The
information in this prospectus is not complete and may be changed. The selling
securityholders may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state or jurisdiction where the offer or
sale is not permitted.
Subject
to Completion
Preliminary
Prospectus dated _____________ __, 2009
PROSPECTUS
Banner
Corporation
124,000
Shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A,
Liquidation
Preference Amount $1,000 Per Share
(or
Depositary Shares Evidencing Fractional Interests in Such Shares)
1,707,989
Shares of Common Stock and Warrant to Purchase Such Shares
This
prospectus relates to (i)124,000 shares of our Fixed Rate Cumulative Perpetual
Preferred Stock, Series A, liquidation preference amount $1,000 per share, or,
in the event such shares are deposited with a depositary, as described in this
prospectus, depositary shares evidencing fractional interests in such shares,
(ii) a warrant, or portions thereof, which expires on November 21, 2018, to
purchase 1,707,989 shares of our common stock at an exercise price of $10.89 per
share, subject to adjustment as described in this prospectus, and (iii) the
shares of our common stock which may be purchased upon exercise of the
warrant. The shares of the Series A Preferred Stock and the warrant
were issued by us on November 21, 2008 to the United States Department of the
Treasury as part of Treasury’s Troubled Asset Relief Program Capital Purchase
Program in a private placement exempt from the registration requirements of the
Securities Act of 1933.
The
selling securityholders who may sell or otherwise dispose of the securities
offered by this prospectus include Treasury and any other holders of the
securities covered by this prospectus to whom Treasury has transferred its
registration rights in accordance with the terms of the securities purchase
agreement between us and Treasury. The selling securityholders may
offer the securities from time to time directly or through underwriters,
broker-dealers or agents and in one or more public or private transactions and
at fixed prices, at prevailing market prices, at prices related to prevailing
market prices or at negotiated prices. If these securities are sold
through underwriters, broker-dealers or agents, the selling securityholders will
be responsible for underwriting discounts or commissions or agents’ commissions,
if any. We will not receive any proceeds from the sale of
securities by the selling securityholders.
Our
common stock is listed on the NASDAQ Global Select Market under the symbol
“BANR.” On August 20, 2009, the closing sale price of our
common stock on the NASDAQ Global Select Market was $3.28 per
share. Neither the Series A Preferred Stock nor the warrant is
currently listed on any established securities exchange or quotation system and
we do not intend to seek such a listing for these securities unless we are
requested to do so by Treasury.
The
securities offered by this prospectus are not savings accounts, deposits or
other obligations of any bank and are not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
Investing
in the securities offered by this prospectus involves risks. See
“Risk Factors” beginning on page 3 of this prospectus.
Neither
the Securities and Exchange Commission nor any state securities commission nor
any other regulatory body has approved or disapproved of these securities or
passed upon the adequacy or accuracy of this prospectus. Any representation to
the contrary is a criminal offense.
The date
of this prospectus is ___________ ,
2009.
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| WHERE YOU CAN FIND
MORE INFORMATION |
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| PROSPECTUS
SUMMARY |
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| RISK
FACTORS |
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| USE OF
PROCEEDS |
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| RATIOS OF EARNINGS
TO FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENT |
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| REGULATORY
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| DESCRIPTION OF
SERIES A PREFERRED STOCK |
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| DESCRIPTION OF
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| DESCRIPTION OF
WARRANT |
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| SELLING
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ABOUT
THIS PROSPECTUS
This
prospectus is part of a registration statement that we filed with the Securities
and Exchange Commission (the “SEC”) using a “shelf” registration, or continuous
offering, process. Under this process, the selling securityholders
may from time to time sell or otherwise dispose of the securities described in
this prospectus in one or more offerings.
You
should rely only on the information contained or incorporated by reference in
this prospectus and any supplement to this prospectus. We have not, and the
selling securityholders have not, authorized anyone to provide you with
information different from that contained in this prospectus. The selling
securityholders are offering to sell, and seeking offers to buy, our securities
only in jurisdictions where it is lawful to do so. The information in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or any sale of our securities. Neither the
delivery of this prospectus nor any sale made under this prospectus shall, under
any circumstances, create any implication that there has been no change in our
affairs since the date of this prospectus or that the information contained or
incorporated by reference in this prospectus is correct as of any time
subsequent to the date of such information.
All
references in this prospectus to “Banner,” “we,” “us,” “our” or similar
references mean Banner Corporation and its consolidated subsidiaries and all
references in this prospectus supplement to “Banner Corporation” mean Banner
Corporation excluding its subsidiaries, in each case unless otherwise expressly
stated or the context otherwise requires. When we refer to “Banner
Bank” and “Islanders Bank” in this prospectus, we mean our subsidiaries, Banner
Bank and Islanders Bank, respectively, each of which is a Washington
state-chartered commercial bank. We sometimes refer to Banner Bank
and Islanders Bank as, collectively, the “Banks” and, individually, a
“Bank.”
This
prospectus and the documents incorporated by reference may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements often include the
words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,”
“plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar
expressions or future or conditional verbs such as “may,” “will,” “should,”
“would” and “could.” These forward-looking statements are subject to known and
unknown risks, uncertainties and other factors that could cause the actual
results to differ materially from the forward-looking statements,
including:
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the
credit risks of lending activities, including changes in the level and
trend of loan delinquencies and write-offs, which may be affected by
deterioration in the housing and commercial real estate markets, may lead
to increased losses and nonperforming assets in our loan portfolio, and
may result in our allowance for loan losses not being adequate to cover
actual losses and require us to materially increase our reserves,
write-down assets, change our regulatory capital position or affect our
ability to borrow funds or maintain or increase deposits, which could
adversely affect our liquidity or
earnings;
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changes
in general economic conditions, either nationally or in our market
areas;
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changes
in the levels of general interest rates and the relative differences
between short and long-term interest rates, deposit interest rates, our
net interest margin and funding
sources;
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fluctuations
in the demand for loans and in real estate values in our market
areas;
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changes
as a result of regulatory exams and/or agreements with our
regulators, including the possibility that any such regulatory
authority may, among other things, require us to increase our reserve for
loan losses or to write-down assets or impose restrictions on the
operation of our business;
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fluctuations
in agricultural commodity prices, crop yields and weather
conditions;
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our
ability to control operating costs and expenses, including further FDIC
insurance premiums and possible shared-risk assessments for Washington and
Oregon public funds deposits;
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the
use of estimates in determining fair value of certain of our assets, which
estimates may prove to be incorrect or result in significant declines in
valuation;
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difficulties
in reducing risk associated with the loans on our balance
sheet;
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our
ability to implement our branch expansion
strategy;
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our
ability to successfully integrate any assets, liabilities, customers,
systems, and management personnel we have acquired or may in the future
acquire into our operations and our ability to realize any anticipated
revenue synergies and cost savings within expected time
frames;
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our
ability to manage loan delinquency
rates;
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our
ability to retain key members of our senior management
team;
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costs
and effects of litigation, including settlements and
judgments;
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increased
competitive pressures among financial services
companies;
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changes
in consumer spending, borrowing and savings
habits;
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legislative
or regulatory changes that adversely affect our
business;
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adverse
changes in the securities markets;
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inability
of key third-party providers to perform their obligations to
us;
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changes
in accounting policies and practices, as may be adopted by the financial
institution regulatory agencies or the Financial Accounting Standards
Board;
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war
or terrorist activities; and
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other
economic, competitive, governmental, regulatory, and technological factors
affecting our operations, pricing, products and services and the other
risks described elsewhere in this prospectus and the incorporated
documents and in our other filings with the
SEC.
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Some of
these and other factors are discussed in this prospectus under the caption “Risk
Factors” and elsewhere in this prospectus and in the incorporated documents.
Such developments could have an adverse impact on our financial position and our
results of operations.
Any
forward-looking statements are based upon management’s beliefs and assumptions
at the time they are made. We undertake no obligation to publicly update or
revise any forward-looking statements included or incorporated by reference in
this prospectus or to update the reasons why actual results could differ from
those contained in such statements, whether as a result of new information,
future events or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking statements discussed in this prospectus or the
incorporated documents might not occur, and you should not put undue reliance on
any forward-looking statements.
We are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). Accordingly, we file annual, quarterly
and current reports, proxy statements and other information with the
SEC. You may read and copy any reports, statements or other
information that we may file with the SEC at the SEC’s Public Reference Room at
100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy
and information statements and other information about issuers that file
electronically with the SEC. The address of the SEC’s Internet site is
http://www.sec.gov.
The SEC
allows us to incorporate by reference the information we file with them, which
means that we can disclose important information to you by referring you to
those documents. The information that we incorporate by reference is considered
to be a part of this prospectus, and the information we later file with the SEC
that is incorporated by reference in this prospectus will automatically update
information previously contained in this prospectus and any incorporated
document. Any statement contained in this prospectus or in a document
incorporated by reference in this prospectus will be deemed modified or
superseded to the extent that a later statement contained in this prospectus or
in an incorporated document modifies or supersedes such earlier
statement.
This
prospectus incorporates by reference the documents listed below that we have
filed with the SEC (excluding any portion of any such document that has been
furnished to and deemed not to be filed with the SEC):
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Report(s)
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Period(s)
of Report(s) or Date(s) Filed
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• Annual
Report on Form 10-K
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For
the year ended December 31, 2008
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• Quarterly
Reports on Form 10-Q
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For
the quarters ended March 31 and June 30, 2009
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We
incorporate by reference these documents and any future documents we may file
with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act, excluding any document or portion thereof that has been furnished to and
deemed not to be filed with the SEC.
These
documents are available without charge to you on the Internet at
http://www.bannerbank.com or if you call or write to: Investor Relations, Banner
Corporation, P.O. Box 907, Walla Walla, Washington 99362, telephone:
(800) 272-9933. The reference to our website is not intended to
be an active link and the information on our website is not, and you must not
consider the information to be, a part of this prospectus.
We have
also filed a registration statement with the SEC relating to the securities
offered by this prospectus. This prospectus, which constitutes part
of the registration statement, does not contain all of the information presented
or incorporated by reference in the registration statement and its exhibits. You
may obtain from the SEC a copy of the registration statement and exhibits that
we filed with the SEC as described above. The registration statement
may contain additional information that may be important to you.
This
summary highlights information contained elsewhere in, or incorporated by
reference into, this prospectus. As a result, it does not contain all of the
information that may be important to you or that you should consider before
investing in our securities. You should read this entire prospectus, including
the “Risk Factors” section, and the documents incorporated by reference, which
are described under “Where You Can Find More Information” in this
prospectus.
Banner
Corporation
Banner
Corporation is a bank holding company incorporated in the State of Washington.
We are primarily engaged in the business of planning, directing and coordinating
the business activities of our wholly owned subsidiaries, Banner Bank and
Islanders Bank. Banner Bank is a Washington-chartered commercial bank
that conducts business from its main office in Walla Walla, Washington and, as
of June 30, 2009, its 84 branch offices and 8 loan production offices located in
Washington, Oregon and Idaho. Islanders Bank is also a
Washington-chartered commercial bank that we acquired in May 2007 and that
conducts business from three locations in San Juan County,
Washington. Banner Corporation is subject to regulation by the Board
of Governors of the Federal Reserve System (“Federal
Reserve”). Banner Bank and Islanders Bank are subject to regulation
by the Washington State Department of Financial Institutions, Division of Banks
and the Federal Deposit Insurance Corporation (“FDIC”). The primary
source of liquidity for us is dividend payments from Banner Bank and to a
substantially lesser extent dividend payments from Islanders
Bank. Banner Bank and Islanders Bank are subject to certain legal
restrictions on their ability to pay dividends or make loans or advances to
us. For information about these restrictions, please see “Regulatory
Considerations” in this prospectus and “Item 1. Business—Regulation” and note 20
to our consolidated financial statements contained in our Annual Report on Form
10-K for the year ended December 31, 2008, which has been filed with the SEC and
is available as described under “Where You Can Find More
Information.”
As of
June 30, 2009, we had total consolidated assets of $4.5 billion, total loans of
$3.8 billion, total deposits of $3.7 billion and total stockholders’ equity of
$409.5 million.
Banner
Bank is a regional bank which offers a wide variety of commercial banking
services and financial products to individuals, businesses and public sector
entities in its primary market areas. Islanders Bank is a community
bank which offers similar banking services to individuals, businesses and public
entities located in the San Juan Islands in the State of
Washington. Our primary business is that of a traditional financial
institution, accepting deposits and originating loans in locations surrounding
our offices in portions of Washington, Oregon and Idaho. Banner Bank
is also an active participant in the secondary residential mortgage market,
engaging in mortgage banking operations largely through the origination and sale
of one- to four-family residential loans. Lending activities include
commercial business and commercial real estate loans, agriculture business
loans, construction and land development loans, one- to four-family residential
loans and consumer loans.
Our
common stock is traded on the NASDAQ Global Select Market under the ticker
symbol “BANR.” Our principal executive offices are located at 10
South First Avenue, Walla Walla, Washington 99362-0265. Our telephone
number is (509) 527-3636.
Securities
Being Offered
On
November 21, 2008, pursuant to the Troubled Asset Relief Program Capital
Purchase Program of the United States Department of the Treasury (“Treasury”),
we sold to Treasury 124,000 shares of our Fixed Rate Cumulative Perpetual
Preferred Stock, Series A (the “Series A Preferred Stock”), liquidation
preference amount $1,000 per share, for an aggregate purchase price of $124.0
million, and concurrently issued to Treasury a ten-year warrant to purchase up
to 1,707,989 shares of our common stock at an exercise price of $10.89 per
share. The issuance of the Series A Preferred Stock and the warrant
were completed in a private placement to Treasury exempt from the registration
requirements of the Securities Act of 1933. We were required under
the terms of the related securities purchase agreement between us and Treasury
to register for resale the shares of the Series A Preferred Stock, the warrant
and the shares of our common stock underlying the warrant. This
registration includes depositary shares, representing fractional interests in
the Series A Preferred Stock, which may be resold pursuant to this prospectus in
lieu of whole shares of Series A Preferred Stock in the event Treasury requests
that we deposit the Series A Preferred Stock held by Treasury with a depositary
under a depositary arrangement entered into in accordance with the securities
purchase agreement. See “Description of Depositary
Shares.” The terms of the Series A Preferred Stock, the warrant and
our common stock are described under “Description of Series A Preferred Stock,”
“Description of Warrant,” and “Description of Capital
Stock.” The securities purchase agreement between us and
Treasury is included as Exhibit 4.2 to the registration statement of which this
prospectus is a part and is incorporated into this prospectus by
reference. See “Where You Can Find More Information.”
