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Loans Receivable And The Allowance For Loan Losses

3 Months Ended

Jun. 30, 2011

Loans Receivable And The Allowance For Loan Losses

Loans Receivable And The Allowance For Loan Losses

Note 7: LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES

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

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

Some of the Company’s loans are reported as troubled debt restructurings (TDRs). Loans are reported as restructured when the Bank grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as the Bank will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement. Loans identified as TDRs are accounted for in accordance with the Banks’ impaired loan accounting policies.

Loans receivable, including loans held for sale, at June 30, 2011, December 31, 2010 and June 30, 2010 are summarized as follows (dollars in thousands):

	June 30, 2011						December 31, 2010						June 30, 2010
	Amount			Percent of Total			Amount			Percent of Total			Amount			Percent of Total

Commercial real estate
Owner-occupied	$	507,751			15.3	%	$	515,093			15.1	%	$	503,796			13.9	%
Investment properties		582,569			17.6			550,610			16.2			553,689			15.3
Multifamily real estate		147,951			4.5			134,634			4.0			149,980			4.1
Commercial construction		35,790			1.1			62,707			1.8			84,379			2.3
Multifamily construction		20,552			0.6			27,394			0.8			56,573			1.6
One- to four-family construction		140,669			4.4			153,383			4.5			182,928			5.0
Land and land development
Residential		128,920			3.9			167,764			4.9			228,156			6.3
Commercial		29,347			0.9			32,386			1.0			29,410			0.8
Commercial business		566,243			17.1			585,457			17.2			635,130			17.5
Agric Agricultural business, including secured by farmland		208,485			6.3			204,968			6.0			208,815			5.8
One- to four-family real estate		658,216			19.9			682,924			20.1			702,420			19.3
Consumer		97,396			2.9			99,761			2.9			103,065			2.8
Consumer secured by one- to four-family		182,778			5.5			186,036			5.5			193,163			5.3

Total loans outstanding		3,306,667			100.0	%		3,403,117			100.0	%		3,631,504			100.0	%

Less allowance for loan losses		(92,000	)					(97,401	)					(95,508	)

Net loans	$	3,214,667					$	3,305,716					$	3,535,996

Loan amounts are net of unearned, unamortized loan fees (and costs) of approximately $10 million, $11 million and $12 million at June 30, 2011, December 31, 2010 and June 30, 2010, respectively.

The Company’s loans by geographic concentration at June 30, 2011 were as follows (dollars in thousands):

		Washington			Oregon			Idaho			Other			Total
Commercial real estate
Owner-occupied	$	383,576		$	69,389		$	51,458		$	3,328		$	507,751
Investment properties		436,279			99,304			41,016			5,970			582,569
Multifamily real estate		120,552			17,187			9,749			463			147,951
Commercial construction		23,267			822			11,701			--			35,790
Multifamily construction		12,514			8,038			--			--			20,552
One- to four-family construction		71,494			66,430			2,745			--			140,669
Land and land development
Residential		67,575			50,719			10,626			--			128,920
Commercial		25,286			949			3,112			--			29,347
Commercial business		382,517			109,068			61,155			13,503			566,243
Agric Agricultural business, including secured by farmland		110,836			40,842			56,784			23			208,485
One- to four-family real estate		416,713			211,703			27,488			2,312			658,216
Consumer		69,094			22,734			5,568			--			97,396
Consumer secured by one- to four- family		125,771			44,070			12,439			498			182,778

Total loans	$	2,245,474		$	741,255		$	293,841		$	26,097		$	3,306,667

Percent of total loans		67.9	%		22.4	%		8.9	%		0.8	%		100.0	%

The geographic concentrations of Banner’s land and land development loans by state at June 30, 2011 were as follows (dollars in thousands):

	Washington		Oregon		Idaho		Total
Residential:
Acquisition and development	$	32,439	$	28,568	$	3,823	$	64,830
Improved land and lots		22,026		16,592		923		39,541
Unimproved land		13,110		5,559		5,880		24,549

Total residential land and development	$	67,575	$	50,719	$	10,626	$	128,920
Commercial and industrial:
Acquisition and development	$	3,873	$	--	$	510	$	4,383
Improved land and lots		8,865		--		200		9,065
Unimproved land		12,548		949		2,402		15,899

Total commercial land development	$	25,286	$	949	$	3,112	$	29,347

The Company originates both adjustable- and fixed-rate loans. The maturity and repricing composition of those loans, less undisbursed amounts and deferred fees, at June 30, 2011, December 31, 2010 and June 30, 2010 were as follows (in thousands):

