Edgar Filing: BANNER CORP

k1029.htm

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT


PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934


Date of Report (Date of earliest event reported): October 29, 2008


Banner Corporation
(Exact name of registrant as specified in its charter)

Washington	0-26584	91-1691604
State or other jurisdiction	Commission	(I.R.S. Employer
of incorporation	File Number	Identification No.)

10 S. First Avenue, Walla Walla, Washington		99362
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number (including area code) (509) 527-3636

Not Applicable
(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions.

[ ]	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[ ]	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[ ]	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[ ]	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition

On October 29, 2008, Banner Corporation issued its earnings release for the quarter ended September 30, 2008. A copy of the earnings release is attached hereto as Exhibit 99.1, which is incorporated herein by reference.

Item 9.01 Financial Statements and Exhibits

(d) Exhibits

99.1 Press Release of Banner Corporation dated October 29, 2008.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

	BANNER CORPORATION



Date: October 29, 2008	By:/s/D. Michael Jones
	D. Michael Jones
	President and Chief Executive Officer

Exhibit 99.1

Contact: D. Michael Jones,

President and CEO

Lloyd W. Baker, CFO

(509) 527-3636

NEWS RELEASE

Banner Corporation Announces Third Quarter Results;

Includes $2.9 Million Operating Profit and Remains “Well Capitalized”

Walla Walla, WA – October 29, 2008 - Banner Corporation (NASDAQ GMS: 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.

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BANR- Third Quarter 2008 Results

October 29, 2008

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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

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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 were 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

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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.

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RESULTS OF OPERATIONS	Quarters Ended									Nine Months Ended
(in thousands except shares and per share data)	Sep 30, 2008			Jun 30, 2008			Sep 30, 2007			Sep 30, 2008			Sep 30, 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
Miscellaneous		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

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FINANCIAL CONDITION
(in thousands except shares and per share data)		Sep 30, 2008			Jun 30, 2008			Sep 30, 2007			Dec 31, 2007
								Restated(1)
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			15,821,067			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.

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BANR- Third Quarter 2008 Results

October 29, 2008

Page 7

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)

				Sep 30, 2008		Jun 30, 2008		Sep 30, 2007		Dec 31, 2007
LOANS (including loans 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 construction				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 performing under their restructured 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 delinquent 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 real estate			$	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 construction				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 including 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 & development		$	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 development loans outstanding	$	245,532	$	164,931	$	71,058	$	- -	$	481,521

ADDITIONAL INFORMATION ON DEPOSITS & OTHER BORROWINGS

	BREAKDOWN OF DEPOSITS			Sep 30, 2008		Jun 30, 2008		Sep 30, 2007		Dec 31, 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 market certificates			153,300		163,980		167,025		165,693
	Other certificates			2,029,018		1,899,412		1,658,071		1,682,537

		Interest-bearing certificates		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

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BANR- Third Quarter 2008 Results

October 29, 2008

Page 8

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)

					Quarters Ended					Nine Months Ended
CHANGE IN THE				Sep 30, 2008		Jun 30, 2008		Sep 30, 2007		Sep 30, 2008		Sep 30, 2007
ALLOWANCE FOR LOAN 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 LOSSES				Sep 30, 2008		Jun 30, 2008		Sep 30, 2007		Dec 31, 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 business, including secured by farmland			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 Adequacy
REGULATORY CAPITAL RATIOS AT				Actual				or "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-weighted 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		10.00%
		Tier 1 capital to risk-weighted 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		10.00%
		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%

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BANR- Third Quarter 2008 Results

October 29, 2008

Page 9

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)

					Sep 30, 2008		Jun 30, 2008		Sep 30, 2007		Dec 31, 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 business				6,905		6,875		5,713		2,250
	Agricultural business, including secured by farmland				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 business				- -		- -		- -		- -
	Agricultural business, including secured by farmland				- -		- -		- -		- -
	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 construction			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 construction 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 business, 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 repossessed assets					3,746		4,540		1,867		- -		10,153
			Total non-performing assets at end of the period	$	76,674	$	32,515	$	20,266	$	64	$	129,519

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BANR- Third Quarter 2008 Results

October 29, 2008

Page 10

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
(rates / ratios annualized)
			Quarters Ended						Nine Months Ended

OPERATING PERFORMANCE			Sep 30, 2008		Jun 30, 2008		Sep 30, 2007		Sep 30, 2008		Sep 30, 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 liabilities			25,506		31,475		62,120		31,967		57,392
	Total average liabilities		4,251,741		4,170,503		3,877,679		4,159,950		3,587,645
Total average stockholders' equity			388,983		436,361		408,949		422,412		346,746
	Total average liabilities 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 liabilities		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%

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