Financial Instruments With Off-Balance-Sheet Risk

12 Months Ended

Dec. 31, 2011

Financial Instruments With Off-Balance-Sheet Risk

Financial Instruments With Off-Balance-Sheet Risk

Note 27:  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Banks have financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of their customers.  These financial instruments include commitments to extend credit and standby letters of credit.  Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition.

The Banks exposure to credit loss in the event of nonperformance by the other party to the financial instrument from commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments.  The Banks use the same credit policies in making commitments and conditional obligations as for on-balance sheet instruments.  As of December 31, 2011, outstanding commitments for which no liability has been recorded consisted of the following (in thousands):

	Contract or Notional Amount
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit
Real estate secured for commercial, construction or   land development	$	94,730
Revolving open-end lines secured by 1-4 family   residential properties		115,008
Credit card lines		76,357
Other, primarily business and agricultural loans		458,149
Real estate secured by one- to four-family residential properties		81,992
Standby letters of credit and financial guarantees		7,872
Total	$	834,108
Commitments to sell loans secured by one- to four-family    residential properties	$	54,082

Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Many of the commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements.  Each customer’s creditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the customer.  Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties.

Standby letters of credit are conditional commitments issued to guarantee a customer’s performance or payment to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Interest rates on residential one- to four-family mortgage loan applications are typically rate locked (committed) to customers during the application stage for periods ranging from 15 to 45 days, the most typical period being 30 days.  Typically, pricing for the sale of these loans is locked with various qualified investors under a best-efforts delivery program at or near the time the interest rate is locked with the customer.  The Banks attempt to deliver these loans before their rate locks expire.  This arrangement generally requires delivery of the loans prior to the expiration of the rate lock.  Delays in funding the loans can require a lock extension.  The cost of a lock extension at times is borne by the customer and at times by the Bank.  These lock extension costs are not expected to have a material impact to Banner’s operations.  This activity is managed daily.  Changes in the value of rate lock commitments are recorded as assets and liabilities as explained in Note 1:  “Derivative Instruments.”

The Company has stand-alone derivative instruments in the form of interest rate swap agreements, which derive their value from underlying interest rates (see Note 1).  These transactions involve both credit and market risk.  The notional amount is the amount on which calculations, payments, and the value of the derivative are based.  The notional amount does not represent direct credit exposure.  Direct credit exposure is limited to the net difference between the calculated amount to be received and paid.  This difference represents the fair value of the derivative instrument.

The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements.  Credit risk of the financial contract is controlled through the credit approval, limits, and monitoring procedures and management does not expect the counterparty to fail its obligations.

Information pertaining to outstanding interest rate swaps at December 31, 2011 and 2010 follows (dollars in thousands):

	December 31
	2011			2010
Notional amount	$	117,110		$	19,213
Weighted average pay rate		4.66	%		5.36	%
Weighted average receive rate		3.85	%		0.26	%
Weighted average maturity in years		7.7			6.9
Unrealized gain included in total loans	$	3,559		$	2,796
Unrealized gain included in other assets	$	2,108		$	--
Unrealized loss included in other liabilities	$	5,666		$	2,796

At December 31, 2011, the Company’s interest rate swap agreements are with the Pacific Coast Bankers Bank, Wells Fargo, N.A., Credit Suisse, and various loan customers.