WALLA WALLA, Wash., Jan. 28, 2009 (GLOBE NEWSWIRE) -- Banner Corporation (Nasdaq:BANR), the parent company of Banner Bank and Islanders Bank, today reported that it had a net loss of $78.5 million, or $4.72 per diluted share available to common shareholders, for the quarter ended December 31, 2008, compared to net income of $12.0 million, or $0.74 per diluted share, for the quarter ended December 31, 2007. The current quarter's results included a $71.1 million non-cash impairment charge to write-off the remaining balance of goodwill previously reflected on the Company's books. The current quarter's net income also included a $33.0 million provision for loan losses and $13.7 million of net fair value gains. Banner recorded a net loss of $128.0 million, or $7.94 per diluted share available to common shareholders (including a $121.1 million write-down of goodwill), for the year ended December 31, 2008, compared to net income of $36.9 million, or $2.49 per diluted share, for the year ended December 31, 2007.
"Deteriorating economic conditions and ongoing strains in the financial and housing markets presented an unusually challenging environment for Banner Corporation in 2008, which is reflected in our disappointing fourth quarter and year-to-date results," said D. Michael Jones, President and CEO. "This was particularly evident in our need to provide for credit losses at a significantly higher level than our historical experience. Although we anticipate that credit costs will be elevated well into 2009, we continue to believe 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."
"The challenging environment and faltering equity markets also caused us to take another hard look at the carrying value of goodwill and to conclude that it was appropriate to record a non-cash write-off of that asset," continued Jones. "At least annually, and more often if appropriate, all companies are required to determine the value of goodwill as an asset. While there currently is a great deal of uncertainty with respect to the market valuation of certain other assets, declining stock prices for financial services companies clearly indicate that the value of goodwill for the industry has been severely diminished. As a result of the significant decline in most banks' common stock prices, including Banner's, and the lack of merger transactions in recent months, measuring the value of goodwill has become difficult and imprecise at best; however, we have concluded that continuing to record it as an asset on our books would be inappropriate. Therefore we have taken this action to reflect current market conditions as of December 31, 2008. As goodwill is not a component of regulatory capital calculations, is ignored by most institutional investors and has no effect on liquidity or operations, there is no meaningful effect from this accounting entry.
"Despite obvious concerns related to the national economy, soft housing markets and financial market turmoil, we continue to have a positive view on the long-term economic prospects for the Northwest markets that we serve. We 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."
Credit Quality
"The housing market remained weak in many of our primary service areas during the fourth quarter, resulting in increasing delinquencies and non-performing assets, primarily in our construction and land development loan portfolios, and declining property values. As a result, our provision for loan losses was at a significantly higher amount than our historical levels and normal expectations." said Jones. "In November and December, in particular, home and lot sales activity was exceptionally slow, causing additional stress on builders' and developers' cash flows and ability to service debt, which is reflected in our increased non-performing asset totals. However, we remain confident that we can work our way through the housing market-related problems and we are actively engaged with our borrowers in resolving problem loans. While property values have continued to decline, our reserve levels are substantial and, along with our impairment analysis and charge-off actions, reflect current appraisals and valuation estimates."
Banner added $33.0 million to its provision for loan losses in the fourth quarter of 2008, compared to $8.0 million in the third quarter of 2008 and $2.0 million in the fourth quarter of 2007. For the year ended December 31, 2008, Banner's provision for loan losses was $62.5 million compared to $5.9 million for the year ended December 31, 2007. The allowance for loan losses at December 31, 2008 was $75.2 million, representing 1.90% of total loans outstanding. Non-performing loans were $187.3 million at December 31, 2008, compared to $119.4 million in the previous quarter and $42.4 million at December 31, 2007. In addition, Banner's real estate owned and repossessed assets were $21.9 million at December 31, 2008 compared to $10.2 million in the previous quarter and $1.9 million at December 31, 2007. Banner's net charge-offs in the current quarter totaled $16.6 million, or 0.42% of average loans. Net charge-offs for the year ended December 31, 2008 were $33.1 million, or 0.84% of average loans.
One-to-four family residential construction and related lot and land loans represent 23% of the total loan portfolio and 82% of non-performing assets. The geographic distribution of all construction and land development loans, including residential and commercial properties, is approximately 30% in the greater Puget Sound market, 40% in the greater Portland, Oregon market, and 9% in the greater Boise, Idaho market, with the remaining 21% 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 $81.0 million, or 47%, in the Puget Sound region, $72.6 million, or 40%, in the greater Portland market area and $16.7 million, or 9%, in the greater Boise market area.