	June 30 2011		December 31 2010		June 30 2010
Fixed-rate (term to maturity):
Due in one year or less	$	191,252	$	214,625	$	187,864
Due after one year through three years		245,203		232,412		216,061
Due after three years through five years		189,938		173,533		214,659
Due after five years through ten years		143,647		119,108		124,755
Due after ten years		512,639		530,548		551,897

Total fixed-rate loans		1,282,679		1,270,226		1,295,236

Adjustable-rate (term to rate adjustment):
Due in one year or less		1,221,511		1,311,679		1,452,687
Due after one year through three years		435,987		428,910		457,819
Due after three years through five years		331,136		356,241		382,801
Due after five years through ten years		35,354		36,061		41,760
Due after ten years		--		--		1,201

Total adjustable-rate loans		2,023,988		2,132,891		2,336,268

Total loans	$	3,306,667	$	3,403,117	$	3,631,504

The adjustable-rate loans have interest rate adjustment limitations and are generally indexed to various prime (The Wall Street Journal) or LIBOR rates, One to Five Year Constant Maturity Treasury Indices or FHLB borrowing rates. Future market factors may affect the correlation of the interest rate adjustment with the rates the Banks pay on the short-term deposits that primarily have been utilized to fund these loans.

Impaired Loans and the Allowance for Loan Losses. A loan is considered impaired when, based on current information and circumstances, the Company determines it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Impaired loans are comprised of loans on nonaccrual, TDRs and loans that are 90 days or more past due, but are still on accrual.

The amount of impaired loans and the related allocated reserve for loan losses as of June 30, 2011 and December 31, 2010 were as follows (in thousands):

	June 30, 2011				December 31, 2010
	Loan Amount		Allocated Reserves		Loan Amount		Allocated Reserves
Impaired loans:
Nonaccrual loans
Commercial real estate	$	22,421	$	1,393	$	24,727	$	2,151
Multifamily		1,559		332		1,889		139
Construction and land		53,529		6,657		75,734		6,541
Commercial business		15,264		2,011		21,100		5,332
Agricultural business, including secured by farmland		1,343		35		5,853		56
One- to four-family residential		15,435		319		16,869		23
Consumer		4,400		1,800		2,332		84

To Total nonaccrual loans		113,951		12,547		148,504		14,326

Past due and still accruing		1,294		40		2,985		7
TDRs		55,652		2,470		60,115		4,054

Total impaired loans	$	170,897	$	15,057	$	211,604	$	18,387

As of June 30, 2011, the Company had additional commitments to advance funds up to an amount of $568,000 related to impaired loans.

The following tables provide additional information on impaired loans, with and without specific allowance reserves, at their recorded investment amount as of June 30, 2011 and December 31, 2010. Recorded investment includes the unpaid principal balance or the carrying amount of loans less charge-offs and net deferred loan fees (in thousands):

	June 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance

Without a specific allowance reserve (1)
Commercial real estate	$	3,905	$	3,905	$	409
Multifamily real estate		2,829		2,829		986
Construction and land		9,878		10,464		1,944
Commercial business		4,912		5,112		1,079
Agricultural business, including secured by farmland		1,055		1,480		72
One- to four-family residential		28,790		28,932		142
Consumer		2,262		2,470		93

		53,631		55,192		4,725

With a specific allowance reserve (2)
Commercial real estate		24,061		27,064		1,350
Multifamily real estate		728		948		--
Construction and land		61,315		88,655		5,769
Commercial business		10,954		15,854		1,016
Agricultural business, including secured by farmland		832		1,052		--
One- to four-family residential		16,126		16,852		413
Consumer		3,250		3,250		1,784

		117,266		153,675		10,332

Total impaired loans
Commercial real estate	$	27,966	$	30,969	$	1,759
Multifamily real estate		3,557		3,777		986
Construction and land		71,193		99,119		7,713
Commercial business		15,866		20,966		2,095
Agricultural business, including secured by farmland		1,887		2,532		72
One- to four-family residential		44,916		45,784		555
Consumer		5,512		5,720		1,877

Total	$	170,897	$	208,867	$	15,057

	December 31, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance

Without a specific allowance reserve (1)
Commercial real estate	$	4,870	$	5,295	$	594
Multifamily real estate		339		339		68
Construction and land		9,758		10,237		1,955
Commercial business		7,558		7,576		1,044
Agricultural business, including secured by farmland		475		900		19
One- to four-family residential		31,094		31,121		122
Consumer		252		252		4

		54,346		55,720		3,806

With a specific allowance reserve (2)
Commercial real estate		26,384		28,048		2,320
Multifamily real estate		1,471		1,471		55
Construction and land		88,065		117,152		7,275
Commercial business		14,134		19,224		4,358
Agricultural business, including secured by farmland		5,457		8,934		37
One- to four-family residential		20,736		21,791		536
Consumer		1,011		1,011		--

