposits:
Non-interest-bearing $ 132,718 $ 140,779
Interest-bearing 1,085,359 1,051,936
----------- ----------
1,218,077 1,192,715
Advances from Federal Home Loan Bank 502,583 507,098
Other borrowings 69,972 74,538
Accrued expenses and other liabilities 16,730 10,857
Deferred compensation 2,392 2,293
Income taxes payable 2,108 1,535
----------- ----------
1,811,862 1,789,036
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value, 500,000 shares
authorized, no shares issued - --
Common stock - $0.01 par value, 27,500,000 shares
authorized, 13,201,418 shares issued:
11,893,753 shares and 12,005,302 shares outstanding
at March 31, 2001 and December 31, 2000, respectively 131,955 133,839
Retained earnings 67,549 66,893
Accumulated other comprehensive income:
Unrealized gain (loss) on securities available
for sale 993 (1,125)
Unearned shares of common stock issued to Employee Stock
Ownership Plan (ESOP) trust:
633,278 and 633,278 restricted shares outstanding
at March 31, 2001 and December 31, 2000,
respectively, at cost (5,234) (5,234)
Carrying value of shares held in trust for stock
related compensation plans (2,872) (3,130)
Liability for common stock issued to deferred, stock
related, compensation plan 2,552 2,552
----------- ----------
(320) (578)
----------- ----------
194,943 193,795
----------- ----------
$ 2,006,805 $1,982,831
=========== ==========
See notes to consolidated financial statements
3
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (in thousands except for per share amounts)
Quarters Ended
March 31
---------------------
(Restated,
See Note 6)
2001 2000
INTEREST INCOME: ------ ------
Loans receivable $ 34,662 $ 29,932
Mortgage-backed securities 3,272 3,955
Securities and deposits 2,644 2,743
-------- --------
40,578 36,630
INTEREST EXPENSE:
Deposits 14,219 11,762
Federal Home Loan Bank advances 7,820 7,036
Other borrowings 1,068 1,187
-------- --------
23,107 19,985
-------- --------
Net interest income before provision
for loan losses 17,471 16,645
PROVISION FOR LOAN LOSSES 950 545
-------- --------
Net interest income 16,521 16,100
OTHER OPERATING INCOME:
Loan servicing fees 310 232
Other fees and service charges 1,463 1,157
Gain on sale of loans 861 187
Gain (loss) on sale of securities -- --
Miscellaneous 231 55
-------- --------
Total other operating income 2,865 1,631
OTHER OPERATING EXPENSES:
Salary and employee benefits 7,379 6,256
Less capitalized loan origination costs (1,065) (791)
Occupancy and equipment 1,859 1,677
Information/computer data services 643 575
Advertising 203 160
Check kiting loss 3,600 --
Amortization of goodwill 795 792
Miscellaneous 2,297 2,141
-------- --------
Total other operating expenses 15,711 10,810
-------- --------
Income before provision for income taxes 3,675 6,921
PROVISION FOR INCOME TAXES 1,366 2,496
-------- --------
NET INCOME $ 2,309 $ 4,425
======== ========
Net income per common share, see Note 5:
Basic $ .21 $ .39
Diluted $ .20 $ .38
Cumulative dividends declared per common share: $ .14 $ .13
See notes to consolidated financial statements
4
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (in thousands)
Quarters Ended
March 31
-------------------
(Restated,
See Note 6)
2001 2000
------ ------
NET INCOME: $ 2,309 $ 4,425
OTHER COMPREHENSIVE INCOME (LOSS) NET OF INCOME TAXES:
Unrealized holding gain (loss) during the period, net
of deferred income tax (benefit) of $1,180 and $1, 2,118 20
respectively.
Less adjustment for gains included in net income,
net of income tax of $0 and $0 -- --
------- -------
Other comprehensive income (loss) 2,118 20
------- -------
COMPREHENSIVE INCOME $ 4,427 $ 4,445
======= =======
See notes to consolidated financial statements
5
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited) ( in thousands)
For the Quarters Ended March 31, 2001 and 2000
(Restated,
See Note 6)
2001 2000
--------- ---------
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period $ 133,839 $ 123,204
Purchase of forfeited shares from MRP -- (11)
Net proceeds (cost) of treasury stock
reissued for exercised stock options 28 113
Purchase and retirement of treasury stock (1,912) (1,599)
--------- ---------
Balance, end of period 131,955 121,707
RETAINED EARNINGS:
Balance, beginning of period 66,893 69,170
Net income 2,309 4,425
Cash dividends (1,653) (1,529)
--------- ---------
Balance, end of period 67,549 72,066
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance, beginning of period (1,125) (5,331)
Other comprehensive income (loss), net of
related income taxes 2,118 20
--------- ---------
Balance, end of period 993 (5,311)
UNEARNED, RESTRICTED ESOP SHARES AT COST:
Balance, beginning of period (5,234) (6,162)
Release of earned ESOP shares -- --
--------- ---------
Balance, end of period (5,234) (6,162)
CARRYING VALUE OF SHARES HELD IN TRUST FOR
STOCK-RELATED COMPENSATION PLANS:
Balance, beginning of period (578) (1,708)
Net change in number and/or valuation of
shares held in trust -- 11
Amortization of compensation related to MRP 258 280
--------- ---------
Balance, end of period (320) (1,417)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY $ 194,943 $ 180,883
========= =========
See notes to consolidated financial statements
6
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited) (continued) ( in thousands)
For the Quarters Ended March 31, 2001 and 2000
2001 2000*
--------- ---------
COMMON STOCK , SHARES ISSUED:
Number of shares, beginning of period 13,201 13,201
--------- ---------
Number of shares, end of period 13,201 13,201
--------- ---------
LESS TREASURY STOCK PURCHASED AND RETIRED:
Number of shares, beginning of period (1,196) (864)
Purchase of shares forfeited from MRP -- (1)
Reissuance of treasury stock to deferred
compensation plan and/or exercised
stock options 3 25
Purchase and retirement of treasury stock (114) (124)
--------- ---------
Number of shares retired/repurchased,
end of period (1,307) (964)
--------- ---------
Shares issued and outstanding, end of period 11,894 12,237
========= =========
UNEARNED, RESTRICTED ESOP SHARES:
Number of shares, beginning of period (633) (746)
Release of earned shares -- --
--------- ---------
Number of shares, end of period (633) (746)
========= =========
*Adjusted for stock dividend, see note 2
See notes to consolidated financial statements
7
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
For the Quarters Ended March 31, 2001 and 2000
(Restated,
See Note 6)
2001 2000
-------- --------
OPERATING ACTIVITIES
Net income $ 2,309 $ 4,425
Adjustments to reconcile net income to net cash
Provided (used) by operating activities:
Deferred taxes -- --
Depreciation 686 628
Loss (gain) on sale of securities -- --
Net amortization of premiums and discounts on investments (32) 37
Increase in cash surrender value of bank owned
life insurance (218) (44)
Amortization of costs in excess of net assets acquired 795 792