RISK
FACTORS
An
investment in our securities is subject to certain risks. You should carefully
review the following risk factors and other information contained in this
prospectus and the documents incorporated by reference, before deciding whether
an investment in our securities is suited to your particular
circumstances. The risks and uncertainties not presently known to us
or that we currently deem immaterial also may impair our business operations. If
any of the following risks actually occur, our business, results of operations
and financial condition could suffer. In that event, the value of our securities
could decline, and you may lose all or part of your investment. The risks
discussed below also include forward-looking statements, and our actual results
may differ materially from those discussed in these forward-looking
statements.
Risks
Relating to Banner
Difficult
economic and market conditions have adversely affected our
industry.
We are
particularly exposed to downturns in the U.S. housing market and general
economic conditions. Dramatic declines in the housing market over the past year,
with falling home prices and increasing foreclosures, unemployment and
under-employment, have negatively impacted the credit performance of mortgage
loans and resulted in significant write-downs of asset values by financial
institutions, including government-sponsored entities, major commercial and
investment banks, and regional financial institutions like
us. Reflecting concern about the stability of the financial markets
generally and the strength of counterparties, many lenders and institutional
investors have reduced or ceased providing funding to borrowers, including to
other financial institutions. This market turmoil and tightening of
credit have led to an increased level of commercial and consumer delinquencies,
lack of consumer confidence, increased market volatility and widespread
reduction of business activity generally. The resulting economic
pressure on consumers and lack of confidence in the financial markets have
adversely affected our business, financial condition and results of
operations. We do not expect that the difficult conditions in the
economy and financial markets are likely to improve in the near
future. A worsening of these conditions would likely exacerbate the
adverse effects of these difficult market conditions on us and others in the
financial institutions industry. In particular, we may
face the following risks in connection with these events:
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We
potentially face increased regulation of our industry. Compliance with
such regulation may increase our costs and limit our ability to pursue
business opportunities.
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Continued
economic weakness may result in increased delinquencies and defaults in
our loan portfolio, which would adversely affect our operating
results.
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The
process we use to estimate losses inherent in our credit exposure requires
difficult, subjective and complex judgments, including forecasts of
economic conditions and how these economic conditions might impair the
ability of our borrowers to repay their loans. The level of
uncertainty concerning economic conditions may adversely affect the
accuracy of our estimates which may, in turn, impact the reliability of
the process.
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Competition
in our industry could intensify as a result of the increasing
consolidation of financial services companies in connection with current
market conditions.
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We
may be required to pay significantly higher FDIC premiums because market
developments have significantly depleted the insurance fund of the FDIC
and reduced the ratio of reserves to insured
deposits.
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Recently
enacted legislation and other measures undertaken by the Treasury, the Federal
Reserve and other governmental agencies may not be successful in stabilizing the
U.S. financial system or improving the housing market.
Emergency Economic Stabilization Act
of 2008. On October 3, 2008, President Bush signed into law the Emergency
Economic Stabilization Act of 2008 (“EESA”) which, among other measures,
authorized the Treasury Secretary to establish the Troubled Asset Relief Program
(“TARP”). The EESA gives broad authority to the Treasury to purchase, manage,
modify, sell and insure the troubled mortgage related assets that triggered the
current economic crisis as well as other troubled assets. The EESA includes
additional provisions directed at bolstering the economy, including: authority
for the Federal Reserve to pay interest on depository institution balances;
mortgage loss mitigation and homeowner protection; temporary increase in FDIC
insurance coverage from $100,000 to $250,000 through December
31, 2009;
and authority for the Securities and Exchange Commission to suspend
mark-to-market accounting requirements for any issuer or class for a specific
category of transactions.
The EESA
followed numerous actions by the Federal Reserve, Congress, Treasury, the
Securities and Exchange Commission, and others to address the current liquidity
and credit crisis that has followed the sub-prime meltdown that commenced in
2007. These measures include homeowner relief that encourages loan restructuring
and modification; the establishment of significant liquidity and credit
facilities for financial institutions and investment banks; the repeated
lowering of the federal funds rate; emergency action against short selling
practices; a temporary guaranty program for money market funds; the
establishment of a commercial paper funding facility to provide back-stop
liquidity to commercial paper issuers; coordinated international efforts to
address illiquidity and other weaknesses in the banking sector.
In
addition, the Internal Revenue Service has issued an unprecedented wave of
guidance in response to the credit crisis, including a relaxation of limits on
the ability of financial institutions that undergo an ownership change to
utilize their pre-change net operating losses and net unrealized built-in
losses. The relaxation of these limits may make significantly more attractive
the acquisition of financial institutions whose tax basis in their loan
portfolios significantly exceeds the fair market value of those
portfolios.
Moreover,
on October 14, 2008, the FDIC announced the establishment of a TLGP to provide
full deposit insurance for all non-interest bearing transaction accounts and
guarantees of particular newly issued senior unsecured debt issued by FDIC
insured institutions and their holding companies. Under the program, the FDIC
will guarantee timely payment of newly issued senior unsecured debt issued on or
before October 31, 2009. The guarantee on debt issued before April 1, 2009, will
expire no later than June 30, 2012. The guarantee on debt issued on or after
April 1, 2009, will expire not later than December 31, 2012. The Bank has
elected to participate in the TLGP.
The
actual impact that EESA and such related measures undertaken to alleviate the
credit crisis, including the extreme levels of volatility and limited credit
availability currently being experienced, is unknown. The failure of such
measures to help stabilize the financial markets and a continuation or worsening
of current financial market conditions could materially and adversely affect our
business, financial condition, results of operations, access to credit or the
trading price of our common stock.
American Recovery and Reinvestment
Act of 2009. On February 17, 2009, President Obama signed The American
Recovery and Reinvestment Act of 2009 (ARRA) into law. The ARRA is intended to
revive the U.S. economy by creating new jobs while reducing home foreclosures.
In addition, the ARRA significantly expanded the original executive
compensation and corporate governance provisions of Section 111 of the EESA,
which pertains to financial institutions that have received or will receive
financial assistance under TARP or related programs. The additional
standards and restrictions imposed on us by the ARRA could adversely affect our
ability to attract and retain management and other personnel of the highest
quality and, consequently, our ability to compete effectively with other
financial institutions that are not subject to these standards and
restrictions.
Current
levels of market volatility are unprecedented.
The
capital and credit markets have been experiencing volatility and disruption for
more than a year. In recent months, the volatility and disruption has reached
unprecedented levels. In some cases, the markets have produced
downward pressure on stock prices and credit availability for certain issuers
without regard to those issuers’ underlying financial strength. If current
levels of market disruption and volatility continue or worsen, our ability to
access capital and our business, financial condition and results of operations
may be materially adversely affected.
Our
profitability depends significantly on economic conditions in the states of
Washington, Oregon and Idaho.
Our success depends primarily on the
general economic conditions of the States of Washington, Oregon and Idaho and
the specific local markets in which we operate. Unlike larger
national or other regional banks that are more geographically diversified, we
provide banking and financial services to customers located primarily in these
three states. The local economic conditions in our market areas have
a significant impact on the demand for our products and services as well as the
ability of our customers to repay loans, the value of the collateral securing
loans and the stability of our deposit funding sources. Adverse
economic conditions unique to these Northwest markets
could
have a material adverse effect on our financial condition and results of
operations. Further, a significant decline in general economic
conditions, caused by inflation, recession, acts of terrorism, outbreak of
hostilities or other international or domestic occurrences, unemployment,
changes in securities markets, increases in credit costs or other factors could
impact these state and local markets and, in turn, also have a material adverse
effect on our financial condition and results of operations.
Beginning in 2007 and continuing
throughout 2008 and the first half of 2009, the housing market in the United
States has experienced significant adverse trends, including accelerated price
depreciation in some markets and rising delinquency and default
rates. As a result of these trends, we experienced an increase in
delinquency and default rates particularly on construction and land loans in our
primary market areas. These trends if they continue or worsen could
cause further credit losses and loan loss provisioning and could adversely
affect our earnings and financial condition.
Weakness in the Washington, Oregon
or Idaho real estate markets could hurt our business.
Our
business activities and credit exposure are primarily concentrated in parts of
Washington, Oregon and Idaho. While we did not participate
in any sub-prime loan programs, our construction and land loan portfolios,
our commercial and multifamily loan portfolios and certain of our other loans
have been affected by the downturn in the residential real estate
market. Substantially all of our loan portfolio consists of loans
secured by real estate located in Washington, Oregon or Idaho. During
the second half of 2008 and continuing in 2009, evidence of this downturn became
more apparent in certain of the Washington, Oregon and Idaho markets we
serve. If real estate values continue to decline, especially in
Washington, Oregon or Idaho, the collateral for our loans will provide less
security. As a result, our ability to recover on defaulted loans by
selling the underlying real estate will be diminished, and we would be more
likely to suffer losses on defaulted loans. The events and conditions
described in this risk factor could therefore have a material adverse effect on
our business, results of operations and financial condition.
We
may be required to make further increases in our provisions for loan losses and
to charge off additional loans in the future, which could adversely affect our
results of operations.
We are
experiencing increasing loan delinquencies and credit losses and we
substantially increased our provision for loan losses during 2008 and the first
half of 2009, which adversely affected our results of
operations. With the exception of residential construction and land
development loans, non performing loans and assets generally reflect unique
operating difficulties for individual borrowers rather than weakness in the
overall economy of the Pacific Northwest; however, more recently the weak pace
of general economic activity has become a significant contributing
factor. Slower sales and excess inventory in certain housing markets
have been the primary cause of the increase in delinquencies and foreclosures
for residential construction and land development loans, which represented
approximately 77% of our non-performing assets as of June 30,
2009. Further, our portfolio is concentrated in construction and land
loans and commercial and multi-family loans, all of which have a higher risk of
loss than residential mortgage loans. If current trends in the
housing and real estate markets continue, we expect that we will continue to
experience higher than normal delinquencies and credit
losses. Moreover, if the current recession is prolonged, we expect
that it could severely impact economic conditions in our market areas and
that we could experience significantly higher delinquencies and credit
losses. As a result, we may be required to make further increases in
our provision for loan losses and to charge off additional loans in the future,
which could adversely affect our results of operations.
Recent
negative developments in the financial industry and credit markets may continue
to adversely impact our financial condition and results of
operations.
Negative
developments beginning in the latter half of 2007 in the sub-prime mortgage
market and the securitization markets for such loans, together with other
factors, have resulted in uncertainty in the financial markets in general and a
related general economic downturn throughout 2008 and into 2009. Many
lending institutions, including us, have experienced substantial declines in the
performance of their loans, including construction and land loans, multifamily
loans, commercial loans and consumer loans. Moreover, competition
among depository institutions for deposits and quality loans has increased
significantly. In addition, the values of real estate collateral supporting many
construction and land, commercial and multifamily and other commercial
loans and
home mortgages have declined and may continue to decline. Bank and bank holding
company stock prices have been negatively affected, as has the ability of banks
and bank holding companies to raise capital or borrow in the debt markets
compared to recent years. These conditions have had and may have a further
material adverse effect on our financial condition and results of
operations. In addition, as a result of the foregoing factors, there
is a potential for new federal or state laws and regulations regarding lending
and funding practices and liquidity standards, and bank regulatory agencies are
expected to be very aggressive in responding to concerns and trends identified
in examinations, including the expected issuance of formal enforcement
orders. Further negative developments in the financial industry and
the impact of new legislation in response to those developments could restrict
our business operations, including our ability to originate or sell loans, and
adversely impact our results of operations and financial condition.
Liquidity
risk could impair our ability to fund operations and jeopardize our financial
condition.
Liquidity
is essential to our business. An inability to raise funds through
deposits, borrowings, the sale of loans and other sources could have a
substantial negative effect on our liquidity. Our access to funding
sources in amounts adequate to finance our activities on terms which are
acceptable to us could be impaired by factors that affect us specifically or the
financial services industry or economy in general. Factors that could
detrimentally impact our access to liquidity sources include a decrease in the
level of our business activity as a result of a downturn in the Washington,
Oregon or Idaho markets in which our loans are concentrated or adverse
regulatory action against us. Our ability to borrow could also be
impaired by factors that are not specific to us, such as a disruption in the
financial markets or negative views and expectations about the prospects for the
financial services industry in light of the recent turmoil faced by banking
organizations and the continued deterioration in credit markets. In
addition, recent changes in the collateralization requirements and other
provisions of the Washington and Oregon public funds deposit programs have
changed the economic benefit associated with accepting public funds deposits,
which may affect our need to utilize alternative sources of
liquidity.
We
may elect or be compelled to seek additional capital in the future, but that
capital may not be available when it is needed.
We are
required by federal and state regulatory authorities to maintain adequate levels
of capital to support our operations. In addition, we may elect to
raise additional capital to support our business or to finance acquisitions, if
any, or we may otherwise elect or be required to raise additional
capital. In that regard, a number of financial institutions have
recently raised considerable amounts of capital to address a deterioration in
their results of operations and financial condition arising from the turmoil in
the mortgage loan market, deteriorating economic conditions, declines in real
estate values and other factors. Should we be required by regulatory
authorities to raise additional capital, we may seek to do so through the
issuance of, among other things, our common stock or preferred
stock.
Our
ability to raise additional capital, if needed, will depend on conditions in the
capital markets, economic conditions and a number of other factors, many of
which are outside our control, and on our financial performance. Accordingly, we
cannot assure you of our ability to raise additional capital if needed or on
terms acceptable to us. If we cannot raise additional capital when needed, it
may have a material adverse effect on our financial condition, results of
operations and prospects.
If
our allowance for loan losses is not sufficient to cover actual loan losses, our
earnings could be reduced.
We make
various assumptions and judgments about the collectibility of our loan
portfolio, including the creditworthiness of our borrowers and the value of the
real estate and other assets serving as collateral for the repayment of many of
our loans. In determining the amount of the allowance for loan
losses, we review our loans and the loss and delinquency experience, and
evaluate economic conditions. Management recognizes that significant
new growth in loan portfolios, new loan products and the refinancing of existing
loans can result in portfolios comprised of unseasoned loans that may not
perform in a historical or projected manner. If our assumptions are
incorrect, the allowance for loan losses may not be sufficient to cover losses
inherent in our loan portfolio, resulting in the need for additions to our
allowance through an increase in the provision for loan
losses. Material additions to the allowance or increases in our
provision for loan losses could have a material adverse effect on our financial
condition and results of operations.
