Fair Value Accounting and Measurement

3 Months Ended

Jun. 30, 2012

Fair Value Accounting and Measurement:

Fair Value Accounting and Measurement

Note 11:  FAIR VALUE ACCOUNTING AND MEASUREMENT

Banner Bank has elected to record certain assets and liabilities at fair value.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale).  The GAAP standard (ASC 820, Fair Value Measurements) establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements.  Among other things, the standard requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s estimates for market assumptions.  These two types of inputs create the following fair value hierarchy:

·                     Level 1 – Quoted prices in active markets for identical instruments.  An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis.  A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

·                     Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data.  

·                     Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs from non-binding single dealer quotes not corroborated by observable market data. 

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.  In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments.  This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.  Transfers between levels of the fair value hierarchy are deemed to occur at the end of the reporting period.

Items Measured at Fair Value on a Recurring Basis:

Banner records trading account securities, securities available-for-sale, FHLB debt and junior subordinated debentures at fair value on a recurring basis.

·                     The securities assets primarily consist of U.S. Government and agency obligations, municipal bonds, corporate bonds, single issue trust preferred securities (TPS), pooled trust preferred collateralized debt obligation securities (TRUP CDO), mortgage-backed securities, asset-backed securities, equity securities and certain other financial instruments. Level 1 measurements are based upon quoted prices in active markets. Level 2 measurements are generally based upon a matrix pricing model from an investment reporting and valuation service.  Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. Level 3 measurements are based primarily on unobservable inputs.  In developing Level 3 measurements, management incorporates whatever market data might be available and uses discounted cash flow models where appropriate.  These calculations include projections of future cash flows, including appropriate default and loss assumptions, and market based discount rates.

From mid-2008 through the current quarter, the lack of active markets and market participants for certain securities resulted in an increase in Level 3 measurements.  This has been particularly true for our TRUP CDO securities.  As of June 30, 2012, we owned $32 million in current par value of these securities, exclusive of those securities the Company elected to write-off completely.  The market for TRUP CDO securities is inactive, which was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which TRUP CDOs trade and then by a significant decrease in the volume of trades relative to historical levels.  The new issue market is also inactive as almost no new TRUP CDOs have been issued since 2007.  There are still very few market participants who are willing and/or able to transact for these securities.  Thus, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issuer or of the fair value of the security.

Given these conditions in the debt markets and the absence of observable transactions in the secondary and new issue markets, management determined that for the TRUP CDOs at June 30, 2012 and December 31, 2011:

·                     The few observable transactions and market quotations that were available were not reliable for purposes of determining fair value,

·                     An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs was equally or more representative of fair value than the market approach valuation technique, and

·                     The Company’s TRUP CDOs should be classified exclusively within Level 3 of the fair value hierarchy because of the significant assumptions required to determine fair value at the measurement date.

The TRUP CDO valuations were derived using input from independent third parties who used proprietary cash flow models for analyzing collateralized debt obligations.  Their approaches to determining fair value involve considering the credit quality of the collateral, assuming a level of defaults based on the probability of default of each underlying trust preferred security, creating expected cash flows for each TRUP CDO security and discounting that cash flow at an appropriate risk-adjusted rate plus a liquidity premium.

Where appropriate, management reviewed the valuation methodologies and assumptions used by the independent third party providers and for certain securities determined that the fair value estimates were reasonable and utilized those estimates in the Company’s reported financial statements, while for other securities management adjusted the third party providers’ modeling to be more reflective of the characteristics of the Company’s remaining TRUP CDOs.

At June 30, 2012, Banner Bank also directly owned approximately $19 million in current book value of TPS securities issued by three individual financial institutions for which no direct market data or independent valuation source is available.  Similar to the TRUP CDOs above, there were too few, if any, issuances of new TPS securities or sales of existing TPS securities to provide Level 1 or even Level 2 fair value measurements for these securities.  Management, therefore, utilized a discounted cash-flow model to calculate the present value of each security’s expected future cash flows to determine their respective fair values.  Management took into consideration the limited market data that was available regarding similar securities, assessed the performance of the three individual issuers of TPS securities owned by the Company and concluded that each has demonstrated sufficient improvement in asset quality, capital position and general performance measures to warrant a reduction in the discount rate used in fair value modeling from the level used in prior periods.  The Company again sought input from independent third parties to help it establish an appropriate set of parameters to identify a reasonable range of discount rates for use in its fair value model.  These factors were then incorporated into the model at June 30, 2012, and discount rates equal to three-month LIBOR plus 550 basis points were used to calculate the respective fair values of these securities, compared to a range of LIBOR plus 600-800 basis points in the previous quarter.  The result of this change in the discount rates from this Level 3 fair value measurement was a fair value gain of $2.0 million in the quarter ended June 30, 2012.  At June 30, 2012, Banner Bank also had one TPS security issued by a large national bank with a par value of $5.0 million that was not actively traded, but for which more market data is available, permitting a Level 2 fair value measurement.  Subsequent to June 30, 2012, the issuer redeemed this security at a price of 101.92%.  The Company has and will continue to assess the appropriate fair value hierarchy for determination of these fair values on a quarterly basis.