"Other non-housing-related segments of the loan portfolio are beginning to show some signs of stress and increased non-performing loans as the effects of the slowing economy become more evident," Jones added. "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 3.23% for the fourth quarter of 2008, compared to 3.45% in the preceding quarter and 3.82% for the fourth quarter of 2007. For the year ended December 31 2008, the net interest margin was 3.45% compared to 3.99% for the year ended December 31, 2007. Funding costs decreased nine basis points compared to the previous quarter and decreased 107 basis points from the fourth quarter a year earlier, while asset yields decreased 34 basis points from the prior linked quarter and 164 basis points from the fourth quarter a year ago.
"While funding costs improved as expected, we continued to experience decreasing asset yields during the fourth quarter which further reduced our net interest margin," said Jones. "Early in the quarter pressure on deposit pricing was intense, as system-wide liquidity concerns temporarily pushed competitive deposit rates higher despite the Federal Reserve's efforts to lower market interest rates. Those concerns abated as the quarter progressed, particularly following the announcement of increased FDIC insurance coverage, allowing deposit costs to decline modestly. By contrast, the impact of the Federal Reserve's three rate cuts was evident in lower loan yields and reduced borrowing costs. In addition, our lower net interest margin also reflected the higher level of delinquencies, as non-accruing loans reduced the margin by approximately 34 basis points in this year's fourth quarter compared to approximately 24 basis points in the third quarter of 2008 and approximately 16 basis points in the fourth quarter of 2007."
For the fourth quarter of 2008, net interest income before the provision for loan losses was $35.6 million, compared to $37.6 million in the preceding quarter and $38.7 million in the same quarter a year ago. Reflecting the lower margin, net interest income before the provision for loan losses decreased to $147.6 million for the year ended December 31, 2008, compared to $149.6 million for the year ended December 31, 2007. Revenues from recurring operations* (net interest income before the provision for loan losses plus total other operating income excluding fair value adjustments) were $42.9 million in the fourth quarter of 2008, compared to $45.7 million for the third quarter of 2008 and $46.2 million for the fourth quarter a year ago. Revenues from recurring operations for the year ended December 31, 2008 increased to $178.3 million, compared to $176.6 million in the year ended December 31, 2007.
Banner's results for the fourth quarter of 2008 included a net gain of $13.7 million ($8.8 million after tax), compared to a net gain of $9.2 million ($5.9 million after tax) in the fourth 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. The fair value adjustments in the current quarter predominantly reflect changes in the valuation of trust preferred securities and junior subordinated debentures, both owned and issued by the Company. For the year ended December 31, 2008, fair value adjustments resulted in a net gain of $9.2 million ($5.9 million after tax), compared to a net gain of $11.6 million ($7.4 million after tax) for the year ended December 31, 2007.
Total other operating income for the fourth quarter was $21.0 million compared to $16.7 million for the same quarter a year ago. Total other operating income from recurring operations* (excluding fair value adjustments) for the fourth quarter was $7.3 million compared to $8.1 million in the preceding quarter and $7.5 million for the same quarter a year ago. For the year ended December 31, 2008, total other operating income from recurring operations increased 14% to $30.7 million, compared to $27.0 million for the year ended December 31, 2007. Primarily reflecting a recent slow-down in customer transaction volumes, income from deposit fees and other service charges decreased to $5.3 million in the fourth quarter of 2008, compared to $5.8 million for the preceding quarter. By contrast, deposit fees and service charges increased by 10% from $4.8 million in the fourth quarter a year ago, largely as a result of growth in our customer base and related payment processing activities. Income from mortgage banking operations decreased slightly in the fourth quarter to $1.4 million compared to $1.5 million in the preceding quarter, but was slightly higher than the $1.3 million recorded in the same quarter a year ago. For the year, mortgage banking revenues declined modestly to $6.0 million from $6.3 million in 2007. "The slowing economy adversely affected our payment processing business in the most recent quarter as activity levels for deposit customers, cardholders and merchants clearly declined; however, we are pleased with the year-over-year growth in our customer base and payment processing activities," Jones noted. "We are also pleased that our mortgage banking revenues have remained solid despite a very difficult year for housing finance. Further, the currently very low level of interest rates has resulted in a significant increase in mortgage loan applications in recent weeks."
