Banner Corporation Announces Second Quarter Results; Includes Provision for Loan Losses of $15 Million and Non-cash Write-down of Goodwill; Remains 'Well Capitalized'


WALLA WALLA, Wash., July 28, 2008 (PRIME NEWSWIRE) -- Banner Corporation (Nasdaq:BANR), the parent company of Banner Bank and Islanders Bank, today reported that, as a result of the significant decline in its stock price and market capitalization during the second quarter in conjunction with similar declines in the value of most financial institutions and the ongoing disruption in related financial markets, it has decided to reduce the carrying value of goodwill by $50 million in its Statement of Financial Condition as of June 30, 2008. While this write-down of goodwill is a non-cash charge that does not affect the Company's or the Banks' liquidity or operations, the adjustment brings the Company's book value and tangible book value more closely in line with each other and more accurately reflects current market conditions. Also, since goodwill is excluded from regulatory capital, this impairment charge (which is not deductible for tax purposes) does not have an adverse effect on the regulatory capital ratios of the Company or either of its subsidiary banks, each of which continues to remain "well capitalized" under the regulatory requirements.

Banner also reported that, as a result of a $15 million provision for loan losses, the Company recorded a net operating loss, excluding fair value adjustments and the goodwill impairment charge*, of $2.7 million, or $0.17 per diluted share, for the quarter ended June 30, 2008, compared to net operating income, excluding fair value adjustments, of $8.3 million, or $0.56 per diluted share, for the quarter ended June 30, 2007. For the six months ended June 30, 2008, net operating income, excluding fair value adjustments and the goodwill impairment charge, was $587,000, or $0.04 per share, compared to $15.4 million, or $1.12 per diluted share, for the six months ended June 30, 2007.

"The first half of 2008 has presented a challenging operating environment for Banner, as well as for the entire financial services industry," stated D. Michael Jones, President and Chief Executive Officer. "This difficult environment has led to a great deal of uncertainty with respect to the valuation of certain assets, including goodwill. As goodwill is deducted for the purpose of regulatory capital calculations, is ignored by most institutional investors and has no effect on liquidity or operations, there is no meaningful economic effect from this non-cash accounting entry. At least annually and more often if appropriate, all companies are required to determine the appropriate carrying value of goodwill as an asset. As a result of the significant decline in many banks' common stock prices, including Banner's, and the lack of merger transactions in recent months, measuring the value of goodwill at June 30, 2008 has become difficult and imprecise at best; however, it is clear that the value has declined. Therefore, we have taken this action to reflect current market conditions as of June 30, 2008. It is important to note that this change is not a result of any concern with the performance of any of last year's acquisitions, each of which is performing in line with our expectations at the time of purchase."

"This difficult environment, including in particular a weakened housing market, also required that we significantly increase our provision for loan losses in order to build our reserves," Jones added. "This elevated level of loan loss provisioning depressed our operating results but was an appropriate response to an increase in non-performing loans and further stress in housing markets which in the second quarter became more apparent in the Puget Sound (Seattle) region as well as in the greater Portland, Oregon and Boise, Idaho areas. Aside from the obvious concerns related to housing markets, the Company's operations continued to progress well during the quarter, reflecting the commitment of our dedicated employees. We are particularly pleased to have added two new branches during the quarter, one in Bellevue, Washington, and one in the Pearl District of Portland, Oregon, two important locations for the long-term success of the Company. And, as we have indicated before, we continue to have a very positive view on the future economic prospects for the Northwest markets that we serve."

Banner's results included a net gain of $649,000 ($415,000 after tax) in the second quarter of 2008, compared to a net loss of $1.9 million ($1.2 million after tax) in the second quarter of 2007 for fair value adjustments* as a result of changes in the valuation of financial instruments carried at fair value in accordance with the adoption of Statement of Financial Accounting Standards (SFAS) Nos. 157 and 159. For the six months ended June 30, 2008, the fair value adjustments resulted in a net gain of $1.5 million ($942,000 after tax), compared to a net loss of $697,000 ($446,000 after tax) for the first six months of 2007.

* Earnings information excluding the goodwill impairment charge and fair value adjustments (net income from recurring operations) represent non-GAAP (Generally Accepted Accounting Principles) financial measures. Management has presented these non-GAAP financial measures in this earnings release because it believes that they provide more useful and comparative information to assess trends in the Company's core operations reflected in the current quarter and year-to-date results. Where applicable, the Company has also presented comparable earnings information using GAAP financial measures.

Credit Quality

"The housing market has continued to soften in our primary markets in the Puget Sound, Portland and Boise, resulting in increasing delinquencies and non-performing assets, primarily construction and land development loans," said Jones. "As a result, we have chosen again this quarter to increase our reserves through a higher level of provisioning, as property values have clearly declined. As well as covering known issues and net charge-offs, the second quarter's provision allowed us to maintain an appropriate portion of the allowance for loan losses against loans that are currently performing according to their repayment terms."

Banner added $15.0 million to its provision for loan losses in the second quarter of 2008, compared to $6.5 million in the first quarter of 2008 and $1.4 million in the second quarter of 2007. The allowance for loan losses at June 30, 2008 was $58.6 million, representing 1.47% of total loans outstanding. Non-performing loans were $89.9 million at June 30, 2008, compared to $54.4 million in the previous quarter and $13.2 million at June 30, 2007. In addition, Banner's real estate owned and repossessed assets increased to $11.4 million at June 30, 2008 compared to $7.6 million in the previous quarter and $1.7 million at June 30, 2007. Banner's net charge-offs in the current quarter totaled $6.9 million, or 0.18% of average loans.

