WALLA WALLA, Wash., Oct. 29, 2008 (GLOBE NEWSWIRE) -- Banner Corporation (Nasdaq:BANR), the parent company of Banner Bank and Islanders Bank, today reported that it had net operating income,* excluding net fair value adjustments, of $2.9 million, or $0.18 per diluted share, for the quarter ended September 30, 2008, compared to net operating income, excluding fair value adjustments, of $8.0 million, or $0.51 per diluted share, for the quarter ended September 30, 2007. The current quarter's net operating income included an $8 million provision for loan losses. As previously announced, the current quarter's results were also adversely affected by a significant reduction in the fair value of the Company's investment in Fannie Mae and Freddie Mac equity securities. Including the fair value adjustments, which in the current quarter predominantly reflects the valuation of the Fannie Mae and Freddie Mac securities, Banner recorded a net loss of $1.0 million, or $0.06 per diluted share, for the quarter ended September 30, 2008, compared to net income of $10.0 million, or $0.64 per diluted share, for the quarter ended September 30, 2007.
"The ongoing strains in the financial and housing markets continued to present a challenging environment for Banner Corporation in the third quarter," said D. Michael Jones, President and CEO. "Still, we are pleased that our revenue generating opportunities and disciplined expense control initiatives were sufficient to produce net operating income despite a need to provide for credit losses at a higher level than our historical experience. Although we anticipate that credit costs will continue to be elevated well into the next year, we are encouraged in our belief that our revenue generation and operating results will be sufficient to sustain our expectation to remain 'well capitalized' under the regulatory guidelines while we continue to grow and improve our commercial banking franchise."
For the nine months ended September 30, 2008, Banner's net operating income, excluding fair value adjustments and the goodwill impairment charge recorded in the second quarter, was $3.5 million, or $0.22 per diluted share, compared to $23.4 million, or $1.62 per diluted share, for the nine months ended September 30, 2007.
Banner's results for the third quarter of 2008 included a net charge of $6.1 million ($3.9 million after tax), compared to a net gain of $3.1 million ($2.0 million after tax) in the third 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 nine months ended September 30, 2008, fair value adjustments resulted in a net charge of $4.6 million ($2.9 million after tax), compared to a net gain of $2.4 million ($1.5 million after tax) for the first nine months of 2007.
"The events that led to the significant valuation adjustment for the Fannie Mae and Freddie Mac stock were disappointing and, unlike most fair value adjustments, we do not anticipate a meaningful recovery with respect to the valuation of that stock," Jones continued. "However, our holdings were not disproportionate to our asset size and net worth and the subsequent charge was not threatening to our 'well capitalized' status or indicative of our recurring operations." In September, the United States Treasury announced a plan to place the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") into conservatorship under the authority of the Federal Housing Finance Agency. As of June 30, 2008, Banner Corporation owned both common and preferred equity securities issued by Fannie Mae and Freddie Mac with a combined book value of $6.9 million. At September 30, 2008, the fair value of these securities had declined to approximately $569,000, with the decrease in the value included in the net fair value adjustments noted above.
"Aside from the obvious concerns related to housing markets and notwithstanding the financial market turmoil in recent weeks, the Company's operations have continued to progress well throughout this year. And, as we have indicated before, we continue to have a very positive view on the long-term economic prospects for the Northwest markets that we serve and are confident we have sufficient capital and human resources to manage the collection of our one-to-four family residential construction and related land loan portfolios in an orderly fashion while we maintain consistent forward momentum in our core operations."
*Earnings information excluding the goodwill impairment charge and fair value adjustments (alternately referred to as net operating income or net income from recurring operations and revenues or expenses 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 remained weak in many of our primary service areas during the third quarter, resulting in increasing delinquencies and non-performing assets, primarily in our construction and land development loan portfolios. As a result, our provision for loan losses, although reduced from the prior quarter, was at a higher amount than our historical levels and normal expectations." said Jones. "However, we continue to be confident that we can work our way through the troubled housing market and we are actively engaged with our borrowers in resolving problem loans."
Banner added $8.0 million to its provision for loan losses in the third quarter of 2008, compared to $15.0 million in the second quarter of 2008 and $1.5 million in the third quarter of 2007. The allowance for loan losses at September 30, 2008 was $58.8 million, representing 1.47% of total loans outstanding. Non-performing loans were $119.4 million at September 30, 2008, compared to $89.9 million in the previous quarter and $19.9 million at September 30, 2007. In addition, Banner's real estate owned and repossessed assets were $10.2 million at September 30, 2008 compared to $11.4 million in the previous quarter and $3.3 million at September 30, 2007. Banner's net charge-offs in the current quarter totaled $7.7 million, or 0.19% of average loans.