Amortization of MRP compensation liability 258 280
Loss (gain) on sale of loans (805) (173)
Net changes in deferred loan fees, premiums and discounts (60) 245
Loss (gain) on disposal of real estate held for sale 16 2
Loss (gain) on disposal of property and equipment (15) 8
Amortization of mortgage servicing rights 130 68
Capitalization of mortgage servicing rights from sale of
mortgages with servicing retained (56) (14)
Provision for losses on loans and real estate held
for sale 950 554
FHLB stock dividend (462) (403)
Net change in:
Loans held for sale (21,821) (2,373)
Accrued interest receivable 329 (1,404)
Other assets (1,050) 589
Deferred compensation 99 141
Accrued expenses and other liabilities 5,889 4,644
Income taxes payable 573 2,343
-------- --------
Net cash provided (used) by operating activities (12,485) 10,345
-------- --------
INVESTING ACTIVITIES:
Purchases of securities available for sale (8,000) (10,751)
Principal repayments and maturities of securities
available for sale 25,891 8,577
Proceeds from sales of securities available for sale -- -
Purchases of securities held to maturity -- (3,249)
Principal repayments and maturities of securities
held to maturity 653 114
Net sales (purchases) of FHLB stock -- (866)
Origination of loans, net of principal repayments (75,466) (61,246)
Purchases of loans and participating interest in loans (489) (4,665)
Proceeds from sales of loans and participating interest
in loans 47,006 15,896
Purchases of property and equipment (635) (1,034)
Proceeds from sale of property and equipment 23 10
Additional capitalized costs of real estate
held for sale, net of insurance proceeds (71) (33)
Proceeds from sale of real estate held for sale 397 369
Funds transferred to deferred compensation plan trusts (24) (61)
Investment in bank owned life insurance (5,000) -
-------- --------
Net cash used by investing activities (15,715) (56,939)
-------- --------
(Continued on next page)
8
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
For the Quarters Ended March 31, 2001 and 2000
(Continued from prior page)
(Restated,
See Note 6)
2001 2000
-------- --------
FINANCING ACTIVITIES
Increase (decrease) in deposits $ 25,362 $ 45,570
Proceeds from FHLB advances 69,465 236,000
Repayment of FHLB advances (73,980) (206,172)
Proceeds from repurchase agreement borrowings --
Repayments of repurchase agreement borrowings (5,432) (1,561)
Increase (decrease) in other borrowings 763 (6,573)
Cash dividends paid (1,669) (1,323)
Net (cost) proceeds of exercised stock options 28 113
Repurchases of stock, net of forfeitures (1,912) (1,599)
-------- --------
Net cash provided by financing activities 12,625 64,455
-------- --------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (15,575) 17,861
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 67,356 44,769
-------- --------
CASH AND DUE FROM BANKS, END OF PERIOD $ 51,781 $ 62,630
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 22,685 $ 19,251
Taxes paid $ 792 $ 150
Non-cash transactions:
Loans, net of discounts, specific loss allowances
and unearned income transferred to real
estate owned $ 2,152 $ 605
Net change in accrued dividends payable $ 16 $ 206
Net change in unrealized gain (loss) in deferred
compensation trust and related liability $ -- $ 59
Treasury stock forfeited by MRP $ -- $ 11
Treasury stock issued to MRP $ -- $ --
See notes to consolidated financial statements
9
BANNER CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
Banner Corporation (BANR or the Company) is a bank holding company incorporated
in the State of Washington. The Company is primarily engaged in the business of
planning, directing and coordinating the business activities of its wholly owned
subsidiaries, Banner Bank (BB) and Banner Bank of Oregon (BBO) (together, the
Banks). BB is a Washington-chartered commercial bank the deposits of which are
insured by the Federal Deposit Insurance Corporation (FDIC) under both the Bank
Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). BB
conducts business from its main office in Walla Walla, Washington, and its 32
branch offices and four loan production offices located in Washington, Oregon
and Idaho. BBO is an Oregon-chartered commercial bank and its deposits are
insured by the FDIC under BIF. BBO conducts business from its main office in
Hermiston, Oregon, and its six branch offices and one loan production office
located in northeast Oregon. The Company and its Bank subsidiaries are subject
to regulation by the Federal Reserve Board (FRB) and the FDIC. In addition BB
and BBO are subject to the state banking regulations applicable to their state
charters.
In the opinion of management, the accompanying consolidated statements of
financial condition and related interim consolidated statements of income,
comprehensive income, changes in stockholders' equity and cash flows reflect all
adjustments (which include reclassifications and normal recurring adjustments as
well as the restatements explained in Notes 2 and 6) that are necessary for a
fair presentation in conformity with accounting principles generally accepted in
the United States of America ("GAAP"). The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions
that affect amounts reported in the financial statements. Actual results could
differ from these estimates and may have a material impact on the financial
statements.
Certain reclassifications have been made to the 2000 financial statements and/or
schedules to conform to the 2001 presentation. These reclassifications may have
affected certain ratios for the prior periods. The effect of such
reclassifications is considered immaterial. All significant intercompany
transactions and balances have been eliminated.
The information included in this Form 10-Q/A (amended for the restatement of
March 31, 2001 financial statements) should be read in conjunction with Banner
Corporation's 2000 Annual Report on Form 10-K to the Securities and Exchange
Commission. Interim results are not necessarily indicative of results for a full
year.
NOTE 2: RECENT DEVELOPMENTS AND SIGNIFICANT EVENTS
Restatement of Financial Statements: As discussed in Note 6, on September 17,
2001, the Company announced that it had become aware of irregularities
associated with a former senior lending officer. The irregularities included a
check kiting scheme of a single commercial loan customer of BB, as well as
activities designed to conceal credit weaknesses of several loan customers.
Upon further review, the Company determined that it would be necessary to file
amended quarterly reports on Form 10-Q/A for each of the quarters ended March
31, 2001 and June 30, 2001, to recognize charges in those periods which
appropriately reflect the timing of losses incurred as a result of the check
kiting scheme and credit manipulation activities.