"Although one-to-four family residential construction and related lot and land loans represent 26% of our portfolio and 81% of our nonperforming assets, they are significantly diversified with respect to geography and sub-markets, price ranges and borrowers," added Jones. "We are proactively monitoring and managing this portion of our portfolio and we are actively engaged with our borrowers in resolving problem loans." The geographic distribution of construction and land development loans is approximately 29% in the greater Puget Sound market, 33% in the greater Portland, Oregon market, and 7% in the greater Boise, Idaho market, with the remaining 31% distributed in various eastern Washington, eastern Oregon and northern Idaho markets served by Banner Bank. While nonperforming assets are similarly geographically disbursed, they are concentrated largely in land and land development loans. The geographic distribution of nonperforming construction, land and land development loans and real estate owned included approximately $34.2 million, or 42%, in the Puget Sound region, $17.6 million, or 22%, in the greater Portland market area and $18.6 million, or 23%, in the greater Boise market area. "Although additional charge-offs will undoubtedly occur, based on recent appraisals, regular inspections and our understanding of the local markets, we are confident losses will not approach the overly pessimistic projections of certain analysts and equity market participants," stated Jones. "And, while the current imbalance in the housing markets will likely require twelve to eighteen months to be fully resolved, we believe we have the management and resources to address these challenges and still maintain a strong forward momentum that will allow Banner Corporation and our talented employees to prosper from the many business opportunities available across our Northwest franchise."

Income Statement Review

Banner's net interest margin was 3.50% for the second quarter of 2008, compared to 3.63% in the preceding quarter and 4.11% for the second quarter of 2007. For the first half of 2008, the net interest margin was 3.56% compared to 4.04% in the first half of 2007. Funding costs decreased 44 basis points compared to the previous quarter and decreased 105 basis points from the second quarter a year earlier, while asset yields decreased 55 basis points from the prior linked quarter and 160 basis points from the second quarter a year ago.

"During the second quarter we continued to experience decreasing asset yields which significantly reduced our net interest margin, as the full impact of the Federal Reserve's earlier rate cuts were realized and changes in the mix of the loan portfolio reduced the proportional contribution of some of the higher yielding loan categories," said Jones. "Deposit costs also declined in the second quarter of 2008, but have not yet matched the more immediate impact of lower market interest rates on a substantial portion of our loan portfolio. In addition, the higher level of delinquencies is also reflected in our lower net interest margin, as non-accruing loans reduced the margin by approximately 16 basis points in this year's second quarter compared to approximately three basis points in the same quarter a year earlier."

In the second quarter of 2008, net interest income before the provision for loan losses was $37.0 million, compared to $37.4 million in the preceding quarter and $38.1 million in the same quarter a year ago. In the first half of 2008, net interest income before the provision for loan losses increased 6% to $74.3 million, compared to $70.3 million in the first half of 2007. Revenues from recurring operations (net interest income before the provision for loan losses plus other operating income excluding fair value adjustments) were $45.0 million in the second quarter of 2008, up slightly from $44.7 million for the first quarter of 2008 and essentially unchanged from the second quarter a year ago. Revenues from recurring operations for the first half of 2008 increased 9% to $89.7 million, compared to $82.3 million in the first half of 2007.

Total other operating income from recurring operations (excluding fair value adjustments) for the second quarter increased to $8.0 million up from $7.4 million in the preceding quarter and increased 16% compared to $6.9 million for the same quarter a year ago. For the first half of 2008, total other operating income from recurring operations increased 28% to $15.3 million, compared to $12.0 million in the first half of 2007. Income from deposit fees and other service charges increased to $5.5 million in the second quarter of 2008, compared to $5.0 million for the preceding quarter, and increased 34% from $4.1 million in the second quarter a year ago. Income from mortgage banking operations, at $1.6 million, was nearly unchanged in the second quarter compared to the preceding quarter but decreased slightly from $1.8 million in the same period a year ago. For the first half of the year, mortgage banking revenues were essentially unchanged but are likely to decline modestly over the remainder of the year given the lower levels of residential sales activity.

"Our expense ratios were higher in the second quarter, compared to the first quarter of the year, largely as a result of higher collection costs and other professional fees, as well as $678,000 of combined operating expenses and valuation adjustments for real estate owned and other repossessed assets and $306,000 of increased costs of FDIC insurance," said Jones. "During the quarter we incurred additional costs associated with the opening of our two new offices. Although we anticipate collection costs will continue to be above historical levels for the next few quarters, we expect little change in total operating expense levels going forward this year and have no plans to add additional branches during the remainder of the year." Other operating expenses from recurring operations (excluding the goodwill write-off) were $35.2 million in the second quarter of 2008, compared to $33.7 million in the preceding quarter and $31.3 million in the second quarter a year ago. The increase from the prior year reflects the effects of new branch openings and last year's acquisitions. For the first half of the year other operating expenses from recurring operations were $68.9 million compared to $57.4 million in the first half of 2007. Operating expenses from recurring operations as a percentage of average assets was 3.08% in the second quarter of 2008, compared to 3.01% in the previous quarter and 3.14% in the second quarter a year ago.

Balance Sheet Review

"We have significantly slowed our origination of construction and land development loans as we remain very cautious in our underwriting," said Jones. "As a result, our construction and development loan balances declined by $32 million during the most recent quarter compared to March 31, 2008 balances, including a $31 million decrease in one-to-four family construction loans. By contrast, we continued to have good growth in all other loan categories." Net loans increased 9% to $3.91 billion at June 30, 2008, compared to $3.58 billion a year earlier. Assets increased 9% to $4.64 billion at June 30, 2008, compared to $4.27 billion a year earlier.