One-to-four family residential construction and related lot and land loans represent 23% of the total loan portfolio and 83% of non-performing assets. The geographic distribution of all construction and land development loans, including residential and commercial properties, is approximately 31% in the greater Puget Sound market, 39% in the greater Portland, Oregon market, and 6% in the greater Boise, Idaho market, with the remaining 24% distributed in various eastern Washington, eastern Oregon and northern Idaho markets served by Banner Bank. While non-performing assets are similarly geographically disbursed, they are concentrated largely in land and land development loans. The geographic distribution of non-performing construction, land and land development loans and real estate owned included approximately $48.2 million, or 45%, in the Puget Sound region, $33.9 million, or 31%, in the greater Portland market area and $18.4 million, or 17%, in the greater Boise market area.
"Other non-housing-related segments of the loan portfolio are performing as expected with only normal levels of credit problems," Jones added. "Nonetheless, we are sensitive to current economic conditions and are proactively monitoring and managing those portions of our portfolio as well."
Income Statement Review
Banner's net interest margin was 3.45% for the third quarter of 2008, compared to 3.50% in the preceding quarter and 4.10% for the third quarter of 2007. For the first nine months of 2008, the net interest margin was 3.52% compared to 4.06% in the same period a year ago. Funding costs decreased 16 basis points compared to the previous quarter and decreased 115 basis points from the third quarter a year earlier, while asset yields decreased 20 basis points from the prior linked quarter and 175 basis points from the third quarter a year ago.
"While funding costs improved as expected, we continued to experience decreasing asset yields during the third quarter which reduced our net interest margin," said Jones. "The full impact of the Federal Reserve's earlier rate cuts was evident, as were changes in the mix of the loan portfolio which reduced the proportional contribution of some of the higher yielding loan categories. In addition, our lower net interest margin also reflected the higher level of delinquencies, as non-accruing loans reduced the margin by approximately 24 basis points in this year's third quarter compared to approximately 16 basis points in the second quarter of 2008 and approximately three basis points in the third quarter of 2007."
In the third quarter of 2008, net interest income before the provision for loan losses was $37.6 million, compared to $37.0 million in the preceding quarter and $40.7 million in the same quarter a year ago. In the first nine months of 2008, net interest income before the provision for loan losses was $96.0 million, compared to $108.1 million in the first nine months of 2007. Revenues from recurring operations (net interest income before the provision for loan losses plus total other operating income excluding fair value adjustments) were $45.7 million in the third quarter of 2008, compared to $45.0 million for the second quarter of 2008 and $48.1 million for the third quarter a year ago. Revenues from recurring operations for the first nine months of 2008 increased 4% to $135.4 million, compared to $130.4 million in the first nine months of 2007.
Total other operating income from recurring operations (excluding fair value adjustments) for the third quarter increased to $8.1 million compared to $8.0 million in the preceding quarter and increased 8% compared to $7.5 million for the same quarter a year ago. For the first nine months of 2008, total other operating income from recurring operations increased 20% to $23.4 million, compared to $19.5 million in the first nine months of 2007. Income from deposit fees and other service charges increased to $5.8 million in the third quarter of 2008, compared to $5.5 million for the preceding quarter, and increased 21% from $4.8 million in the third quarter a year ago. Income from mortgage banking operations decreased slightly in the third quarter to $1.5 million compared to $1.6 million in the preceding quarter and $1.8 million in the same quarter a year ago. For the first nine months of the year, mortgage banking revenues declined modestly to $4.7 million from $4.9 million in the same period a year ago, due to lower levels of residential sales activity. "We continue to be pleased with the growth in deposit fee and service charges, which reflect further increases in our customer base and related payment processing activities," Jones noted. "We are also pleased that our mortgage banking revenues have remained solid despite a very difficult housing finance environment."
"As anticipated, we made good progress in reducing operating expenses this quarter despite higher collection and legal costs," said Jones. "Although we anticipate collection costs will continue to be above historical levels for the next few quarters, we expect continued expense discipline will be a positive factor going forward and we have no plans to add additional branches during the remainder of the year."
Total other operating expenses from recurring operations (non-interest expenses excluding the second quarter of 2008 goodwill write-off) were $34.0 million in the third quarter of 2008, compared to $35.2 million in the preceding quarter and $34.8 million in the third quarter a year ago. For the first nine months of the year, other operating expenses from recurring operations were $102.9 million compared to $92.2 million in the first nine months of 2007. The nine month increase from the prior year reflects the effects of new branch openings, including two added in 2008 and ten at various times during 2007, as well as last year's three acquisitions which added another sixteen branches and nearly $800 million in total assets. Operating expenses from recurring operations as a percentage of average assets was 2.91% in the third quarter of 2008, compared to 3.08% in the previous quarter and 3.23% in the third quarter a year ago.