		157,258		197,631		14,581

Total impaired loans
Commercial real estate	$	31,254	$	33,343	$	2,914
Multifamily real estate		1,810		1,810		123
Construction and land		97,823		127,389		9,230
Commercial business		21,692		26,800		5,402
Agricultural business, including secured by farmland		5,932		9,834		56
One- to four-family residential		51,830		52,912		658
Consumer		1,263		1,263		4

Total	$	211,604	$	253,351	$	18,387

(1)	Loans without a specific allowance reserve have not been individually evaluated for impairment, but have been included in pools of homogeneous loans for evaluation of related allowance reserves.

(2)

Loans with a specific allowance reserve have been individually evaluated for impairment using either a discounted cash flow analysis or, for collateral dependent loans, current appraisals to establish realizable value. These analyses may identify a specific impairment amount needed or may conclude that no reserve is needed. Any specific impairment that is identified is included in the category’s Related Allowance column.

The following table provides additional information on the average recorded investment and interest income recognized on impaired loans with and without specific allowance reserves for the three and six-month periods ended June 30, 2011 and 2010 (in thousands):
	Three Months Ended June 30				Three Months Ended June 30				Six Months Ended June 30				Six Months Ended June 30
	2011				2010				2011				2010
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Without a specific allowance reserve:
Commercial real estate	$	4,022	$	49	$	5,629	$	56	$	4,070	$	102	$	5,646	$	138
Multifamily		2,833		38		366		10		2,838		78		371		20
Construction and land		9,912		117		20,531		244		10,178		231		20,777		497
Commercial and industrial		5,008		53		9,334		68		5,212		121		9,757		141
Agricultural business, including secured by farmland		1,059		14		468		--		1,177		20		493		--
One- to four-family residential		28,858		306		31,071		368		28,938		643		31,129		744
Consumer		2,410		22		2,747		13		2,449		43		2,766		30
		54,102		599		70,146		759		54,862		1,238		70,939		1,570

With a specific allowance reserve:
Commercial real estate		25,220		108		5,776		43		25,634		257		5,812		114
Multifamily		875		5		--		--		915		10		--		--
Construction and land		76,648		243		136,207		262		82,251		555		139,931		577
Commercial and industrial		11,650		3		17,098		77		12,283		64		18,080		149
Agricultural business, including secured by farmland		832		--		7,782		75		832		--		8,139		154
One- to four-family residential		16,243		146		16,440		51		16,335		296		16,453		112
Consumer		3,242		27		720		2		3,247		47		720		4
		134,710		532		184,023		510		141,497		1,229		189,135		1,110

Total impaired loans:
Commercial real estate	$	29,242	$	157	$	11,405	$	99	$	29,704	$	359	$	11,458	$	252
Multifamily		3,708		43		366		10		3,753		88		371		20
Construction and land		86,560		360		156,738		506		92,429		786		160,708		1,074
Commercial and industrial		16,658		56		26,432		145		17,495		185		27,837		290
Agricultural business, including secured by farmland		1,891		14		8,250		75		2,009		20		8,632		154
One- to four-family residential		45,101		452		47,511		419		45,273		939		47,582		856
Consumer		5,652		49		3,467		15		5,696		90		3,486		34

Total	$	188,812	$	1,131	$	254,169	$	1,269	$	196,359	$	2,467	$	260,074	$	2,680

Credit Quality Indicators: To appropriately and effectively manage the ongoing credit quality of the Company’s loan portfolio, management has implemented a risk-rating or loan grading system for its loans. The system is a tool to evaluate portfolio asset quality throughout each applicable loan’s life as an asset of the Company. Generally, loans and leases are risk rated on an aggregate borrower/relationship basis with individual loans sharing similar ratings. There are some instances when specific situations relating to individual loans will provide the basis for different risk ratings within the aggregate relationship. Loans are graded on a scale of 1 to 9. For a description of the general characteristics of these categories, please refer to Note 6 of the Notes to the Consolidated Financial Statements in our 2010 Form 10-K.