·         Fair valuations for FHLB advances are estimated using fair market values provided by the lender, the FHLB of Seattle.  The FHLB of Seattle prices advances by discounting the future contractual cash flows for individual advances using its current cost of funds curve to provide the discount rate.  Management considers this to be a Level 2 input method.

·         The fair valuations of junior subordinated debentures (TPS-related debt that the Company has issued) were also valued using discounted cash flows.  As of June 30, 2012, all of these debentures carry interest rates that reset quarterly, using the three-month LIBOR index plus spreads of 1.38% to 3.35%.  While the quarterly reset of the index on this debt would seemingly keep its fair value reasonably close to book value, the disparity in the fixed spreads above the index and the inability to determine realistic current market spreads, due to lack of new issuances and trades, resulted in having to rely more heavily on assumptions about what spread would be appropriate if market transactions were to take place.  In periods prior to the third quarter of 2008, the discount rate used was based on recent issuances or quotes from brokers on the date of valuation for comparable bank holding companies and was considered to be a Level 2 input method.  However, as noted above in the discussions of TPS securities and TRUP CDOs, due to the unprecedented disruption of certain financial markets, management concluded that there were insufficient transactions or other indicators to continue to reflect these measurements as Level 2 inputs.  Due to this reliance on assumptions and not on directly observable transactions, management believes fair value for this instrument should follow a Level 3 input methodology.  From March 2009 to March 2012, the Company used a discount rate of LIBOR plus 800 basis points to value its junior subordinated debentures.  However, similar to the discussion above about the TPS securities, management assessed the performance of Banner Corporation and concluded that it has demonstrated sufficient improvement in asset quality, capital position and other performance measures to project sustainable profitability for the foreseeable future sufficient to warrant a reduction in the discount rate used in its fair value modeling.  Since the discount rate used in the fair value modeling is the most sensitive unobservable estimate in the calculation, the Company again utilized input from the same independent third party noted above to help it establish an appropriate set of parameters to identify a reasonable range of discount rates for use in its fair value model.  In valuing the debentures at June 30, 2012, management evaluated discounted cash flows to maturity and for the discount rate used the period-ending three-month LIBOR plus 550 basis points, resulting in a fair value loss on these instruments of $21.2 million in the current quarter ended June 30, 2012.

Derivative instruments include interest rate commitments related to one- to four family loans and residential mortgage backed securities and interest rate swaps.  The fair value of interest rate lock commitments and forward sales commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical trends, where appropriate.  The fair value of interest rate swaps is determined by using current market quotes on similar instruments provided by active broker/dealers in the swap market.  The changes in the fair value of all of these deirviative instruments is primarily attributable to changes in the level of market interest rates.  The Company has elected to record the fair value of these derivative instruments on a net basis.

The following tables present financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011 (in thousands):

	June 30, 2012
	Level 1	Level 2	Level 3	Total
Assets:
Securities—available-for-sale
U.S. Government and agency	$--	$228,024	$--	$228,024
Municipal bonds	--	33,702	--	33,702
Corporate bonds	--	4,068	--	4,068
Mortgage-backed securities	--	137,844	--	137,844
Asset-backed securities	--	32,492	--	32,492
Total available for sale securities	--	436,130	--	436,130
Securities—trading
U.S. Government and agency	--	1,645	--	1,645
Municipal bonds	--	5,601	--	5,601
TPS and TRUP CDOs	--	5,112	32,493	37,605
Mortgage-backed securities	--	32,063	--	32,063
Equity securities and other	--	454	--	454
Total trading securities	--	44,875	32,493	77,368
Derivatives
Interest rate lock commitments	--	364	--	364
Interest rate swaps	--	7,734	--	7,734
Total securities and derivatives	$--	$489,103	$32,493	$521,596
Liabilities
Advances from FHLB at fair value	$--	$10,423	$--	$10,423
Junior subordinated debentures net of   unamortized deferred issuance costs   at fair value	--	--	70,553	70,553
Derivatives
Interest rate sales forward commitments, net	--	414	--	414
Interest rate swaps	--	7,732	--	7,732
Total liabilities and derivatives	$--	$18,569	$70,553	$89,122