Total deposits increased 5% to $3.76 billion at June 30, 2008, compared to $3.59 billion at the end of June 2007. Non-interest-bearing accounts increased 5% and certificates of deposit increased 13% during the twelve months ending June 30, 2008, while total transaction and savings accounts decreased 7%. "Our retail deposit activity has been steady, although we have seen a decline in average deposit balances for certain real estate-related customers as their business activity has slowed," said Jones. "We are optimistic that our expanded branch network will deliver continued deposit growth and related fee income as we have experienced a healthy increase in the number of transaction deposit accounts."

Tangible shareholders' equity at June 30, 2008 was $295.2 million compared to $273.6 million at June 30, 2007. Tangible book value per share was $18.38 at quarter-end, compared to $17.72 a year earlier. During the quarter ended June 30, 2008, the Company issued 402,000 shares of common stock through its Dividend Reinvestment and Stock Purchase Plan and in connection with the exercise of vested stock options at an average price of $18.13 per share. At June 30, 2008, Banner had 16.3 million shares outstanding, while it had 15.7 million shares outstanding a year ago.

"In the past few months, the market price of Banner's common stock has significantly declined due in part to the uncertainty revolving around the U.S. housing market and Banner's commitment to loans for construction of one-to-four family dwellings and related land and lot loans," said Jones. "Further, we believe the price has been partially influenced by speculation by short sellers concerning our potential need to raise additional capital. To set the record straight, aside from continuation of our dividend reinvestment and stock purchase plan, Banner Corporation does not now intend to sell common stock or issue other capital instruments as our analysis indicates that the Company and its subsidiary banks have sufficient capital to accommodate the orderly collection of existing housing and land loan portfolios at current price levels and absorption rates and remain well capitalized during the entire process.

Accounting Treatments

Banner Corporation adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, and SFAS No. 157, Fair Value Measurements, effective January 1, 2007. SFAS No. 159, which was issued in February 2007, generally permits the measurement of selected eligible financial instruments at fair value at specified election dates. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles (GAAP), and expands disclosures about fair value measurement. The Company has chosen to apply SFAS No. 159 to certain investment securities and wholesale borrowings, including its junior subordinated debentures, to allow it more flexibility with respect to the management of those assets and liabilities and its interest rate risk position.

Restatement and Reclassification

The Statement of Financial Condition for the quarter ended June 30, 2007 has been restated to reflect non-material cumulative adjustments to the common stock and retained earnings components of stockholders' equity related to the tax treatment of certain elements of stock-based compensation for periods prior to January 1, 2007. The effects of these adjustments are reductions of $380,000 in income taxes payable and $2.4 million in retained earnings and increases of $2.8 million and $380,000, respectively, in common stock (paid-in capital) and total stockholders' equity as of December 31, 2006. These adjustments have immaterially affected certain previously reported ratios for the quarter ended June 30, 2007.

In addition, certain reclassifications have been made to the prior periods' consolidated financial statements and/or schedules to conform to the current period's presentation. These reclassifications may have slightly affected certain ratios for the prior periods. These reclassifications had no effect on retained earnings or net income as previously presented and the effect of these reclassifications is considered immaterial.

Conference Call

Banner will host a conference call on Tuesday, July 29, 2008, at 7:00 a.m. PDT, to discuss second quarter results. The conference call can be accessed live by telephone at 303-205-0044. To listen to the call online, go to the Company's website at www.bannerbank.com. An archived recording of the call can be accessed by dialing 303-590-3000, passcode 11116845# until Tuesday, August 5, 2008, or via the Internet at www.bannerbank.com.

About the Company

Banner Corporation is a $4.6 billion bank holding company operating two commercial banks in Washington, Oregon and Idaho. Banner serves the Pacific Northwest region with a full range of deposit services and business, commercial real estate, construction, residential, agricultural and consumer loans. Visit Banner Bank on the Web at www.bannerbank.com.

This press release contains statements that the Company believes are "forward-looking statements." These statements relate to the Company's financial condition, results of operations, plans, objectives, future performance or business. You should not place undue reliance on these statements, as they are subject to risks and uncertainties. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Company may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors which could cause actual results to differ materially include, but are not limited to, the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; results of examinations of us by the Board of Governors of the Federal Reserve System and our bank subsidiaries by the Federal Deposit Insurance Corporation, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, 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; fluctuations in agricultural commodity prices, crop yields and weather conditions; our ability to control operating costs and expenses; our ability to implement our branch expansion strategy; 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 related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; legislative or regulatory changes that adversely affect our business; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board; war or terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and other risks detailed in Banner's reports filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended December 31, 2007.


 RESULTS OF OPERATIONS
 ---------------------
 (in thousands except shares and per share data)

                         Quarters Ended             Six Months Ended
                -------------------------------- ---------------------
                  Jun 30,    Mar 31,    Jun 30,    Jun 30,    Jun 30,
                   2008       2008       2007       2008       2007
                ---------- ---------- ---------- ---------- ----------
 INTEREST INCOME:
  Loans
   receivable   $   64,094 $   68,073 $   71,047 $  132,167 $  132,875
  Mortgage-
   backed
   securities        1,087      1,153      1,535      2,240      3,310
  Securities
   and cash
   equivalents       2,861      2,727      1,829      5,588      3,672
                ---------- ---------- ---------- ---------- ----------
                    68,042     71,953     74,411    139,995    139,857