"Controllable operating expenses were generally well managed in the fourth quarter reflecting continuing efforts to improve our processes and efficiency. Unfortunately, collection and legal costs, including charges related to acquired real estate, remained high," said Jones. "In addition, FDIC insurance expense increased significantly as a result of increased assessment rates for the current quarter, as well as a $1.3 million correction of an error recognizing the appropriate coverage periods related to previous quarterly assessments, including $744,000 for the year ended December 31, 2007. Although we anticipate collection costs will continue to be above historical levels for a number of future quarters, we expect continued expense discipline will be a positive factor going forward."
Total other operating expenses from recurring operations* (non-interest expenses excluding the goodwill write-off) were $36.0 million in the fourth quarter of 2008, compared to $34.0 million in the preceding quarter and $35.3 million in the fourth quarter a year ago. For the year ended December 31, 2008, other operating expenses from recurring operations were $138.9 million compared to $127.5 million in 2007. The 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 16 branches and nearly $800 million in total assets. Operating expenses from recurring operations as a percentage of average assets was 3.06% in the fourth quarter of 2008, compared to 2.91% in the previous quarter and 3.20% in the fourth quarter a year ago.
*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.
Balance Sheet Review
"New loan origination volumes were light in the fourth quarter, reflecting the slowing economic activity. While commercial business loans increased meaningfully, continued payoffs of construction loans and seasonal declines in certain agricultural loans resulted in a modest decrease in total loan balances compared to the prior quarter end." said Jones. "Although slower in the fourth quarter, home sales have been sufficient to reduce the portfolio of one-to-four family construction loans by $193.1 million over the past twelve months, including a $61.8 million reduction in the most recent quarter. As a result, at December 31, 2008 our one-to-four family construction loans have declined by $233.9 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 $190.2 million, also compared to their peak quarter-end balances at June 30, 2007." Net loans increased 3% to $3.89 billion at December 31, 2008, compared to $3.76 billion a year earlier. Total assets also increased 2% to $4.58 billion at December 31, 2008, compared to $4.49 billion a year earlier.
Total deposits increased 4% to $3.78 billion at December 31, 2008, compared to $3.62 billion at December 31, 2007. Non-interest-bearing accounts increased 5% and certificates of deposit increased 15% during the twelve months ended December 31, 2008, while total transaction and savings accounts decreased 7%. "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."
On November 21, 2008, Banner received $124 million from the U.S. Treasury Department as a part of the Treasury's Capital Purchase Program. This funding marked Banner's successful completion of the sale of $124 million in senior preferred stock, with a related warrant to purchase up to $18.6 million in common stock, to the U.S. Treasury. The warrant provides the Treasury the option to purchase up to 1,707,989 shares of Banner Corporation common stock at a price of $10.89 per share at any time during the next ten years. "The additional capital will enhance our capacity to support the communities we serve through expanded lending activities and economic development," said Jones. "This capital will also add flexibility in considering strategic options that may be available to us. We believe participation in this program should be beneficial not only to the communities we serve, but also to the employees, customers and shareholders of Banner Corporation."
Tangible stockholders' equity at December 31, 2008 was $419.6 million, including $115.9 million attributable to preferred stock, compared to $300.2 million at December 31, 2007. Tangible book value per common share was $17.96 at quarter-end, compared to $18.73 a year earlier. During the quarter ended December 31, 2008, the Company issued 171,770 shares of common stock through its Dividend Reinvestment and Stock Purchase Plan at an average price of $10.91 per share, generating approximately $1.9 million of additional paid in capital. At December 31, 2008, Banner had 16.9 million shares outstanding, while it had 16.0 million shares outstanding a year ago.
Cash Dividend
On December 16, 2008, Banner's Board of Directors declared a quarterly cash dividend of $0.05 per share, payable to shareholders of record as of the close of business on December 31, 2008. The dividend was paid on January 12, 2009. "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," said Jones. "Nonetheless, we will continue to evaluate our dividend payments on a quarterly basis during this period of uncertain economic times to ensure that we are appropriately managing our capital position."
