Edgar Filing: BANNER CORP

k638.htm

SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, 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): July 28, 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.

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

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

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

G	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 July 28, 2008, Banner Corporation issued its earnings release for the quarter ended June 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 July 28, 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: July 28, 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 Second Quarter Results;

Includes Provision for Loan Losses of $15 Million and

Non-cash Write-down of Goodwill; Remains “Well Capitalized”

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

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

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

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

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

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

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Credit Quality

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

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

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

Income Statement Review

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

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

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

Total other operating income from recurring operations (excluding fair value adjustments) for the second quarter increased to $8.0 million up from $7.4 million in the preceding quarter and increased 16% compared to $6.9 million for the same quarter a year ago. For the first half of 2008, total other operating income from recurring operations increased 28% to $15.3 million, compared to $12.0 million in the first half of 2007. Income from deposit fees and other service charges increased to $5.5 million in the second quarter of 2008, compared to $5.0 million for the preceding quarter, and increased 34% from $4.1 million in the second quarter a year ago. Income from mortgage banking operations, at $1.6 million, was nearly unchanged in the second quarter compared to the preceding

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quarter but decreased slightly from $1.8 million in the same period a year ago. For the first half of the year, mortgage banking revenues were essentially unchanged but are likely to decline modestly over the remainder of the year given the lower levels of residential sales activity.

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

Balance Sheet Review

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

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

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

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

Accounting Treatments

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

Restatement and Reclassification

The Statement of Financial Condition for the quarter ended June 30, 2007 has been restated to reflect non-material cumulative adjustments to the common stock and retained earnings components of stockholders’ equity related to the tax treatment of certain elements of stock-based compensation for periods prior to January 1, 2007. The effects of these adjustments are reductions of $380,000 in income taxes payable and $2.4 million in retained earnings and increases of $2.8 million and $380,000, respectively, in

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common stock (paid-in capital) and total stockholders’ equity as of December 31, 2006. These adjustments have immaterially affected certain previously reported ratios for the quarter ended June 30, 2007.

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

Conference Call

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

About the Company

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

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

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RESULTS OF OPERATIONS			Quarters Ended							Six Months Ended
(in thousands except shares and per share data)				Jun 30, 2008		Mar 31, 2008		Jun 30, 2007		Jun 30, 2008		Jun 30, 2007


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

INTEREST EXPENSE:
	Deposits			27,565		30,063		32,378		57,628		59,988
	Federal Home Loan Bank advances			1,301		1,849		1,164		3,150		3,441
	Other borrowings			530		610		790		1,140		1,718
	Junior subordinated debentures			1,666		2,064		1,969		3,730		4,423
				31,062		34,586		36,301		65,648		69,570

	Net interest income before provision for loan losses			36,980		37,367		38,110		74,347		70,287
PROVISION FOR LOAN LOSSES				15,000		6,500		1,400		21,500		2,400

	Net interest income			21,980		30,867		36,710		52,847		67,887

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

OTHER OPERATING EXPENSE:
	Salary and employee benefits			19,744		19,638		19,635		39,382		36,103
	Less capitalized loan origination costs			(2,728)		(2,241)		(3,175)		(4,969)		(5,769)
	Occupancy and equipment			5,989		5,868		5,106		11,857		9,458
	Information / computer data services			1,840		1,989		1,767		3,829		3,136
	Payment and card processing services			1,768		1,531		1,298		3,299		2,286
	Professional services			1,331		755		723		2,086		1,282
	Advertising and marketing			1,677		1,418		1,867		3,095		3,724
	State/municipal business and use taxes			576		564		470		1,140		878
	Amortization of core deposit intangibles			725		736		352		1,461		352
	Miscellaneous			4,300		3,450		3,256		7,750		5,920
				35,222		33,708		31,299		68,930		57,370
	Goodwill write-off			50,000		- -		- -		50,000		- -
	Total other operating expense			85,222		33,708		31,299		118,930		57,370
	Income (Loss) before provision (benefit) for income taxes			(54,610)		5,343		10,397		(49,267)		21,837
PROVISION (BENEFIT) FOR INCOME TAXES				(2,305)		1,509		3,286		(796)		6,913
NET INCOME (LOSS)			$	(52,305)	$	3,834	$	7,111	$	(48,471)	$	14,924