In
addition, bank regulators periodically review our allowance for loan losses and
may require us to increase our provision for loan losses or recognize further
loan charge-offs. Any increase in our allowance for loan losses or
loan charge-offs as required by these regulatory authorities may have a material
adverse effect on our financial condition and results of
operations.
The
maturity and repricing characteristics of our assets and liabilities are
mismatched and subject us to interest rate risk which could adversely affect our
net earnings and economic value.
Our
financial condition and operations 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. Our
profitability is dependent to a large extent on our net interest income, which
is the difference between the interest received from our interest-earning assets
and the interest expense incurred on our interest-bearing
liabilities. Significant changes in market interest rates or errors
or misjudgments in our interest rate risk management procedures could have a
material adverse effect on our net earnings and economic value. We
currently believe that declining interest rates will adversely affect our
near-term net earnings.
Our
activities, like other 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 our earnings and underlying
economic value. Interest rate risk is determined by the maturity and
repricing characteristics of our 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 affecting our
financial performance.
We
believe that the greatest source of interest rate risk to us results from the
mismatch of maturities or repricing intervals for our 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 us.
Our
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 and net market value of equity resulting from those movements under
different rate environments. We update and prepare our simulation
modeling at least quarterly for review by senior management and our
directors. We believe the data and assumptions are realistic
representations of our portfolio and possible outcomes under the various
interest rate scenarios. Nonetheless, the interest rate
sensitivity of our net interest income and net market value of our equity could
vary substantially if different assumptions were used or if actual experience
differs from the assumptions used and, as a result, our interest rate risk
management strategies may prove to be inadequate.
Our
loan portfolio is concentrated in loans with a higher risk of loss.
We
originate construction and land loans, commercial and multifamily mortgage
loans, commercial business loans, consumer loans, agricultural mortgage loans
and agricultural loans as well as residential mortgage loans primarily within
our market areas. Generally, these types of loans, other than the
residential mortgage loans, have a higher risk of loss than the residential
mortgage loans. We had approximately $3.3 billion outstanding in
these types of higher risk loans at June 30, 2009, which represented
approximately 83% of our total portfolio. These loans have greater
credit risk than residential real estate loans for a number of reasons,
including those described below:
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Construction and Land Loans.
This type of lending contains the inherent difficulty in estimating
both a property’s value at completion of the project and the estimated
cost (including interest) of the project. If the estimate of
construction cost proves to be inaccurate, we may be required to advance
funds beyond the amount originally committed to permit completion of the
project. If the estimate of value upon completion proves to be
inaccurate, we may be confronted at, or prior to, the maturity of the loan
with a project the value of which is insufficient to assure full
repayment. In addition, speculative construction
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loans
to a builder are often associated with homes that are not pre-sold, and
thus pose a greater potential risk to us than construction loans to
individuals on their personal residences. Loans on land under
development or held for future construction also pose additional risk
because of the lack of income being produced by the property and the
potential illiquid nature of the security. These risks can be
significantly impacted by supply and demand conditions. As a
result, this type of lending often involves the disbursement of
substantial funds with repayment dependent on the success of the ultimate
project and the ability of the borrower to sell or lease the property,
rather than the ability of the borrower or guarantor to repay principal
and interest. During the years ended December 31, 2006 and
2005, we significantly increased our origination of construction and land
loans. While new construction and land loan originations
decreased by approximately 35% in 2007 and an additional 59% in 2008, we
continue to have a significant investment in construction and land loan
balances. Most of our construction loans are for the
construction of single family residences and most of our land loans are
for properties ultimately intended to be improved with single family
residences.
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Commercial and Multifamily
Mortgage Loans. These loans typically involve higher
principal amounts than other types of loans, and repayment is dependent
upon income being generated from the property securing the loan in amounts
sufficient to cover operating expenses and debt service, which may be
adversely affected by changes in the economy or local market
conditions. Commercial and multifamily mortgage loans also
expose a lender to greater credit risk than loans secured by residential
real estate because the collateral securing these loans typically may not
be sold as easily as residential real estate. In addition, many
of our commercial and multifamily real estate loans are not fully
amortizing and contain large balloon payments upon
maturity. Such balloon payments may require the borrower to
either sell or refinance the underlying property in order to make the
payment, which may increase the risk of default or non-payment, which risk
is exacerbated in this current
environment.
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Commercial Business
Loans. Our commercial loans are primarily made based on
the cash flow of the borrower and secondarily on the underlying collateral
provided by the borrower. The borrowers’ cash flow may be
unpredictable, and collateral securing these loans may fluctuate in
value. Most often, this collateral is accounts receivable,
inventory, equipment or real estate. In the case of loans secured by
accounts receivable, the availability of funds for the repayment of these
loans may be substantially dependent on the ability of the borrower to
collect amounts due from its customers. Other collateral
securing loans may depreciate over time, may be difficult to appraise and
may fluctuate in value based on the success of the
business.
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Agricultural
Loans. Repayment is dependent upon the successful
operation of the business, which is greatly dependent on many things
outside the control of either us or the borrowers. These
factors include weather, commodity prices and interest rates, among
others. Collateral securing these loans may be difficult to
evaluate, manage or liquidate and may not provide an adequate source of
repayment.
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Consumer
Loans. Consumer loans (such as personal lines of credit)
are collateralized, if at all, with assets that may not provide an
adequate source of payment of the loan due to depreciation, damage, or
loss. In addition, consumer loan collections are dependent on
the borrower’s continuing financial stability, and thus are more likely to
be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and
state laws, including federal and state bankruptcy and insolvency laws,
may limit the amount that can be recovered on these
loans.
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We
may face risks with respect to our recent acquisitions and future
expansion.
We
completed three bank acquisitions in 2007 and may acquire other financial
institutions or parts of those institutions in the future. We also
plan to continue to engage in additional de novo branch expansion although at a
slower pace than in 2007. We may also consider and enter into new
lines of business or offer new products or services. These activities
involve a number of risks, including:
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the
time and costs associated with identifying and evaluating potential
acquisitions and merger partners;
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the
estimates and judgments used to evaluate credit, operations, management
and market risks with respect to the target institution may not be
accurate;
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the
time and costs of evaluating new markets, hiring experienced local
management and opening new offices, and the time lags between these
activities and the generation of sufficient assets and deposits to support
the costs of the expansion;
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our
ability to finance an acquisition and possible dilution to our existing
shareholders;
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the
diversion of our management’s attention to the negotiation of a
transaction, and the integration of the operations and personnel of the
acquired businesses;
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entry
into new markets where we lack
experience;
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the
introduction of new products and services into our
business;
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the
incurrence and possible impairment of goodwill associated with an
acquisition and possible adverse short-term effects on our results of
operations; and
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the
risk of loss of key employees and
customers.
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We may
incur substantial costs to acquire other companies, businesses or assets in the
future, and the results of any such acquisition may not meet our expectations or
enhance our results of operations. We may also incur substantial
expenses integrating the operations of any acquired company, business or assets
with our existing operations. In that regard, although we have no
current integration plans, Islanders Bank, which we acquired in 2007, is
currently utilizing the same accounting and financial systems that it had in
place prior to the time of the acquisition, and we will incur expenses, which
could be substantial, should we choose to migrate Islanders Bank to our
accounting and financial systems. Also, we may issue equity
securities, including common stock and securities convertible into shares of our
common stock, in connection with future acquisitions, which could cause
ownership and economic dilution to our current shareholders and to investors
purchasing common stock.
If
we are not able to achieve profitability on new branches it will negatively
affect our results of operations.
We have
expanded our presence throughout our market area, and although the pace of our
de novo branch expansion slowed considerably in 2008, we intend to pursue
further expansion by opening additional new branches. The success of our
expansion strategy will depend on whether the revenue that we generate from the
new branches will exceed the increased expenses resulting from operating these
branches. Largely as a result of this de novo branching strategy, our
operating expenses have increased significantly, adversely affecting our
operating efficiency. As a result, our efficiency ratio, which is the
ratio of non-interest expense to net interest income and other income, is higher
than many of our competitor institutions. We expect that it may take
a period of time before certain of these branches can become profitable,
especially in areas in which we do not have an established presence, and it is
possible that some of these branches may not achieve
profitability. As a result, the expense of operating these branches
may negatively affect our results of operations.
If
external funds were not available, this could adversely impact our growth and
prospects.
We rely
on deposits and advances from the Federal Home Loan Bank (“FHLB”) of Seattle and
other borrowings to fund our operations. Although we have
historically been able to replace maturing deposits and advances if desired, we
might not be able to replace such funds in the future if our financial condition
or the financial condition of the FHLB of Seattle or market
conditions were to change. Although we consider such sources of funds
adequate for our liquidity needs, we may be compelled or elect to seek
additional sources of financing in the future. Likewise, we may seek
additional debt in the future to achieve our long-term business objectives, in
connection with future acquisitions or for other reasons. Additional
borrowings, if sought, may not be available to us or, if available, may not be
on reasonable terms. If additional financing sources are unavailable
or not available on reasonable terms, our financial condition, results of
operations and future prospects could be materially adversely
affected.
Our
investment in Federal Home Loan Bank stock may be impaired.
At June
30, 2009, we owned $37.4 million in FHLB stock. As a condition of membership at
the FHLB, we are required to purchase and hold a certain amount of FHLB stock.
Our stock purchase requirement is based, in part, upon the outstanding principal
balance of advances from the FHLB and is calculated in accordance with the
Capital Plan of the FHLB. Our FHLB stock has a par value of $100, is carried at
cost, and it is subject to recoverability
testing according
to SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The FHLB recently announced that it had a
risk-based capital deficiency under the regulations of the Federal Housing
Finance Agency (the "FHFA"), its primary regulator, as of December 31, 2008, and
that it would suspend future dividends and the repurchase and redemption of
outstanding common stock. As a result, the FHLB did not pay a dividend for the
fourth quarter of 2008 or the first two quarters of 2009. The FHLB has
communicated that it believes the calculation of risk-based capital under the
current rules of the FHFA significantly overstates the market risk of the FHLB's
private-label mortgage-backed securities in the current market environment and
that it has enough capital to cover the risks reflected in its balance sheet. As
a result, we have not recorded an other-than-temporary impairment on our
investment in FHLB stock. However, continued deterioration in the FHLB's
financial position may result in impairment in the value of those securities. We
will continue to monitor the financial condition of the FHLB as it relates to,
among other things, the recoverability of our investment.
Strong
competition within our market areas may limit our growth and adversely affect
our operating results.
Competition
in the banking and financial services industry is intense. We compete
in our market areas with commercial banks, savings institutions, mortgage
brokerage firms, credit unions, finance companies, mutual funds, insurance
companies, and brokerage and investment banking firms operating locally and
elsewhere. Some of these competitors have substantially greater
resources and lending limits than we do, have greater name recognition and
market presence that benefit them in attracting business, and offer certain
services that we do not or cannot provide. In addition, larger
competitors may be able to price loans and deposits more aggressively than we
do. Our results of operations depend upon our continued ability to
successfully compete in our market areas. The greater resources and
deposit and loan products offered by some of our competitors may limit our
ability to increase or maintain our interest-earning assets. In
that regard, the negative economic conditions that began in 2007 and that
continued in 2008 and the first half of 2009 have significantly reduced our
origination of new loans, and we cannot assure you that our total loans or
assets will increase or not decline in future periods.
The
loss of key members of our senior management team could adversely affect our
business.
We
believe that our success depends largely on the efforts and abilities of our
senior management. Their experience and industry contacts
significantly benefit us. The competition for qualified personnel in
the financial services industry is intense, and the loss of any of our key
personnel or an inability to continue to attract, retain and motivate key
personnel could adversely affect our business. Our compensation and
ability to attract executive officers is limited as a result of our
participation in TARP.
We
are subject to extensive government regulation, which could adversely affect our
business.
Our
operations are subject to extensive regulation by federal, state and local
governmental authorities and are subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on part or all
of our operations. Because our business is highly regulated, the laws, rules and
regulations applicable to it are subject to regular modification and change.
Regulatory authorities have extensive discretion in their supervisory and
enforcement activities, including the imposition of restrictions on our
operations, the classification of our assets and determination of the level of
our allowance for loan losses. Any change in this regulation and oversight,
whether in the form of regulatory policy, regulations, legislation or
supervisory action, may have a material impact on our operations or otherwise
materially and adversely affect our business, financial condition, prospects or
profitability. In addition, we may be subject to new legislation in
response to negative developments in the financial industry and the economy as
described under “Recent negative developments in the financial industry and
credit markets may continue to adversely impact our financial condition and
results of operations,” which also could have a
material adverse effect on our results of operations and financial
condition.
We
are subject to various additional regulatory requirements and may be subject to
future regulatory restrictions and enforcement actions.
Currently,
Banner Bank must obtain prior regulatory approval before adding any new director
or senior executive officer or changing the responsibilities of any current
senior executive officer. In addition, Banner Bank may not pay
pursuant to or enter into certain severance and other forms of compensation
agreements without regulatory approval. Further, we require the
approval of the FDIC to participate in any additional borrowings under the
Temporary Liquidity Guarantee Program.
In light
of the current challenging operating environment, along with our elevated level
of non-performing assets, delinquencies, and adversely classified assets, we may
be subject to additional increased regulatory scrutiny, regulatory restrictions,
and potential enforcement actions. Such enforcement actions could
place limitations on our business and adversely affect our ability to implement
our business plans. Even though we remain well-capitalized in terms
of our capital ratios, the regulatory agencies have the authority to restrict
our operations to those consistent with adequately capitalized institutions. For
example, if the regulatory agencies were to implement such a restriction, we
would likely have limitations on our lending activities and be limited in our
ability to utilize brokered deposits as a funding source, an area that has been
a source of funds for us in recent years. The regulatory agencies also have the
power to limit the rates paid by the Banks to attract retail deposits in their
local markets. We also may be required to reduce our levels of
construction and land development loans and classified or non-performing assets
within specified time frames. These time frames might not necessarily
result in maximizing the price which might otherwise be received for the
underlying properties. In addition, if such restrictions were also
imposed upon other institutions which operate in the Bank’s markets, multiple
institutions disposing of properties at the same time could further diminish the
potential proceeds received from the sale of these properties. If any
of these or similar additional restrictions are placed on us, it would limit the
resources currently available to us as a well-capitalized
institution.
The
value of securities in our investment securities portfolio may be negatively
affected by continued disruptions in securities markets.
The
market for some of the investment securities held in our portfolio
has become generally illiquid and volatile over the past twelve
months. Illiquid and volatile market conditions
may detrimentally affect the value of these securities, such as through
reduced valuations due to the perception of heightened credit and liquidity
risks. There can be no assurance that the declines in market value associated
with these disruptions will not result in other-than-temporary impairments
of these assets, which would lead to accounting charges that could have a
material adverse effect on our net income and capital levels.