The following table shows Banner’s portfolio of risk-rated loans and non-risk-rated loans by grade or other characteristics as of June 30, 2011 and December 31, 2010 (in thousands):

	June 30, 2011
	Commercial Real Estate			Multifamily	Construction and Land		Commercial Business			Agricultural Business	One- to Four- Family Residential		Consumer		Total Loans

Risk-rated loans:
Pass (Risk Ratings 1-5) (1)	$	980,495	$	129,611	$	249,561	$	486,679	$	201,518	$	619,158	$	272,289	$	2,939,311
Special mention		28,263		15,301		1,725		33,704		2,152		1,287		395		82,827
Substandard		81,562		3,039		103,992		45,296		4,815		37,771		7,490		283,965
Doubtful		--		--		--		564		--		--		--		564
Loss		--		--		--		--		--		--		--		--

Total loans	$	1,090,320	$	147,951	$	355,278	$	566,243	$	208,485	$	658,216	$	280,174	$	3,306,667

Performing loans	$	1,067,899	$	146,391	$	301,749	$	550,978	$	206,598	$	642,159	$	275,648	$	3,191,422
Non-performing loans		22,421		1,560		53,529		15,265		1,887		16,057		4,526		115,245

Total loans	$	1,090,320	$	147,951	$	355,278	$	566,243	$	208,485	$	658,216	$	280,174	$	3,306,667

		December 31, 2010
	Commercial Real Estate			Multifamily	Construction and Land		Commercial Business			Agricultural Business	One- to Four- Family Residential		Consumer		Total Loans

Risk-rated loans:
Pass (Risk Ratings 1-5) (1)	$	950,889	$	116,078	$	281,871	$	514,204	$	195,123	$	645,452	$	280,511	$	2,984,128
Special mention		31,799		16,302		16,168		17,674		1,327		1,154		248		84,672
Substandard		83,015		2,254		145,595		52,713		8,352		36,318		5,038		333,285
Doubtful		--		--		--		866		166		--		--		1,032
Loss		--		--		--		--		--		--		--		--

Total loans	$	1,065,703	$	134,634	$	443,634	$	585,457	$	204,968	$	682,924	$	285,797	$	3,403,117

Performing loans	$	1,040,976	$	132,745	$	367,900	$	564,357	$	199,115	$	663,100	$	283,435	$	3,251,628
Non-performing loans		24,727		1,889		75,734		21,100		5,853		19,824		2,362		151,489

Total loans	$	1,065,703	$	134,634	$	443,634	$	585,457	$	204,968	$	682,924	$	285,797	$	3,403,117

(1)

The Pass category includes some performing loans that are part of homogenous pools which are not individually risk-rated. This includes all consumer loans, all one- to four-family residential loans and, in the commercial business category, and $38 million of scored business loans. As loans in these pools become non-performing, they are individually risk-rated.

The following table provides additional detail on delinquency aging of Banner’s loans, including delinquent loans on accrual and on non-accrual status as of June 30, 2011 and December 31, 2010 (in thousands):

	June 30, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Loans 90 Days or More Past Due and Accruing

Commercial real estate	$	3,912	$	1,905	$	18,216	$	24,033	$	1,066,287	$	1,090,320	$	--
Multifamily real estate		253		--		1,244		1,497		146,454		147,951		--
Construction and land		317		2,588		47,787		50,692		304,586		355,278		--
Commercial business		1,510		617		10,019		12,146		554,097		566,243		1
Agricultural business, including secured by farmland		--		--		1,742		1,742		206,743		208,485		545
One-to four-family residential		522		3,354		11,763		15,639		642,577		658,216		622
Consumer		1,191		153		1,770		3,114		277,060		280,174		126

Total	$	7,705	$	8,617	$	92,541	$	108,863	$	3,197,804	$	3,306,667	$	1,294


	December 31, 2010
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Loans 90 Days or More Past Due and Accruing

Commercial real estate	$	7,847	$	8,753	$	20,584	$	37,184	$	1,028,519	$	1,065,703	$	--
Multifamily real estate		--		--		1,329		1,329		133,305		134,634		--
Construction and land		6,148		1,846		54,460		62,454		381,180		443,634		--
Commercial business		3,939		824		14,159		18,922		566,535		585,457		--
Agricultural business, including Secured by farmland		514		3,684		3,499		7,697		197,271		204,968		--
One-to four-family residential		951		6,119		17,106		24,176		658,748		682,924		2,955
Consumer		1,535		1,006		1,554		4,095		281,702		285,797		30

Total	$	20,934	$	22,232	$	112,691	$	155,857	$	3,247,260	$	3,403,117	$	2,985

The following tables provide additional information on the allowance for loan losses and loan balances individually and collectively evaluated for impairment at or for the three and six months ended June 30, 2011 and 2010 (in thousands):