Earnings (Loss) per share
		Basic	$	(3.31)	$	0.24	$	0.49	$	(3.06)	$	1.11
		Diluted	$	(3.30)	$	0.24	$	0.48	$	(3.05)	$	1.09
Cumulative dividends declared per common share			$	0.20	$	0.20	$	0.19	$	0.40	$	0.38
Weighted average shares outstanding
		Basic		15,821,934		15,847,921		14,519,669		15,834,728		13,426,939
		Diluted		15,872,604		15,965,032		14,791,195		15,877,093		13,727,889
Shares repurchased during the period				- -		613,903		2,624		613,903		10,610
Shares issued in connection with acquisitions				- -		- -		2,592,611		- -		2,592,611
Shares issued in connection with exercise of stock options or DRIP				401,645		251,391		110,820		653,036		784,215

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

NET INCOME (LOSS) FROM RECURRING OPERATIONS			$	(2,720)	$	3,307	$	8,312	$	587	$	15,370
Earnings (Loss) per share EXCLUDING the effects of change in valuation of financial
	instruments carried at fair value and goodwill write-off
		Basic	$	(0.17)	$	0.21	$	0.57	$	0.04	$	1.14
		Diluted	$	(0.17)	$	0.21	$	0.56	$	0.04	$	1.12

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FINANCIAL CONDITION
(in thousands except shares and per share data)			Jun 30, 2008		Mar 31, 2008		Jun 30, 2007		Dec 31, 2007

							Restated(1)
ASSETS
Cash and due from banks		$	91,953	$	93,634	$	81,366	$	98,120
Federal funds and interest-bearing deposits			430		28,760		25,437		310
Securities - at fair value			238,670		226,910		182,969		202,863
Securities - held to maturity			55,612		55,647		48,196		53,516
Federal Home Loan Bank stock			37,371		37,371		37,291		37,371
Loans receivable:
	Held for sale		6,817		6,118		8,178		4,596
	Held for portfolio		3,966,482		3,833,875		3,610,174		3,805,021
	Allowance for loan losses		(58,570)		(50,446)		(43,248)		(45,827)

			3,914,729		3,789,547		3,575,104		3,763,790

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

LIABILITIES

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

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

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

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

STOCKHOLDERS' EQUITY

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

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

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

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

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BANR - Second Quarter 2008 Results

July 28, 2008

Page 7

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)

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

LOANS BY GEOGRAPHIC CONCENTRATION AT
		Jun 30, 2008		Washington		Oregon		Idaho		Other		Total

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

		Percent of total loans		68.3%		21.0%		9.8%		0.9%		100.0%

DETAIL OF LAND AND LAND DEVELOPMENT LOANS AT
		Jun 30, 2008		Washington		Oregon		Idaho		Other		Total

Residential
	Acquisition & development		$	110,562	$	121,380	$	24,916	$	- -	$	256,858
	Improved lots			42,423		31,736		10,893		- -		85,052
	Unimproved land			39,918		12,245		30,403		- -		82,566
Commercial & industrial
	Acquisition & development			2,590		9,999		226		- -		12,815
	Improved land			18,555		2,795		6,344		- -		27,694
	Unimproved land			21,438		1,591		6,930		- -		29,959
		Total land & land development loans outstanding	$	235,486	$	179,746	$	79,712	$	- -	$	494,944

ADDITIONAL INFORMATION ON DEPOSITS & OTHER BORROWINGS

	BREAKDOWN OF DEPOSITS			Jun 30, 2008		Mar 31, 2008		Jun 30, 2007		Dec 31, 2007

	Non-interest-bearing		$	477,144	$	486,201	$	455,628	$	484,251

	Interest-bearing checking			411,571		452,531		461,749		430,636
	Regular savings accounts			580,482		610,085		570,117		609,073
	Money market accounts			224,164		234,599		275,814		248,403
		Interest-bearing transaction & savings accounts		1,216,217		1,297,215		1,307,680		1,288,112

	Three-month maturity money market certificates			163,980		174,957		176,107		165,693
	Other certificates			1,899,412		1,734,937		1,653,366		1,682,537
		Interest-bearing certificates		2,063,392		1,909,894		1,829,473		1,848,230
		Total deposits	$	3,756,753	$	3,693,310	$	3,592,781	$	3,620,593