	December 31, 2011
	Level 1	Level 2	Level 3	Total
Assets:
Securities—available-for-sale
U.S. Government and agency	$--	$338,971	$--	$338,971
Municipal bonds	--	6,260	--	6,260
Corporate bonds	--	27,310	--	27,310
Mortgage-backed securities	--	93,254	--	93,254
Total available for sale securities	--	465,795	--	465,795
Securities—trading
U.S. Government and agency	--	2,635	--	2,635
Municipal bonds	--	5,962	--	5,962
TPS and TRUP CDOs	--	4,600	30,455	35,055
Mortgage-backed securities	--	36,673	--	36,673
Equity securities and other	--	402	--	402
Total trading securities	--	50,272	30,455	80,727
Derivatives
Interest rate lock commitments	--	617	--	617
Interest rate swaps	--	5,667	--	5,667
Total securities and derivatives	$--	$522,351	$30,455	$552,806
Liabilities
Advances from FHLB at fair value	$--	$10,533	$--	$10,533
Junior subordinated debentures net of   unamortized deferred issuance costs   at fair value	--	--	49,988	49,988
			,
Derivatives
Interest rate sales forward commitments, net	--	617	--	617
Interest rate swaps	--	5,666	--	5,666
Total assets and liabilities	$--	$16,816	$49,988	$66,804

The following table provides a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and six months ended June 30, 2012 and 2011 (in thousands):

	Three Months Ended June 30, 2012 Level 3 Fair Value Inputs		Six Months Ended June 30, 2012 Level 3 Fair Value Inputs
	TPS and TRUP CDOs	Borrowings--Junior Subordinated Debentures	TPS and TRUP CDOs	Borrowings--Junior Subordinated Debentures
Beginning balance	$31,056	$49,368	$30,455	$49,988
Total gains or losses recognized	--	--	--	--
Assets gains, including OTTI	1,437	--	2,038	--
Liabilities (gains)	--	21,185	--	20,565
Ending balance at June 30, 2012	$32,493	$70,553	$32,493	$70,553

	Three Months Ended June 30, 2011 Level 3 Fair Value Inputs		Six Months Ended June 30, 2011 Level 3 Fair Value Inputs
	TPS and TRUP CDOs	Borrowings--Junior Subordinated Debentures	TPS and TRUP CDOs	Borrowings--Junior Subordinated Debentures
Beginning balance	$29,670	$48,395	$29,661	$48,425
Total gains or losses recognized	--	--	--	--
Assets gains, including OTTI	1,058	--	1,109	--
Liabilities (gains)	--	(409)	--	(439)
Purchases, issuances and settlements	--	--	--	--
Paydowns and maturities	--	--	(42)	--
Transfers in and/or out of Level 3	--	--	--	--
Ending balance at June 30, 2011	$30,728	$47,986	$30,728	$47,986

The Company has elected to continue to recognize the interest income and dividends from the securities reclassified to fair value as a component of interest income as was done in prior years when they were classified as available-for-sale.  Interest expense related to the FHLB advances and junior subordinated debentures continues to be measured based on contractual interest rates and reported in interest expense.  The change in fair market value of these financial instruments has been recorded as a component of other operating income.

Items Measured at Fair Value on a Non-recurring Basis:

Carrying values of certain impaired loans are periodically evaluated to determine if valuation adjustments, or partial write-downs, should be recorded.  These non-recurring fair value adjustments are recorded when observable market prices or current appraised values of collateral indicate a shortfall in collateral value or discounted cash flows indicate a shortfall compared to current carrying values of the related loan.  If the Company determines that the value of the impaired loan is less than the carrying value of the loan, the Company either establishes an impairment reserve as a specific component of the allowance for loan and lease losses (ALLL) or charges off the impaired amount.  The remaining impaired loans are evaluated for reserve needs in homogenous pools within the Company’s ALLL methodology.  As of June 30, 2012, the Company reviewed all of its classified loans totaling $167 million and identified $105 million which were considered impaired.  Of those $105 million in impaired loans, $59 million were individually evaluated to determine if valuation adjustments, or partial write-downs, should be recorded, or if specific impairment reserves should be established.  The $59 million had original carrying values of $68 million which have been reduced by partial write-downs totaling $9 million.  In addition to these write-downs, in order to bring the impaired loan balances to fair value, the Company also established $7 million in specific reserves on these impaired loans.  Impaired loans that were collectively evaluated for reserve purposes within homogenous pools totaled $46 million and were found to require allowances totaling $3 million.  The $46 million evaluated for reserve purposes within homogeneous pools included $26 million of restructured loans which are currently performing according to their restructured terms.  The valuation inputs for impaired loans are considered to be Level 3 inputs.