Name Change/Consolidation of Banking Operations: On October 30, 2000 First
Washington Bancorp, Inc. (FWWB) changed its name to Banner Corporation in
conjunction with a consolidation of banking operations affecting its banking
subsidiaries. Towne Bank (TB) merged with First Savings Bank of Washington
(FSBW), FSBW converted from a Washington state-chartered savings bank to a
Washington state-chartered commercial bank and 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 (IEB) changed its name to Banner Bank
of Oregon.
The combination was designed to strengthen the Company 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. The Banks used one name, Banner Bank, and were united under
the leadership of an experienced management team. The same ten individuals
serve as members of the Board of Directors of the Company and each of the Banks.
In light of the Gramm-Leach-Bliley financial modernization legislation, the
Company chose to retain a separate charter for BBO and to operate two banking
subsidiaries. That legislation enacted Federal Home Loan Bank (FHLB) System
reforms that affected community financial institutions. The intent was for BBO
to qualify as a community financial institution allowing it to obtain long-term
FHLB advances to fund small business and small agribusiness loans and to offer
those loans as collateral for such borrowings. A community financial
institution is defined as a "member of the Federal Home Loan Bank (FHLB) System,
the deposits of which
10
are insured by the FDIC and that has average total assets (over the preceding
three years) of less than $500 million." However, with release of the FHLB's
implementing procedures, including rules expanding eligible collateral for
members not qualifying as community financial institutions, the Company has
determined that potential benefits of additional borrowing capacity are not as
substantial as the efficiencies it may derive by operating the Banks under a
single bank charter. Therefore, on June 29, 2001, the Company announced its
plans to merge its two subsidiary banks. The merger of BB and BBO was completed
on September 1, 2001, with the surviving entity operating as a Washington state-
chartered commercial bank.
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 BB 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 Banner Bank. BB has capitalized CFC with $2
million of equity capital and provides funding support for CFC's lending
operations.
Accounting Standards Recently Adopted: In June 1998 the Financial Accounting
Standards Board (FASB) issued Statements of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities.
In June 2000, the FASB issued SFAS No. 138, which amends certain provisions of
SFAS No. 133 to clarify specific areas causing difficulties in implementation.
The Company has not historically engaged in any hedging activities, and does not
anticipate that it will enter into any transactions that will qualify for hedge
accounting as defined by SFAS No. 133. The Company adopted SFAS No. 133 and the
corresponding amendments under SFAS No. 138 effective on January 1, 2001. The
adoption of SFAS No. 133, as amended by SFAS No. 138, did not have a material
impact on the Company's consolidated results of operations, financial position
or cash flows.
Recent Accounting Standard Not Yet Adopted: In September 2000, the FASB issued
Statement of Financial Accounting Standards (SFAS) No. 140 Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
which revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but carries over most of the provisions of SFAS No. 125 without reconsideration.
SFAS No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The provisions of
this statement are not expected to have a material effect on the Company's
financial position or results of operations.
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 BB, 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.
BB is a community oriented commercial bank chartered in the State of Washington.
As explained above under Consolidation of Banking Operations in Note 2, BB
includes the operation of the former First Saving Bank of Washington including
its divisions Whatcom State Bank and Seaport Citizens Bank, and the former Towne
Bank. BB offers a wide variety of deposit products to its consumer and
commercial customers. Lending activities include the origination of real state,
commercial/agriculture business and consumer loans. BB's primary business is
that of a traditional banking institution, gathering deposits and originating
loans for portfolio in its primary market area. BB is also an active participant
in the secondary market, originating residential loans for sale on both a
servicing released and servicing retained basis. In addition to interest income
on loans and investment securities, BB receives other income from deposit
servicing charges, loan servicing fees and from the sale of loans and
investments. On April 1, 2000, BB opened a new mortgage lending subsidiary,
Community Financial Corporation (CFC), located in the Lake Oswego area of
Portland, Oregon. CFC's primary lending activities are in the area of
construction and permanent financing for one- to four-family residential
dwellings.
BBO (formerly IEB) is a community oriented commercial bank chartered in the
State of Oregon which historically has offered a wide variety of deposit and
loan products to its consumer and commercial customers. Lending activities have
included origination of consumer, commercial, agribusiness and real estate
loans. BBO 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. BBO operates a division, Inland
Financial Services, which offers insurance and brokerage services to its
customers. The performance of each Bank is reviewed by the Company's executive
management team and the Board of Directors on a monthly basis.
11
NOTE 3: BUSINESS SEGMENTS (CONTINUED)
Financial highlights by legal entity were as follows:
Quarter Ended March 31, 2001 (Restated)
---------------------------------------------
(dollars in thousands)
Condensed Income Statement
BB BBO Other * Total
----------- --------- ------ ----------
Net interest income before
provision for loan losses $ 14,783 $ 2,664 $ 24 $ 17,471
Provision for loan losses 905 45 -- 950
Other operating income 2,376 489 -- 2,865
Other operating expenses 13,319 1,858 534 15,711
----------- --------- ------ ----------
Income (loss) before income taxes 2,935 1,250 (510) 3,675
Income taxes (benefit) 975 571 (180) 1,366
----------- --------- ------ ----------
Net income (loss) $ 1,960 $ 679 $ (330) $ 2,309
=========== ========= ====== ==========
March 31, 2001 (Restated)
--------------------------------------------
Total Assets $ 1,775,772 $ 230,120 $ 913 $2,006,805
=========== ========= ====== ==========
Quarter Ended March 31, 2000
----------------------------------------------------
(dollars in thousands)
Condensed Income Statement
TB
Now merged
BB BBO into BB Other* Total
---------- -------- -------- ------ --------
Net interest income
before provision for
loan losses $ 9,983 $ 2,605 $ 4,040 $ 17 $ 16,645
Provision for loan losses 275 70 200 -- 545
Other operating income 816 436 393 (14) 1,631
Other operating expenses 5,910 1,765 2,675 460 10,810
---------- -------- -------- ------ --------