Conference Call
Banner will host a conference call on Thursday, January 29, 2009, at 8:00 a.m. PT, to discuss fourth 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, February 5, 2009, 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 ----------- Quarters Ended Year Ended (in thousands -------------------------------- --------------------- except shares Dec 31, Sep 30, Dec 31, Dec 31, Dec 31, and per share 2008 2008 2007 2008 2007 data) ---------- ---------- ---------- ---------- ---------- INTEREST INCOME: Loans receivable $ 60,603 $ 64,181 $ 72,592 $ 256,951 $ 281,135 Mortgage- backed securities 1,359 1,040 1,179 4,639 5,832 Securities and cash equivalents 2,934 2,786 2,471 11,308 8,342 ---------- ---------- ---------- ---------- ---------- 64,896 68,007 76,242 272,898 295,309 INTEREST EXPENSE: Deposits 25,868 26,818 34,091 110,314 129,420 Federal Home Loan Bank advances 1,097 1,160 435 5,407 4,168 Other borrowings 397 734 766 2,271 3,214 Junior sub- ordinated debentures 1,954 1,669 2,288 7,353 8,888 ---------- ---------- ---------- ---------- ---------- 29,316 30,381 37,580 125,345 145,690 ---------- ---------- ---------- ---------- ---------- Net interest income before pro- vision for loan losses 35,580 37,626 38,662 147,553 149,619 PROVISION FOR LOAN LOSSES 33,000 8,000 2,000 62,500 5,900 ---------- ---------- ---------- ---------- ---------- Net interest income 2,580 29,626 36,662 85,053 143,719 OTHER OPERATING INCOME: Deposit fees and other service charges 5,263 5,770 4,770 21,540 16,573 Mortgage banking operations 1,351 1,500 1,325 6,045 6,270 Loan servic- ing fees 478 536 625 1,963 1,830 Miscellaneous 205 286 800 1,185 2,336 ---------- ---------- ---------- ---------- ---------- 7,297 8,092 7,520 30,733 27,009 Increase (Decrease) in valuation of financial instruments carried at fair value 13,740 (6,056) 9,209 9,156 11,574 ---------- ---------- ---------- ---------- ---------- Total other operating income 21,037 2,036 16,729 39,889 38,583 OTHER OPERATING EXPENSE: Salary and employee benefits 18,481 18,241 19,441 76,104 75,975 Less capitalized loan origination costs (1,730) (2,040) (2,459) (8,739) (10,683) Occupancy and equip- ment 6,197 5,956 6,011 24,010 20,953 Information/ computer data ser- vices 1,309 1,560 2,130 6,698 7,297 Payment and card proces- sing ser- vices 1,781 1,913 1,663 6,993 5,415 Professional services 1,175 1,117 932 4,378 3,207 Advertising and marketing 2,009 1,572 2,163 6,676 8,310 Deposit insurance 2,308 701 101 3,969 373 State/ municipal business and use taxes 545 572 566 2,257 1,993 Amortization of core deposit intangibles 676 691 736 2,828 1,881 Miscellaneous 3,218 3,717 3,989 13,725 12,768 ---------- ---------- ---------- ---------- ---------- 35,969 34,000 35,273 138,899 127,489 Goodwill write-off 71,121 -- -- 121,121 -- ---------- ---------- ---------- ---------- ---------- Total other operating expense 107,090 34,000 35,273 260,020 127,489 ---------- ---------- ---------- ---------- ---------- Income (Loss) before provision (benefit) for income taxes (83,473) (2,338) 18,118 (135,078) 54,813 PROVISION FOR (BENEFIT FROM) INCOME TAXES (4,942) (1,347) 6,106 (7,085) 17,890 ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS) $ (78,531) $ (991) $ 12,012 $(127,993) $ 36,923 ========== ========== ========== ========== ========== PREFERRED STOCK DIVIDEND AND DISCOUNT ACCRETION Preferred stock divi- dend 689 -- -- 689 -- Preferred stock dis- count accretion 161 -- -- 161 -- ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS) AVAILABLE TO COMMON SHARE- HOLDERS $ (79,381) $ (991) $ 12,012 $(128,843) $ 36,923 ========== ========== ========== ========== ========== Earnings (Loss) per common share Basic $ (4.72) $ (0.06) $ 0.75 $ (7.94) $ 2.53 Diluted $ (4.72) $ (0.06) $ 0.74 $ (7.94) $ 2.49 Cumulative dividends declared per common share $ 0.05 $ 0.05 $ 0.20 $ 0.50 $ 0.77 Weighted average common shares out- standing Basic 16,820,350 16,402,607 15,936,430 16,225,225 14,581,286 Diluted 