Balance Sheet Review
"Despite good activity in commercial real estate, business and agricultural loans, as well as consumer and residential loans, total loan growth has been modest as home sales have been sufficient to reduce the portfolio of one-to-four family construction loans by $141.8 million over the past twelve months, including a $58.3 million reduction in the most recent quarter," said Jones. "As we have noted before, we have significantly curtailed our origination of construction and land development loans as housing market conditions clearly warranted further caution; however, we are seeing meaningful improvement in the inventory of completed but unsold homes in selected markets. As a result, at September 30, 2008 our one-to-four family construction loans have declined by $172.1 million compared to their peak quarter-end balance at June 30, 2007, and our aggregate construction and land development loan balances, including commercial and multi-family real estate, have declined by $135.7 million, also compared to their peak quarter-end balances at June 30, 2007." Net loans increased 10% to $3.94 billion at September 30, 2008, compared to $3.58 billion a year earlier. Total assets increased 8% to $4.65 billion at September 30, 2008, compared to $4.30 billion a year earlier.
Total deposits increased 5% to $3.79 billion at September 30, 2008, compared to $3.60 billion at the end of September 2007. Non-interest-bearing accounts increased 10% and certificates of deposit increased 20% during the twelve months ending September 30, 2008, while total transaction and savings accounts decreased 16%. "We continue to see a decline in average deposit balances for certain real estate-related customers as their business activity has slowed," said Jones. "We have also experienced further shifts into certificate of deposit accounts as customers have repositioned balances to obtain more attractive yields and additional deposit insurance coverage. Still, we are optimistic that our expanded branch network will deliver core deposit growth and related fee income as we have experienced a healthy increase in the number of transaction deposit accounts."
Tangible shareholders' equity at September 30, 2008 was $301.4 million compared to $285.1 million at September 30, 2007. Tangible book value per share was $18.01 at quarter-end, compared to $18.30 a year earlier. During the quarter ended September 30, 2008, the Company issued 675,186 shares of common stock through its Dividend Reinvestment and Stock Purchase Plan at an average price of $10.19 per share, generating approximately $6.9 million of additional paid in capital. At September 30, 2008, Banner had 16.7 million shares outstanding, while it had 15.6 million shares outstanding a year ago.
Cash Dividend
In September 2008, Banner's Board of Directors reduced the quarterly cash dividend from $0.20 per share to $0.05 per share. The dividend was paid on October 15, 2008, to shareholders of record as of the close of business on October 6, 2008. "Our analysis indicates that the Company and its subsidiary banks have sufficient capital to accommodate the orderly collection of existing loan portfolios at current price levels and absorption rates and remain 'well capitalized' during the entire process. Nonetheless, as a result of the continuing uncertainties in the one-to-four family residential real estate market and the effect on our construction and related land and lot loan portfolio, we chose to preserve capital by reducing our quarterly dividend," Jones added. "We believe the dividend reduction is the least expensive way to maintain our capital ratios during this period of uncertain economic times."
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. However, as a result of the unprecedented disruption of certain financial markets, the Company has determined that there were insufficient transactions or other market indicators during the most recent quarter to support changes in the fair values of its junior subordinated debentures and similar securities in its investment portfolio, including single issuer and pooled trust preferred securities, from their carrying values as of June 30, 2008. Had the Company valued its junior subordinated debentures and the similar investment securities using recent distressed sales, which was the only transaction data available, as market indicators, the additional net fair value adjustments would have resulted in a substantial net gain being recognized in the current quarter's operating results. However, this gain would likely be reversed in subsequent periods as market conditions normalized. We believe this conservative approach to the valuation adjustments in light of the current abnormal market conditions produces a more realistic portrayal of the quarter's results and is consistent with the recent guidance from the FASB and SEC concerning fair value estimates.
Restatement and Reclassification
The Statement of Financial Condition for the quarter ended September 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 September 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 Thursday, October 30, 2008, at 8:00 a.m. PT, to discuss second quarter results. The conference call can be accessed live by telephone at 303-262-2140. 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 11119693# until Thursday, November 6, 2008, or via the Internet at www.bannerbank.com.