The
level of our commercial real estate loan portfolio may subject us to additional
regulatory scrutiny.
The FDIC,
the Federal Reserve and the Office of the Comptroller of the Currency, have
promulgated joint guidance on sound risk management practices for financial
institutions with concentrations in commercial real estate
lending. Under the guidance, a financial institution that is actively
involved in commercial real estate lending should perform a risk assessment to
identify concentrations. A financial institution may have a concentration in
commercial real estate lending if, among other factors, (i) total reported loans
for construction, land development, and other land represent 100% or more of
total capital or (ii) total reported loans secured by multifamily and non-farm
residential properties, loans for construction, land development and other land
and loans otherwise sensitive to the general commercial real estate market,
including loans to commercial real estate related entities, represent
300% or more of total capital. The guidance also indicates that
management should employ heightened risk management practices including board
and management oversight and strategic planning, development of underwriting
standards, risk assessment and monitoring through market analysis and stress
testing. While we believe we have implemented policies and procedures
with respect to our commercial real estate loan portfolio consistent with this
guidance, bank regulators could require us to implement additional policies and
procedures consistent with their interpretation of the guidance which could
result in additional costs to us.
Our
deposit insurance premiums will increase substantially, which will adversely
affect our operating results.
Our
FDIC deposit insurance assessment expense for the six-month period ended June
30, 2009 was $5.6 million. Deposit insurance assessments increased in 2009 as a
result of recent strains on the FDIC deposit insurance fund resulting from the
cost of recent bank failures and an increase in the number of banks likely to
fail over the next few years. Effective April 1, 2009, FDIC assessments
increased, ranging between 12 and 45 basis points. Additional premiums are
charged for institutions that rely on excessive amounts of brokered deposits,
including CDARS, and excessive use of secured liabilities, including FHLB and
FRB advances. The FDIC may adjust rates from one quarter to the next, except
that no single adjustment can exceed three basis points without a rulemaking
proceeding. In May 2009, the FDIC approved a special assessment of five basis
points applied to the amount of assets reduced by the amount of Tier 1 capital
as of June 30, 2009 (not to exceed 10 basis points of the deposit assessment
base). Two additional special assessments, each of the same amount or less than
the first special
assessment,
may be imposed for the third and fourth quarters of 2009. The FDIC has announced
that the first additional special assessment is likely and the second additional
special assessment is less certain.
Our
information systems may experience an interruption or breach in
security.
We rely
heavily on communications and information systems to conduct our
business. Any failure, interruption or breach in security of these
systems could result in failures or disruptions in our customer relationship
management, general ledger, deposit, loan and other systems. While we
have policies and procedures designed to prevent or limit the effect of the
failure, interruption or security breach of our information systems, there can
be no assurance that any such failures, interruptions or security breaches will
not occur or, if they do occur, that they will be adequately
addressed. The occurrence of any failures, interruptions or security
breaches of our information systems could damage our reputation, result in a
loss of customer business, subject us to additional regulatory scrutiny, or
expose us to civil litigation and possible financial liability, any of which
could have a material adverse effect on our financial condition and results of
operations.
If
we fail to maintain an effective system of internal control over financial
reporting, we may not be able to accurately report our financial results or
prevent fraud, and, as a result, investors and depositors could lose confidence
in our financial reporting, which could materially adversely affect our
business, the trading price of our common stock and our ability to attract
additional deposits.
In
connection with the enactment of the Sarbanes-Oxley Act of 2002 and the
implementation of the rules and regulations promulgated by the SEC, we document
and evaluate our internal control over financial reporting in order to satisfy
the requirements of Section 404 of the Sarbanes-Oxley Act. This
requires us to prepare an annual management report on our internal control over
financial reporting, including among other matters, management’s assessment of
the effectiveness of internal control over financial reporting and an
attestation report by our independent auditors addressing these
assessments. If we fail to identify and correct any deficiencies in
the design or operating effectiveness of our internal control over financial
reporting or fail to prevent fraud, current and potential shareholders and
depositors could lose confidence in our internal controls and financial
reporting, which could materially adversely affect our business, financial
condition and results of operations, the trading price of our common stock and
our ability to attract additional deposits.
We
rely on dividends from subsidiaries for most of our revenue.
Banner
Corporation is a separate and distinct legal entity from its
subsidiaries. We receive substantially all of our revenue from
dividends from our subsidiaries. These dividends are the principal
source of funds to pay dividends on our preferred and common stock and interest
and principal on our debt. Various federal and/or state laws and
regulations limit the amount of dividends that Banner Bank, Islanders Bank and
certain non-bank subsidiaries may pay to Banner Corporation. Also,
our right to participate in a distribution of assets upon a subsidiary’s
liquidation or reorganization is subject to the prior claims of the subsidiary’s
creditors. In the event the Banks are unable to pay dividends to
Banner Corporation, we may not be able to service debt, pay obligations or pay
dividends on Banner Corporation preferred and common stock. The
inability to receive dividends from the Banks could also have a material adverse
effect on our business, financial condition and results of
operations.
Our
ability to foreclose on single family home loans may be restricted.
New
legislation proposed by Congress may give bankruptcy judges the power to reduce
the increasing number of home foreclosures. Bankruptcy judges would be given the
authority to restructure mortgages and reduce a borrower's payments. Property
owners would be allowed to keep their property while working out their debts.
This legislation may restrict our collection efforts on one-to-four family
loans. Separately, the administration has announced a voluntary program under
the Troubled Asset Relief Program law, which provides for government subsidies
for reducing a borrower's interest rate, which a lender would have to match with
its own money.
If
other financial institutions holding deposits for government related entities in
Washington or Oregon fail, we may be assessed a pro-rata share of the uninsured
portion of the deposits by the States of Washington and Oregon.
We
participate in the Washington Public Deposit Protection Program by accepting
deposits from local governments, school districts and other municipalities
located in the State of Washington. Under the recovery provisions of the 1969
Public Deposits Protection Act, when a participating bank fails and has public
entity deposits that are not insured by the FDIC or assumed by a successor
financial institution, the remaining banks that participate in the program are
assessed a pro-rata share of the uninsured deposits. We also accept public funds
deposits in the State of Oregon, but to a much lesser extent, subject to a
similar arrangement.
We
could see declines in our uninsured deposits, which would reduce the funds we
have available for lending and other funding purposes.
The FDIC
in the fourth quarter of 2008 increased the federal insurance of deposit
accounts from $100,000 to $250,000 and provided 100% insurance coverage for
noninterest-bearing transaction accounts for participating members including
Banner Bank and Islanders Bank. These increases of coverage, with the exception
of IRA and certain retirement accounts, are scheduled to expire December 31,
2013. With the increase of bank failures, depositors are reviewing deposit
relationships to maximize federal deposit insurance coverage. We may see
outflows of uninsured deposits as customers restructure their banking
relationships in setting up multiple accounts in multiple banks to maximize
federal deposit insurance coverage.
Risks Relating to Both the Series A
Preferred Stock and Our Common Stock
The
Series A Preferred Stock is equity and is subordinate to all of our existing and
future indebtedness; regulatory and contractual restrictions may limit or
prevent us from paying dividends on the Series A Preferred Stock and our common
stock; and the Series A Preferred Stock places no limitations on the amount of
indebtedness we and our subsidiaries may incur in the future.
Shares of
the Series A Preferred Stock are equity interests in Banner Corporation and do
not constitute indebtedness. As such, the Series A Preferred Stock, like our
common stock, ranks junior to all indebtedness and other non-equity claims on
Banner Corporation with respect to assets available to satisfy claims on Banner
Corporation, including in a liquidation of Banner Corporation. Additionally,
unlike indebtedness, where principal and interest would customarily be payable
on specified due dates, in the case of preferred stock like the Series A
Preferred Stock, as with our common stock, (1) dividends are payable only
when, as and if authorized and declared by our Board of Directors and depend on,
among other things, our results of operations, financial condition, debt service
requirements, other cash needs and any other factors our Board of Directors
deems relevant, and (2) as a Washington corporation, under Washington law
we are subject to restrictions on payments of dividends out of lawfully
available funds.
As a bank
holding company, Banner Corporation’s ability to declare and pay dividends is
dependent on certain federal regulatory considerations. Banner Corporation is an
entity separate and distinct from its principal subsidiaries, Banner Bank and
Islanders Bank, and derives substantially all of its revenue in the form of
dividends from those subsidiaries. Accordingly, Banner Corporation is
and will be dependent upon dividends from Banner Bank and Islanders Bank to pay
the principal of and interest on its indebtedness, to satisfy its other cash
needs and to pay dividends on the Series A Preferred Stock and its common
stock. Banner Bank’s and Islanders Bank’s ability to pay dividends is
subject to their ability to earn net income and to meet certain regulatory
requirements. In the event the Banks are unable to pay dividends to
Banner Corporation, it may not be able to service its debt, pay its obligations
or pay dividends on Banner Corporation’s common stock or the Series A Preferred
Stock. See “Regulatory Considerations” in this prospectus and Note 20
of the Notes to Consolidated Financial Statements included in our Annual Report
on Form 10-K for the year ended December 31, 2008. Also, Banner
Corporation’s right to participate in a distribution of assets upon a
subsidiary’s liquidation or reorganization is subject to the prior claims of the
subsidiary’s creditors. This includes claims under the liquidation
account maintained for the benefit of certain eligible deposit account holders
of Banner Bank established in connection with Banner Bank’s conversion from the
mutual to the stock form of ownership.
Banner
Corporation is also subject to certain contractual restrictions that could
prohibit it from declaring or paying dividends or making liquidation payments on
its common stock or the Series A Preferred Stock. See “If we defer
payments of interest on our outstanding junior subordinated debentures or if
certain defaults relating to those
debentures
occur, we will be prohibited from declaring or paying dividends or distributions
on, and from making liquidation payments with respect to, the Series A Preferred
Stock” below.
In
addition, the Series A Preferred Stock does not limit the amount of debt or
other obligations we or our subsidiaries may incur in the future. Accordingly,
we and our subsidiaries may incur substantial amounts of additional debt and
other obligations that will rank senior to the Series A Preferred Stock or to
which the Series A Preferred Stock will be structurally
subordinated.
If
we defer payments of interest on our outstanding junior subordinated debentures
or if certain defaults relating to those debentures occur, we will be prohibited
from declaring or paying dividends or distributions on, and from making
liquidation payments with respect to, the Series A Preferred Stock and our
common stock.
As of
June 30, 2009, we had outstanding $123.7 million aggregate principal amount of
junior subordinated debentures issued in connection with the sale of trust
preferred securities by certain of our subsidiaries that are statutory business
trusts. We have also guaranteed those trust preferred securities. There are
currently six separate series of these junior subordinated debentures
outstanding, each series having been issued under a separate indenture and with
a separate guarantee. Each of these indentures, together with the related
guarantee, prohibits us, subject to limited exceptions, from declaring or paying
any dividends or distributions on, or redeeming, repurchasing, acquiring or
making any liquidation payments with respect to, any of our capital stock
(including the Series A Preferred Stock and our common stock) at any
time when (i) there shall have occurred and be continuing an event of default
under such indenture or any event, act or condition that with notice or lapse of
time or both would constitute an event of default under such indenture; or (ii)
we are in default with respect to payment of any obligations under such
guarantee; or (iii) we have deferred payment of interest on the junior
subordinated debentures outstanding under that indenture. In that regard, we are
entitled, at our option but subject to certain conditions, to defer payments of
interest on the junior subordinated debentures of each series from time to time
for up to five years.
Events of
default under each indenture generally consist of our failure to pay interest on
the junior subordinated debentures outstanding under that indenture under
certain circumstances, our failure to pay any principal of or premium on such
junior subordinated debentures when due, our failure to comply with certain
covenants under such indenture, and certain events of bankruptcy, insolvency or
liquidation relating to us or, in the case of certain of these indentures, any
of our “significant subsidiaries” (as defined) that is a depository
institution.
As a
result of these provisions, if we were to elect to defer payments of interest on
any series of junior subordinated debentures, or if any of the other events
described in clause (i) or (ii) of the first paragraph of this risk factor were
to occur, we would be prohibited from declaring or paying any dividends on the
Series A Preferred Stock and our common stock, from repurchasing or otherwise
acquiring any of the Series A Preferred Stock or our common stock, and from
making any payments to holders of the Series A Preferred Stock or our common
stock in the event of our liquidation, which would likely have a material
adverse effect on the market value of the Series A Preferred Stock and our
common stock. Moreover, without notice to or consent from the holders
of the Series A Preferred Stock or our common stock, we may issue additional
series of junior subordinated debentures in the future with terms similar to
those of our existing junior subordinated debentures or enter into other
financing agreements that limit our ability to purchase or to pay dividends or
distributions on our capital stock, including our common stock.
The
prices of the Series A Preferred Stock and our common stock may fluctuate
significantly, and this may make it difficult for you to resell the Series A
Preferred Stock and/or common stock when you want or at prices you find
attractive.
There
currently is no market for the Series A Preferred Stock, and we cannot predict
how the Series A Preferred Stock or our common stock will trade in the future.
The market value of the Series A Preferred Stock and our common stock will
likely continue to fluctuate in response to a number of factors including the
following, most of which are beyond our control, as well as the other factors
described in this “Risk Factors” section:
|
·
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actual
or anticipated quarterly fluctuations in our operating and financial
results;
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·
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developments
related to investigations, proceedings or litigation that involve
us;
|
|
·
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changes
in financial estimates and recommendations by financial
analysts;
|
|
·
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dispositions,
acquisitions and financings;
|
|
·
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actions
of our current shareholders, including sales of common stock by existing
shareholders and our directors and executive
officers;
|
|
·
|
fluctuations
in the stock price and operating results of our
competitors;
|
|
·
|
regulatory
developments; and
|
|
·
|
developments
related to the financial services
industry.
|
The
market value of the Series A Preferred Stock and our common stock may also be
affected by conditions affecting the financial markets in general, including
price and trading fluctuations, economic conditions and tax laws. These
conditions may result in (i) volatility in the level of, and fluctuations
in, the market prices of stocks generally and, in turn, the Series A Preferred
Stock and our common stock and (ii) sales of substantial amounts of the
Series A Preferred Stock or our common stock in the market, in each case that
could be unrelated or disproportionate to changes in our operating performance.
These broad market fluctuations may adversely affect the market value of the
Series A Preferred Stock and our common stock.