The Company records REO (acquired through a lending relationship) at fair value on a non-recurring basis.  All REO properties are recorded at amounts which are equal to fair value of the properties based on independent appraisals (reduced by estimated selling costs) upon transfer of the loans to REO.  From time to time, non-recurring fair value adjustments to REO are recorded to reflect partial write-downs based on an observable market price or current appraised value of property.  Banner considers any valuation inputs related to REO to be Level 3 inputs.  The individual carrying values of these assets are reviewed for impairment at least annually and any additional impairment charges are expensed to operations.  For the three months ended June 30, 2012, the Company recognized $1.6 million of additional impairment charges related to REO assets, compared to $4.8 million for the same quarter one year earlier.  For the six months ended June 30, 2012, these impairment charges totaled $3.2 million, compared to $7.8 million for the same period in 2011.

The following tables present the fair value measurement of assets and liabilities measured at fair value on a non-recurring basis and the level within the fair value hierarchy of the fair value measurements for those assets at June 30, 2012 and December 31, 2011 (in thousands):

	At or For the Six Months Ended June 30, 2012
	Fair Value	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	Losses Recognized During the Period
Impaired loans	$44,428	$--	$--	$44,428	$13,352
REO	25,816	--	--	25,816	3,357

	At or For the Year Ended December 31, 2011
	Fair Value	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	Losses Recognized During the Period
Impaired loans	$47,959	$--	$--	$47,959	$21,902
REO	42,965	--	--	42,965	7,325

Fair Values of Financial Instruments:

The following table presents estimated fair values of the Company’s financial instruments as of June 30, 2012 and December 31, 2011, whether or not recognized or recorded in the consolidated balance sheets.  The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies.  However, considerable judgment is necessary to interpret market data in the development of the estimates of fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.  The estimated fair value of financial instruments is as follows (in thousands):

	June 30, 2012
	Carrying Value	Estimated Fair Value
Assets:
Cash and due from banks	$189,176	$189,176
Securities—trading	77,368	77,368
Securities—available-for-sale	486,130	486,130
Securities—held-to-maturity	83,312	89,153
Loans receivable held for sale	6,752	6,821
Loans receivable	3,205,505	3,132,055
FHLB stock	37,371	37,371
Bank-owned life insurance	59,800	59,800
Mortgage servicing rights	6,202	6,202
Derivatives	8,098	8,098
Liabilities:
Demand, NOW and money market accounts	1,589,716	1,522,791
Regular savings	664,736	630,020
Certificates of deposit	1,171,297	1,176,892
FHLB advances at fair value	10,423	10,423
Junior subordinated debentures at fair value	70,553	70,553
Other borrowings	90,030	90,030
Derivatives	8,146	8,146
Off-balance-sheet financial instruments:
Commitments to originate loans	364	364
Commitments to sell loans	(414)	(414)

	December 31, 2011
	Carrying Value	Estimated Fair Value
Assets:
Cash and due from banks	$132,436	$132,436
Securities—trading	80,727	80,727
Securities—available-for-sale	465,795	465,795
Securities—held-to-maturity	75,438	80,107
Loans receivable held for sale	3,007	3,069
Loans receivable	3,293,331	3,224,112
FHLB stock	37,371	37,371
Bank-owned life insurance	58,563	58,563
Mortgage servicing rights	5,584	5,584
Derivatives	6,284	6,284
Liabilities:
Demand, NOW and money market accounts	1,555,561	1,487,080
Regular savings	669,596	630,450
Certificates of deposit	1,250,497	1,258,431
FHLB advances at fair value	10,533	10,533
Junior subordinated debentures at fair value	49,988	49,988
Other borrowings	152,128	152,128
Derivatives	6,283	6,283
Off-balance-sheet financial instruments:
Commitments to originate loans	617	617
Commitments to sell loans	(617)	(617)

Fair value estimates, methods, assumptions and the level within the fair value hierarchy of the fair value measurements are set forth below for the Company’s financial and off-balance-sheet instruments:

Cash and Due from Banks:  The carrying amount of these items is a reasonable estimate of their fair value and management considers this to be a Level 1 measurement.