About the Company
Banner Corporation is a $4.7 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 Quarters Ended Nine Months Ended
and per -------------------------------- ---------------------
share data) Sep 30, Jun 30, Sep 30, Sep 30, Sep 30,
2008 2008 2007 2008 2007
---------- ---------- ---------- ---------- ----------
INTEREST
INCOME:
Loans
receivable $ 64,181 $ 64,094 $ 75,668 $ 196,348 $ 208,543
Mortgage-
backed
securities 1,040 1,087 1,343 3,280 4,653
Securities
and cash
equivalents 2,786 2,861 2,199 8,374 5,871
---------- ---------- ---------- ---------- ----------
68,007 68,042 79,210 208,002 219,067
INTEREST
EXPENSE:
Deposits 26,818 27,565 35,341 84,446 95,329
Federal Home
Loan Bank
advances 1,160 1,301 292 4,310 3,733
Other
borrowings 734 530 730 1,874 2,448
Junior
subordinated
debentures 1,669 1,666 2,177 5,399 6,600
---------- ---------- ---------- ---------- ----------
30,381 31,062 38,540 96,029 108,110
---------- ---------- ---------- ---------- ----------
Net interest
income before
provision for
loan losses 37,626 36,980 40,670 111,973 110,957
PROVISION FOR
LOAN LOSSES 8,000 15,000 1,500 29,500 3,900
---------- ---------- ---------- ---------- ----------
Net interest
income 29,626 21,980 39,170 82,473 107,057
OTHER
OPERATING
INCOME:
Deposit fees
and other
service
charges 5,770 5,494 4,750 16,277 11,803
Mortgage
banking
operations 1,500 1,579 1,782 4,694 4,945
Loan
servicing
fees 536 547 457 1,485 1,205
Miscellan-
eous 286 363 483 980 1,536
---------- ---------- ---------- ---------- ----------
8,092 7,983 7,472 23,436 19,489
Increase
(Decrease)
in
valuation
of
financial
instruments
carried at
fair value (6,056) 649 3,062 (4,584) 2,365
---------- ---------- ---------- ---------- ----------
Total other
operating
income 2,036 8,632 10,534 18,852 21,854
OTHER
OPERATING
EXPENSE:
Salary and
employee
benefits 18,241 19,744 20,431 57,623 56,534
Less
capitalized
loan
origination
costs (2,040) (2,728) (2,455) (7,009) (8,224)
Occupancy and
equipment 5,956 5,989 5,484 17,813 14,942
Information /
computer
data
services 1,560 1,840 2,031 5,389 5,167
Payment and
card
processing
services 1,913 1,768 1,466 5,212 3,752
Professional
services 1,117 1,331 993 3,203 2,275
Advertising
and
marketing 1,572 1,677 2,423 4,667 6,147
State/
municipal
business and
use taxes 572 576 549 1,712 1,427
Amortization
of core
deposit
intangibles 691 725 793 2,152 1,145
Miscellaneous 4,418 4,300 3,131 12,168 9,051
---------- ---------- ---------- ---------- ----------
34,000 35,222 34,846 102,930 92,216
Goodwill
write-off -- 50,000 -- 50,000 --
---------- ---------- ---------- ---------- ----------
Total other
operating
expense 34,000 85,222 34,846 152,930 92,216
---------- ---------- ---------- ---------- ----------
Income (Loss)
before
provision
(benefit)
for income
taxes (2,338) (54,610) 14,858 (51,605) 36,695
PROVISION FOR
(BENEFIT
FROM)
INCOME TAXES (1,347) (2,305) 4,871 (2,143) 11,784
---------- ---------- ---------- ---------- ----------
NET INCOME
(LOSS) $ (991)$ (52,305)$ 9,987 $ (49,462)$ 24,911
========== ========== ========== ========== ==========
Earnings
(Loss) per
share
Basic $ (0.06)$ (3.31)$ 0.64 $ (3.09)$ 1.76
Diluted $ (0.06)$ (3.30)$ 0.64 $ (3.09)$ 1.73
Cumulative
dividends
declared per
common share $ 0.05 $ 0.20 $ 0.19 $ 0.45 $ 0.57
Weighted
average
shares
outstanding
Basic 16,402,607 15,821,934 15,497,193 16,025,403 14,124,607
Diluted 16,402,607 15,872,604 15,720,248 16,025,403 14,399,211
Shares
repurchased
during the
period -- -- 700 613,903 11,310
Shares issued
in connection
with
acquisitions -- -- -- -- 2,592,611
Shares issued
in connection
with exercise
of stock
options or
DRIP 675,186 401,645 141,281 1,328,222 925,496
---------------------------------------------------------------------
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 $ (991)$ (52,305)$ 9,987 $ (49,462)$ 24,911
ADJUSTMENTS
FOR CHANGE
IN VALUATION
OF FINANCIAL
INSTRUMENTS
AND GOODWILL
WRITE-OFF
Change in
valuation
of financial
instruments
carried at
fair value 6,056 (649) (3,062) 4,584 (2,365)
Goodwill
write-off -- 50,000 -- 50,000 --
Income tax
provision
(benefit)
related to
above items (2,180) 234 1,102 (1,650) 851
---------- ---------- ---------- ---------- ----------
Above
items,
net of
income tax
