| UNITED STATES SECURITIES AND EXCHANGE COMMISSION |
| Washington, D.C. 20549 |
| FORM 10-Q |
(Mark One)
| [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004. |
| OR |
| [ ] 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 |
| BANNER CORPORATION |
| (Exact name of registrant as specified in its charter) |
| Washington (State or other jurisdiction of incorporation or organization) |
91-1691604 (I.R.S. Employer Identification Number) |
| 10 South First Avenue, Walla Walla, Washington 99362 |
| (Address of principal executive offices and zip code) |
| Registrant's telephone number, including area code: (509) 527-3636 |
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No |
| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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: Common Stock, $.01 par value per share |
As of October 31, 2004 11,654,291 shares* | |
| * Includes 438,985 shares held by employee stock ownership plan (ESOP) that have not been released, committed to be released, or allocated to participant accounts. |
<PAGE>
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, 2004 and December 31, 2003 | 2 |
| Consolidated Statements of Income for the Quarters and Nine Months Ended September 30, 2004 and 2003 | 3 |
| Consolidated Statements of Comprehensive Income (Loss) for the Quarters and Nine Months Ended September 30, 2004 and 2003 | 4 |
| Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended September 30, 2004 and 2003 | 5 |
| Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003 | 7 |
| Selected Notes to Consolidated Financial Statements | 9 |
| Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operation | |
| Special Note Regarding Forward-Looking Statements | 13 |
| General | 13 |
| Comparison of Financial Condition at September 30, 2004 and December 31, 2003 | 13 |
| Comparison of Results of Operations for the Quarters and Nine Months Ended September 30, 2004 and 2003 | 14 |
| Asset Quality | 20 |
| Liquidity and Capital Resources | 21 |
| Financial Instruments with Off-Balance-Sheet Risk | 22 |
| Capital Requirements | 23 |
| Item 3 - Quantitative and Qualitative Disclosures About Market Risk | |
| Market Risk and Asset/Liability Management | 24 |
| Sensitivity Analysis | 24 |
| Item 4 - Controls and Procedures | 28 |
| PART II - OTHER INFORMATION | |
| Item 1 - Legal Proceedings | 29 |
| Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds | 29 |
| Item 3 - Defaults upon Senior Securities | 29 |
| Item 4 - Submission of Matters to a Vote of Stockholders | 29 |
| Item 5 - Other Information | 29 |
| Item 6 - Exhibits | 30 |
| SIGNATURES | 31 |
1
<PAGE>
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except shares)
September 30, 2004 (Unaudited) and December 31, 2003
| (Unaudited) | ||||||||||||
| September 30 | December 31 | |||||||||||
| ASSETS | 2004 |
2003 |
||||||||||
| Cash and due from banks | $ | 65,800 | $ | 77,298 | ||||||||
| Securities available for sale, cost $582,288 and $670,033, respectively | ||||||||||||
| Encumbered | 33,672 | 55,228 | ||||||||||
| Unencumbered | 549,524 |
619,714 |
||||||||||
| 583,196 | 674,942 | |||||||||||
| Securities held to maturity, fair value $51,239 and $28,402, respectively | ||||||||||||
| Encumbered | -- | 216 | ||||||||||
| Unencumbered | 49,554 |
27,016 |
||||||||||
| 49,554 | 27,232 | |||||||||||
| Federal Home Loan Bank stock | 35,698 | 34,693 | ||||||||||
| Loans receivable: | ||||||||||||
| Held for sale, fair value $8,453and $16,199 | 8,303 | 15,912 | ||||||||||
| Held for portfolio | 1,976,100 | 1,711,013 | ||||||||||