16,820,350 16,402,607 16,141,941 16,225,225 14,838,469 Common shares repurchased during the period 200 -- 58,157 614,103 69,467 Common shares issued in connection with acquisitions -- -- 339,860 -- 2,932,471 Common shares issued in connection with exercise of stock options or DRIP 171,770 675,186 163,379 1,499,992 1,088,875 FINANCIAL CONDITION -------------------- (in thousands except shares and per share data) Dec 31, Sep 30, Dec 31, 2008 2008 2007 ---------- ---------- ---------- ASSETS ------ Cash and due from banks $ 89,964 $ 80,508 $ 98,120 Federal funds and interest- bearing deposits 12,786 403 310 Securities - at fair value 211,506 239,009 202,863 Securities - available for sale 53,272 -- -- Securities - held to maturity 52,190 55,389 53,516 Federal Home Loan Bank stock 37,371 37,371 37,371 Loans receivable: Held for sale 7,413 6,085 4,596 Held for portfolio 3,953,995 3,993,094 3,805,021 Allowance for loan losses (75,197) (58,846) (45,827) ---------- ---------- ---------- 3,886,211 3,940,333 3,763,790 Accrued interest receivable 21,219 22,799 24,980 Real estate owned held for sale, net 21,782 10,147 1,867 Property and equipment, net 97,647 97,958 98,098 Goodwill and other intangibles, net 13,716 85,513 137,654 Bank-owned life insurance 52,680 52,500 51,483 Other assets 34,024 28,329 22,606 ---------- ---------- ---------- $4,584,368 $4,650,259 $4,492,658 ========== ========== ========== LIABILITIES ----------- Deposits: Non-interest-bearing $ 509,105 $ 521,927 $ 484,251 Interest-bearing transaction and savings accounts 1,137,878 1,086,621 1,288,112 Interest-bearing certificates 2,131,867 2,182,318 1,848,230 ---------- ---------- ---------- 3,778,850 3,790,866 3,620,593 Advances from Federal Home Loan Bank at fair value 111,415 209,243 167,045 Customer repurchase agreements and other borrowings 145,230 104,496 91,724 Junior subordinated debentures at fair value 61,776 101,358 113,270 Accrued expenses and other liabilities 40,600 44,486 47,989 Deferred compensation 13,149 12,880 11,596 Deferred income tax liability, net -- -- 2,595 ---------- ---------- ---------- 4,151,020 4,263,329 4,054,812 STOCKHOLDERS' EQUITY -------------------- Preferred stock -Series A 115,915 -- -- Common stock 316,740 306,741 300,486 Retained earnings 2,150 82,377 139,636 Other components of stockholders' equity (1,457) (2,188) (2,276) ---------- ---------- ---------- 433,348 386,930 437,846 ---------- ---------- ---------- $4,584,368 $4,650,259 $4,492,658 ========== ========== ========== Common Shares Issued: Shares outstanding at end of period 17,152,038 16,980,468 16,266,149 Less unearned ESOP shares at end of period 240,381 240,381 240,381 ---------- ---------- ---------- Shares outstanding at end of period excluding unearned ESOP shares 16,911,657 16,740,087 16,025,768 ========== ========== ========== Book value per common share, excluding preferred stock (1) $ 18.77 $ 23.11 $ 27.32 Tangible book value per common share, excluding preferred stock (1) (2) $ 17.96 $ 18.01 $ 18.73 Consolidated Tier 1 leverage capital ratio 10.32% 8.86% 10.04% (1)-Calculation is based on number of common shares outstanding at the end of the period rather than weighted average shares outstanding and excludes unallocated shares in the ESOP. (2)-Tangible book value excludes goodwill, core deposit and other intangibles. ADDITIONAL FINANCIAL INFORMATION (dollars in thousands) LOANS (including loans held for Dec 31, Sep 30, Dec 31, sale): 2008 2008 2007 -------------- ---------- ---------- ---------- Commercial real estate $1,013,709 $1,013,919 $ 882,523 Multifamily real estate 151,274 141,787 165,886 Commercial construction 104,495 113,342 74,123 Multifamily construction 33,661 22,236 35,318 One- to four-family construction 420,673 482,443 613,779 Land and land development 486,130 481,521 497,962 Commercial business 679,867 694,688 696,350 Agricultural business including secured by farmland 204,142 213,753 186,305 One- to four-family real estate 599,169 