q5908.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
  
[X] 
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008 .
 
 
OR
 
 
[   ] 
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 OF 1934 FOR  THE  TRANSITION PERIOD FROM _______________   to   _______________ :
 
 
 
 
Commission File Number 0-26584
BANNER CORPORATION
(Exact name of registrant as specified in its charter)
 
 
Washington
(State or other jurisdiction of incorporation or
organization)
  
91-1691604
(I.R.S. Employer Identification Number)
 
 
 
10 South First Avenue, Walla Walla, Washington 99362
(Address of principal executive offices and zip code)
 
Registrant's telephone number, including area code:  (509) 527-3636
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
  [X]
No
   [   ]   
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one)
Large accelerated filer   [   ]  Accelerated filer  [X]  Non-accelerated filer  [   ] Smaller reporting company  [   ]
               
 
           
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
 [   ]
No
  [X]   
 
APPLICABLE ONLY TO CORPORATE ISSUERS
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
 Title of class:
Common Stock, $.01 par value per share
  
As of April 30, 2008
15,977,000 shares*
 
 
*  Includes 240,381 shares held by the Employee Stock Ownership Plan that have not been released, committed to be released, or    allocated to participant accounts.
 
 
 
 
 

BANNER CORPORATION AND SUBSIDIARIES
Table of Contents
 
PART I - FINANCIAL INFORMATION
 
Item 1 - Financial Statements.  The Consolidated Financial Statements of Banner Corporation and Subsidiaries filed as a part of the report are as follows:
Consolidated Statements of Financial Condition as of March 31, 2008 and December 31, 2007
3
   
Consolidated Statements of Income for the Quarters Ended March 31, 2008 and 2007
4
   
Consolidated Statements of Comprehensive Income for the Quarters Ended March 31, 2008 and 2007
5
   
Consolidated Statements of Changes in Stockholders’ Equity for the Quarters Ended March 31, 2008 and 2007
6
   
Consolidated Statements of Cash Flows for the Quarters Ended March 31, 2008 and 2007
9
   
Selected Notes to Consolidated Financial Statements
11
   
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
  
   
Special Note Regarding Forward-Looking Statements
21
   
Executive Overview
21
   
Comparison of Financial Condition at March 31, 2008 and December 31, 2007
23
   
Comparison of Results of Operations for the Quarters Ended March 31, 2008 and 2007
25
   
Asset Quality
32
   
Liquidity and Capital Resources
33
   
Financial Instruments with Off-Balance-Sheet Risk
34
   
Capital Requirements
34
   
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
  
   
Market Risk and Asset/Liability Management
36
   
Sensitivity Analysis
36
   
Item 4 - Controls and Procedures
40
   
PART II - OTHER INFORMATION
  
   
Item 1 - Legal Proceedings
41
   
Item 1A - Risk Factors
41
   
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
41
   
Item 3 - Defaults upon Senior Securities
41
   
Item 4 - Submission of Matters to a Vote of Security Holders
41
   
Item 5 - Other Information
41
   
Item 6 - Exhibits
42
   
SIGNATURES
44

 
2
 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
March 31, 2008 and December 31, 2007
 
   
March 31
    
December 31
  
ASSETS
  
2008
    
2007
  
         
Restated
  
Cash and due from banks
   $ 122,394     $ 98,430  
                 
Securities at fair value, cost $233,869 and $204,279, respectively
     226,910       202,863  
Securities held to maturity, fair value $57,113 and $55,010, respectively
     55,647       53,516  
                 
Federal Home Loan Bank (FHLB) stock
     37,371       37,371  
Loans receivable:
                
Held for sale, fair value $6,228 and $4,680, respectively
     6,118       4,596  
Held for portfolio
     3,833,875       3,805,021  
Allowance for loan losses
     (50,446 )     (45,827 )
      3,789,547       3,763,790  
                 