Securities:  The estimated fair values of investment securities and mortgaged-backed securities are priced using current active market quotes, if available, which are considered Level 1 measurements.  For most of the portfolio, matrix pricing based on the securities’ relationship to other benchmark quoted prices is used to establish the fair value.  These measurements are considered Level 2.  Due to the increasing credit concerns in the capital markets and inactivity in the trust preferred markets that have limited the observability of market spreads for some of the Company’s TRUP CDO securities (see earlier discussion above in determining the securities’ fair market value), management has classified these securities as a Level 3 fair value measure.

Loans Receivable:  Fair values are estimated first by stratifying the portfolios of loans with similar financial characteristics.  Loans are segregated by type such as multifamily real estate, residential mortgage, nonresidential mortgage, commercial/agricultural, consumer and other.  Each loan category is further segmented into fixed- and adjustable-rate interest terms and by performing and non-performing categories.  A preliminary estimate of fair value is then calculated based on discounted cash flows using as a discount rate the current rate offered on similar products, plus an adjustment for liquidity to reflect the non-homogeneous nature of the loans.  The preliminary estimate is then further reduced by the amount of the allowance for loan losses to arrive at a final estimate of fair value.  Fair value for significant non-performing loans is also based on recent appraisals or estimated cash flows discounted using rates commensurate with risk associated with the estimated cash flows.  Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.  Management considers this to be a Level 3 measurement.

The fair value of performing residential mortgages held for sale is estimated based upon secondary market sources by type of loan and terms such as fixed or variable interest rates.  Management considers this to be a Level 2 measurement.

FHLB Stock:  The fair value is based upon the redemption value of the stock which equates to its carrying value.  Management considers this to be a Level 3 measurement.

Mortgage Servicing Rights:  Fair values are estimated based on current pricing for sales of servicing for new loans adjusted up or down based on the serviced loan’s interest rate versus current new loan rates.  Management considers this a Level 3 measurement.

Deposit Liabilities: The fair value of deposits with no stated maturity, such as savings, checking and NOW accounts, is estimated by applying decay rate assumptions to segregated portfolios of similar deposit types to generate cash flows which are then discounted using short-term market interest rates.  The market value of certificates of deposit is based upon the discounted value of contractual cash flows.  The discount rate is determined using the rates currently offered on comparable instruments. Management considers this a Level 3 measurement.

FHLB Advances and Other Borrowings:  Fair valuations for Banner’s FHLB advances are estimated using fair market values provided by the lender, the FHLB of Seattle.  The FHLB of Seattle prices advances by discounting the future contractual cash flows for individual advances using its current cost of funds curve to provide the discount rate.  This is considered to be a Level 2 input method.  Other borrowings are priced using discounted cash flows to the date of maturity based on using current rates at which such borrowings can currently be obtained.

Junior Subordinated Debentures:  Due to the increasing credit concerns in the capital markets and inactivity in the trust preferred markets that have limited the observability of market spreads (see earlier discussion above in determining the junior subordinated debentures’ fair market value), junior subordinated debentures have been classified as a Level 3 fair value measure.  Management believes that the credit risk adjusted spread and resulting discount rate utilized is indicative of those that would be used by market participants.

Commitments:  Commitments to sell loans with notional balances of $84 million and $54 million at June 30, 2012 and December 31, 2011, respectively, have a carrying value of $364,000 and $617,000, representing the fair value of such commitments.  Interest rate lock commitments to originate loans held for sale with notional balances of $84 million and $54 million at June 30, 2012 and December 31, 2011, respectively, have a carrying value of ($414,000) and ($617,000).  The fair value of commitments to sell loans and of interest rate locks reflect changes in the level of market interest rates from the date of the commitment or rate lock to the date of the Company's financial statements.  Management considers this to be a Level 2 measurement.  Other commitments to fund loans totaled $854 million and $780 million at June 30, 2012 and December 31, 2011, respectively, and have no carrying value at both dates.  There were no commitments to purchase securities at June 30, 2012, and no commitments to purchase securities at December 31, 2011.

Limitations: The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2012 and December 31, 2011.  Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business.  The fair value has not been estimated for assets and liabilities that are not considered financial instruments.  Significant assets and liabilities that are not financial instruments include the deferred tax assets/liabilities; land, buildings and equipment; costs in excess of net assets acquired; and REO.