There
may be future sales of additional common stock or preferred stock or other
dilution of our equity, which may adversely affect the market price of our
common stock or the Series A Preferred Stock.
We are
not restricted from issuing additional common stock or preferred stock,
including any securities that are convertible into or exchangeable for, or that
represent the right to receive, common stock or preferred stock or any
substantially similar securities. The market value of our common stock or the
Series A Preferred Stock could decline as a result of sales by us of a large
number of shares of common stock or preferred stock or similar securities in the
market or the perception that such sales could occur.
The
voting limitation provision in our Articles of Incorporation could limit your
voting rights as a holder of the Series A Preferred Stock or our common
stock.
Our
Articles of Incorporation provide that, subject to certain limited exceptions,
if any person or group acting in concert acquires beneficial ownership of more
than 10% of any class of our equity securities (which would include the Series A
Preferred Stock as well as our common stock) without the prior approval by a
two-thirds vote of our “Continuing Directors,” (as defined therein), then with
respect to each share of voting stock in excess of 10% of all shares
of our voting stock, such person will be entitled to cast only
one-hundredth of one vote per share. See “Description of Capital
Stock—Anti-takeover Effects-Restrictions on Voting Rights.” This means that any
person owning more than 10% of our common stock will have limited voting rights
with respect to the shares owned in excess of 10% of the number of shares of
outstanding common stock. This also means that under the
circumstances where the holders of the Series A Preferred Stock have voting
rights (see “Description of Series A Preferred Stock-- Voting Rights”), whether
as a separate class or as a single class together with the holders of our common
stock and/or any other class of our equity securities then outstanding, any
person who holds shares of the Series A Preferred Stock representing (together
with any shares of common stock and/or any other class of our equity securities
then outstanding) more than 10% of the outstanding voting power with respect to
the matter being voted upon, will be able to cast only one-hundredth of one vote
per share for each share held in excess of the 10% limitation.
Anti-takeover
provisions could negatively impact our shareholders.
Provisions
in our Articles of Incorporation and Bylaws, the corporate law of the State of
Washington and federal regulations could delay, defer or prevent a third party
from acquiring us, despite the possible benefit to our shareholders, or
otherwise adversely affect the market price of any class of our equity
securities, including our common stock and the Series A Preferred
Stock. These provisions include: limitations on voting rights of
beneficial owners of more than 10% of our equity securities, supermajority
voting requirements for certain business combinations with any person who owns
10% or more of our outstanding common stock; the election of directors to
staggered terms of three years; advance notice requirements for nominations for
election to our Board of Directors and for proposing matters that shareholders
may act on at shareholder meetings, a requirement that only directors may fill a
vacancy in our Board of Directors, supermajority voting requirements to remove
any of our directors and the other provisions described under “Description of
Capital Stock─Anti-Takeover Effects.” In addition, we are subject to
Washington laws, including one that prohibits us from engaging in a significant
business combination with any shareholder who acquires 10% or more of our voting
stock for a period of five years from the date of that
acquisition
unless certain conditions are met. Additionally, our Articles of Incorporation
authorize our Board of Directors to issue preferred stock, and preferred stock could be
issued as a defensive measure in response to a takeover proposal. For
further information, see “Description of Capital Stock—Preferred
Stock.” These provisions may discourage potential takeover attempts,
discourage bids for our common stock at a premium over market price or adversely
affect the market price of, and the voting and other rights of the holders of,
our common stock. These provisions could also discourage proxy
contests and make it more difficult for holders of our common stock to elect
directors other than the candidates nominated by our Board of
Directors.
Risks
Specific to the Series A Preferred Stock
An
active trading market for the Series A Preferred Stock may not
develop.
The
Series A Preferred Stock is not currently listed on any securities exchange and
we do not anticipate listing the Series A Preferred Stock on an exchange unless
we are requested to do so by Treasury pursuant to the securities purchase
agreement between us and Treasury. There can be no assurance that an
active trading market for the Series A Preferred Stock will develop, or, if
developed, that an active trading market will be maintained. If an
active market is not developed or sustained, the market value and liquidity of
the Series A Preferred Stock may be adversely affected.
The
Series A Preferred Stock may be junior in rights and preferences to our future
preferred stock.
Subject
to approval by the holders of at least 66 2/3% of the shares of Series A
Preferred Stock then outstanding, voting together as a separate class, we may
issue preferred stock in the future the terms of which are expressly senior to
the Series A Preferred Stock. The terms of any such future preferred stock
expressly senior to the Series A Preferred Stock may restrict dividend payments
on the Series A Preferred Stock. For example, the terms of any such senior
preferred stock may provide that, unless full dividends for all of our
outstanding preferred stock senior to the Series A Preferred Stock have been
paid for the relevant periods, no dividends will be paid on the Series A
Preferred Stock, and no shares of the Series A Preferred Stock may be
repurchased, redeemed, or otherwise acquired by us. This could result
in dividends on the Series A Preferred Stock not being paid when
contemplated. In addition, in the event of our liquidation,
dissolution or winding-up, the terms of the senior preferred stock may prohibit
us from making payments on the Series A Preferred Stock until all amounts due to
holders of the senior preferred stock in such circumstances are paid in
full.
Holders
of the Series A Preferred Stock have limited voting rights.
Until and
unless we are in arrears on our dividend payments on the Preferred Stock for six
dividend periods, whether or not consecutive, the holders of the Series A
Preferred Stock will have no voting rights except with respect to certain
fundamental changes in the terms of the Series A Preferred Stock and certain
other matters and except as may be required by Washington law. If dividends on
the Preferred Stock are not paid in full for six dividend periods, whether or
not consecutive, the total number of positions on the Banner Corporation Board
of Directors will automatically increase by two and the holders of the Series A
Preferred Stock, acting as a class with any other parity securities having
similar voting rights, will have the right to elect two individuals to serve in
the new director positions. This right and the terms of such
directors will end when we have paid in full all accrued and unpaid dividends
for all past dividend periods. See “Description of Series A Preferred
Stock—Voting Rights.” Based on the current number of members of the
Banner Corporation Board of Directors (15), directors elected by the holders of
the common stock would have a controlling majority of the board and would be
able to take any action approved by them notwithstanding any objection by the
directors elected by the holders of the Series A Preferred Stock.
If
we are unable to redeem the Series A Preferred Stock after five years, the cost
of this capital to us will increase substantially.
If we are unable to redeem the Series A
Preferred Stock prior to February 15, 2014, the cost of this capital to us will
increase substantially on that date, from 5.0% per annum (approximately $6.2
million) to 9.0% per annum (approximately $11.2 million). See
“Description of Series A Preferred Stock—Redemption and
Repurchases.”
Depending
on our financial condition at the time, this increase in the annual dividend
rate on the Series A Preferred Stock could have a material negative effect on
our liquidity.
Risks
Specific to the Common Stock
The
securities purchase agreement between us and Treasury limits our ability to pay
dividends on and repurchase our common stock.
The securities purchase agreement
between us and Treasury provides that prior to the earlier of (i) November 21,
2011 and (ii) the date on which all of the shares of the Series A Preferred
Stock have been redeemed by us or transferred by Treasury to third parties, we
may not, without the consent of Treasury, (a) increase the cash dividend on our
common stock or (b) subject to limited exceptions, redeem, repurchase or
otherwise acquire shares of our common stock or preferred stock other than the
Series A Preferred Stock or trust preferred securities. In addition,
we are unable to pay any dividends on our common stock unless we are current in
our dividend payments on the Series A Preferred Stock. These
restrictions, together with the potentially dilutive impact of the warrant
described in the next risk factor, could have a negative effect on the value of
our common stock. Moreover, holders of our common stock are entitled
to receive dividends only when, as and if declared by our Board of Directors.
Although we have historically paid cash dividends on our common stock, we are
not required to do so and our Board of Directors could reduce or eliminate our
common stock dividend in the future.
The
Series A Preferred Stock impacts net income available to our common shareholders
and earnings per common share and the warrant we issued to Treasury may be
dilutive to holders of our common stock.
The
dividends declared on the Series A Preferred Stock will reduce the net income
available to common shareholders and our earnings per common
share. The Series A Preferred Stock will also receive preferential
treatment in the event of liquidation, dissolution or winding up of Banner
Corporation. Additionally, the ownership interest of the existing
holders of our common stock will be diluted to the extent the warrant we issued
to Treasury in conjunction with the sale to Treasury of the Series A Preferred
Stock is exercised. The shares of common stock underlying the warrant
represent approximately 8.5% of the shares of our common stock outstanding as of
June 30, 2009 (including the shares issuable upon exercise of the warrant in
total shares outstanding). Although Treasury has agreed not to vote
any of the shares of common stock it receives upon exercise of the warrant, a
transferee of any portion of the warrant or of any shares of common stock
acquired upon exercise of the warrant is not bound by this
restriction.
The
federal banking laws limit the ownership of our common stock.
Because
we are a bank holding company, purchasers of 10% or more of our common stock may
be required to obtain approvals under the Change in Bank Control Act of 1978, as
amended, or Bank Holding Company Act of 1956, as amended (and in certain cases
such approvals may be required at a lesser percentage of
ownership). Specifically, under regulations adopted by the Federal
Reserve, (a) any other bank holding company may be required to obtain the
approval of the Federal Reserve to acquire or retain 5% or more of the common
stock and (b) any person other than a bank holding company may be required to
obtain the approval of the Federal Reserve to acquire or retain 10% or more of
the common stock.
All
securities sold pursuant to this prospectus will be sold by the selling
securityholders and we will not receive the proceeds from such
sales.
RATIOS
OF EARNINGS TO FIXED
CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENT
Our
historical consolidated ratios of earnings to fixed charges and preferred stock
dividend requirement for the periods indicated, both including and excluding
interest on deposits, are set forth in the table below. The ratio of
earnings to fixed charges and preferred stock dividend requirement is computed
by dividing (i) income from continuing operations before income taxes and
fixed charges by (ii) the sum of total fixed charges and (pre-tax)
preferred stock dividend requirement. For purposes of computing these ratios,
fixed charges excluding interest on
deposits
represents interest expense on Federal Home Loan Bank advances and other
borrowed funds and fixed charges including interest on deposits represents all
interest expense.
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|
|
Six
Months
Ended
June
30,
2009
|
|
Year
Ended December 31,
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|
|
|
2009
|
2008
|
|
2008
|
|
2007
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2006
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|
2005
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2004
|
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Restated
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Restated
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Restated
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Ratio
of Earnings to Fixed Charges
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|
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|
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| and
Preferred Stock Dividend Requirement |
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Excluding
interest on deposits
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--(1)
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--(2)
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--(3)
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4.37x
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2.82x
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1.58x
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2.12x
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|
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less
goodwill impairment
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|
--(1)
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1.09x
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0.13x
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4.37x
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2.82x
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1.58x
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2.12x
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|
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Including
interest on deposits
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0.21x
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0.25x
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--(4)
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1.38x
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1.41x
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1.21x
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1.47x
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less
goodwill impairment
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0.21x
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1.01x
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0.89x
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1.38x
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1.41x
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1.21x
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1.47x
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The
earnings coverage for some of these periods was inadequate to cover total fixed
charges. The coverage deficiencies were:
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(1)
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for
the six months ended June 30, 2009: $33.5
million.
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(2)
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for
the six months ended June 30, 2008: $41.2
million.
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(3)
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for
the year ended December 31, 2008: $119.0
million.
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As a bank
holding company under the Bank Holding Company Act of 1956, Banner Corporation
is subject to regulation, supervision and examination by the Federal Reserve.
For a discussion of elements of the regulatory framework applicable to bank
holding companies and their subsidiaries, please refer to our Annual Report on
Form 10-K for the fiscal year ended December 31, 2008 and the other
documents incorporated herein by reference as described under “Where You Can
Find More Information.” This regulatory framework is intended
primarily for the protection of depositors and the federal deposit insurance
fund and not for the protection of security holders, including holders of our
common stock and the Series A Preferred Stock. As a result of this
regulatory framework, our results of operations and financial condition are
affected by actions of the Federal Reserve, the FDIC, which insures the deposits
of our banking subsidiaries within certain limits, and the Washington State
Department of Financial Institutions, Division of Banks, which regulates Banner
Bank and Islanders Bank.
Our
ability to pay dividends on the Series A Preferred Stock and our common stock
depends primarily on dividends we receive from Banner Bank and Islanders
Bank. Under federal regulations, the dollar amount of dividends the
Banks may pay depends upon their capital position and recent net
income. Generally, if a Bank satisfies its regulatory capital
requirements, it may make dividend payments up to the limits prescribed under
state law and FDIC regulations. However, an institution that has
converted to a stock form of ownership may not declare or pay a dividend on, or
repurchase any of, its common stock if the effect thereof would cause the
regulatory capital of the institution to be reduced below the amount required
for the liquidation account which was established in connection with the
conversion. Banner Bank, our primary subsidiary, converted to a stock
form of ownership and is therefore subject to the limitation described in the
preceding sentence.
In
addition, under Washington law, Banner Corporation is prohibited from paying a
dividend if, after making such dividend payment, it would be unable to pay its
debts as they become due in the usual course of business, or if its total
liabilities, plus the amount that would be needed, in the event Banner
Corporation were to be dissolved at the time of the dividend payment, to satisfy
preferential rights on dissolution of holders of preferred stock ranking senior
in right of payment to the capital stock on which the applicable distribution is
to be made exceed our total assets. Banner Corporation must also
maintain required capital levels of a bank holding company before it may pay
dividends on its stock.
In
addition to the foregoing regulatory considerations, there are numerous
governmental requirements and regulations that affect our business activities. A
change in applicable statutes, regulations or regulatory policy may
have a
material effect on our business and on our ability to pay dividends on our
common stock and the Series A Preferred Stock.
Depository
institutions, like Banner Bank and Islanders Bank, are also affected by various
federal laws, including those relating to consumer protection and similar
matters. Banner Corporation also has other financial services
subsidiaries regulated, supervised and examined by the Federal Reserve, as well
as other relevant state and federal regulatory agencies and self-regulatory
organizations. Our non-bank subsidiaries may be subject to other laws and
regulations of the federal government or the various states in which they are
authorized to do business.
In
addition to the foregoing regulatory restrictions, we are and may in the future
become subject to contractual restrictions that would limit or prohibit us from
paying dividends on our common stock, including those described under “Risk
Factors—Risks Relating to Both the Series A Preferred Stock and Our Common
Stock-If we defer payments of interest on our outstanding junior subordinated
debentures or if certain defaults relating to those debentures occur, we will be
prohibited from declaring or paying dividends or distributions on, and from
making liquidation payments with respect to, the Series A Preferred Stock or our
common stock” and “Description of Capital Stock—Common Stock-Restrictions on
Dividends and Repurchases Under Agreement with Treasury.”