561,043 445,222 Consumer 268,288 274,447 212,149 ---------- ---------- ---------- Total loans outstanding $3,961,408 $3,999,179 $3,809,617 ========== ========== ========== Restructured loans performing under their restructured terms $ 17,852 $ 15,514 $ 2,750 ========== ========== ========== Total loans 30 days past due and on non-accrual $ 248,469 $ 137,953 $ 69,031 ========== ========== ========== Total delinquent loans / Total loans outstanding 6.27% 3.45% 1.81% GEOGRAPHIC CONCENTRATION OF LOANS AT December 31, 2008 Washington Oregon Idaho Other Total -------------- ---------- ---------- ---------- ---------- ---------- Commercial real estate $ 765,490 $ 160,608 $ 77,489 $ 10,122 $1,013,709 Multifamily real estate 125,571 12,570 9,735 3,398 151,274 Commercial construction 59,590 33,927 10,028 950 104,495 Multifamily construction 20,536 13,125 -- -- 33,661 One- to four-family construction 208,699 193,025 18,949 -- 420,673 Land and land development 247,505 166,721 71,904 -- 486,130 Commercial business 506,864 75,678 80,566 16,759 679,867 Agricultural business including secured by farmland 79,817 54,918 69,407 -- 204,142 One- to four-family real estate 474,774 87,797 31,664 4,934 599,169 Consumer 194,990 54,852 17,938 508 268,288 ---------- ---------- ---------- ---------- ---------- Total loans outstanding $2,683,836 $ 853,221 $ 387,680 $ 36,671 $3,961,408 ========== ========== ========== ========== ========== Percent of total loans 67.7% 21.5% 9.8% 1.0% 100.0% DETAIL OF LAND AND LAND DEVELOPMENT LOANS AT December 31, 2008 Washington Oregon Idaho Other Total ------------- ----------- ---------- ---------- ---------- ---------- Residential Acquisition & development $ 125,933 $ 120,167 $ 25,257 $ -- $ 271,357 Improved lots 53,641 31,497 11,544 -- 96,682 Unimproved land 28,353 11,630 26,046 -- 66,029 Commercial & industrial Acquisition & development 5,011 -- 193 -- 5,204 Improved land 18,277 699 3,601 -- 22,577 Unimproved land 16,290 2,728 5,263 -- 24,281 ---------- ---------- ---------- ---------- ---------- Total land & land development loans outstanding $ 247,505 $ 166,721 $ 71,904 $ -- $ 486,130 ========== ========== ========== ========== ========== ADDITIONAL INFORMATION ON DEPOSITS & OTHER BORROWINGS --------------- BREAKDOWN OF Dec 31, Sep 30, Dec 31, DEPOSITS 2008 2008 2007 ------------- ---------- ---------- ---------- Non-interest -bearing $ 509,105 $ 521,927 $ 484,251 ---------- ---------- ---------- Interest -bearing checking 378,952 373,496 430,636 Regular savings accounts 474,885 519,285 609,073 Money market accounts 284,041 193,840 248,403 ---------- ---------- ---------- Interest -bearing transaction & savings accounts 1,137,878 1,086,621 1,288,112 ---------- ---------- ---------- Three-month maturity money market certificates 118,923 153,300 165,693 Other certificates 2,012,944 2,029,018 1,682,537 ---------- ---------- ---------- Interest -bearing certificates 2,131,867 2,182,318 1,848,230 ---------- ---------- ---------- Total deposits $3,778,850 $3,790,866 $3,620,593 ========== ========== ========== INCLUDED IN OTHER BORROWINGS -------------- Customer repurchase agreements / "Sweep accounts" $ 145,230 $ 103,496 $ 91,724 ========== ========== ========== Washington Oregon Idaho Total ---------- ---------- ---------- ---------- GEOGRAPHIC CONCENTRATION OF DEPOSITS AT December 31, 2008 $3,004,221 $ 535,998 $ 238,631 $3,778,850 ------------- ========== ========== ========== ========== ADDITIONAL FINANCIAL INFORMATION (dollars in thousands) Quarters Ended Year ------------------------------ Ended CHANGE IN THE Dec 31, Sep 30, Dec 31, Dec 31, ALLOWANCE FOR LOAN LOSSES 2008 2008 2007 2008 ------------------------- -------- -------- -------- -------- Balance, beginning of period $ 58,846 $ 58,570 $ 44,212 $ 45,827 Acquisitions / (divestitures) -- -- 1,319 -- Provision 33,000 8,000 2,000 62,500 Recoveries of loans previously charged off 715 2,357 127 3,471 Loans charged-off (17,364) (10,081) (1,831) (36,601) -------- -------- -------- -------- Net (charge-offs) recoveries (16,649) (7,724) (1,704) (33,130) -------- -------- -------- -------- Balance, end of period $ 75,197 $ 58,846 $ 45,827 $ 75,197 ======== ======== ======== ======== Net charge-offs (recoveries) / Average loans outstanding 0.42% 0.19% 0.05% 0.84% ALLOCATION OF Dec 31, Sep 30, Dec 31, ALLOWANCE FOR LOAN LOSSES 2008 2008 2007 ------------------------- -------- -------- -------- Specific or allocated loss allowance Commercial real estate $ 4,255 $ 2,789 $ 3,771 Multifamily real estate 87 103 934 Construction and land 42,045 21,932 7,569 One- to four-family real estate 753 511 1,987 Commercial business 16,612 23,085 19,026 Agricultural business, including secured by farmland 530 1,097 1,419 Consumer 1,742 2,935 3,468 -------- -------- -------- Total allocated 66,024 52,452 38,174 Estimated allowance for undisbursed commitments 1,129 1,060 330 Unallocated 8,044 5,334 7,323 -------- -------- -------- Total allowance for loan losses $ 75,197 $ 58,846 $ 45,827 ======== ======== ======== Allowance for loan losses / Total loans outstanding 1.90% 1.47% 1.20% Minimum for Capital REGULATORY CAPITAL Adequacy or RATIOS AT Actual "Well Capitalized" ------------------- ------------------- ------------------- December 31, 2008 Amount Ratio Amount Ratio ----------------- -------- -------- -------- -------- Banner Corporation- consolidated Total capital to risk-weighted assets $532,784 13.07% $326,071 8.00% Tier 1 capital to risk-weighted assets 481,697 11.82% 163,036 4.00% Tier 1 leverage capital to average assets 481,697 10.32% 186,696 4.00% Banner Bank Total capital to risk-weighted assets 468,472 12.02% 389,695 10.00% Tier 1 capital to risk-weighted assets 419,450 10.76% 233,817 6.00% Tier 1 leverage capital to average assets 419,450 9.40% 223,058 5.00% Islanders Bank Total capital to risk-weighted assets 24,088 13.27% 18,152 10.00% Tier 1 capital to risk-weighted assets 22,703 12.51% 10,891 6.00% Tier 1 leverage capital to average assets 22,703 10.74% 10,568 5.00% ADDITIONAL FINANCIAL INFORMATION (dollars in thousands) Dec 31, Sep 30, Dec 31, 2008 2008 2007 -------- -------- -------- NON-PERFORMING ASSETS --------------------- Loans on non-accrual status Secured by real estate: Commercial $ 12,879 $ 6,368 $ 1,357 Multifamily -- -- 1,222 Construction and land 154,823 98,108 33,432 One- to four-family 8,649 6,583 3,371 Commercial business 8,617 6,905 2,250 Agricultural business, including secured by farmland 1,880 265 436 Consumer 130 427 -- -------- -------- -------- 186,978 118,656 42,068 Loans more than 90 days delinquent, still on accrual Secured by real estate: Commercial -- -- -- Multifamily -- -- -- Construction and land -- -- -- One- to four-family 124 635 221 Commercial business -- -- -- Agricultural business, including secured by farmland -- -- -- Consumer 243 75 94 -------- -------- -------- 367 710 315 -------- -------- -------- Total non-performing loans 187,345 119,366 42,383 Real estate owned (REO) / Repossessed assets 21,886 10,153 1,885 -------- -------- -------- Total non- performing assets $209,231 $129,519 $ 44,268 ======== ======== ======== Total non-performing assets / Total assets 4.56% 2.79% 0.99% DETAIL & GEOGRAPHIC CONCENTRATION OF NON- PERFORMING ASSETS AT December 31, 2008 Washington Oregon Idaho Other Total -------------- ---------- ---------- ---------- ---------- ---------- Secured by real estate: Commercial $ 6,208 $ 6,671 $ -- $ -- $ 12,879 Multifamily -- -- -- -- -- Construction and land One- to four-family construction 26,404 22,440 1,685 -- 50,529 Residential land acquisition & develop- ment 38,061 33,330 5,984 -- 77,375 Residential land improved lots 10,735 2,832 2,041 -- 15,608 Residential land unimproved 785 -- 5,099 -- 5,884 Commercial land acquisition & develop- ment -- -- -- -- -- Commercial land improved 232 -- -- -- 232 Commercial land unimproved 4,786 409 -- -- 5,195 ---------- ---------- ---------- ---------- ---------- Total construction