Accrued interest receivable
     23,795       24,980  
Real estate owned, held for sale, net
     7,572       1,867  
Property and equipment, net
     98,808       98,098  
Goodwill and other intangibles, net
     136,918       137,654  
Income taxes receivable, net
     --       1,610  
Bank-owned life insurance (BOLI)
     51,725       51,483  
Other assets
     21,538       20,996  
    $ 4,572,225     $ 4,492,658  
LIABILITIES
                
Deposits:
                
Non-interest-bearing
   $ 486,201     $ 484,251  
Interest-bearing transactions and savings accounts
     1,297,215       1,288,112  
Interest-bearing certificates
     1,909,894       1,848,230  
      3,693,310       3,620,593  
                 
Advances from FHLB at fair value
     155,405       167,045  
Other borrowings
     135,032       91,724  
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
     105,516       113,270  
Accrued expenses and other liabilities
     39,263       47,989  
Deferred compensation
     12,224       11,596  
Deferred income tax liability, net
     38       2,595  
Income taxes payable, net
     1,899       --  
      4,142,687       4,054,812  
COMMITMENTS AND CONTINGENCIES
                
                 
STOCKHOLDERS’ EQUITY
                
Preferred stock - $0.01 par value, 500,000 shares authorized, none issued
     --       --  
Common stock - $0.01 par value per share, 25,000,000 shares authorized, 15,903,637 shares issued:
15,663,256 shares and 16,025,768 shares outstanding at March 31, 2008 and December 31, 2007, respectively
     292,061       300,486  
Retained earnings
     139,722       139,636  
Accumulated other comprehensive income (loss):
                
Unrealized loss on securities available for sale transferred to held to maturity
     (162 )     (176 )
Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust at cost:
                
240,381 and 240,381 restricted shares outstanding at March 31, 2008 and December 31, 2007, respectively
     (1,987 )     (1,987 )
                 
Carrying value of shares held in trust for stock related compensation plans
     (8,100 )     (7,960 )
Liability for common stock issued to deferred, stock related, compensation plans
     8,004       7,847  
      (96 )     (113 )
      429,538       437,846  
    $ 4,572,225     $ 4,492,658  
 
See selected notes to consolidated financial statements
 
 
3
 
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (In thousands except for per share amounts)
For the Quarters Ended March 31, 2008 and 2007
 
               
2008
    
2007
  
INTEREST INCOME:
                        
Loans receivable
            
$
68,073
  
$
61,828
  
Mortgage-backed securities
              
1,153
    
1,775
  
Securities and cash equivalents
              
2,727
    
1,843
  
               
71,953
    
65,446
  
INTEREST EXPENSE:
                        
Deposits
              
30,063
    
27,610
  
FHLB advances
              
1,849
    
2,277
  
Other borrowings
              
610
    
928
  
Junior subordinated debentures
              
2,064
    
2,454
  
               
34,586
    
33,269
  
                         
Net interest income before provision for loan losses
              
37,367
    
32,177
  
                         
PROVISION FOR LOAN LOSSES
              
6,500
    
1,000
  
Net interest income
              
30,867
    
31,177
  
                         
OTHER OPERATING INCOME:
                        
Deposit fees and other service charges
              
5,013
    
2,963
  
Mortgage banking operations
              
1,615
    
1,355
  
Loan servicing fees
              
402
    
375
  
Miscellaneous
              
331
    
461
  
               
7,361
    
5,154
  
Gain on sale of securities
              
--
    
--
  
Net change in valuation of financial instruments carried at fair value
              
823
    
1,180
  
Total other operating income
              
8,184
    
6,334
  
                         
OTHER OPERATING EXPENSES:
                        
Salary and employee benefits
              
19,638
    
16,468
  
Less capitalized loan origination costs
              
(2,241
)
  