| Allowance for loan losses | (29,407 |
) | (26,060 |
) | ||||||||
| 1,954,996 | 1,700,865 | |||||||||||
| Accrued interest receivable | 14,930 | 13,410 | ||||||||||
| Real estate owned, held for sale, net | 2,923 | 2,967 | ||||||||||
| Property and equipment, net | 35,351 | 22,818 | ||||||||||
| Goodwill and other intangibles, net | 36,405 | 36,513 | ||||||||||
| Deferred income tax asset, net | 5,266 | 1,941 | ||||||||||
| Bank-owned life insurance | 34,957 | 33,669 | ||||||||||
| Other assets | 11,086 |
8,965 |
||||||||||
| $ | 2,830,162 | $ | 2,635,313 | |||||||||
| LIABILITIES | ||||||||||||
| Deposits: | ||||||||||||
| Non-interest-bearing | $ | 229,624 | $ | 205,656 | ||||||||
| Interest-bearing | 1,681,548 |
1,465,284 |
||||||||||
| 1,911,172 | 1,670,940 | |||||||||||
| Advances from Federal Home Loan Bank | 530,958 | 612,552 | ||||||||||
| Junior subordinated debentures | 72,168 | 56,703 | ||||||||||
| Other borrowings | 79,080 | 69,444 | ||||||||||
| Accrued expenses and other liabilities | 21,288 | 18,444 | ||||||||||
| Deferred compensation | 4,931 | 4,252 | ||||||||||
| Income taxes payable | 50 |
178 |
||||||||||
| 2,619,647 | 2,432,513 | |||||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||||||
| STOCKHOLDERS' EQUITY | ||||||||||||
| Common stock - $0.01 par value per share, 27,500,000 shares authorized, 13,201,419 shares issued: | ||||||||||||
| 11,652,816 shares and 11,473,311 shares outstanding at September 30, 2004 and December 31, 2003, respectively. |
125,672 |
123,375 |
||||||||||
| Retained earnings | 88,796 | 80,286 | ||||||||||
| Accumulated other comprehensive income (loss): | ||||||||||||
| Unrealized gain (loss) on securities available for sale | 183 | 3,191 | ||||||||||
| Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust: |
(3,628 |
) |
(3,589 |
) | ||||||||
| 438,985 and 434,299 restricted shares outstanding at September 30, 2004 and December 31, 2003, respectively, at cost |
||||||||||||
| Carrying value of shares held in trust for stock related compensation plans | (4,015 | ) | (3,554 | ) | ||||||||
| Liability for common stock issued to deferred, stock related, compensation plans |
3,507 |
3,091 |
||||||||||
| (508 |
) | (463 |
) | |||||||||
| 210,515 |
202,800 |
|||||||||||
| $ 2,830,162 | $ 2,635,313 |
See notes to consolidated financial statements
2
<PAGE>
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (in thousands except for per share amounts)
For the Quarters and Nine Months Ended September 30, 2004 and 2003
| Quarters Ended September 30 |
Nine Months Ended September 30 |
| 2004 |
2003 |
2004 |
2003 |
|||||||||
| INTEREST INCOME: | ||||||||||||
| Loans receivable | $ | 33,051 | $ | 29,260 | $ | 92,368 | $ | 87,500 | ||||
| Mortgage-backed securities | 4,155 | 2,227 | 13,076 | 8,462 | ||||||||
| Securities and cash equivalents | 3,194 |
3,035 |
9,415 |
8,690 |
||||||||
| 40,400 | 34,522 | 114,859 | 104,652 | |||||||||
| INTEREST EXPENSE: | ||||||||||||
| Deposits | 9,074 | 8,889 | 25,342 | 26,611 | ||||||||
| Federal Home Loan Bank advances | 5,058 | 5,339 | 15,145 | 16,786 | ||||||||
| Junior subordinated debentures/Trust preferred securities | 911 | 446 | 2,446 | 1,559 | ||||||||
| Other borrowings | 257 |
188 |
717 |
563 |
||||||||
| 15,300 |
14,862 |
43,650 |
45,519 |
|||||||||
| Net interest income before provision for loan losses | 25,100 |
19,660 |
71,209 |
59,133 |
||||||||
| PROVISION FOR LOAN LOSSES | 1,444 |
1,400 |
4,344 |
5,900 |
||||||||
| Net interest income | 23,656 | 18,260 | 66,865 | 53,233 | ||||||||