This
section summarizes specific terms and provisions of the Series A Preferred
Stock. The description of the Series A Preferred Stock contained in
this section is qualified in its entirety by the actual terms of the Series A
Preferred Stock, as are stated in the articles of amendment to our Articles of
Incorporation, a copy of which is included in Exhibit 3.2 to the registration
statement of which this prospectus is a part and is incorporated by reference
into this prospectus. See “Where You Can Find More
Information.”
General
The
Series A Preferred Stock constitutes a single series of our preferred stock,
consisting of 124,000 shares, par value $0.01 per share, having a liquidation
preference amount of $1,000 per share. The Series A Preferred Stock
has no maturity date. We issued the shares of Series A Preferred
Stock to Treasury on November 21, 2008 in connection with the TARP Capital
Purchase Program for a purchase price of $124.0 million. Pursuant to
the securities purchase agreement between us and Treasury, we have agreed, if
requested by Treasury, to enter into a depositary arrangement pursuant to which
the shares of Series A Preferred Stock may be deposited and depositary shares,
each representing a fraction of a share of Series A Preferred Stock as specified
by Treasury, may be issued. See “Description of Depositary
Shares.”
Dividends
Rate. Dividends on the Series
A Preferred Stock are payable quarterly in arrears, when, as and if authorized
and declared by our Board of Directors out of legally available funds, on a
cumulative basis on the $1,000 per share liquidation preference amount plus the
amount of accrued and unpaid dividends for any prior dividend periods, at a rate
of (i) 5% per annum, from the original issuance date to but excluding the first
day of the first dividend period commencing after the fifth anniversary of the
original issuance date (i.e., 5% per annum from November 21, 2008 to but
excluding February 15, 2014), and (ii) 9% per annum, from and after the first
day of the first dividend period commencing after the fifth anniversary of the
original issuance date (i.e., 9% per annum on and after February 15,
2014). Dividends are payable quarterly in arrears on February
15, May 15, August 15 and November 15 of each year,
commencing on February 15, 2009. Each dividend will be payable
to holders of record as they appear on our stock register on the applicable
record date, which will be the 15th
calendar day immediately preceding the related dividend payment date (whether or
not a business day), or such other record date determined by our Board of
Directors that is not more than 60 nor less than ten days prior to the related
dividend payment date. Each period from and including a dividend
payment date (or the date of the issuance of the Series A Preferred Stock) to
but excluding the following dividend payment date is referred to as a “dividend
period.” Dividends payable for each dividend period are computed on
the basis of a 360-day year consisting of twelve 30-day months. If a
scheduled dividend payment date falls on a day that is not a business day, the
dividend will be paid on the next business day as if it were paid on the
scheduled dividend payment date, and no interest or other additional amount will
accrue on the dividend. The term “business day” means any day except
Saturday, Sunday and any day on which banking
institutions
in the State of New York generally are authorized or required by law or other
governmental actions to close.
Dividends
on the Series A Preferred Stock will be cumulative. If for any reason
our Board of Directors does not declare a dividend on the Series A Preferred
Stock for a particular dividend period, or if the Board of Directors
declares less than a full dividend, we will remain obligated to pay the unpaid
portion of the dividend for that period and the unpaid dividend will compound on
each subsequent dividend date (meaning that dividends for future dividend
periods will accrue on any unpaid dividend amounts for prior dividend
periods).
We are
not obligated to pay holders of the Series A Preferred Stock any dividend in
excess of the dividends on the Series A Preferred Stock that are payable as
described above. There is no sinking fund with respect to dividends
on the Series A Preferred Stock.
Priority of
Dividends. So long as the Series A Preferred Stock remains
outstanding, we may not declare or pay a dividend or other distribution on our
common stock or any other shares of Junior Stock (other than dividends payable
solely in common stock) or Parity Stock (other than dividends paid on a pro rata
basis with the Series A Preferred Stock), and we generally may not directly or
indirectly purchase, redeem or otherwise acquire any shares of common stock,
Junior Stock or Parity Stock unless all accrued and unpaid dividends on the
Series A Preferred Stock for all past dividend periods are paid in
full.
“Junior
Stock” means our common stock and any other class or series of our stock the
terms of which expressly provide that it ranks junior to the Series A Preferred
Stock as to dividend rights and/or as to rights on liquidation, dissolution or
winding up of Banner Corporation. We currently have no outstanding
class or series of stock constituting Junior Stock other than our common
stock.
“Parity
Stock” means any class or series of our stock, other than the Series A Preferred
Stock, the terms of which do not expressly provide that such class or series
will rank senior or junior to the Series A Preferred Stock as to dividend rights
and/or as to rights on liquidation, dissolution or winding up of Banner
Corporation, in each case without regard to whether dividends accrue
cumulatively or non-cumulatively. We currently have no outstanding
class or series of stock constituting Parity Stock.
Liquidation
Rights
In the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of Banner Corporation, holders of the Series A Preferred Stock will
be entitled to receive for each share of Series A Preferred Stock, out of the
assets of Banner Corporation or proceeds available for distribution to our
shareholders, subject to any rights of our creditors, before any distribution of
assets or proceeds is made to or set aside for the holders of our common stock
and any other class or series of our stock ranking junior to the Series A
Preferred Stock, payment of an amount equal to the sum of (i) the $1,000
liquidation preference amount per share and (ii) the amount of any accrued and
unpaid dividends on the Series A Preferred Stock (including dividends accrued on
any unpaid dividends). To the extent the assets or proceeds available
for distribution to shareholders are not sufficient to fully pay the liquidation
payments owing to the holders of the Series A Preferred Stock and the holders of
any other class or series of our stock ranking equally with the Series A
Preferred Stock, the holders of the Series A Preferred Stock and such other
stock will share ratably in the distribution.
For
purposes of the liquidation rights of the Series A Preferred Stock, neither a
merger or consolidation of Banner Corporation with another entity nor a sale,
lease or exchange of all or substantially all of Banner Corporation’s assets
will constitute a liquidation, dissolution or winding up of the affairs of
Banner Corporation.
Redemption
and Repurchases
Subject
to the prior approval of the Federal Reserve, the Series A Preferred Stock is
redeemable at our option in whole or in part at a redemption price equal to 100%
of the liquidation preference amount of $1,000 per share plus any accrued and
unpaid dividends to but excluding the date of redemption (including dividends
accrued on any unpaid dividends), provided that any declared but unpaid dividend
payable on a redemption date that occurs subsequent to the record date for the
dividend will be payable to the holder of record of the redeemed shares on the
dividend
record date, and provided further that the Series A Preferred Stock may be
redeemed prior to the first dividend payment date falling after the third
anniversary of the original issuance date (i.e., prior to February 15, 2012)
only if (i) we have, or our successor following a business combination with
another entity which also participated in the TARP Capital Purchase Program has,
raised aggregate gross proceeds in one or more Qualified Equity Offerings of at
least the Minimum Amount and (ii) the aggregate redemption price of the Series A
Preferred Stock does not exceed the aggregate net proceeds from such Qualified
Equity Offerings by us and any successor. The “Minimum Amount” means
$31.0 million plus, in the event we are succeeded in a business combination by
another entity which also participated in the TARP Capital Purchase Program, 25%
of the aggregate liquidation preference amount of the preferred stock issued by
that entity to Treasury. A “Qualified Equity Offering” is defined as
the sale for cash by Banner Corporation (or its successor) of preferred stock or
common stock that qualifies as Tier 1 capital under applicable regulatory
capital guidelines.
To
exercise the redemption right described above, we must give notice of the
redemption to the holders of record of the Series A Preferred Stock by first
class mail, not less than 30 days and not more than 60 days before the date of
redemption. Each notice of redemption given to a holder of Series A
Preferred Stock must state: (i) the redemption date; (ii) the number of shares
of Series A Preferred Stock to be redeemed and, if less than all the shares held
by such holder are to be redeemed, the number of such shares to be redeemed from
such holder; (iii) the redemption price; and (iv) the place or places where
certificates for such shares are to be surrendered for payment of the redemption
price. In the case of a partial redemption of the Series A Preferred
Stock, the shares to be redeemed will be selected either pro rata or in such
other manner as our Board of Directors determines to be fair and
equitable.
Subsequent
to our issuance of the Series A Preferred Stock, on February 17, 2009, President
Obama signed the ARRA into law. Among other things, the ARRA provides that
subject to consulting with the appropriate federal banking agency (the Federal
Reserve in our case), Treasury must permit repayment of funds provided under the
TARP Capital Purchase Program without regard to whether the institution which
received the funds has replaced the funds from any other source, and upon
repayment of the assistance, Treasury will liquidate warrants issued by the
institution at the current market price. Accordingly, the ARRA effectively
permits us to currently cause the redemption of the Series A Preferred Stock,
without regard to whether we have raised additional capital in a Qualified
Equity Offering or otherwise, subject to Treasury's consultation with the
Federal Reserve.
Shares of
Series A Preferred Stock that we redeem, repurchase or otherwise acquire will
revert to authorized but unissued shares of preferred stock, which may then be
reissued by us as any series of preferred stock other than the Series A
Preferred Stock.
No
Conversion Rights
Holders
of the Series A Preferred Stock have no right to exchange or convert their
shares into common stock or any other securities.
Voting
Rights
The
holders of the Series A Preferred Stock do not have voting rights other than
those described below, except to the extent specifically required by Washington
law.
Whenever
dividends have not been paid on the Series A Preferred Stock for six or more
quarterly dividend periods, whether or not consecutive, the authorized number of
directors of Banner Corporation will automatically increase by two and the
holders of the Series A Preferred Stock will have the right, with the holders of
shares of any other classes or series of Voting Parity Stock outstanding at the
time, voting together as a class, to elect two directors (the “Preferred
Directors”) to fill such newly created directorships at our next annual meeting
of shareholders (or at a special meeting called for that purpose prior to the
next annual meeting) and at each subsequent annual meeting of shareholders until
all accrued and unpaid dividends for all past dividend periods on all
outstanding shares of
Series A Preferred Stock have been paid in full at which time this right will
terminate with respect to the Series A Preferred Stock, subject to revesting in
the event of each and every subsequent default by us in the payment of dividends
on the Series A Preferred Stock.
No person
may be elected as a Preferred Director who would cause us to violate any
corporate governance requirements of any securities exchange or other trading
facility on which our securities may then be listed or traded that listed or
traded companies must have a majority of independent directors. Upon any
termination of the right of the holders of the Series A Preferred Stock and
Voting Parity Stock as a class to vote for directors as described above, the
Preferred Directors will cease to be qualified as directors, the terms of office
of all Preferred Directors then in office will terminate immediately and the
authorized number of directors will be reduced by the number of Preferred
Directors which had been elected by the holders of the Series A Preferred Stock
and the Voting Parity Stock. Any Preferred Director may be removed at any time,
with or without cause, and any vacancy created by such a removal may be filled,
only by the affirmative vote of the holders a majority of the outstanding shares
of Series A Preferred Stock voting separately as a class together with the
holders of shares of Voting Parity Stock, to the extent the voting rights of
such holders described above are then exercisable. If the office of any
Preferred Director becomes vacant for any reason other than removal from office,
the remaining Preferred Director may choose a successor who will hold office for
the unexpired term of the office in which the vacancy occurred.
The term
“Voting Parity Stock” means with regard to any matter as to which the holders of
the Series A Preferred Stock are entitled to vote, any series of Parity Stock
(as defined under “Dividends-Priority of Dividends”) upon which voting rights
similar to those of the Series A Preferred Stock have been conferred and are
exercisable with respect to such matter. We currently have no
outstanding shares of Voting Parity Stock.
Under
regulations adopted by the Federal Reserve, if the holders of the Series A
Preferred Stock are or become entitled to vote for the election of directors,
the Series A Preferred Stock may then be deemed a “class of voting securities”
and a holder of 10% or more of the Series A Preferred Stock that is a company
may then be subject to regulation as a bank holding company. In addition, at
such time as the Series A Preferred Stock is deemed a class of voting
securities, (a) any bank holding company that is a holder of more than 5%
of the Series A Preferred Stock may be required to obtain the approval of the
Federal Reserve to acquire or retain more than 5% of the Series A Preferred
Stock and (b) any person may be required to obtain the approval of the
Federal Reserve to acquire or retain 10% or more of the Series A Preferred
Stock.
In
addition to any other vote or consent required by Washington law or by our
Articles of Incorporation, the vote or consent of the holders of at least 66
2/3% of the outstanding shares of Series A Preferred Stock, voting as a separate
class, is required in order to do the following:
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amend
our Articles of Incorporation or the articles of amendment for the Series
A Preferred Stock to authorize or create or increase the authorized amount
of, or any issuance of, any shares of, or any securities convertible into
or exchangeable or exercisable for shares of, any class or series of stock
ranking senior to the Series A Preferred Stock with respect to the payment
of dividends and/or the distribution of assets on any liquidation,
dissolution or winding up of Banner Corporation;
or
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amend
our Articles of Incorporation or the articles of amendment for the Series
A Preferred Stock in a way that materially and adversely affects the
rights, preferences, privileges or voting powers of the Series A Preferred
Stock; or
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consummate
a binding share exchange or reclassification involving the Series A
Preferred Stock or a merger or consolidation of Banner Corporation with
another entity, unless (i) the shares of Series A Preferred Stock
remain outstanding or, in the case of a merger or consolidation in which
Banner Corporation is not the surviving or resulting entity, are converted
into or exchanged for preference securities of the surviving or resulting
entity or its ultimate parent, and (ii) the shares of Series A
Preferred Stock remaining outstanding or such preference securities, have
such rights, preferences, privileges, voting powers, limitations and
restrictions, taken as a whole, as are not materially less favorable than
the rights, preferences, privileges, voting powers, limitations and
restrictions of the Series A Preferred Stock prior to consummation of the
transaction, taken as a whole;
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provided, however, that
(1) any increase in the amount of our authorized but unissued shares of
preferred stock, and (2) the creation and issuance, or an increase in the
authorized or issued amount, of any other series of preferred stock, or any
securities convertible into or exchangeable or exercisable for any other series
of preferred stock, ranking
equally with and/or junior to the Series A Preferred Stock with respect to the
payment of dividends whether such dividends are cumulative or non-cumulative,
and the distribution of assets upon our liquidation, dissolution or winding up,
will not be deemed to materially and adversely affect the rights, preferences,
privileges or voting powers of the Series A Preferred Stock and will not require
the vote or consent of the holders of the Series A Preferred
Stock.