Income (loss) before income
taxes 4,614 1,206 1,558 (457) 6,921
Income taxes (benefit) 1,429 558 669 (160) 2,496
---------- -------- -------- ------ --------
Net income (loss) $ 3,185 $ 648 $ 889 $ (297) $ 4,425
========== ======== ======== ====== ========
March 31, 2000
-----------------------------------------------------
Total Assets $1,350,352 $221,412 $324,113 $ 474 $1,896,351
========== ======== ======== ====== ==========
* 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 BANR's interest-bearing
deposits and securities at the dates indicated (at carrying value) (in
thousands):
March 31 December 31
2001 2000
---- ----
Interest-bearing deposits included
in cash and due from banks $ 11,192 $ 15,661
Mortgage-backed securities 198,351 194,073
Other securities-taxable 81,160 100,261
Other securities-tax exempt 27,969 28,212
Other stocks with dividends 3,821 3,969
-------- --------
Total securities 311,301 326,515
Federal Home Loan Bank (FHLB) stock 29,269 28,807
-------- --------
$351,762 $370,983
======== ========
The following table provides additional detail on income from deposits and
securities for the periods indicated (in thousands):
Quarters Ended
March 31
-----------------------
2001 2000
------ ------
Mortgage-backed securities $3,272 $3,955
------ ------
Taxable interest and dividends 1,766 1,865
Tax-exempt interest 416 476
Federal Home Loan Bank stock-dividends 462 402
------ ------
2,644 2,743
------ ------
$5,916 $6,698
====== ======
NOTE 5: CALCULATION OF WEIGHTED AVERAGE SHARES OUTSTANDING FOR EARNINGS PER
SHARE (EPS)
Calculation of
Weighted Average Shares Outstanding
for Earnings Per Share
-----------------------
(in thousands)
Quarters Ended
March 31
--------------------------
2001 2000
------ ------
Total shares originally issued 13,201 13,201
Less retired shares and treasury stock plus
unvested shares allocated to MRP (1,305) (1,071)
Less unallocated shares held by the ESOP (633) (746)
------ ------
Basic weighted average shares outstanding 11,263 11,384
Plus unvested MRP and stock option incremental
shares considered outstanding for diluted
EPS calculations 359 192
------ ------
Diluted weighted average shares outstanding 11,622 11,576
====== ======
13
NOTE 6: RESTATEMENT OF FINANCIAL STATEMENT
In September 2001, the Company became aware of irregularities associated with a
former senior lending officer. The irregularities included a check kiting scheme
of a single commercial loan customer of Banner Bank, as well as activities
designed to conceal credit weaknesses of several loan customers. As a result,
the Company's financial statements as of and for the quarter ended March 31,
2001 have been restated from the amounts previously reported to recognize an
expense of $3.6 million ($2.3 million after tax) related to the check kiting
scheme. The following table shows the effects of the restatement for the
quarter ended March 31, 2001.
As Previously Reported As Restated
---------------------- -----------
At March 31, 2001:
Cash and due from banks $ 55,981 $ 51,781
Non-interest-bearing deposits 133,318 132,718
Income taxes payable 3,368 2,108
Retained earnings 69,889 67,549
For the quarter ended March 31, 2001:
Check kiting loss $ -- $ 3,600
Income before provision for
income taxes 7,275 3,675
Provision for income taxes 2,626 1,366
Net income 4,649 2,309
Comprehensive income 6,767 4,427
Net income per common share:
Basic $ .41 $ .21
Diluted .40 .20
The Company also determined that the financial statements for the quarter ended
June 30, 2001 needed to be restated to reflect charges relating to both the
check kiting scheme and the credit manipulation activities. During the restated
quarter ended June 30, 2001, the Company recorded $2.6 million ($1.7 after tax)
of expense related to the check kiting scheme and an additional $2.0 million
($1.3 million after tax) was added to the provision for loan losses relating to
the credit manipulation (see the Company's Form 10-Q/A for the quarter ended
June 30, 2001 for more information). The Company recorded an additional expense
of $1.9 million in the quarter ended September 30, 2001, with respect to the
check kiting scheme and also recognized $4.2 million of additional provision for
loan losses associated with the credit manipulation (see the Company's Form 10-Q
for the quarter ended September 30, 2001 for more information).
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, Banner Bank (BB) and Banner Bank of
Oregon (BBO). Prior to the consolidation and name change, which occurred on
October 30, 2000, the Company's subsidiaries included First Savings Bank of
Washington (FSBW), Inland Empire Bank (IEB) and Towne Bank (TB) (together, the
Banks). As of March 31, 2001, Banner Bank is a Washington-chartered commercial
bank the deposits of which are insured by the Federal Deposit Insurance
Corporation (FDIC) under both the Bank Insurance Fund (BIF) and the Savings
Association Insurance Fund (SAIF). As of March 31, 2001, BB conducted business
from its main office in Walla Walla, Washington, and its 32 branch offices and
four loan production offices located in Washington, Idaho and Oregon. Banner
Bank of Oregon is an Oregon-chartered commercial bank and its deposits are
insured by the FDIC, under the BIF. BBO 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 October 30, 2000, TB conducted business from seven full
service branches in the Seattle, Washington, metropolitan area. An eighth
Seattle area office opened in November 2000.
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 increased for the quarter ended March 31,
2001, when compared to the same quarter one year prior. 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 a 7 basis
point reduction of the interest rate spread for the quarter, which resulted from
changes in the mix of assets and liabilities and changes in the levels of
various market interest rates. The net interest margin also declined 6 basis
points for the quarter ended March 31, 2001, when compared to the same quarter
one year prior reflecting the reduced interest rate spread 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. As explained in Note
6 of the Selected Notes to Consolidated Financial Statements, BANR's net income
for the quarter ended March 31, 2001 has been restated to reflect a charge of
$3.6 million ($2.3 million after tax) as a result of a check kiting scheme
involving a single commercial loan customer that had been concealed by a former
senior lending officer of BB. The accompanying discussion and analysis gives
effect to the restatement.
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 Notes to the
Consolidated Financial Statements.
15
RECENT DEVELOPMENTS AND SIGNIFICANT EVENTS
See Notes 2 and 6 to Selected Notes to Consolidated Financial Statements
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2001, (RESTATED) AND DECEMBER 31,
2000
Total assets increased $24.0 million, or 1.2%, from $1.983 billion at December
31, 2000, to $2.007 billion at March 31, 2001. The growth of $24.0 million
occurred mostly at BB and was funded primarily with deposit growth. 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 $48.6 million, or 3.3%,
from $1.472 billion at December 31, 2000, to $1.520 billion at March 31, 2001.