 INTEREST
  EXPENSE:
  Deposits          27,565     30,063     32,378     57,628     59,988
  Federal Home
   Loan Bank
   advances          1,301      1,849      1,164      3,150      3,441
  Other
   borrowings          530        610        790      1,140      1,718
  Junior
   subordinated
   debentures        1,666      2,064      1,969      3,730      4,423
                ---------- ---------- ---------- ---------- ----------
                    31,062     34,586     36,301     65,648     69,570
                ---------- ---------- ---------- ---------- ----------
  Net interest
   income before
   provision
   for loan
   losses           36,980     37,367     38,110     74,347     70,287

 PROVISION FOR
  LOAN LOSSES       15,000      6,500      1,400     21,500      2,400
                ---------- ---------- ---------- ---------- ----------
  Net interest
   income           21,980     30,867     36,710     52,847     67,887

 OTHER OPERATING
  INCOME:
  Deposit fees
   and other
   service
   charges           5,494      5,013      4,090     10,507      7,053
  Mortgage
   banking
   operations        1,579      1,615      1,808      3,194      3,163
  Loan servicing
   fees                547        402        373        949        748
  Miscellaneous        363        331        592        694      1,053
                ---------- ---------- ---------- ---------- ----------
                     7,983      7,361      6,863     15,344     12,017
  Increase
   (Decrease)
   in valuation
   of financial
   instruments
   carried at
   fair value          649        823     (1,877)     1,472       (697)
                ---------- ---------- ---------- ---------- ----------
  Total other
   operating
   income            8,632      8,184      4,986     16,816     11,320

 OTHER OPERATING
  EXPENSE:
  Salary and
   employee
   benefits         19,744     19,638     19,635     39,382     36,103
  Less
   capitalized
   loan origin-
   ation costs      (2,728)    (2,241)    (3,175)    (4,969)    (5,769)
  Occupancy
   and equipment     5,989      5,868      5,106     11,857      9,458
  Information /
   computer data
   services          1,840      1,989      1,767      3,829      3,136
  Payment and
   card process-
   ing services      1,768      1,531      1,298      3,299      2,286
  Professional
   services          1,331        755        723      2,086      1,282
  Advertising
   and marketing     1,677      1,418      1,867      3,095      3,724
  State/municipal
   business and
   use taxes           576        564        470      1,140        878
  Amortization
   of core
   deposit
   intangibles         725        736        352      1,461        352
  Miscellaneous      4,300      3,450      3,256      7,750      5,920
                ---------- ---------- ---------- ---------- ----------
                    35,222     33,708     31,299     68,930     57,370
  Goodwill
   write-off        50,000         --         --     50,000         --
                ---------- ---------- ---------- ---------- ----------
  Total other
   operating
   expense          85,222     33,708     31,299    118,930     57,370
                ---------- ---------- ---------- ---------- ----------
  Income (Loss)
   before
   provision
   (benefit)
   for income
   taxes           (54,610)     5,343     10,397    (49,267)    21,837

 PROVISION
  (BENEFIT) FOR
  INCOME TAXES      (2,305)     1,509      3,286       (796)     6,913
                ---------- ---------- ---------- ---------- ----------
 NET INCOME
  (LOSS)        $  (52,305)$    3,834 $    7,111 $  (48,471)$   14,924
                ========== ========== ========== ========== ==========
 Earnings (Loss)
  per share
   Basic        $    (3.31)$     0.24 $     0.49 $    (3.06)$     1.11
   Diluted      $    (3.30)$     0.24 $     0.48 $    (3.05)$     1.09

 Cumulative
  dividends
  declared per
  common share  $     0.20 $     0.20 $     0.19 $     0.40 $     0.38

 Weighted average
  shares
  outstanding
   Basic        15,821,934 15,847,921 14,519,669 15,834,728 13,426,939
   Diluted      15,872,604 15,965,032 14,791,195 15,877,093 13,727,889

 Shares repurch-
  ased during
  the period            --    613,903      2,624    613,903     10,610
 Shares issued
  in connection
  with acquis-
  itions                --         --  2,592,611         --  2,592,611
 Shares issued
  in connection
  with exercise
  of stock
  options or DRIP  401,645    251,391    110,820    653,036    784,215

 ---------------------------------------------------------------------
 PRO FORMA DISCLOSURES EXCLUDING THE EFFECTS OF THE CHANGE IN THE
  VALUATION OF FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE AND
  GOODWILL WRITE-OFF
 NET INCOME
  (LOSS) from
  above         $  (52,305)$    3,834 $    7,111 $  (48,471)$   14,924
  ADJUSTMENTS
   FOR CHANGE
   IN VALUATION
   OF FINANCIAL
   INSTRUMENTS
   AND GOODWILL
   WRITE-OFF
  Change in
   valuation of
   financial
   instruments
   carried at
   fair value         (649)      (823)     1,877     (1,472)       697
  Goodwill
   write-off        50,000         --         --     50,000         --
  Income tax
   provision
   (benefit)
   related to
   above items         234        296       (676)       530       (251)
                ---------- ---------- ---------- ---------- ----------
   Above items,
    net of income
    tax provision
    (benefit)       49,585       (527)     1,201     49,058        446
                ---------- ---------- ---------- ---------- ----------

 NET INCOME
  (LOSS) FROM
  RECURRING
  OPERATIONS    $   (2,720)$    3,307 $    8,312 $      587 $   15,370
                ========== ========== ========== ========== ==========

 Earnings (Loss)
  per share
  EXCLUDING the
  effects of
  change in
  valuation of
  financial
  instruments
  carried at
  fair value and
  goodwill
  write-off
  Basic         $    (0.17)$     0.21 $     0.57 $     0.04 $     1.14
  Diluted       $    (0.17)$     0.21 $     0.56 $     0.04 $     1.12