provision
(benefit) 3,876 49,585 (1,960) 52,934 (1,514)
---------- ---------- ---------- ---------- ----------
NET INCOME
(LOSS) FROM
RECURRING
OPERATIONS $ 2,885 $ (2,720)$ 8,027 $ 3,472 $ 23,397
========== ========== ========== ========== ==========
Earnings (Loss)
per share
EXCLUDING the
effects of
change in
valuation of
financial
instruments
carried at
fair value
and goodwill
write-off
Basic $ 0.18 $ (0.17)$ 0.52 $ 0.22 $ 1.66
Diluted $ 0.18 $ (0.17)$ 0.51 $ 0.22 $ 1.62
FINANCIAL CONDITION
(in thousands except
shares and per share
data) Sep 30, Jun 30, Sep 30, Dec 31,
2008 2008 2007 2007
---------- ---------- ---------- ----------
ASSETS
------
Cash and due from banks $ 80,508 $ 91,953 $ 83,933 $ 98,120
Federal funds and
interest-bearing
deposits 403 430 62,628 310
Securities - at fair
value 239,009 238,670 158,932 202,863
Securities - held to
maturity 55,389 55,612 53,259 53,516
Federal Home Loan Bank
stock 37,371 37,371 37,291 37,371
Loans receivable:
Held for sale 6,085 6,817 4,121 4,596
Held for portfolio 3,993,094 3,966,482 3,617,130 3,805,021
Allowance for loan
losses (58,846) (58,570) (44,212) (45,827)
---------- ---------- ---------- ----------
3,940,333 3,914,729 3,577,039 3,763,790
Accrued interest
receivable 22,799 22,890 26,376 24,980
Real estate owned held
for sale, net 10,147 11,390 3,072 1,867
Property and equipment,
net 97,958 97,928 95,816 98,098
Goodwill and other
intangibles, net 85,513 86,205 128,868 137,654
Bank-owned life insurance 52,500 52,213 51,024 51,483
Other assets 28,329 26,953 22,123 22,606
---------- ---------- ---------- ----------
$4,650,259 $4,636,344 $4,300,361 $4,492,658
========== ========== ========== ==========
LIABILITIES
----------
Deposits:
Non-interest-bearing $ 521,927 $ 477,144 $ 473,571 $ 484,251
Interest-bearing
transaction and
savings
accounts 1,086,621 1,216,217 1,299,232 1,288,112
Interest-bearing
certificates 2,182,318 2,063,392 1,825,096 1,848,230
---------- ---------- ---------- ----------
3,790,866 3,756,753 3,597,899 3,620,593
Advances from Federal
Home Loan Bank at fair
value 209,243 182,496 24,577 167,045
Customer repurchase
agreements and other
borrowings 104,496 164,192 78,511 91,724
Junior subordinated
debentures at fair value 101,358 101,358 122,220 113,270
Accrued expenses and
other liabilities 44,486 37,438 47,577 47,989
Deferred compensation 12,880 12,694 10,830 11,596
Deferred income tax
liability, net -- -- -- 2,595
Income taxes payable (1) -- -- 4,783 --
---------- ---------- ---------- ----------
4,263,329 4,254,931 3,886,397 4,054,812
STOCKHOLDERS' EQUITY
--------------------
Common stock (1) 306,741 299,425 285,468 300,486
Retained earnings (1) 82,377 84,204 130,826 139,636
Other components of
stockholders' equity (2,188) (2,216) (2,330) (2,276)
---------- ---------- ---------- ----------
386,930 381,413 413,964 437,846
---------- ---------- ---------- ----------
$4,650,259 $4,636,344 $4,300,361 $4,492,658
========== ========== ========== ==========
Shares Issued:
Shares outstanding at end
of period 16,980,468 16,305,282 5,821,067 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 16,740,087 16,064,901 15,580,686 16,025,768
========== ========== ========== ==========
Book value per share (1)
(2) $ 23.11 $ 23.74 $ 26.57 $ 27.32
Tangible book value per
share (1) (2) (3) $ 18.01 $ 18.38 $ 18.30 $ 18.73
Consolidated Tier 1
leverage capital ratio 8.86% 8.80% 9.83% 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)
Sep 30, Jun 30, Sep 30, Dec 31,
2008 2008 2007 2007
---------- ---------- ---------- ----------
LOANS (includ-
ingloans held
for sale):
-------------
Commercial
real estate $1,013,919 $ 983,732 $ 811,816 $ 882,523
Multifamily
real estate 141,787 145,016 170,316 165,886
Commercial
construction 113,342 103,009 84,176 74,123
Multifamily
construction 22,236 17,681 41,814 35,318
One- to four-
family const-
ruction 482,443 540,718 624,280 613,779
Land and land
development 481,521 494,944 463,514 497,962
Commercial
business 694,688 709,109 630,827 696,350
Agricultural
business
including
secured by
farmland 213,753 212,397 178,158 186,305
One- to four-
family real
estate 561,043 511,611 424,122 445,222
Consumer 274,447 255,082 192,228 212,149
---------- ---------- ---------- ----------
Total loans