| OTHER OPERATING INCOME: | ||||||||||||
| Deposit fees and other service charges | 2,148 | 1,895 | 6,048 | 5,392 | ||||||||
| Mortgage banking operations | 1,383 | 2,924 | 4,087 | 8,230 | ||||||||
| Loan servicing fees | 711 | 241 | 1,324 | 688 | ||||||||
| Gain on sale of securities | 67 | 15 | 140 | 18 | ||||||||
| Miscellaneous | 441 |
464 |
1,092 |
1,412 |
||||||||
| Total other operating income | 4,750 | 5,539 | 12,691 | 15,740 | ||||||||
| OTHER OPERATING EXPENSES: | ||||||||||||
| Salary and employee benefits | 13,719 | 12,495 | 38,846 | 35,295 | ||||||||
| Less capitalized loan origination costs | (1,806 | ) | (2,028 | ) | (5,184 | ) | (5,578 | ) | ||||
| Occupancy and equipment | 2,791 | 2,447 | 7,923 | 7,168 | ||||||||
| Information/computer data services | 1,107 | 930 | 3,149 | 2,636 | ||||||||
| Professional services | 746 | 626 | 2,451 | 1,900 | ||||||||
| Advertising | 1,108 | 918 | 3,557 | 2,585 | ||||||||
| Miscellaneous | 3,257 |
2,480 |
8,544 |
8,194 |
||||||||
| Total other operating expenses | 20,922 |
17,868 |
59,286 |
52,200 |
||||||||
| Income before provision for income taxes | 7,484 | 5,931 | 20,270 | 16,773 | ||||||||
| PROVISION FOR INCOME TAXES | 2,322 |
1,778 |
6,197 |
5,070 |
||||||||
| NET INCOME | $ | 5,162 | $ | 4,153 | $ | 14,073 | $ | 11,703 | ||||
| Earnings per common share (see Note 5): | ||||||||||||
| Basic | $ | 0.46 | $ | 0.38 | $ | 1.27 | $ | 1.08 | ||||
| Diluted | $ | 0.44 | $ | 0.37 | $ | 1.20 | $ | 1.05 | ||||
| Cumulative dividends declared per common share: | $ | 0.16 | $ | 0.15 | $ | 0.48 | $ | .45 | ||||
See notes to consolidated financial statements
3
<PAGE>
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) (in thousands except for per share amounts)
For the Quarters and Nine Months Ended September 30, 2004 and 2003
| Quarters Ended September 30 |
Nine Months Ended September 30 |
|||
| 2004 |
2003 |
2004 |
2003 |
|
| NET INCOME | $ 5,162 | $ 4,153 | $ 14,073 | $ 11,703 |
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES: | ||||
| Unrealized holding gain (loss) during the period, net of deferred income tax (benefit) of $2,741, $449, $(1,351) and $371, respectively. |
4,688 |
836 |
(2,917) |
690 |
| Less adjustment for (gains)/losses included in net income, net of income tax (benefit) of $23, $5, $49 and $6, respectively |
(44) |
(10) |
(91) |
(12) |
| Other comprehensive income (loss) | 4,644 |
826 |
(3,008) |
678 |
| COMPREHENSIVE INCOME | $ 9,806 | $ 4,979 | $ 11,065 | $ 12,381 |
See notes to consolidated financial statements
4
<PAGE>
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited) (In thousands, except per share amounts)
For the Nine Months Ended September 30, 2004 and 2003
| Common Stock and Additional Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Unearned Restricted ESOP Shares |
Value, Net of Liability, Of Shares Held in Trust for Stock-Related Compensation Plans |
Stockholders' Equity |
|||||||||||||
| BALANCE, January 1, 2003 | $ | 120,554 | $ | 70,813 | $ | 3,488 | $ | (4,262 | ) | $ | (216 | ) | $ | 190,377 | ||||
| Net income | 11,703 | 11,703 | ||||||||||||||||
| Change in valuation of securities available for sale, net of income taxes |
678 | 678 | ||||||||||||||||
| Cash dividend on common stock ($.45/share cumulative) |
(5,105 | ) | (5,105 | ) | ||||||||||||||
| Proceeds from reissued common stock for exercise of stock options |
437 | 437 | ||||||||||||||||
| Adjust prior year release of earned ESOP shares |
(3 | ) | (2 | ) | (5 | ) | ||||||||||||
| Release of stock for Management Recognition Plan (MRP) grant |
443 | (443 | ) | -- | ||||||||||||||