To the
extent holders of the Series A Preferred Stock are entitled to vote, holders of
shares of the Series A Preferred Stock will be entitled to one for each share
then held.
The
voting provisions described above will not apply if, at or prior to the time
when the vote or consent of the holders of the Series A Preferred Stock would
otherwise be required, all outstanding shares of the Series A Preferred Stock
have been redeemed by us or called for redemption upon proper notice and
sufficient funds have been set aside by us for the benefit of the holders of
Series A Preferred Stock to effect the redemption.
DESCRIPTION
OF DEPOSITARY SHARES
Pursuant
to the securities purchase agreement between us and Treasury, we have agreed, if
requested by Treasury, to enter into a depositary arrangement pursuant to which
the shares of Series A Preferred Stock may be deposited and depositary shares,
each representing a fraction of a share of Series A Preferred Stock as specified
by Treasury, may be issued. The Shares of Series A Preferred Stock
would be held by a depositary (expected to be a bank or trust company)
reasonably acceptable to Treasury. If we enter into such a depositary
arrangement, the selling securityholders would be offering depositary shares,
each representing a fraction of a share of Series A Preferred Stock, instead of
actual whole shares of Series A Preferred Stock. The actual terms of
any such depositary arrangement would be set forth in a deposit agreement to
which we would be a party, which would be attached as an exhibit to a filing by
us that would be incorporated by reference into this
prospectus. See “Where You Can Find More
Information.”
DESCRIPTION
OF WARRANT
This
section summarizes specific terms and provisions of the warrant we issued to
Treasury on November 21, 2008 concurrent with our sale to Treasury of 124,000
shares of Series A Preferred Stock pursuant to the TARP Capital Purchase
Program. The description of the warrant contained in this section is qualified
in its entirety by the actual terms of the warrant, a copy of which is included
as Exhibit 4.1 to the registration statement of which this prospectus is a part
and is incorporated by reference into this prospectus. See “Where You
Can Find More Information.”
General
The
warrant gives the holder the right to initially purchase up to 1,707,989 shares
of our common stock at an exercise price of $10.89 per share. Subject
to the limitations on exercise to which Treasury is subject described under
“Transferability,” the warrant is immediately exercisable and expires on
November 21, 2018. The exercise price may be paid (i) by having us
withhold from the shares of common stock that would otherwise be issued to the
warrant holder upon exercise, a number of shares of common stock having a market
value equal to the aggregate exercise price or (ii) if both we and the warrant
holder consent, in cash.
Possible
Reduction in Number of Shares
If we (or
any successor to us by a business combination) complete one or more Qualified
Equity Offerings (as defined under “Description of Series A Preferred
Stock-Redemption and Repurchases”) prior to December 31, 2009 resulting in
aggregate gross proceeds of at least $124.0 million (plus the aggregate
liquidation preference amount of any preferred stock issued to Treasury by a
successor to us), the number of shares of common stock
underlying the warrant
then held by Treasury will be reduced by 50%. The number of
shares subject to the warrant are subject to further adjustment as described
below under “Other Adjustments.”
Transferability
The
warrant is not subject to any restrictions on transfer; however, Treasury may
only transfer or exercise the warrant with respect to one-half of the shares
underlying the warrant prior to the earlier of (i) the date on which we (or any
successor to us by a business combination) have received aggregate gross
proceeds of at least $124.0 million (plus the aggregate liquidation preference
amount of any preferred stock issued to Treasury by a successor to us) from one
or more Qualified Equity Offerings (including those by any successor to us by a
business combination) and (ii) December 31, 2009.
Voting
of Warrant Shares
Treasury
has agreed that it will not vote any of the shares of common stock that it
acquires upon exercise of the warrant. This does not apply to any
other person who acquires any portion of the warrant, or the shares of common
stock underlying the warrant, from Treasury. Our Articles of
Incorporation provide, however, that if any person or group acting in concert
acquires the beneficial ownership of more than 10% of any class of our equity
security without the prior approval by a two-thirds vote of our “Continuing
Directors,” (as defined therein) then, with respect to each vote in excess of
10% of the voting power of our outstanding shares of voting stock which such
person would otherwise have been entitled to cast, such person shall be entitled
to cast only one-hundredth of one vote per share. See “Description of
Capital Stock—Anti-takeover Effects-Restrictions on Voting Rights.”
Other
Adjustments
The
exercise price of the warrant and the number of shares underlying the warrant
automatically adjust to upon the following events:
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any stock split, stock dividend,
subdivision, reclassification or combination of our common
stock;
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until the earlier of (i) the date
on which Treasury no longer holds any portion of the warrant and (ii)
November 21, 2011, issuance of our common stock (or securities convertible
into our common stock) for consideration (or having a conversion price
per share) less than
90% of then current market value, except for issuances in connection with
benefit plans, business acquisitions and public
or other broadly marketed
offerings;
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a
pro rata repurchase by us of our common stock;
or
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a determination by our Board of
Directors to make an adjustment to the anti-dilution provisions as
are reasonably
necessary, in the good faith opinion of the Board, to protect the purchase
rights of the warrant holders.
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In
addition, if we declare any dividends or distributions on our common stock other
than our historical, ordinary cash dividends, dividends paid in our common stock
and other dividends or distributions covered by the first bullet point above,
the exercise price of the warrant will be adjusted to reflect such
distribution.
In the
event of any merger, consolidation, or other business combination to which we
are a party, the warrantholder’s right to receive shares of our common stock
upon exercise of the warrant will be converted into the right to exercise the
warrant to acquire the number of shares of stock or other securities or property
(including cash) which the common stock issuable upon exercise of the warrant
immediately prior to such business combination would have been entitled to
receive upon consummation of the business combination. For purposes
of the provision described in the preceding sentence, if the holders of our
common stock have the right to elect the amount or type of consideration to be
received by them in the business combination, then the consideration that the
warrantholder will be entitled to receive upon exercise will be the amount and
type of consideration received by a majority of the holders of the common stock
who affirmatively make an election.
No
Rights as Stockholders
The
warrant does not entitle its holder to any of the rights of a shareholder of
Banner Corporation prior to exercise.
As of the
date of this prospectus, our authorized capital stock consists of:
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25,000,000
shares of common stock, par value $.01 per share; and
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500,000 shares of preferred stock, par
value $.01 per share. |
As of
June 30, 2009, there were 18,426,458 shares of our common stock issued and
outstanding and 124,000 shares of our preferred stock issued and outstanding,
all of which consisted of our Series A Preferred Stock.
We have
called a special meeting of our shareholders for August 26, 2009 for the purpose
of approving an amendment of our Articles of Incorporation to (1) increase
the authorized number of shares of common stock from 25,000,000 to 75,000,000
shares, and to (2) increase the authorized number of shares of preferred stock
from 500,000 to 10,000,000 shares. We proposed the amendments to our
Articles of Incorporation for the purpose of increasing the authorized shares of
common and preferred stock in order to meet possible future business and
financing needs. The availability of these additional shares will provide us
with the capability and flexibility to issue common stock and/or preferred stock
for a variety of purposes that the Board of Directors may deem advisable in the
future. These purposes could include, among other things, raising additional
capital; increasing the capital position of our subsidiary banks; issuing stock
for possible acquisition transactions; repaying Treasury for the funds we
received through TARP should we elect to do so in the future; or for other
corporate and business purposes.
In this
section we describe certain features and rights of our capital stock. The
summary does not purport to be exhaustive and is qualified in its entirety by
reference to our Articles of Incorporation, Bylaws, and to applicable Washington
law.
Common
Stock
General. Except as described
below under “Anti-takeover
Effects – Restrictions on Voting Rights,” each holder of common stock is
entitled to one vote for each share on all matters to be voted upon by the
common shareholders. There are no cumulative voting rights. Subject to
preferences to which holders of any shares of preferred stock may be entitled,
holders of common stock will be entitled to receive ratably any dividends that
may be declared from time to time by the Board of Directors out of funds legally
available for that purpose. In the event of our liquidation,
dissolution or winding up, holders of common stock will be entitled to share in
our assets remaining after the payment or provision for payment of our debts and
other liabilities, distributions or provisions for distributions in settlement
of the liquidation account established in connection with the conversion of
Banner Bank from the mutual to the stock form of ownership, and the satisfaction
of the liquidation preferences of the holders of the Series A Preferred Stock
and any other series of our preferred stock then outstanding. Holders
of common stock have no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions that apply
to the common stock. All shares of common stock currently outstanding are fully
paid and nonassessable. The rights, preferences and privileges of the holders of
common stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock that we may designate in the
future.
Restrictions on Dividends and
Repurchases Under Agreement with Treasury. The securities
purchase agreement between us and Treasury provides that prior to the earlier of
(i) November 21, 2011 and (ii) the date on which all of the shares of the Series
A Preferred Stock have been redeemed by us or transferred by Treasury to third
parties, we may not, without the consent of Treasury, (a) increase the cash
dividend on our common stock or (b) subject to limited exceptions, redeem,
repurchase or otherwise acquire shares of our common stock or preferred stock
other than the Series A Preferred Stock or trust preferred
securities.
Preferred
Stock
Our
Articles of Incorporation permit our Board of Directors to authorize the
issuance of up to 500,000 shares of preferred stock, par value $0.01, in one or
more series, without shareholder action. The Board of Directors can fix
the designation, powers, preferences and rights of each
series. Therefore, without approval of the holders of our common
stock or the Series A Preferred Stock (except as may be required under the terms
of the Series A Preferred Stock (see “Description of Series A Preferred
Stock—Voting Rights”) or by the rules of the NASDAQ Stock Market or any other
exchange or market on which our securities may then be listed or quoted), our
Board of Directors can authorize the issuance of preferred stock with voting,
dividend, liquidation and conversion and other rights that could dilute the
voting power or other rights or adversely affect the market value of our common
stock and the Series A Preferred Stock and may assist management in impeding any
unfriendly takeover or attempted change in control. See “Anti-Takeover
Effects – Authorized Shares.”
For a
description of the terms of the Series A Preferred Stock, see “Description of
Series A Preferred Stock.”
Anti-takeover
Effects
The
provisions of our Articles of Incorporation, our Bylaws, and Washington law
summarized in the following paragraphs may have anti-takeover effects and could
delay, defer, or prevent a tender offer or takeover attempt that a shareholder
might consider to be in such shareholder’s best interest, including those
attempts that might result in a premium over the market price for the shares
held by shareholders, and may make removal of the incumbent management and
directors more difficult.
Authorized Shares. Our Articles of
Incorporation authorize the issuance of 25,000,000 shares of common stock and
500,000 shares of preferred stock. These shares of common stock and
preferred stock provide our Board of Directors with as much flexibility as
possible to effect, among other transactions, financings, acquisitions, stock
dividends, stock splits and the exercise of employee stock
options. However, these additional authorized shares may also be used
by the Board of Directors consistent with its fiduciary duty to deter future
attempts to gain control of us. The Board of Directors also has sole
authority to determine the terms of any one or more series of preferred stock,
including voting rights, conversion rates, and liquidation
preferences. As a result of the ability to fix voting rights for a
series of preferred stock, the Board has the power to the extent consistent with
its fiduciary duty to issue a series of preferred stock to persons friendly to
management in order to attempt to block a tender offer, merger or other
transaction by which a third party seeks control of us, and thereby assist
members of management to retain their positions.
Restrictions on Voting
Rights. Our Articles of
Incorporation provide for restrictions on voting rights of shares owned in
excess of 10% of any class of our equity security. Specifically, our
Articles of Incorporation provide that if any person or group acting in concert
acquires the beneficial ownership of more than 10% of any class of our equity
security without the prior approval by a two-thirds vote of our “Continuing
Directors,” (as defined therein) then, with respect to each vote in excess of
10% of the voting power of our outstanding shares of voting stock which such
person would otherwise have been entitled to cast, such person shall be entitled
to cast only one-hundredth of one vote per share. Exceptions from
this limitation are provided for, among other things, any proxy granted to one
or more of our “Continuing Directors” and for our employee benefit
plans. Under our Articles of Incorporation, the restriction on voting
shares beneficially owned in violation of the foregoing limitations is imposed
automatically, and the Articles of Incorporation provide that a majority of our
Continuing Directors have the power to construe the forgoing restrictions and to
make all determinations necessary or desirable to implement these
restrictions. These restrictions would, among other things, restrict
voting power of a beneficial owner of more than 10% of our outstanding shares of
common stock in a proxy contest or on other matters on which such person is
entitled to vote.
Board of Directors. Our Board of
Directors is divided into three classes, each of which contains approximately
one-third of the members of the Board. The members of each class are
elected for a term of three years, with the terms of office of all members of
one class expiring each year so that approximately one-third of the total number
of directors is elected each year. The classification of directors,
together with the provisions in our Articles of Incorporation described below
that limit the ability of shareholders to remove directors and that permit
only the
remaining directors to fill any vacancies on the Board of Directors, have the
effect of making it more difficult for shareholders to change the composition of
the Board of Directors. As a result, at least two annual meetings of
shareholders will be required for the shareholders to change a majority of the
directors, whether or not a change in the Board of Directors would be beneficial
and whether or not a majority of shareholders believe that such a change would
be desirable.
Our
Articles of Incorporation provide that the size of the Board shall be not less
than five or more than 25 as set in accordance with the Bylaws. In
accordance with the Bylaws, the number of directors is currently set at
fifteen. The Articles of Incorporation provide that any vacancy
occurring in the Board, including a vacancy created by an increase in the number
of directors, shall be filled by a vote of two-thirds of the directors then in
office and any director so chosen shall hold office for a term expiring at the
annual meeting of shareholders at which the term of the class to which the
director has been chosen expires. The classified Board is intended to
provide for continuity of the Board of Directors and to make it more difficult
and time consuming for a shareholder group to fully use its voting power to gain
control of the Board of Directors without the consent of incumbent members of
the Board. The Articles of Incorporation further provide that a
director may be removed from the Board of Directors prior to the expiration of
his term only for cause and only upon the vote of the holders of 80% of the
total votes eligible to be cast thereon. In the absence of this
provision, the vote of the holders of a majority of the shares could remove the
entire Board, but only with cause, and replace it with persons of such holders'
choice.
The
foregoing description of our Board of Directors does not apply with respect to
directors that may be elected by the holders of the Series A Preferred Stock in
the event we do not pay dividends on the Series A Preferred Stock for six or
more dividend periods. See “Description of Series A Preferred
Stock—Voting Rights.”
