During the second quarter of 2012, Banner reversed most of its deferred tax asset valuation allowance, reflecting Banner’s return to profitability and its expectation of sustainable profitability in future periods. This expectation also led to the significant adjustment of the fair value estimate for the junior subordinated debentures issued by the Company. The substantial changes to both of these significant accounting estimates were directly linked to the improved performance and profitability of the Company. In the third quarter of 2012, Banner reversed an additional $4.0 million of the deferred tax valuation allowance, which substantially reduced the provision for income tax expense for the quarter, and the remaining $3.0 million balance will be recovered in the fourth quarter.
Banner’s third quarter 2012 results included a $473,000 net gain for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value, which was largely offset by $409,000 of OTTI charges related to certain equity securities issued by government sponsored entities. In the preceding quarter, Banner recorded a net loss of $19.1 million for fair value adjustments, which largely resulted from a $21.2 million increase in the estimated value of the junior subordinated debentures issued by the Company, which was partially offset by increases in the estimated value of similar trust preferred securities owned by the Company. Banner’s year-to-date results included net charges of $16.9 million for fair value adjustments compared to a net gain of $1.2 million for the same period a year ago. For the nine months ended September 30, 2012, OTTI charges were $409,000 compared to a recovery of $3.0 million for the nine months ended September 30, 2011. The third quarter and year-to-date results included an additional $2.5 million increase in the estimated fair value of the junior subordinated debentures, which primarily reflects management’s judgment with respect to further tightening in general market credit spreads. The impact of this adjustment was partially offset by similar adjustments to the fair value estimates for certain investment securities also carried at fair value.