This loan growth included an increase of $21.8 million in loans held for sale
which increased to $29.8 million at March 31, 20001. The increase in net loans
consisted of $4.0 million of residential mortgages, $13.7 million of mortgages
secured by commercial and multifamily real estate, $26.7 million of construction
and land loans and $5.0 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 of 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 $25.4 million in deposits. Asset growth
was also funded by net income from operations. Deposits grew $25.4 million, or
2.1%, from $1.193 billion at December 31, 2000, to $1.218 billion at March 31,
2001. FHLB advances decreased $4.5 million from $507.1 million at December 31,
2000, to $502.6 million at March 31, 2001. Other borrowings, primarily reverse
repurchase agreements with securities dealers, decreased $4.6 million, from
$74.5 million at December 31, 2000, to $70.0 million at March 31, 2001.
Securities available for sale and held to maturity decreased $15.2 million, or
4.7%, from $326.5 million at December 31, 2000, to $311.3 million at March 31,
2001, as much of the proceeds from maturing or called securities and
amortizations or prepayments on mortgage-related securities were used to fund
loan growth. FHLB stock increased $462,000, as a result of the regular
quarterly stock dividend paid by the FHLB. The Company's investment in bank
owned life insurance increased by $5.2 million reflecting accumulated earnings
from increased cash surrender value and an initial premium of $5.0 million for
the purchase of additional insurance.
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 2001,
(RESTATED) AND 2000
GENERAL. Net income for the quarter ended March 31, 2001 was $2.3 million, or
$.20 per share (diluted), compared to net income of $4.4 million, or $.38 per
share (diluted), for the quarter ended March 31, 2000. Net income for the
quarter ended March 31, 2001 decreased $2.1 million from the comparable quarter
ended March 31, 2000. The decrease in net income resulted from the expense
associated with the check kiting scheme described earlier in Note 6. Excluding
this expense and the related tax effect, net income for the quarter ended March
31, 2001, would have increased $244,000 compared to the quarter ended March 31,
2001. BANR's improved operating results (excluding the check kiting charge)
primarily reflect the significant growth of assets and liabilities which was
offset somewhat by the decline in net interest margin and increased operating
expenses. Compared to levels a year ago, total assets increased 5.8% to $2.007
billion at March 31, 2001, net loans rose 11.8% to $1.520 billion, deposits grew
8.4% to $1.218 billion and borrowings increased 0.5% to $572.6 million. Average
equity was 9.93% of average assets for the quarter ended March 31, 2001,
compared to 9.80% of average assets for the quarter ended March 31, 2000. In
addition to other activity reflected in the capital accounts, average equity
increased significantly from the quarter ended March 31, 2000 as a result of
changes in the market value of securities accounted for as available for sale.
In accordance with FAS 115, changes in the market value of those securities, net
of a related tax effect, are recorded in equity as accumulated other
comprehensive income.
Net interest margin declined 6 basis points for the quarter reflecting changes
in the level of market rates and the mix of assets and liabilities. Over the
past eighteen months the Company encountered a period of very volatile market
interest rates. The effects of this volatility were generally adverse to the
Company's interest rate spread and net interest margin, causing interest expense
to increase by 40 basis points compared to the same quarter a year earlier.
Interest income also increased, up 33 basis points compared to the March 31,
2000 quarter; however, in contrast to interest expense, much of this increase
reflects changes in the asset mix. Continued pressure on net interest margin
appears likely over the near term as decreases in funding costs are expected to
lag declines in asset yields, which reflect in particular the lower level of the
prime rate. Changes in the level of interest rates also impacted mortgage
banking activity resulting in significantly greater gain on sale of loans in the
most recent quarter compared to the same period a year earlier. Results for the
quarter ended March 31, 2001, also reflect a substantially higher provision for
loan losses than was recognized in the same quarter a year ago.
16
INTEREST INCOME. Interest income for the quarter ended March 31, 2001 was $40.6
million compared to $36.6 million for the quarter ended March 31, 2000, an
increase of $3.9 million, or 15.8%. The increase in interest income was a result
of a $130.2 million, or 7.5%, growth in average balances of interest-earning
assets, and a 33 basis point increase in the average yield on those assets. The
yield on average interest-earning assets increased to 8.78% for the quarter
ended March 31, 2001 compared to 8.45% for the same period a year earlier.
Average loans receivable for the quarter ended March 31, 2001 increased by
$174.4 million, or 13.0%, when compared to the quarter ended March 31, 2000,
reflecting the Banks' significant internal growth. Interest income on loans
increased by $4.7 million, or 15.8%, compared to the prior year, reflecting the
impact of the increase in average loan balances and a 30 basis point increase in
the average yield. The increase in average loan yield resulted largely from the
changes in the mix of the loan portfolio. In particular, the portion of the
portfolio invested in lower yielding one- to four-family residential loans
declined, while the portion invested in higher yielding construction, land
development and commercial loans increased. Adding to this effect was the higher
level of market interest rates in the nine months immediately preceding the
current quarter than existed during the nine months preceding the quarter ending
March 31, 2000. Those higher market rates in preceding periods resulted in
higher yields for certain fixed and adjustable rate loans during the March 31,
2001 quarter than were realized in the March 31, 2000 quarter. On the other
hand, the average prime rate, which affects many of the Company's floating rate
loans, while trending in opposite directions, was nearly the same for the two
quarters being compared. Loans yielded 9.27% for the quarter ended March 31,
2001 compared to 8.97% for the quarter ended March 31, 2000. The average balance
of mortgage-backed securities, investment securities, daily interest-bearing
deposits and FHLB stock decreased by $44.2 million for the quarter ended March
31, 2001, while the interest and dividend income from those investments
decreased $782,000 compared to the quarter ended March 31, 2000. The average
yield on mortgage-backed securities decreased from 6.74% for the quarter ended
March 31, 2000, to 6.71% for the comparable period in 2001. Yields on
mortgage-backed securities were lower in the 2001 period reflecting the impact
of lower market rates on the interest rates paid on the significant portion of
those securities that have adjustable interest rates. The average yield on
investment securities and short term cash investments increased from 6.65% for
the quarter ended March 31, 2000 to 6.72% for the comparable quarter in 2001,
reflecting a modest change in the mix of the securities portfolio which was
generally offset by the lower level of market rates. Earnings on FHLB stock
increased by $60,000, resulting from an increase of $3.9 million in the average
balance of FHLB stock for the quarter ended March 31, 2001. The dividend yield
on FHLB stock was 6.50% for both the quarter ended March 31, 2001, and the
quarter ended March 31, 2000. Dividends on FHLB stock are established on a
quarterly basis by vote of the Directors of the FHLB.