(2,594
)
Occupancy and equipment
              
5,868
    
4,352
  
Information/computer data services
              
1,989
    
1,369
  
Payment and card processing expenses
              
1,531
    
988
  
Professional services
              
755
    
559
  
Advertising and marketing
              
1,418
    
1,857
  
State/municipal business and use taxes
              
564
    
408
  
Amortization of core deposit intangibles
              
736
    
--
  
Miscellaneous
              
3,450
    
2,664
  
Total other operating expenses
              
33,708
    
26,071
  
                         
Income before provision for income taxes
              
5,343
    
11,440
  
                         
PROVISION FOR INCOME TAXES
              
1,509
    
3,627
  
                         
NET INCOME
            
$
3,834
  
$
7,813
  
                         
Earnings per common share (see Note 8):
                        
Basic
            
$
0.24
  
$
0.63
  
Diluted
            
$
0.24
  
$
0.62
  
Cumulative dividends declared per common share:
            
$
0.20
  
$
0.19
  
                         
 
See selected notes to consolidated financial statements
 

 
4
 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (In thousands)
For the Quarters Ended March 31, 2008 and 2007
 
 
               
2008
    
2007
  
NET INCOME
            
$
3,834
  
$
7,813
  
                         
OTHER COMPREHENSIVE INCOME, NET OF INCOME TAXES:
                        
Amortization of unrealized loss on tax exempt securities transferred from available-for-sale to held-to-maturity
              
14
    
14
  
Other comprehensive income
              
14
    
14
  
                         
COMPREHENSIVE INCOME
            
$
3,848
  
$
7,827
  
 
See selected notes to consolidated financial statements
 
 
 
 
 
 
 
 
 
 

 
5
 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited) (In thousands, except per share amounts)
For the Quarters Ended March 31, 2008 and 2007
 
 
   
Common
Stock
    
Retained
Earnings
    
Accumulated Other Comprehensive Income (Loss)
    
Unearned Restricted
ESOP
Shares
    
Carrying Value,
Net of Liability, Of Shares Held in Trust for Stock-Related Compensation Plans
    
Stockholders’ Equity
  
BALANCE, January 1, 2008
   $ 300,486     $ 139,636     $ (176 )   $ (1,987 )   $ (113 )   $ 437,846  
                                                 
Net income
             3,834                               3,834  
                                                 
Cumulative effect of adoption of EITF 06-4 relating to liabilities under split dollar life insurance arrangements
             (617 )                             (617 )
                                                 
Amortization of unrealized loss on tax exempt securities transferred from available for sale to held to maturity
                     14                       14  
                                                 
Cash dividend on common stock ($.20/share cumulative)
             (3,131 )                             (3,131 )
                                                 
Purchase and retirement of common stock
     (14,265 )                                     (14,265 )
                                                 
Proceeds from issuance of common stock for exercise of stock options
     551                                       551  
                                                 
Proceeds from issuance of common stock for stockholder reinvestment program
     5,193                                       5,193  
                                                 
Net issuance of stock through employer’s stock plans, including tax benefit
                                             --  
                                                 
Amortization of compensation expense related to stock options
     96                                       96  
                                                 
Amortization of compensation expense related to MRP
                                     17       17  
 
BALANCE, March 31, 2008
   $ 292,061     $ 139,722     $ (162 )   $ (1,987 )   $ (96 )   $ 429,538  
                                                 
 
See selected notes to consolidated financial statements
 
 
 
 
 

 
6
 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)
(Unaudited) (In thousands, except per share amounts)
For the Quarters Ended March 31, 2008 and 2007
 
 
   
Common
Stock
    
Retained
Earnings
    
Accumulated Other Comprehensive Income (Loss)
    
Unearned Restricted
ESOP
Shares
    
Carrying Value,
Net of Liability, Of Shares Held in Trust for Stock-Related Compensation Plans
    
Stockholders’ Equity
  
BALANCE, January 1, 2007
 (As previously reported)
   $ 135,149     $ 120,206     $ (2,852 )   $ (1,987 )   $ (289 )   $ 250,227  
                                                 
Cumulative ESOP tax expense
             (2,452 )                             (2,452 )
                                                 
Tax benefit from prior periods
     2,832                                       2,832  
                                                 