 FINANCIAL  CONDITION
 --------------------
 (in thousands except shares and per share data)

                   Jun 30, 2008 Mar 31, 2008 Jun 30, 2007 Dec 31, 2007
                    -----------  -----------  -----------  -----------
                                              Restated(1)
 ASSETS
 ------
 Cash and due from
  banks             $    91,953  $    93,634  $    81,366  $    98,120
 Federal funds and
  interest-bearing
  deposits                  430       28,760       25,437          310
 Securities - at
  fair value            238,670      226,910      182,969      202,863
 Securities - held
  to maturity            55,612       55,647       48,196       53,516
 Federal Home Loan
  Bank stock             37,371       37,371       37,291       37,371

 Loans receivable:
   Held for sale          6,817        6,118        8,178        4,596
   Held for portfolio 3,966,482    3,833,875    3,610,174    3,805,021
   Allowance for
    loan losses         (58,570)     (50,446)     (43,248)     (45,827)
                    -----------  -----------  -----------  -----------
                      3,914,729    3,789,547    3,575,104    3,763,790

 Accrued interest
  receivable             22,890       23,795       24,885       24,980
 Real estate owned
  held for sale, net     11,390        7,572        1,700        1,867
 Property and
  equipment, net         97,928       98,808       87,327       98,098
 Goodwill and other
  intangibles, net       86,205      136,918      129,126      137,654
 Bank-owned life
  insurance              52,213       51,725       50,441       51,483
 Other assets            26,953       21,538       25,207       22,606
                    -----------  -----------  -----------  -----------
                    $ 4,636,344  $ 4,572,225  $ 4,269,049  $ 4,492,658
                    ===========  ===========  ===========  ===========

 LIABILITIES
 -----------
 Deposits:
   Non-interest-
    bearing         $   477,144  $   486,201  $   455,628  $   484,251
   Interest-bearing
    transaction and
    savings accounts  1,216,217    1,297,215    1,307,680    1,288,112
   Interest-bearing
    certificates      2,063,392    1,909,894    1,829,473    1,848,230
                    -----------  -----------  -----------  -----------
                      3,756,753    3,693,310    3,592,781    3,620,593

 Advances from
  Federal Home Loan
  Bank at fair value    182,496      155,405       33,826      167,045
 Customer repurchase
  agreements and
  other borrowings      164,192      135,032       71,926       91,724

 Junior subordinated
  debentures at
  fair value            101,358      105,516       98,419      113,270

 Accrued expenses
  and other
  liabilities            37,438       39,263       51,792       47,989
 Deferred
  compensation           12,694       12,224       10,497       11,596
 Deferred income
  tax liability, net         --           38           --        2,595
 Income taxes
  payable (1)                --        1,899        7,121           --
                    -----------  -----------  -----------  -----------
                      4,254,931    4,142,687    3,866,362    4,054,812

 STOCKHOLDERS' EQUITY
 --------------------
 Common stock (1)       299,425      292,061      281,279      300,486
 Retained
  earnings (1)           84,204      139,722      123,797      139,636
 Other components of
  stockholders'
  equity                 (2,216)      (2,245)      (2,389)      (2,276)
                    -----------  -----------  -----------  -----------
                        381,413      429,538      402,687      437,846
                    -----------  -----------  -----------  -----------
                    $ 4,636,344  $ 4,572,225  $ 4,269,049  $ 4,492,658
                    ===========  ===========  ===========  ===========

 Shares Issued:
 Shares outstanding
  at end of period   16,305,282   15,903,637   15,680,486   16,266,149
   Less unearned
    ESOP shares at
    end of period       240,381      240,381      240,381      240,381
                    -----------  -----------  -----------  -----------
 Shares outstanding
  at end of period
  excluding unearned
  ESOP shares        16,064,901   15,663,256   15,440,105   16,025,768
                    ===========  ===========  ===========  ===========
 Book value per
  share (1) (2)     $     23.74  $     27.42  $     26.08  $     27.32
 Tangible book value
  per share (1) (2)
  (3)               $     18.38  $     18.68  $     17.72  $     18.73

 Consolidated Tier 1
  leverage capital
  ratio                    8.80%        9.15%        9.67%       10.04%

 (1) - Income taxes payable, common stock and retained earnings have
       been restated to reflect adjustments related to the tax
       treatment of certain elements of stock-based compensation.
 (2) - Calculation  is based on number of shares outstanding at the
       end of the period rather than weighted average shares
       outstanding and excludes unallocated shares in the ESOP.
 (3) - Tangible book value excludes goodwill, core deposit and other
       intangibles.


 ADDITIONAL FINANCIAL INFORMATION
 (dollars in thousands)

                          Jun 30,     Mar 31,     Jun 30,     Dec 31,
                           2008        2008        2007        2007
                        ----------  ----------  ----------  ----------
 LOANS
  (including loans
  held for sale):
 -----------------
 Commercial real
  estate                $  983,732  $  899,333  $  811,072  $  882,523
 Multifamily real
  estate                   145,016     163,110     174,315     165,886
 Commercial
  construction             103,009      75,849      87,821      74,123
 Multifamily
  construction              17,681      38,434      35,552      35,318
 One- to
  four-family
  construction             540,718     571,720     654,558     613,779
 Land and land
  development              494,944     502,077     457,264     497,962
 Commercial business       709,109     735,802     595,250     696,350
 Agricultural business
  including secured by
  farmland                 212,397     181,403     181,505     186,305
 One- to four-family
  real estate              511,611     456,199     445,585     445,222
 Consumer                  255,082     216,066     175,430     212,149
                        ----------  ----------  ----------  ----------
   Total loans
    outstanding         $3,973,299  $3,839,993  $3,618,352  $3,809,617
                        ==========  ==========  ==========  ==========
 Restructured loans
  performing under
  their restructured
  terms                 $    7,771  $    2,026  $       --  $    2,750
                        ==========  ==========  ==========  ==========
 Total delinquent loans $   96,530  $   85,927  $   22,391  $   69,031
                        ==========  ==========  ==========  ==========
 Total delinquent
  loans  / Total loans
  outstanding                 2.43%       2.24%       0.62%       1.81%