INTEREST EXPENSE. Interest expense for the quarter ended March 31, 2001 was
$23.1 million compared to $20.0 million for the comparable period in 2000, an
increase of $3.1 million, or 15.6%. The increase in interest expense was due to
the $127.7 million growth in average interest-bearing liabilities and the
increase in the average cost of all interest-bearing liabilities from 4.88% to
5.28%. The $99.1 million increase in average interest-bearing deposits for the
quarter ended March 31, 2001 reflects the solid deposit growth throughout the
Company over the past twelve months. Deposit interest expense increased $2.5
million for the quarter ended March 31, 2001 compared to the same quarter a year
ago. Average deposit balances increased from $1.093 billion for the quarter
ended March 31, 2000, to $1.193 billion for the quarter ended March 31, 2001,
while, at the same time, the average rate paid on deposit balances increased 51
basis points. The increase in the rate paid on deposits reflects the significant
increase in market interest rates in the periods just prior to the current
quarter compared to the levels that prevailed in the same periods a year
earlier. To a significant degree deposit costs for a quarter reflect market
interest rates and pricing decisions made three to twelve months prior to the
end of that quarter. Generally, market interest rates were higher for the nine
months preceding the quarter ended March 31, 2001 than for the same period
preceding the March 31, 2000 quarter. Average FHLB advances totaled $508.8
million during the quarter ended March 31, 2001, compared to $476.4 million
during the quarter ended March 31, 2000, an increase of $32.4 million that,
combined with a 29 basis point increase in average cost of advances, resulted in
a $784,000 increase in related interest expense. The average rate paid on those
advances increased to 6.23% for the quarter ended March 31, 2001 from 5.94% for
the quarter ended March 31, 2000. Other borrowings consist of retail repurchase
agreements wit customers and repurchase agreements with investment banking firms
secured by certain investment securities. The average balance for other
borrowings decreased $3.7 million from $78.4 million for the quarter ended March
31, 2000, to $74.7 million for the same period in 2001, while the related
interest expense decreased $119,000 from $1.2 million to $1.1 million for the
respective periods. The average rate paid on other borrowings was 5.8% in the
quarter ended March 31, 2001 compared to 6.09% for the same quarter in 2000.
Similar to deposits, the cost of FHLB advances reflects to a degree a lagged
effect from prior period market interest rate levels, while the Company's other
borrowings generally have relatively short terms and therefore reprice to
current market levels more quickly.
17
The following tables provide additional comparative data on the Company's
operating performance:
Quarters Ended
Average Balances March 31
---------------- ---------------------------
(in thousands) (Restated,
See Note 6)
2001 2000
----------- -----------
Investment securities and deposits $ 131,710 $ 141,498
Mortgage-backed obligations 197,634 235,986
Loans 1,516,361 1,341,942
FHLB stock 28,817 24,873
----------- -----------
Total average interest-earning asset 1,874,522 1,744,299
Non-interest-earning assets 114,039 94,054
----------- -----------
Total average assets $ 1,988,561 $ 1,838,353
=========== ===========
Deposits $ 1,192,508 $ 1,093,444
Advances from FHLB 508,785 476,415
Other borrowings 74,704 78,411
----------- -----------
Total average interest-bearing liabilities 1,775,997 1,648,270
Non-interest-bearing liabilities 15,198 9,858
----------- -----------
Total average liabilities 1,791,195 1,658,128
Equity 197,366 180,225
----------- -----------
Total average liabilities and equity $ 1,988,561 $ 1,838,353
=========== ===========
Interest Rate Yield/Expense (Rates Are Annualized)
--------------------------------------------------
Interest Rate Yield:
Investment securities and deposits 6.72% 6.65%
Mortgage-backed obligations 6.71% 6.74%
Loans 9.27% 8.97%
FHLB stock 6.50% 6.50%
----------- -----------
Total interest rate yield on interest-
earning assets 8.78% 8.45%
----------- -----------
Interest Rate Expense:
Deposits 4.84% 4.33%
Advances from FHLB 6.23% 5.94%
Other borrowings 5.80% 6.09%
----------- -----------
Total interest rate expense on
interest-bearing liabilities 5.28% 4.88%
----------- -----------
Interest spread 3.50% 3.57%
============ ===========
Net interest margin on interest earning assets 3.78% 3.84%
----------- -----------
Additional Key Financial Ratios (Ratios Are Annualized)
-------------------------------------------------------
Return on average assets 0.47% 0.97%
Return on average equity 4.74% 9.88%
Average equity / average assets 9.93% 9.80%
Average interest-earning assets /
interest-bearing liabilities 105.55% 105.83%
Non-interest [other operating] expenses/average assets
Excluding amortization of costs in excess of net
assets acquired (goodwill) 3.10% 2.24%
Including amortization of costs in excess of net
assets acquired (goodwill) 3.20% 2.37%
Efficiency ratio [non-interest (other operating)
expenses/revenues]
Excluding amortization of costs in excess of net
assets acquired (goodwill) 73.35% 54.82%
Including amortization of costs in excess of net
assets acquired (goodwill) 77.26% 59.15%
18
PROVISION FOR LOAN LOSSES. During the quarter ended March 31, 2001, the
provision for loan losses was $950,000, compared to $545,000 for the quarter
ended March 31, 2000, an increase of $405,000. 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, slightly higher levels of non-performing loans and net charge offs, and
concerns about the current economic environment. Non-performing loans increased
modestly to $5.5 million at March 31, 2001, compared to $5.4 million at March
31, 2000. Net charge offs were $284,000 for the current quarter compared to
$135,000 for the same quarter a year earlier. A comparison of the allowance for
loan losses at March 31, 2001 and 2000 shows an increase of $2.0 million from
$14.0 million at March 31, 2000 to $16.0 million at March 31, 2001. The
allowance for loan losses as a percentage of net loans (loans receivable
excluding allowance for losses) was 1.04% and 1.02% at March 31, 2001 and March
31, 2000, respectively. The allowance for loan losses equaled 292% of
non-performing loans at March 31, 2001 compared to 259% of non-performing loans
at March 31, 2000.