outstanding $3,999,179 $3,973,299 $3,621,251 $3,809,617
========== ========== ========== ==========
Restructured
loans perfo-
rming under
their restr-
uctured
terms $ 15,514 $ 7,771 $ -- $ 2,750
========== ========== ========== ==========
Total loans 30
days past due
and on non-
accrual $ 137,953 $ 113,115 $ 38,974 $ 69,031
========== ========== ========== ==========
Total delinq-
uent loans /
Total loans
outstanding 3.45% 2.85% 1.08% 1.81%
GEOGRAPHIC
CONCENTRATION
OF LOANS AT
September 30,
2008 Washington Oregon Idaho Other Total
------------- ---------- ---------- ---------- ---------- ----------
Commercial
realestate $ 759,622 $ 165,730 $ 79,031 $ 9,536 $1,013,919
Multifamily
real estate 117,907 12,327 8,133 3,420 141,787
Commercial
construction 76,240 29,438 7,038 626 113,342
Multifamily
construction 18,206 4,030 -- -- 22,236
One- to four-
family cons-
truction 219,247 238,947 24,249 -- 482,443
Land and land
development 245,532 164,931 71,058 -- 481,521
Commercial
business 523,087 72,110 82,584 16,907 694,688
Agricultural
business inc-
luding
secured by
farmland 89,726 57,071 66,925 31 213,753
One- to four-
family real
estate 463,090 68,652 25,984 3,317 561,043
Consumer 206,587 48,766 19,094 -- 274,447
---------- ---------- ---------- ---------- ----------
Total loans
outstanding $2,718,907 $ 862,394 $ 384,041 $ 33,837 $3,999,179
========== ========== ========== ========== ==========
Percent of
total loans 68.0% 21.6% 9.6% 0.8% 100.0%
DETAIL OF LAND
AND LAND
DEVELOPMENT
LOANS AT
September 30,
2008 Washington Oregon Idaho Other Total
------------- ---------- ---------- ---------- ---------- ----------
Residential
Acquisition
& develop-
ment $ 127,501 $ 117,630 $ 27,365 $ -- $ 272,496
Improved
lots 45,589 31,281 13,341 -- 90,211
Unimproved
land 31,430 11,684 21,276 -- 64,390
Commercial &
industrial
Acquisition
& development 6,554 -- 191 -- 6,745
Improved
land 17,453 1,604 3,602 -- 22,659
Unimproved
land 17,005 2,732 5,283 -- 25,020
========== ========== ========== ========== ==========
Total land
& land de-
velopment
loans out-
standing $ 245,532 $ 164,931 $ 71,058 $ -- $ 481,521
========== ========== ========== ========== ==========
ADDITIONAL
INFORMATION
ON DEPOSITS &
OTHER
BORROWINGS
--------------
BREAKDOWN OF Sep 30, Jun 30, Sep 30, Dec 31,
DEPOSITS 2008 2008 2007 2007
---------- ---------- ---------- ----------
Non-interest
-bearing $ 521,927 $ 477,144 $ 473,571 $ 484,251
---------- ---------- ---------- ----------
Interest-
bearing
checking 373,496 411,571 438,974 430,636
Regular
savings
accounts 519,285 580,482 602,190 609,073
Money market
accounts 193,840 224,164 258,068 248,403
---------- ---------- ---------- ----------
Interest-
bearing
transaction
& savings
accounts 1,086,621 1,216,217 1,299,232 1,288,112
---------- ---------- ---------- ----------
Three-month
maturity
money mark-
et certifi-
cates 153,300 163,980 167,025 165,693
Other certi-
ficates 2,029,018 1,899,412 1,658,071 1,682,537
---------- ---------- ---------- ----------
Interest-
bearing
certific-
ates 2,182,318 2,063,392 1,825,096 1,848,230
---------- ---------- ---------- ----------
Total
deposits $3,790,866 $3,756,753 $3,597,899 $3,620,593
========== ========== ========== ==========
INCLUDED IN
OTHER
BORROWINGS
------------
Customer
repurchase
agreements/
"Sweep
accounts" $ 103,496 $ 91,192 $ 78,511 $ 91,724
========== ========== ========== ==========
Washington Oregon Idaho Total
---------- ---------- ---------- ----------
GEOGRAPHIC
CONCENTRATION
OF DEPOSITS AT
September 30,
2008 $3,051,226 $ 510,080 $ 229,560 $3,790,866
------------- ========== ========== ========== ==========
ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
Quarters Ended Nine Months Ended
---------------------------- ------------------
CHANGE IN THE Sep 30, Jun 30, Sep 30, Sep 30, Sep 30,
ALLOWANCE FOR LOAN 2008 2008 2007 2008 2007
LOSSES -------- -------- -------- -------- --------
-------------------
Balance, beginning
of period 58,570 $ 50,446 $ 43,248 $ 45,827 $ 35,535
Acquisitions /
(divestitures) -- -- -- -- 5,957
Provision 8,000 15,000 1,500 29,500 3,900
Recoveries of loans
previously charged
off 2,357 255 469 2,756 1,364
Loans charged-off (10,081) (7,131) (1,005) (19,237) (2,544)
======== ======== ======== ======== ========