	INCLUDED IN OTHER BORROWINGS
	Customer repurchase agreements / "Sweep accounts"		$	91,192	$	85,032	$	69,726	$	91,724

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

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BANR - Second Quarter 2008 Results

July 28, 2008

Page 8

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)

						Quarters Ended				Six Months Ended
CHANGE IN THE				Jun 30, 2008		Mar 31, 2008		Jun 30, 2007		Jun 30, 2008		Jun 30, 2007
ALLOWANCE FOR LOAN LOSSES

Balance, beginning of period			$	50,446	$	45,827	$	36,299	$	45,827	$	35,535
Acquisitions / (divestitures)				- -		- -		5,957		- -		5,957
Provision				15,000		6,500		1,400		21,500		2,400

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

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

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

ALLOCATION OF
ALLOWANCE FOR LOAN LOSSES				Jun 30, 2008		Mar 31, 2008		Jun 30, 2007		Dec 31, 2007
Specific or allocated loss allowance
	Commercial real estate		$	4,518	$	4,180	$	5,905	$	3,771
	Multifamily real estate			524		587		939		934
	Construction and land			19,991		11,117		14,490		7,569
	One- to four-family real estate			2,322		2,054		1,465		1,987
	Commercial business			21,494		17,842		13,881		19,026
	Agricultural business, including secured by farmland			1,634		1,397		2,796		1,419
	Consumer			2,583		2,807		1,604		3,468

		Total allocated		53,066		39,984		41,080		38,174
	Estimated allowance for undisbursed commitments			543		599		327		330
	Unallocated			4,961		9,863		1,841		7,323

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

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

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BANR - Second Quarter 2008 Results

July 28, 2008

Page 9

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)

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

NON-PERFORMING ASSETS

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

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

Total non-performing assets / Total assets					2.19%		1.36%		0.35%		0.99%

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

Real estate owned (REO) / Repossessed assets					3,487		5,293		2,617		- -		11,397

			Total non-performing assets at end of the period	$	55,087	$	19,878	$	26,350	$	- -	$	101,315

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BANR-Second Quarter 2008 Results

July 28, 2008

Page 10

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

OPERATING PERFORMANCE			Jun 30, 2008		Mar 31, 2008		Jun 30, 2007		Jun 30, 2008		Jun 30, 2007

							Restated(1)				Restated(1)
Average loans		$	3,917,563	$	3,830,992	$	3,413,095	$	3,874,277	$	3,193,662
Average securities and deposits			336,662		312,596		302,971		324,605		313,318
Average non-interest-earning assets			352,639		359,474		286,725		354,960		237,133

	Total average assets	$	4,606,864	$	4,503,062	$	4,002,791	$	4,553,842	$	3,744,113

Average deposits		$	3,719,748	$	3,606,121	$	3,302,750	$	3,662,934	$	3,043,663
Average borrowings			419,280		411,560		278,366		415,421		335,856
Average non-interest-earning liabilities			31,475		42,997		60,776		36,130		54,667

	Total average liabilities		4,170,503		4,060,678		3,641,892		4,114,485		3,434,186

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

Interest rate yield on loans			6.58%		7.15%		8.35%		6.86%		8.39%
Interest rate yield on securities and deposits			4.72%		4.99%		4.45%		4.85%		4.49%

	Interest rate yield on interest-earning assets		6.43%		6.98%		8.03%		6.70%		8.04%

Interest rate expense on deposits			2.98%		3.35%		3.93%		3.16%		3.97%
Interest rate expense on borrowings			3.35%		4.42%		5.65%		3.88%		5.75%

	Interest rate expense on interest-bearing liabilities		3.02%		3.46%		4.07%		3.24%		4.15%

Interest rate spread			3.41%		3.52%		3.96%		3.46%		3.89%

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

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

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

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

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

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

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

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

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


Operating performance for the periods presented excluding the effects of change in valuation
	of financial instruments carried at fair value and goodwill write-off
Other operating income (loss) EXCLUDING change in valuation of
	financial instruments carried at fair value and goodwill write-off / Average assets		0.70%		0.66%		0.69%		0.68%		0.65%

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

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

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

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

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

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