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 o 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 th 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):
March 31 December 31
2001 2000
-------- -----------
Loans (including loans held for sale):
Secured by real estate
One- to four-family $ 422,964 $ 418,057
Commercial 381,301 366,071
Multifamily 82,709 84,282
Construction and land 297,969 271,273
Commercial business 235,186 228,676
Agricultural business 68,255 67,809
Consumer 48,001 50,915
----------- -----------
Total Loans $ 1,536,385 $ 1,487,083
Less allowance for loan losses 15,980 15,314
----------- -----------
Total net loans at end of period $ 1,520,405 $ 1,471,769
=========== ===========
Allowance for loan losses as a percentage of
net loans outstanding 1.04% 1.03%
Quarters Ended
March 31
---------------------------
2001 2000
----------- -----------
Balance, beginning of the year $ 15,314 $ 13,541
Allowances added through business combinations -- --
Provision 950 545
Recoveries of loans previously charged off:
Secured by real estate
One- to four-family -- --
Commercial -- 1
Multifamily -- --
Construction and land -- 4
Commercial business 6 11
Agricultural business -- --
Consumer 5 3
----------- -----------
11 19
Loans charged off:
Secured by real estate
One- to four-family (32) (6)
Commercial -- --
Multifamily -- --
Construction and land -- --
Commercial business (102) (59)
Agricultural business (100) --
Consumer (61) (89)
----------- -----------
(295) (154)
----------- -----------
Net charge offs (284) (135)
----------- -----------
Balance, end of period $ 15,980 $ 13,951
=========== ===========
Net charge-offs as a percentage of average
net book value of loans outstanding for
the period 0.02% 0.01%
----------- -----------
20
The following is a schedule of the Company's allocation of the allowance for
loan losses:
March 31 December 31
2001 2000
----------- -----------
Specific or allocated loss allowances:
Secured by real estate:
One- to four-family $ 2,289 $ 2,256
Commercial 4,146 4,556
Multifamily 765 731
Construction and land 2,842 2,738
Commercial business 3,195 2,859
Agricultural business 758 851
Consumer 966 879
----------- -----------
Total allocated 14,961 14,870
Unallocated 1,019 444
----------- -----------
Total allowance for loan losses $ 15,980 $ 15,314
=========== ==========
Ratio of allowance for loan losses to non-
performing loans 2.92 1.83
Allowance for loan losses as a percent of net loans
(loans receivable excluding allowance for losses) 1.04% 1.03%
OTHER OPERATING INCOME. Other operating income at $2.9 million for the quarter
ended March 31, 2001, increased by $1.2 million compared to the quarter ended
March 31, 2000. This included a $674,000 increase in the gain on sale of loans
and a $306,000 increase in other fees and service charges in the current
quarter. Loan sales for the quarter ended March 31, 2001 totaled $47.0 million,
including $9.4 million of loans sold by CFC, compared to $15.9 million for the
quarter ended March 31, 2000. Gain on sale of loans for BANR included $66,000 of
fees on $5.5 million of loans brokered by CFC, which are not reflected in the
volume of loans sold. In addition to selling fewer loans, 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. Other fee and service
charge income increased at BANR, reflecting deposit growth and pricing
adjustments. Miscellaneous income increased by $176,000 in large part reflecting
the Company's increased investment in bank owned life insurance and the
resulting increase in cash surrender value.
OTHER OPERATING EXPENSES. Other operating expenses increased $4.9 million from
$10.8 million for the quarter ended March 31, 2000, to $15.7 million for the
quarter ended March 31, 2001. As noted earlier, other operating expenses for
the quarter ended March 31, 2001, included a charge of $3.6 million associated
with a check kiting scheme which previously had been concealed by a former
senior lending officer of BB. Excluding the check kiting charge, other
operating expense increased $1.3 million compared to the same quarter a year
earlier. Increases in other operating expenses, excluding the check kiting
charge, 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 March 31, 2000. The increase also reflects expenses associated
with the new lending subsidiary, CFC. The increase in other operating expenses
was partially offset by a $274,000 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, and
the recognition of the check kiting loss caused BANR's efficiency ratio,
excluding the amortization of goodwill, to increase to 73.35% (77.26% including
goodwill), for the quarter ended March 31, 2001, from 54.82% (59.15% including
goodwill) for the comparable period ended March 31, 2000. Other operating
expenses as a percentage of average assets increased to 3.10% (3.20% excluding
the amortization of goodwill) for the quarter ended March 31, 2001, compared to
2.24% (2.37% excluding the amortization of goodwill) for the quarter ended March
31, 2000. Excluding the check kiting loss and the amortization of goodwill for
the quarter ended March 31, 2001, BANR's efficiency ratio would have been 55.65%
and other operating expenses as a percentage of average assets would have been
2.35%.
INCOME TAXES. Income tax expense was $1.4 million for the quarter ended March
31, 2001, compared to $2.5 million for the comparable period in 2000. The
Company's effective tax rates for the quarters ended March 31, 2001 and 2000,
were 37% and 36%, respectively. The higher effective tax rate in the current
quarter is a result of a larger relative effect of the non-deductible goodwill
amortization expense compared to the quarter one year earlier.
21
ASSET QUALITY
The following tables are provided to disclose additional details on asset
quality (in thousands):
March 31 December 31
2001 2000
----------- -----------
Non-performing assets at end of the period:
Nonaccrual Loans:
Secured by real estate
One- to four-family $ 571 $ 873
Multifamily real estate 62 1,741
Commercial real estate -- --
Construction and land 1,884 2,937
Commercial business 958 1,734
Agricultural business 829 529
Consumer 115 18
----------- -----------
4,419 7,832
Loans more than 90 days delinquent, still on accrual:
Secured by real estate
One- to four-family -- 20
Multifamily real estate -- --
Commercial real estate -- --
Construction and land -- --
Commercial business 59 1
Agricultural business 878 467
Consumer 121 54
----------- -----------
1,058 542
----------- -----------
Total non-performing loans 5,477 8,374
Real estate owned, held for sale, net (REO), and
other repossessed assets 5,097 3,287
----------- -----------
Total non-performing assets at the end of
the period $ 10,574 $ 11,661
=========== ===========
Non-performing loans as a percentage of total
net loans before allowance for loan losses
at end of the period 0.36% 0.56%
Ratio of allowance for loan losses to non-
performing loans at end of the period 292% 183%
Non-performing assets as a percentage of total
assets at end of the period. 0.53% 0.59%
Troubled debt restructuring [TDRs]
at end of the period $ 311 $ 337
=========== ===========
Troubled debt restructuring as a percentage of:
Total gross principal of loans outstanding at end
of the period 0.02% 0.02%
Total assets at end of the period 0.02% 0.02%
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 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 March 31, 2001, 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
Estimated Change in
------------------------------------------
Change (In Basis Points) Net Interest Income
in Interest Rates (1) Next 12 Months Net Market Value
- ------------------------ ------------------- ----------------
(Dollars in thousands)
+400 $ 1,864 2.6% $(66,272) (34.3%)
+300 1,503 2.1% (50,570) (26.2%)
+200 1,162 1.6% (31,393) (16.3%)
+100 751 1.0% (12,583) (6.5%)
0 0 0 0 0
-100 (1,927) (2.6%) 633 0.3%
-200 (4,702) (6.4%) (11,060) (5.7%)
-300 (8,477) (11.6%) (29,980) (15.5%)
-400 (12,168) (16.7%) (47,599) (24.7%)
- ----------
(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 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 March 31, 2001. 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 March 31, 2001, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same time period by $38.8 million, representing a one-year gap
to total assets ratio of (1.93%).