| Amortization of compensation related to MRP |
100 | 100 | ||||||||||||||||
| Forfeiture or net change in the number and/or carrying value of shares held in trust for compensation plans |
(48 |
) |
48 |
-- |
||||||||||||||
| BALANCE, September 30, 2003 | $ | 121,383 | $ | 77,411 | $ | 4,166 | $ | (4,264 | ) | $ | (511 | ) | $ | 198,185 | ||||
| BALANCE, January 1, 2004 | $ | 123,375 | $ | 80,286 | $ | 3,191 | $ | (3,589 | ) | $ | (463 | ) | $ | $202,800 | ||||
| Net income | 14,073 | 14,073 | ||||||||||||||||
| Change in valuation of securities available for sale, net of income taxes |
(3,008 | ) | (3,008 | ) | ||||||||||||||
| Cash dividend on common stock ($.48/share cumulative) |
(5,563 | ) | (5,563 | ) | ||||||||||||||
| Purchase and/or retirement of common stock |
(556 | ) | (556 | ) | ||||||||||||||
| Proceeds from issuance of common stock for exercise of stock options |
2,749 | 2,749 | ||||||||||||||||
| Net issuance of stock through employees' stock plans, including tax benefit |
104 | (39 | ) | (159 | ) | (94 | ) | |||||||||||
| Amortization of compensation related to MRP |
114 |
114 |
||||||||||||||||
| BALANCE, September 30, 2004 | $ | 125,672 | $ | 88,796 | $ | 183 | $ | (3,628 | ) | $ | (508 | ) | $ | 210,515 |
See notes to consolidated financial statements
5
<PAGE>
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited) (continued) (in thousands)
For the Nine Months Ended September 30, 2004 and 2003
| 2004 |
2003 |
|||||||||||
| 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 COMMON STOCK RETIRED: | ||||||||||||
| Number of shares, beginning of period | (1,728 | ) | (1,894 | ) | ||||||||
| Purchase and retirement of common stock | (20 | ) | (9 | ) | ||||||||
| Issuance of common stock to exercised stock options and /or employee stock plans | 200 |
117 |
||||||||||
| Number of shares retired, end of period | (1,548 |
) | (1,786 |
) | ||||||||
| SHARES ISSUED AND OUTSTANDING, END OF PERIOD | 11,653 | 11,415 | ||||||||||
| UNEARNED, RESTRICTED ESOP SHARES: | ||||||||||||
| Number of shares, beginning of period | (434 | ) | (516 | ) | ||||||||
| Adjustment of earned shares | (5 |
) | -- |
|||||||||
| Number of shares, end of period | (439 | ) | (516 | ) |
See notes to consolidated financial statements
6
<PAGE>
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
For the Nine Months Ended September 30, 2004 and 2003
| 2004 |
2003 |
|||||||||||
| OPERATING ACTIVITIES: | ||||||||||||
| Net income | $ | 14,073 | $ | 11,703 | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 3,259 | 5,304 | ||||||||||
| Gain on sale of securities | (140 | ) | (18 | ) | ||||||||
| Increase in cash surrender value of bank-owned life insurance | (1,288 | ) | (1,409 | ) | ||||||||
| Gain on sale of loans, excluding capitalized servicing rights | (4,023 | ) | (6,872 | ) | ||||||||
| Gain on disposal of real estate held for sale and property and equipment | (145 | ) | (170 | ) | ||||||||
| Provision for losses on loans and real estate held for sale | 4,525 | 6,405 | ||||||||||
| Federal Home Loan Bank stock dividend | (1,005 | ) | (1,431 | ) | ||||||||
| Net change in: | ||||||||||||
| Loans held for sale | 7,609 | 15,773 | ||||||||||
| Other assets | (4,156 | ) | (5,163 | ) | ||||||||
| Other liabilities | 3,758 |
(4,759 |
) | |||||||||
| Net cash provided (used) by operating activities | 22,467 |
19,363 |
||||||||||
| INVESTING ACTIVITIES: | ||||||||||||
| Purchases of securities | (165,885 | ) | (600,642 | ) | ||||||||
| Principal repayments and maturities of securities | 188,435 | 382,747 |