 LOANS BY GEOGRAPHIC CONCENTRATION AT
  Jun 30,
  2008      Washington    Oregon      Idaho       Other       Total
 --------   ----------  ----------  ----------  ----------  ----------
 Commercial
  real
  estate    $  731,519  $  158,421  $   83,629  $   10,163  $  983,732
 Multifamily
  real estate  127,617      10,219       3,726       3,454     145,016
 Commercial
  construc-
  tion          72,758      23,943       5,940         368     103,009
 Multifamily
  construc-
  tion          16,066       1,615          --          --      17,681
 One- to
  four-family
  construc-
  tion         276,695     236,084      27,939          --     540,718
 Land and
  land
  development  235,486     179,746      79,712          --     494,944
 Commercial
  business     521,004      90,654      81,373      16,078     709,109
 Agricultural
  business
  including
  secured by
  farmland      89,886      49,910      71,629         972     212,397
 One- to
  four-family
  real estate  437,383      47,043      23,710       3,475     511,611
 Consumer      203,560      38,514      13,008          --     255,082
            ----------  ----------  ----------  ----------  ----------
   Total
    loans
    outstand-
    ing     $2,711,974  $  836,149  $  390,666  $   34,510  $3,973,299
            ==========  ==========  ==========  ==========  ==========
   Percent
    of total
    loans         68.3%       21.0%        9.8%        0.9%      100.0%


 DETAIL OF LAND AND LAND DEVELOPMENT LOANS AT
  Jun 30,
  2008      Washington    Oregon      Idaho       Other       Total
 --------   ----------  ----------  ----------  ----------  ----------
 Residential
   Acquisi-
    tion &
    devel-
    opment  $  110,562  $  121,380  $   24,916  $       --  $  256,858
   Improved
    lots        42,423      31,736      10,893          --      85,052
   Unimproved
    land        39,918      12,245      30,403          --      82,566
 Commercial
  & indus-
  trial
   Acquisi-
    tion &
    devel-
    opment       2,590       9,999         226          --      12,815
   Improved
    land        18,555       2,795       6,344          --      27,694
   Unimproved
    land        21,438       1,591       6,930          --      29,959
            ----------  ----------  ----------  ----------  ----------
   Total
    land &
    land
    develop-
    ment
    loans
    outstand-
    ing     $  235,486  $  179,746  $   79,712  $       --  $  494,944
            ==========  ==========  ==========  ==========  ==========


 ADDITIONAL INFORMATION ON DEPOSITS & OTHER BORROWINGS
 -----------------------------------------------------
                         Jun 30,     Mar 31,     Jun 30,     Dec 31,
 BREAKDOWN OF DEPOSITS     2008        2008        2007        2007
 ---------------------  ----------  ----------  ----------  ----------
 Non-interest-
  bearing               $  477,144  $  486,201  $  455,628  $  484,251
                        ----------  ----------  ----------  ----------
 Interest-bearing
  checking                 411,571     452,531     461,749     430,636
 Regular savings
  accounts                 580,482     610,085     570,117     609,073
 Money market accounts     224,164     234,599     275,814     248,403
                        ----------  ----------  ----------  ----------
   Interest-bearing
    transaction &
    savings accounts     1,216,217   1,297,215   1,307,680   1,288,112
                        ----------  ----------  ----------  ----------
 Three-month maturity
  money market
  certificates             163,980     174,957     176,107     165,693
 Other certificates      1,899,412   1,734,937   1,653,366   1,682,537
                        ----------  ----------  ----------  ----------
   Interest-bearing
    certificates         2,063,392   1,909,894   1,829,473   1,848,230
                        ----------  ----------  ----------  ----------
   Total deposits       $3,756,753  $3,693,310  $3,592,781  $3,620,593
                        ==========  ==========  ==========  ==========
 INCLUDED IN OTHER
  BORROWINGS
 -----------------
 Customer repurchase
  agreements / "Sweep
  accounts"             $   91,192  $   85,032  $   69,726  $   91,724
                        ==========  ==========  ==========  ==========

                        Washington    Oregon      Idaho       Total
                        ----------  ----------  ----------  ----------
 GEOGRAPHIC
  CONCENTRATION OF
  DEPOSITS AT
  Jun 30, 2008          $2,985,817  $  514,784  $  256,152  $3,756,753
 -----------------      ==========  ==========  ==========  ==========


 ADDITIONAL FINANCIAL INFORMATION
 (dollars in thousands)

                            Quarters Ended           Six Months Ended
                       ---------------------------   -----------------
                       Jun 30,   Mar 31,   Jun 30,   Jun 30,   Jun 30,
                        2008      2008      2007      2008      2007
                       -------   -------   -------   -------   -------
 CHANGE IN THE
  ALLOWANCE FOR LOAN
  LOSSES
 --------------------
 Balance, beginning
  of period            $50,446   $45,827   $36,299   $45,827   $35,535
 Acquisitions /
  (divestitures)            --        --     5,957        --     5,957
 Provision              15,000     6,500     1,400    21,500     2,400