24
TABLE OF INTEREST SENSITIVITY GAP
As of March 31, 2001
6 Months
Within to 1-3 3-5 5-10 Over 10
6 Months One Year Years Years Years Years Total
-------- -------- ----- ----- ----- ----- -----
(dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c>
Interest-earning assets(1):
Construction loans $150,336 $ 66,059 $ 2,223 $ 1,116 $ -- $ -- $ 219,734
Fixed-rate mortgage loans 59,378 50,585 159,870 120,371 160,931 81,496 632,631
Adjustable-rate mortgage loans 180,303 57,807 80,004 6,000 -- -- 324,114
Fixed-rate mortgage-backed securities 10,393 11,629 52,443 20,340 10,595 4,483 109,883
Adjustable-rate mortgage-backed
securities 89,643 4,164 -- -- -- -- 93,807
Fixed-rate commercial/agriculture
loans 13,621 7,719 20,456 25,615 8,141 2,788 78,340
Adjustable-rate commercial/
agriculture loans 224,986 -- -- -- -- -- 224,986
Consumer and other loans 22,093 5,478 16,676 13,274 1,328 2,668 61,517
Investment securities and interest-
bearing deposits 47,425 6,535 22,965 5,490 10,400 55,851 148,666
-------- --------- -------- -------- -------- -------- ----------
Total rate-sensitive assets 798,178 209,976 354,637 192,206 191,395 147,286 1,893,678
-------- --------- -------- -------- -------- -------- ----------
Interest-bearing liabilities(2):
Regular savings and NOW accounts 18,136 18,135 42,315 42,315 -- -- 120,901
Money market deposit accounts 66,644 39,986 26,658 -- -- -- 133,288
Certificates of deposit 425,885 215,565 164,005 18,268 7,412 34 831,169
FHLB advances 110,500 86,600 166,054 60,500 78,079 849 502,582
Other borrowings 57,958 -- -- -- -- -- 57,958
Retail repurchase agreements 7,308 208 1,215 1,354 1,929 1 12,015
-------- --------- -------- -------- -------- -------- ----------
Total rate-sensitive liabilities 686,431 360,494 400,247 122,437 87,420 884 1,657,913
-------- --------- -------- -------- -------- -------- ----------
Excess (deficiency) of interest-
sensitive assets over interest-
sensitive liabilities $111,747 $(150,518) (45,610) 69,769 103,975 $146,402 $ 235,765
======== ========= ======== ======== ======== ======== ==========
Cumulative excess (deficiency) of
interest-sensitive assets $111,747 $ (38,771) (84,381) (14,612) 89,363 $235,765 $ 235,765
======== ========= ======== ======== ======== ======== ==========
Cumulative ratio of interest-earning
assets to interest-bearing liabilities 116.28% 96.30% 94.17% 99.07% 105.39% 114.22% 114.22%
======== ========= ======== ======== ======== ======== ==========
Interest sensitivity gap to total assets 5.56% (7.48%) (2.27%) 3.47% 5.17% 7.28% 11.72%
======== ========= ======== ======== ======== ======== ==========
Ratio of cumulative gap to total assets 5.56% (1.93%) (4.20%) (0.73%) 4.44% 11.72% 11.72%
======== ========= ======== ======== ======== ======== ==========
(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 $150.1
million or (7.46%) 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 prepayment 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 th quarter ended March 31, 2001, the
Company purchased loans in the amount of $489,000 while loan origination, net of
repayments totaled $75.5 million. This activity was funded primarily by
principal repayments on securities, sales of loans, and deposit growth. During
the quarter ended March 31, 2001, the Company sold $47.0 million of loans. Net
deposit growth was $25.4 million for the quarter ended March 31, 2001. FHLB
advances decreased $4.5 million for the quarter ended March 31, 2001. Other
borrowings also decreased $4.6 million for the quarter ended March 31, 2001.
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 quarter ended March 31, 2001, the Banks
used their sources of funds primarily to fund loan commitments, to purchase
securities, to repay FHLB advances and other borrowings, and to pa maturing
savings certificates and deposit withdrawals. At March 31, 2001, the Banks had
outstanding loan commitments totaling $159.4 million and undisbursed loans in
process totaling $121.1 million. The Banks generally maintain sufficient cash
and readily marketable securities to meet short-term liquidity needs. BB
maintains a credit facility with the FHLB-Seattle, which provides for advances
which, in aggregate, may equal the lesser of 45% of B s assets or unencumbered
qualifying collateral, which as of March 31, 2001 could give a maximum total
credit line of $801 million. Advances under this credit facility totaled $481.5
million, or 27% of BB's assets at March 31, 2001. BBO also maintains credit
lines with various institutions, including the FHLB-Seattle, that would allow
them to borrow up to $16.5 million.
At March 31, 2001, savings certificates amounted to $830.9 million or 68.2%, of
the Banks' total deposits, including $639.5 million which were scheduled to
mature by March 31, 2002. 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, FHLB
Seattle advances, other borrowings and sale of mortgage loans and that it can
adjust the offering rates for 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
March 31, 2001, BANR'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.
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. BANR'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
------ ----- ------- -----
MARCH 31, 2001: (Restated)
BANR--consolidated
Total capital to risk-
weighted assets $177,056 12.67% $111,834 8.00%
Tier 1 capital to risk-
weighted assets 159,963 11.44 55,917 4.00
Tier 1 leverage capital
average assets 159,936 8.19 78,145 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
he ordinary course of business, none of which is considered to have a material
mpact 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
None
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 March 31, 2001, are as
follows:
Date Filed Purpose
---------- -------
NONE
28
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
October 31, 2001 /s/ Gary Sirmon
----------------
Gary Sirmon
President and Chief Executive Officer
October 31, 2001 /s/ Lloyd W. Baker
-------------------
Lloyd W. Baker
Treasurer and Executive Vice President
29