Net (charge-offs)
recoveries (7,724) (6,876) (536) (16,481) (1,180)
-------- -------- -------- -------- --------
Balance, end of
period $ 58,846 $ 58,570 $ 44,212 $ 58,846 $ 44,212
======== ======== ======== ======= ========
Net charge-offs
(recoveries) /
Average loans
outstanding 0.19% 0.18% 0.01% 0.42% 0.04%
ALLOCATION OF
ALLOWANCE FOR LOAN Sep 30, Jun 30, Sep 30, Dec 31,
LOSSES 2008 2008 2007 2007
------------------ -------- -------- -------- --------
Specific or allocated
loss allowance
Commercial real
estate $ 2,789 $ 4,518 $ 5,393 $ 3,771
Multifamily real
estate 103 524 1,504 934
Construction and
land 21,932 19,991 16,527 7,569
One- to four-
family real
estate 511 2,322 1,164 1,987
Commercial
business 23,085 21,494 14,424 19,026
Agricultural busi-
ness, including
secured by farm-
land 1,097 1,634 2,575 1,419
Consumer 2,935 2,583 1,572 3,468
-------- -------- -------- --------
Total allocated 52,452 53,066 43,159 38,174
Estimated allowance
for undisbursed
commitments 1,060 543 407 330
Unallocated 5,334 4,961 646 7,323
-------- -------- -------- --------
Total allowance
for loan losses $ 58,846 $ 58,570 $ 44,212 $ 45,827
======== ======== ======== ========
Allowance for loan
losses / Total
loans outstanding 1.47% 1.47% 1.22% 1.20%
Minimum for Capital
REGULATORY CAPITAL Adequacy or
RATIOS AT Actual "Well Capitalized"
------------------- ------------------ ------------------
September 30, 2008 Amount Ratio Amount Ratio
------------------- -------- -------- -------- --------
Banner Corporation-
consolidated
Total capital to
risk-weighted
assets $455,928 11.01% $331,389 8.00%
Tier 1 capital
to risk-weight-
ed assets 404,061 9.75% 165,695 4.00%
Tier 1 leverage
capital to
average assets 404,061 8.86% 181,054 4.00%
Banner Bank
Total capital to
risk-weighted
assets 428,966 10.81% 396,804 0.00%
Tier 1 capital
to risk-weight-
ed assets 379,272 9.56% 238,082 6.00%
Tier 1 leverage
capital to
average assets 379,272 8.61% 220,351 5.00%
Islanders Bank
Total capital to
risk-weighted
assets 21,589 12.21% 17,677 0.00%
Tier 1 capital to
risk-weighted
assets 19,944 11.28% 10,606 6.00%
Tier 1 leverage
capital to
average assets 19,944 12.36% 8,065 5.00%
ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
Sep 30, Jun 30, Sep 30, Dec 31,
2008 2008 2007 2007
-------- -------- -------- --------
NON-PERFORMING ASSETS
---------------------
Loans on non-accrual
status Secured by
real estate:
Commercial $ 6,368 $ 5,907 $ 544 $ 1,357
Multifamily -- -- 1,250 1,222
Construction and
land 98,108 70,340 10,699 33,432
One- to four-
family 6,583 5,526 1,070 3,371
Commercial busi-
ness 6,905 6,875 5,713 2,250
Agricultural busi-
ness, including
secured by farm-
land 265 265 512 436
Consumer 427 -- -- --
======== ======== ======== ========
118,656 88,913 19,788 42,068
Loans more than 90
days delinquent,
still on accrual
Secured by real
estate:
Commercial -- -- -- --
Multifamily -- -- -- --
Construction and
land -- -- -- --
One- to four-
family 635 889 54 221
Commercial busi-
ness -- -- -- --
Agricultural bus-
iness, including
secured by farm-
land -- -- -- --
Consumer 75 116 78 94
======== ======== ======== ========
710 1,005 132 315
======== ======== ======== ========
Total non-
performing loans 119,366 89,918 19,920 42,383
Real estate owned
(REO) /
Repossessed assets 10,153 11,397 3,294 1,885
-------- -------- -------- --------
Total non-
performing
assets $129,519 $101,315 $ 23,214 $ 44,268
======== ======== ======== ========
Total non-
performing assets
/ Total assets 2.79% 2.19% 0.54% 0.99%
DETAIL & GEOGRAPHIC
CONCENTRATION OF
NON-PERFORMING
ASSETS AT
September 30,
2008 Washington Oregon Idaho Other Total
------------------ ---------- -------- -------- -------- --------
Secured by real
estate:
Commercial $ 5,261 $ 121 $ 986 $ -- $ 6,368
Multifamily -- -- -- -- --
Construction and
land
One- to four-
family constru-
ction 24,773 14,027 3,591 -- 42,391
Residential land
acquisition &
development 20,732 12,071 6,240 -- 39,043
Residential land
improved lots 8,399 945 1,297 -- 10,641
Residential land
unimproved 330 -- 5,414 -- 5,744
Commercial land
acquisition &
development -- -- -- -- --
Commercial land
improved 232 -- -- -- 232
Commercial land
unimproved 57 -- -- -- 57
-------- -------- -------- -------- --------