 Recoveries of loans
  previously charged
  off                      255       144       231       399       895
 Loans charged-off      (7,131)   (2,025)     (639)   (9,156)   (1,539)
                       -------   -------   -------   -------   -------
   Net (charge-offs)
    recoveries          (6,876)   (1,881)     (408)   (8,757)     (644)
                       -------   -------   -------   -------   -------

 Balance, end of
  period               $58,570   $50,446   $43,248   $58,570   $43,248
                       =======   =======   =======   =======   =======

 Net charge-offs
  (recoveries) /
  Average loans
  outstanding             0.18%     0.05%     0.01%     0.23%     0.02%


 ALLOCATION OF ALLOWANCE FOR     Jun 30,   Mar 31,   Jun 30,   Dec 31,
  LOAN LOSSES                     2008      2008      2007      2007
 ---------------------------     -------   -------   -------   -------
 Specific or allocated loss
  allowance
   Commercial real estate        $ 4,518   $ 4,180   $ 5,905   $ 3,771
   Multifamily real estate           524       587       939       934
   Construction and land          19,991    11,117    14,490     7,569
   One- to four-family real
    estate                         2,322     2,054     1,465     1,987
   Commercial business            21,494    17,842    13,881    19,026
   Agricultural business,
    including secured by
    farmland                       1,634     1,397     2,796     1,419
   Consumer                        2,583     2,807     1,604     3,468
                                 -------   -------   -------   -------
     Total allocated              53,066    39,984    41,080    38,174
   Estimated allowance for
    undisbursed commitments          543       599       327       330
   Unallocated                     4,961     9,863     1,841     7,323
                                 -------   -------   -------   -------

     Total allowance for loan
      losses                     $58,570   $50,446   $43,248   $45,827
                                 =======   =======   =======   =======

 Allowance for loan losses  /
  Total loans outstanding           1.47%     1.31%     1.20%     1.20%


 ADDITIONAL FINANCIAL INFORMATION
 (dollars in thousands)

                           Jun 30,     Mar 31,     Jun 30,     Dec 31,
                            2008        2008        2007        2007
                          --------    --------    --------    --------

 NON-PERFORMING ASSETS
 ---------------------
 Loans on non-accrual
  status
   Secured by real
    estate:
     Commercial           $  5,907    $  3,273    $  3,557    $  1,357
     Multifamily                --          --          --       1,222
     Construction and
      land                  70,340      44,192       1,690      33,432
     One- to four-family     5,526       2,869       1,627       3,371
   Commercial business       6,875       3,114       5,040       2,250
   Agricultural business,
    including secured
    by farmland                265         386         987         436
   Consumer                     --          40          83          --
                          --------    --------    --------    --------
                            88,913      53,874      12,984      42,068

 Loans more than 90 days
  delinquent, still on
  accrual
   Secured by real estate:
     Commercial                 --          --          --          --
     Multifamily                --          --          --          --
     Construction and land      --          --          --          --
     One- to four-family       889         488         175         221
   Commercial business          --          --           8          --
   Agricultural business,
    including secured
    by farmland                 --          --          --          --
   Consumer                    116          73          10          94
                          --------    --------    --------    --------
                             1,005         561         193         315
                          --------    --------    --------    --------
 Total non-performing
  loans                     89,918      54,435      13,177      42,383
 Real estate owned (REO) /
  Repossessed assets        11,397       7,579       1,712       1,885
                          --------    --------    --------    --------
     Total non-performing
      assets              $101,315    $ 62,014    $ 14,889    $ 44,268
                          ========    ========    ========    ========
 Total non-performing
  assets / Total assets       2.19%       1.36%       0.35%       0.99%

 DETAIL & GEOGRAPHIC
  CONCENTRATION OF
  NON-PERFORMING
  ASSETS AT
  Jun 30, 2008       Washington  Oregon    Idaho     Other     Total
 -------------------  --------  --------  --------  --------  --------
 Secured by real
  estate:
   Commercial         $  3,931  $    991  $    985  $     --  $  5,907
   Multifamily              --        --        --        --        --
   Construction and
    land
     One- to four-
      family
      construction      21,233     6,466     4,412        --    32,111
     Residential land
      acquisition &
      development       14,556     5,991     4,875        --    25,422
     Residential land
      improved lots      4,062       945     1,354        --     6,361
     Residential land
      unimproved         1,136        --     5,310        --     6,446
     Commercial land
      acquisition &
      development           --        --        --        --        --
     Commercial land
      improved              --        --        --        --        --
     Commercial land
      unimproved            --        --        --        --        --
                      --------  --------  --------  --------  --------
       Total
        construction
        and land        40,987    13,402    15,951        --    70,340
   One- to four-family   6,140       103       172        --     6,415
 Commercial business       161        89     6,625        --     6,875
 Agricultural
  business, including
  secured by farmland      265        --        --        --       265
 Consumer                  116        --        --        --       116
                      --------  --------  --------  --------  --------
 Total non-performing
  loans                 51,600    14,585    23,733        --    89,918

 Real estate owned
  (REO) / Repossessed
  assets                 3,487     5,293     2,617        --    11,397
                      --------  --------  --------  --------  --------
       Total non-
        performing
        assets at end
        of the period $ 55,087  $ 19,878  $ 26,350  $     --  $101,315
                      ========  ========  ========  ========  ========


 ADDITIONAL FINANCIAL INFORMATION
 (dollars in thousands)
 (rates / ratios annualized)