Cumulative Voting, Special Meetings
and Action by Written Consent. Our Articles of
Incorporation do not provide for cumulative voting for any
purpose. Moreover, the Articles of Incorporation provide that special
meetings of shareholders may be called only by our Board of Directors or by the
written request of not less than a majority of the shares entitled to vote at
the meeting. In addition, our Bylaws require that any action taken by
written consent must receive the consent of all of the outstanding voting stock
entitled to vote on the action taken.
Shareholder Vote Required to Approve
Business Combinations with Principal Shareholders. The Articles of
Incorporation require the approval of the holders of at least 80% of each class
of our outstanding shares of each class of voting stock to approve certain
"Business Combinations" (as defined therein) involving a "Related Person" (as
defined therein) except in cases where the proposed transaction has been
approved in advance by two-thirds of those members of Banner Corporation’s Board
of Directors who are unaffiliated with the Related Person and were directors
prior to the time when the Related Person became a Related
Person. The term "Related Person" is defined to include any
individual, corporation, partnership or other entity (other than tax-qualified
benefit plans of Banner Corporation) which owns beneficially or controls,
directly or indirectly, 10% or more of the outstanding shares of common stock of
Banner Corporation or an affiliate of such person or entity. This
provision of the Articles of Incorporation applies to any "Business
Combination," which is defined to include: (i) any merger or
consolidation of Banner Corporation with or into any Related Person; (ii) any
sale, lease, exchange, mortgage, transfer, or other disposition of 25% or more
of the assets of Banner Corporation to a Related Person; (iii) any merger or
consolidation of a Related Person with or into Banner Corporation or a
subsidiary of Banner Corporation; (iv) any sale, lease, exchange, transfer, or
other disposition of certain assets of a Related Person to Banner Corporation or
a subsidiary of Banner Corporation; (v) the issuance of any securities of Banner
Corporation or a subsidiary of Banner Corporation to a Related Person; (vi) the
acquisition by Banner Corporation or a subsidiary of Banner Corporation of any
securities of a Related Person; (vii) any reclassification of common stock of
Banner Corporation or any recapitalization involving the common stock of Banner
Corporation; or (viii) any agreement or other arrangement providing for any of
the foregoing.
Washington
law imposes restrictions on certain transactions between a corporation and
certain significant shareholders. Chapter 23B.19 of the Washington Business
Corporation Act prohibits a "target corporation," with certain exceptions, from
engaging in certain "significant business transactions" with an "Acquiring
Person" who acquires 10% or more of the voting securities of a target
corporation for a period of five years after such acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members of
the target corporation's Board of Directors prior to the date of the acquisition
or, at or subsequent to the date of the acquisition, the transaction is approved
by a majority of the members of the target corporation’s Board of Directors and
authorized
at
a shareholders’ meeting by the vote of at least two-thirds of the outstanding
voting shares of the target corporation, excluding shares owned or controlled by
the Acquiring Person. The prohibited transactions include, among
others, a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the Acquiring Person, termination of 5% or more
of the employees of the target corporation as a result of the Acquiring Person's
acquisition of 10% or more of the shares, or allowing the Acquiring Person to
receive any disproportionate benefit as a shareholder. After the five-year
period during which significant business transactions are prohibited, certain
significant business transactions may occur if certain "fair price" criteria or
shareholder approval requirements are met. Target corporations
include all publicly-traded corporations incorporated under Washington law, as
well as publicly traded foreign corporations that meet certain
requirements.
Amendment of Articles of
Incorporation and Bylaws. Amendments to our
Articles of Incorporation must be approved by our Board of Directors by a
majority vote of the Board and by our shareholders by a majority of the voting
group comprising all the votes entitled to be cast on the proposed amendment,
and a majority of each other voting group entitled to vote separately on the
proposed amendment; provided, however, that the affirmative vote of the holders
of at least 80% of votes entitled to be cast by each separate voting group
entitled to vote thereon (after giving effect to the provision limiting voting
rights, if applicable) is required to amend or repeal certain provisions of the
Articles of Incorporation, including the provision limiting voting rights, the
provisions relating to the removal of directors, shareholder nominations and
proposals, the approval of certain business combinations, calling special
meetings, director and officer indemnification by us and amendment of our Bylaws
and Articles of Incorporation. Our Bylaws may be amended by a
majority vote of our Board of Directors, or by a vote of 80% of the total votes
entitled to vote generally in the election of directors at a duly constituted
meeting of shareholders.
Shareholder Nominations and
Proposals. Our Articles of
Incorporation generally require a shareholder who intends to nominate a
candidate for election to the Board of Directors, or to raise new business at a
shareholder meeting to give not less than 30 nor more than 60 days' advance
notice to the Secretary of Banner Corporation. The notice provision
requires a shareholder who desires to raise new business to provide certain
information to us concerning the nature of the new business, the shareholder and
the shareholder's interest in the business matter. Similarly, a
shareholder wishing to nominate any person for election as a director must
provide us with certain information concerning the nominee and the proposing
shareholder.
The
cumulative effect of the restrictions on a potential acquisition of us that are
contained in our Articles of Incorporation and Bylaws, and federal and
Washington law, may be to discourage potential takeover attempts and perpetuate
incumbent management, even though certain shareholders may deem a potential
acquisition to be in their best interests, or deem existing management not to be
acting in their best interests.
Transfer
Agent
The
transfer agent and registrar for our common stock is Computershare.
SELLING
SECURITYHOLDERS
The
selling securityholders may include (i) Treasury, which acquired all of the
shares of Series A Preferred Stock and the warrant from us in a private
placement exempt from the registration requirements of the Securities Act of
1933, and (ii) any other person or persons holding shares of Series A Preferred
Stock or depositary shares evidencing fractional interests in shares of Series A
Preferred Stock, any portion of the warrant and any shares of our common stock
issued upon exercise of the warrant, to whom Treasury has transferred its
registration rights under the terms of the securities purchase agreement between
us and Treasury. Treasury is required to notify us in writing of any
such transfer of its registration rights within ten days after the transfer,
including the name and address of the transferee and the number and type of
securities with respect to which the registration rights have been
assigned. As of the date of this prospectus, Treasury has not
notified us of any such transfer. Accordingly, we believe that
Treasury currently holds record and beneficial ownership of 100% of the
outstanding shares of the Series A Preferred Stock and the entire amount of the
warrant (none of which has been exercised) covered by this
prospectus.
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124,000
shares of Series A Preferred Stock, representing 100% of the shares of
Series A Preferred Stock outstanding on the date of this prospectus, or,
in the event Treasury requests that we deposit the shares
of Series A Preferred Stock with a depositary in accordance with the
securities purchase agreement between us and Treasury, depositary shares
evidencing fractional share interests in such shares of Series A Preferred
Stock;
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a
ten-year warrant to purchase 1,707,989 shares of our common stock at an
exercise price of $10.89 per share, subject to adjustment as described
under “Description of Warrant”; and
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the
1,707,989 shares of our common stock issuable upon exercise of the warrant
(subject to adjustment as described under “Description of Warrant”), which
shares, if issued, would represent ownership of approximately
8.8% of the shares of our common stock outstanding as of June 30, 2009
(including the shares issuable upon exercise of the warrant in total
shares outstanding).
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For
purposes of this prospectus, we have assumed that, after completion of the
offering, none of the securities covered by this prospectus will be held by the
selling securityholders.
We do not
know when or in what amounts the selling securityholders may offer the
securities for sale. The selling securityholders might not sell any or all of
the securities offered by this prospectus. Because the selling securityholders
may offer all or some of the securities pursuant to this offering, and because,
to our knowledge, no sale of any of the securities is currently subject to any
agreements, arrangements or understandings, we cannot estimate the number of the
securities that will be held by the selling securityholders after completion of
the offering.
The only
potential selling securityholder whose identity we are currently aware of is
Treasury. Other than with respect to Treasury’s acquisition of the
Series A Preferred Stock and warrant from us, Treasury has not had a material
relationship with us.
Information
about the selling securityholders may change over time and changed information
will be set forth in supplements to this prospectus if and when
necessary.
The
selling securityholders may sell all or a portion of the securities beneficially
owned by them and offered by this prospectus from time to time directly or
through one or more underwriters, broker-dealers or agents. If securities are
sold through underwriters or broker-dealers, the selling securityholders will be
responsible for underwriting discounts or commissions or agent’s commissions.
The securities may be sold in one or more transactions at fixed prices, at
prevailing market prices at the time of the sale, at varying prices determined
at the time of sale, or at negotiated prices. These sales may be effected in
transactions, which may involve crosses or block transactions. The selling
securityholders may use any one or more of the following methods when selling
shares:
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on
any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of
sale;
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in
the over-the-counter market;
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in
transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
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through
the writing of options, whether such options are listed on an options
exchange or otherwise;
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ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
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block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
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purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
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an
exchange distribution in accordance with the rules of the applicable
exchange;
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privately
negotiated transactions;
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settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a
part;
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broker-dealers
may agree with the selling securityholders to sell a specified number of
such shares at a stipulated price per
share;
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a
combination of any such methods of sale;
and
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any
other method permitted pursuant to applicable
law.
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The
selling securityholders may also sell securities under Rule 144 under the
Securities Act of 1933, if available, rather than under this
prospectus.
Broker-dealers
engaged by the selling securityholders may arrange for other brokers-dealers to
participate in sales. If the selling securityholders effect such transactions by
selling securities to or through underwriters, broker-dealers or agents, such
underwriters, broker-dealers or agents may receive commissions in the form of
discounts, concessions or commissions from the selling securityholders or
commissions from purchasers of the securities for whom they may act as agent or
to whom they may sell as principal. These discounts, concessions or commissions
as to any particular underwriter, broker-dealer or agent will be in amounts to
be negotiated, which are not expected to be in excess of those customary in the
types of transactions involved.
In
connection with sales of securities, the selling securityholders may enter into
hedging transactions with broker-dealers or other financial institutions, which
may in turn engage in short sales of the securities in the course of hedging in
positions they assume. The selling securityholders may also sell securities
short and if such short sale shall take place after the date that the
registration statement of which this prospectus is a part is declared effective
by the Securities and Exchange Commission, the selling securityholders may
deliver securities covered by this prospectus to close out short positions and
to return borrowed shares in connection with such short sales. The selling
securityholders may also loan or pledge securities to broker-dealers that in
turn may sell such shares. The selling securityholders may also enter into
option or other transactions with broker-dealers or other financial institutions
or the creation of one or more derivative securities which require the delivery
to such broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction).
The
selling securityholders may pledge or grant a security interest in some or all
of the securities owned by them and, if they default in the performance of their
secured obligations, the pledgees or secured parties may offer and sell the
securities from time to time pursuant to this prospectus or any amendment or
supplement to this prospectus under Rule 424(b)(3) or other applicable provision
of the Securities Act of 1933, amending, if necessary, the identification of
selling securityholders to include the pledgee, transferee or other successors
in interest as selling securityholders under this prospectus. The selling
securityholders also may transfer and donate the securities in other
circumstances in which case the transferees, donees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
The
selling securityholders and any broker-dealer participating in the distribution
of the securities may be deemed to be “underwriters” within the meaning of the
Securities Act of 1933, and any commission paid, or any discounts or concessions
allowed to, any such broker-dealer may be deemed to be underwriting commissions
or discounts under the Securities Act of 1933. At the time a
particular offering of securities is made, a prospectus supplement, if required,
will be distributed which will set forth (i) the name of each such selling
securityholder and of the participating broker-dealer(s), (ii) the number
of securities involved, (iii) the price at which such securities
were
sold, (iv) the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable, and (v) any other facts material to the
transaction.
The
aggregate proceeds to the selling securityholders from the sale of
the securities will be the purchase price of the securities less
discounts and commissions, if any.
Under the
securities laws of some states, the securities covered by this prospectus may be
sold in such states only through registered or licensed brokers or dealers. In
addition, in some states the securities may not be sold unless such shares have
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
There can
be no assurance that any selling securityholder will sell any or all of the
securities registered pursuant to the registration statement of which this
prospectus forms a part.
If a
selling securityholder uses this prospectus for any sale of securities, it will
be subject to the prospectus delivery requirements of the Securities Act of
1933. The selling securityholders and any other person participating in such
distribution will be subject to applicable provisions of the Securities Exchange
Act of 1934 and the rules and regulations thereunder, including, without
limitation, Regulation M under the Exchange Act, which may limit the timing of
purchases and sales of any of the securities by the selling securityholders and
any other participating person. Regulation M may also restrict the ability of
any person engaged in the distribution of securities to engage in market-making
activities with respect to such securities. All of the foregoing may affect the
marketability of the securities covered by this prospectus and the ability of
any person or entity to engage in market-making activities with respect to such
securities.
Pursuant
to the securities purchase agreement between us and Treasury, we will pay
substantially all expenses of the registration of the securities covered by this
prospectus, including, without limitation, SEC filing fees and expenses of
compliance with state securities or “blue sky” laws; provided, however, that a selling
securityholder will pay all underwriting discounts and selling commissions, if
any. We will indemnify the selling securityholders against
liabilities, including some liabilities under the Securities Act of 1933, in
accordance with the securities purchase agreement between us and Treasury, or
the selling securityholders will be entitled to
contribution. We have agreed under the securities purchase
agreement between us and Treasury to cause such of our directors and senior
executive officers to execute customary lock-up agreements in such form and for
such time period up to 90 days as may be requested by a managing underwriter
with respect to an underwritten offering of securities covered by this
prospectus.
We do not
intend to apply for listing of the Series A Preferred Stock on any securities
exchange or for inclusion of the Series A Preferred Stock in any automated
quotation system unless we are requested to do so by Treasury. No
assurance can be given as to the liquidity of the trading market, if any, for
the Series A Preferred Stock.
The
validity of the securities offered by this prospectus has been passed upon for
us by Breyer & Associates PC, McLean, Virginia.
EXPERTS
The
consolidated financial statements of Banner Corporation as of December 31,
2008 and 2007, and for each of the years in the three year period ended
December 31, 2008, and management’s assessment of the effectiveness of
internal control over financial reporting as of December 31, 2008, have
been incorporated by reference herein in reliance upon the reports of Moss
Adams, LLP, independent registered public accounting firm, and upon the
authority of said firm as experts in accounting and auditing.
124,000
Shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A,
Liquidation
Preference $1,000 Per Share
(or
Depositary Shares Evidencing Fractional Interests in Such Shares)
1,707,989
Shares of Common Stock and Warrant to Purchase Such Shares
Banner
Corporation
_______________________________
PROSPECTUS
___________________________
_________
__, 2009