	For the Three Months Ended June 30, 2011
	Commercial Real Estate and Multifamily			Construction and Land			Commercial / Agricultural Business			One- to Four- Family Residential			Consumer			Commitments and Unallocated(1)		Total
Allowance for loan losses:
Beginning balance	$	17,926		$	30,346		$	23,495		$	8,149		$	1,452		$	16,264	$	97,632
Provision for loan losses		2,665			991			1,904			1,970			221			249		8,000
Recoveries		15			716			81			29			84			--		925
Charge-offs		(2,115	)		(6,077	)		(4,159	)		(1,894	)		(312	)		--		(14,557	)

Ending balance	$	18,491		$	25,976		$	21,321		$	8,254		$	1,445		$	16,513	$	92,000

	For the Six Months Ended June 30, 2011
	Commercial Real Estate and Multifamily			Construction and Land			Commercial / Agricultural Business			One- to Four- Family Residential			Consumer			Commitments and Unallocated(1)		Total
Allowance for loan losses:
Beginning balance	$	15,742		$	33,121		$	26,391		$	5,829		$	1,794		$	14,524	$	97,401
Provision for loan losses		6,265			8,718			1,418			6,447			163			1,989		25,000
Recoveries		15			751			162			81			162			--		1,171
Charge-offs		(3,531	)		(16,614	)		(6,650	)		(4,103	)		(674	)		--		(31,572	)

Ending balance	$	18,491		$	25,976		$	21,321		$	8,254		$	1,445		$	16,513	$	92,000

	At June 30, 2011

Allowance individually evaluated for impairment	$	1,350	$	5,769	$	1,016	$	413	$	1,784		$	--	$	10,332
Allowance collectively evaluated for impairment		17,141		20,207		20,305		7,841		(339	)		16,513		81,668

Total allowance for loan losses	$	18,491	$	25,976	$	21,321	$	8,254	$	1,445		$	16,513	$	92,000

(1)The portion of the allowance allocated to commitments was $1.0 million and the portion that is unallocated was $15.5 million.

	At June 30, 2011

Loan balances:
Loans individually evaluated for impairment	$	24,789	$	61,315	$	11,786	$	16,126	$	3,250	n/a	$	117,266
Loans collectively evaluated for impairment		1,213,482		293,963		762,942		642,090		276,924	n/a		3,189,401

Total loans	$	1,238,271	$	355,278	$	774,728	$	658,216	$	280,174	n/a	$	3,306,667

	For the Three Months Ended June 30, 2010
	Commercial Real Estate and Multifamily			Construction and Land			Commercial / Agricultural Business			One- to Four- Family Residential			Consumer			Commitments and Unallocated(1)			Total
Allowance for loan losses:
Beginning balance	$	10,351		$	44,078		$	25,479		$	3,093		$	1,898		$	10,834		$	95,733
Provision for loan losses		(945	)		13,543			943			2,494			302			(337	)		16,000
Recoveries		--			235			595			71			69			--			970
Charge-offs		--			(12,255	)		(2,433	)		(2,128	)		(379	)		--			(17,195	)

Ending balance	$	9,406		$	45,601		$	24,584		$	3,530		$	1,890		$	10,497		$	95,508

	For the Six Months Ended June 30, 2010
	Commercial Real Estate and Multifamily			Construction and Land			Commercial / Agricultural Business			One- to Four- Family Residential			Consumer			Commitments and Unallocated(1)			Total
Allowance for loan losses:
Beginning balance	$	8,368		$	45,209		$	22,973		$	2,912		$	1,809		$	13,998		$	95,269
Provision for loan losses		1,130			19,749			6,945			4,790			887			(3,501	)		30,000
Recoveries		--			622			1,885			71			128			--			2,706
Charge-offs		(92	)		(19,979	)		(7,219	)		(4,243	)		(934	)		--			(32,467	)

Ending balance	$	9,406		$	45,601		$	24,584		$	3,530		$	1,890		$	10,497		$	95,508

	At June 30, 2010

Allowance individually evaluated for impairment	$	156	$	11,533	$	4,018	$	890	$	219	$	--	$	16,816
Allowance collectively evaluated for impairment		9,250		34,068		20,566		2,640		1,671		10,497		78,692

Total allowance for loan losses	$	9,406	$	45,601	$	24,584	$	3,530	$	1,890	$	10,497	$	95,508

(1)The portion of the allowance allocated to commitments was $900,000 and the portion that is unallocated was $9.6 million.

	At June 30, 2010

Loan balances:
Loans individually evaluated for impairment	$	5,750	$	108,520	$	21,676	$	15,140	$	1,991	n/a	$	153,077
Loans collectively evaluated for impairment		1,201,715		472,926		822,269		687,280		294,237	n/a		3,478,427

Total loans	$	1,207,465	$	581,446	$	843,945	$	702,420	$	296,228	n/a	$	3,631,504