                      Quarters Ended               Six Months Ended
            ----------------------------------  ----------------------
 OPERATING    Jun 30,     Mar 31,     Jun 30,     Jun 30,     Jun 30,
  PERFORMANCE  2008        2008        2007        2008        2007
 ----------- ---------  ----------  ----------  ----------  ----------
                                    Restated(1)             Restated(1)
 Average
  loans     $3,917,563  $3,830,992  $3,413,095  $3,874,277  $3,193,662
 Average
  securities
  and dep-
  osits        336,662     312,596     302,971     324,605     313,318
 Average non-
  interest-
  earning
  assets       352,639     359,474     286,725     354,960     237,133
            ----------  ----------  ----------  ----------  ----------
   Total
    average
    assets  $4,606,864  $4,503,062  $4,002,791  $4,553,842  $3,744,113
            ==========  ==========  ==========  ==========  ==========

 Average
  deposits  $3,719,748  $3,606,121  $3,302,750  $3,662,934  $3,043,663
 Average
  borrowings   419,280     411,560     278,366     415,421     335,856
 Average non-
  interest-
  earning
  liabilities   31,475      42,997      60,776      36,130      54,667
            ----------  ----------  ----------  ----------  ----------
   Total
    average
    liabil-
    ities    4,170,503   4,060,678   3,641,892   4,114,485   3,434,186

 Total
  average
  stockholders'
  equity       436,361     442,384     360,899     439,357     309,927
            ----------  ----------  ----------  ----------  ----------
   Total
    average
    liabil-
    ities and
    equity  $4,606,864  $4,503,062  $4,002,791  $4,553,842  $3,744,113
            ==========  ==========  ==========  ==========  ==========

 Interest
  rate yield
  on loans        6.58%       7.15%       8.35%       6.86%       8.39%
 Interest
  rate yield
  on secur-
  ities and
  deposits        4.72%       4.99%       4.45%       4.85%       4.49%
            ----------  ----------  ----------  ----------  ----------
   Interest
    rate
    yield on
    interest-
    earning
    assets        6.43%       6.98%       8.03%       6.70%       8.04%
            ----------  ----------  ----------  ----------  ----------
 Interest
  rate
  expense on
  deposits        2.98%       3.35%       3.93%       3.16%       3.97%
 Interest
  rate
  expense on
  borrowings      3.35%       4.42%       5.65%       3.88%       5.75%
            ----------  ----------  ----------  ----------  ----------
   Interest
    rate
    expense on
    interest-
    bearing
    liabilities   3.02%       3.46%       4.07%       3.24%       4.15%
            ----------  ----------  ----------  ----------  ----------
 Interest
  rate spread     3.41%       3.52%       3.96%       3.46%       3.89%
            ==========  ==========  ==========  ==========  ==========

 Net interest
  margin          3.50%       3.63%       4.11%       3.56%       4.04%
            ==========  ==========  ==========  ==========  ==========

 Other
  operating
  income /
  Average
  assets          0.75%       0.73%       0.50%       0.74%       0.61%

 Other
  operating
  expense /
  Average
  assets          7.44%       3.01%       3.14%       5.25%       3.09%

 Efficiency
  ratio
  (other
  operating
  expense /
  revenue)      186.84%      74.00%      72.63%     130.46%      70.30%

 Return
  (Loss) on
  average
  assets         (4.57%)      0.34%       0.71%      (2.14%)      0.80%

 Return
  (Loss) on
  average
  equity        (48.21%)      3.49%       7.90%     (22.19%)      9.71%

 Return
  (Loss) on
  average
  tangible
  equity (2)    (66.67%)      4.80%      10.31%     (30.60%)     11.98%

 Average
  equity  /
  Average
  assets          9.47%       9.82%       9.02%       9.65%       8.28%

 (1) - Average non-interest-earning liabilities and average
       stockholders' equity have been restated to reflect adjustments
       related to the tax treatment of certain elements of stock-based
       compensation.
 (2) - Average tangible equity excludes goodwill, core deposit and
       other intangibles.
 ---------------------------------------------------------------------

 Operating performance for the periods presented excluding the effects
  of change in valuation of financial instruments carried at fair
  value and goodwill write-off

 Other
  operating
  income
  (loss)
  EXCLUDING
  change in
  valuation
  of financial
  instruments
  carried at
  fair value
  and goodwill
  write-off /
  Average
  assets          0.70%       0.66%       0.69%       0.68%       0.65%

 Other
  operating
  expense
  EXCLUDING
  goodwill
  write-off /
  Average
  assets          3.08%       3.01%       3.14%       3.04%       3.09%

 Efficiency
  ratio (other
  operating
  expense /
  revenue)
  EXCLUDING
  change in
  valuation
  of financial
  instruments
  carried at
  fair value
  and goodwill
  write-off      78.34%      75.36%      69.60%      76.85%      69.70%

 Return (Loss)
  on average
  assets
  EXCLUDING
  change in
  valuation
  of financial
  instruments
  carried at
  fair value
  and goodwill
  write-off      (0.24%)      0.30%       0.83%       0.03%       0.83%

 Return (Loss)
  on average
  equity
  EXCLUDING
  change in
  valuation
  of financial
  instruments
  carried at
  fair value
  and goodwill
  write-off      (2.51%)      3.01%       9.24%       0.27%      10.00%

 Return (Loss)
  on average
  tangible
  equity
  EXCLUDING
  change in
  valuation
  of financial
  instruments
  carried at
  fair value
  and goodwill
  write-off      (3.47%)      4.14%      12.05%       0.37%      12.33%


            

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