and land 81,003 59,011 14,809 -- 154,823 One- to four-family 6,008 1,257 1,508 -- 8,773 Commercial business 7,872 376 305 64 8,617 Agricultural business, including secured by farmland 774 121 985 -- 1,880 Consumer 373 -- -- -- 373 ---------- ---------- ---------- ---------- ---------- Total non- performing loans 102,238 67,436 17,607 64 187,345 Real estate owned (REO) and repossessed assets 14,605 5,203 2,078 -- 21,886 ---------- ---------- ---------- ---------- ---------- Total non- performing assets at end of the period $ 116,843 $ 72,639 $ 19,685 $ 64 $ 209,231 ========== ========== ========== ========== ========== ADDITIONAL FINANCIAL INFORMATION (dollars in thousands) (rates / ratios annualized) Quarters Ended Year Ended -------------------------------- --------------------- OPERATING Dec 31, Sep 30, Dec 31, Dec 31, Dec 31, PERFORMANCE 2008 2008 2007 2008 2007 ------------ ---------- ---------- ---------- ---------- ---------- Average loans $3,988,531 $4,001,999 $3,716,512 $3,935,039 $3,437,259 Average securities and deposits 391,560 342,153 301,071 345,827 309,860 Average non- interest- earning assets 296,927 296,572 356,752 325,235 297,353 ---------- ---------- ---------- ---------- ---------- Total average assets $4,677,018 $4,640,724 $4,374,335 $4,606,101 $4,044,472 ========== ========== ========== ========== ========== Average deposits $3,750,383 $3,810,718 $3,628,581 $3,722,012 $3,332,098 Average borrowings 456,383 415,517 258,431 425,713 287,478 Average non- interest- earning lia- bilities 25,459 25,506 62,415 30,335 58,371 ---------- ---------- ---------- ---------- ---------- Total average liabilities 4,232,225 4,251,741 3,949,427 4,178,060 3,677,947 Total average stockholders' equity 444,793 388,983 424,908 428,041 366,525 ---------- ---------- ---------- ---------- ---------- ` Total average liabilities and equity $4,677,018 $4,640,724 $4,374,335 $4,606,101 $4,044,472 ========== ========== ========== ========== ========== Interest rate yield on loans 6.04% 6.38% 7.75% 6.53% 8.18% Interest rate yield on securities and deposits 4.36% 4.45% 4.81% 4.61% 4.57% ---------- ---------- ---------- ---------- ---------- Interest rate yield on interest- earning assets 5.89% 6.23% 7.53% 6.37% 7.88% ---------- ---------- ---------- ---------- ---------- Interest rate expense on deposits 2.74% 2.80% 3.73% 2.96% 3.88% Interest rate expense on borrowings 3.01% 3.41% 5.36% 3.53% 5.66% ---------- ---------- ---------- ---------- ---------- Interest rate expense on interest- bearing liabilities 2.77% 2.86% 3.84% 3.02% 4.03% ---------- ---------- ---------- ---------- ---------- Interest rate spread 3.12% 3.37% 3.69% 3.35% 3.85% ========== ========== ========== ========== ========== Net interest margin 3.23% 3.45% 3.82% 3.45% 3.99% ========== ========== ========== ========== ========== Other operating income / Ave- rage assets 1.79% 0.17% 1.52% 0.87% 0.95% Other operating income (loss) EXCLUDING change in valuation of financial instruments carried at fair value / Average assets (1) 0.62% 0.69% 0.68% 0.67% 0.67% Other operating expense / Average assets 9.11% 2.91% 3.20% 5.65% 3.15% Other operating expense EX- CLUDING good- will write- off / Average assets 3.06% 2.91% 3.20% 3.02% 3.15% Efficiency ratio (other operating expense / revenue) 189.15% 85.72% 63.68% 138.72% 67.74% Return (Loss) on average assets (6.68%) (0.08%) 1.09% (2.78%) 0.91% Return (Loss) on average equity (70.24%) (1.01%) 11.22% (29.90%) 10.07% Return (Loss) on average tangible equity (2) (83.44%) (1.24%) 15.28% (38.51%) 13.27% Average equity / Average assets 9.51% 8.38% 9.71% 9.29% 9.06% (1) - Earnings information excluding the fair value adjustments and goodwill impairment charge (alternately referred to as operating income from recurring operations and expenses from recurring operations) represent non-GAAP (Generally Accepted Accounting Principles) financial measures. (2) - Average tangible equity excludes goodwill, core deposit and other intangibles.