Total construc-
tion and land 54,523 27,043 16,542 -- 98,108
One- to four-
family 6,956 103 159 -- 7,218
Commercial business 5,421 708 712 64 6,905
Agricultural busi-
ness, including
secured by farmland 265 -- -- -- 265
Consumer 502 -- -- -- 502
-------- -------- -------- -------- --------
Total non-performing
loans 72,928 27,975 18,399 64 119,366
Real estate owned
(REO) and reposse-
sed assets 3,746 4,540 1,867 -- 10,153
-------- -------- -------- -------- --------
Total non-per-
forming assets
at end of the
period $ 76,674 $ 32,515 $ 20,266 $ 64 $129,519
======== ======== ======== ======== ========
ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
(rates / ratios annualized)
Quarters Ended Nine Months Ended
OPERATING ---------------------------------- ----------------------
PERFORMANCE Sep 30, Jun 30, Sep 30, Sep 30, Sep 30,
----------- 2008 2008 2007 2008 2007
---------- ---------- ---------- ---------- ----------
Restated(1) Restated(1)
Average
loans $4,001,999 $3,917,563 $3,626,541 $3,917,155 $3,343,901
Average
securities
and
deposits 342,153 336,662 313,325 330,474 312,903
Average
non-
interest-
earning
assets 296,572 352,639 346,762 334,733 277,587
---------- ---------- ---------- ---------- ----------
Total
average
assets $4,640,724 $4,606,864 $4,286,628 $4,582,362 $3,934,391
========== ========== ========== ========== ==========
Average
deposits $3,810,718 $3,719,748 $3,593,722 $3,712,530 $3,232,959
Average
borrowings 415,517 419,280 221,837 415,453 297,294
Average
non-
interest-
earning
liabilit-
ies 25,506 31,475 62,120 31,967 57,392
---------- ---------- ---------- ---------- ----------
Total
average
liabil-
ities 4,251,741 4,170,503 3,877,679 4,159,950 3,587,645
Total
average
stock-
holders'
equity 388,983 436,361 408,949 422,412 346,746
---------- ---------- ---------- ---------- ----------
Total
average
liabil-
ities
and
equity $4,640,724 $4,606,864 $4,286,628 $4,582,362 $3,934,391
========== ========== ========== ========== ==========
Interest
rate yield
on loans 6.38% 6.58% 8.28% 6.70% 8.34%
Interest
rate yield
on
securities
and
deposits 4.45% 4.72% 4.48% 4.71% 4.50%
---------- ---------- ---------- ---------- ----------
Interest
rate
yield on
interest
-earning
assets 6.23% 6.43% 7.98% 6.54% 8.01%
---------- ---------- ---------- ---------- ----------
Interest
rate
expense on
deposits 2.80% 2.98% 3.90% 3.04% 3.94%
Interest
rate
expense on
borrowings 3.41% 3.35% 5.72% 3.72% 5.75%
---------- ---------- ---------- ---------- ----------
Interest
rate
expense
on
interest
-bearing
liabili-
ties 2.86% 3.02% 4.01% 3.11% 4.09%
---------- ---------- ---------- ---------- ----------
Interest
rate
spread 3.37% 3.41% 3.97% 3.43% 3.92%
========== ========== ========== ========== ==========
Net
interest
margin 3.45% 3.50% 4.10% 3.52% 4.06%
========== ========== ========== ========== ==========
Other
operating
income /
Average
assets 0.17% 0.75% 0.97% 0.55% 0.74%
Other
operating
expense /
Average
assets 2.91% 7.44% 3.23% 4.46% 3.13%
Efficiency
ratio
(other
operating
expense /
revenue) 85.72% 186.84% 68.05% 116.90% 69.43%
Return
(Loss) on
average
assets (0.08%) (4.57%) 0.92% (1.44%) 0.85%
Return
(Loss) on
average
equity (1.01%) (48.21%) 9.69% (15.64%) 9.61%
Return
(Loss) on
average
tangible
equity(2) (1.24%) (66.67%) 13.36% (20.76%) 12.44%
Average
equity /
Average
assets 8.38% 9.47% 9.54% 9.22% 8.81%
(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 0.69% 0.70% 0.69% 0.68% 0.66%
Other operating expense
EXCLUDING goodwill write-off /
Average assets 2.91% 3.08% 3.23% 3.00% 3.13%
Efficiency ratio (other
operating expense / revenue)
EXCLUDING change in valuation
of financial instruments
carried at fair value and
goodwill write-off 74.37% 78.34% 72.38% 76.01% 70.69%
Return (Loss) on average
assets EXCLUDING change
in valuation of financial
instruments carried at
fair value and goodwill
write-off 0.25% (0.24%) 0.74% 0.10% 0.80%
Return (Loss) on average equity
EXCLUDING change in valuation
of financial instruments
carried at fair value and
goodwill write-off 2.95% (2.51%) 7.79% 1.10% 9.02%
Return (Loss) on average
tangible equity EXCLUDING
change in valuation of
financial instruments carried
at fair value and goodwill
write-off 3.61% (3.47%) 10.74% 1.46% 11.69%