Balance, January 1, 2007 (Restated)
     137,981       117,754       (2,852 )     (1,987 )     (289 )     250,607  
                                                 
Net income
             7,813                               7,813  
                                                 
Cumulative effect of early adoption of SFAS Nos. 157 & 159 Fair Value Option
             (3,520 )     2,623                       (897 )
                                                 
Amortization of unrealized loss on tax exempt securities transferred from available for sale to held to maturity
                     14                       14  
                                                 
Cash dividend on common stock ($.19/share cumulative)
             (2,429 )                             (2,429 )
                                                 
Purchase and retirement of common stock
     (335 )                                     (335 )
                                                 
Proceeds from issuance of common stock for exercise of stock options
     502                                       502  
                                                 
Proceeds from issuance of common stock for stockholder reinvestment program
     26,445                                       26,445  
                                                 
Net issuance of stock through employer’s stock plans, including tax benefit
                                             --  
                                                 
Amortization of compensation expense related to stock options
     84                                       84  
                                                 
Amortization of compensation expense related to MRP
                                     46       46  
 
BALANCE, March 31, 2007
   $ 164,677     $ 119,618     $ (215 )   $ (1,987 )   $ (243 )   $ 281,850  
 
See selected notes to consolidated financial statements
 
 
 
 

 
7
 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)
(Unaudited) (In thousands)
For the Quarters Ended March 31, 2008 and 2007
 
 
               
2008
    
2007
  
                         
SHARES ISSUED AND OUTSTANDING:
                        
Common stock, shares issued, beginning of period
              
16,266
    
12,314
  
                         
Purchase and retirement of common stock
              
(614
)
  
(8
)
Issuance of common stock for exercised stock options and/or
  employee stock plans
              
28
    
27
  
Issuance of common stock for stockholder reinvestment program
              
223
    
646
  
Number of shares (retired) issued during the period
              
(363
)
  
665
  
                         
SHARES ISSUED AND OUTSTANDING, END OF PERIOD
              
15,903
    
12,979
  
                         
UNEARNED, RESTRICTED ESOP SHARES:
                        
Number of shares, beginning of period
              
(240
)
  
(240
)
 Issuance/adjustment of earned shares
              
--
    
--
  
Number of shares, end of period
              
(240
)
  
(240
)
                         
NET SHARES OUTSTANDING
              
15,663
    
12,739
  
 

 
See selected notes to consolidated financial statements
 
 
 
 
 

 
8
 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Quarters Ended March 31, 2008 and 2007
               
2008
    
2007
  
OPERATING ACTIVITIES:
                        
Net income
            
$
3,834
  
$
7,813
  
Adjustments to reconcile net income to net cash provided by
operating activities:
                        
Depreciation
              
2,535
    
1,654
  
Deferred income and expense, net of amortization
              
(152
)
  
(851
)
Loss (gain) on sale of securities
              
--
    
--
  
Net change in valuation of financial instruments carried at fair value
              
(823
)
  
(1,180
)
Purchases of securities at fair value
              
(49,012
)
  
(769
)
Principal repayments and maturities of securities at fair value
              
16,800
    
6,285
  
Proceeds from sales of securities at fair value
              
2,598
    
3,122
  
Deferred taxes
              
(2,557
)
  
429
  
Equity-based compensation
              
113
    
130
  
Tax benefits realized from equity-based compensation
              
--
    
--
  
Increase in cash surrender value of bank-owned life insurance
              
(242
)
  
(408
)
Gain on sale of loans, excluding capitalized servicing rights
              
(1,218
)
  
(1200
)
Loss (gain) on disposal of real estate held for sale and property
and equipment
              
58
    
(113
 
)
Provision for losses on loans and real estate held for sale
              
6,500
    
1,000
  
Origination of loans held for sale
              
(111,088
)
  
(83,887
)
Proceeds from sales of loans held for sale
              
109,566
    
83,627
  
Net change in:
                        
Other assets
              
2,826
    
(335
)
Other liabilities
              
(6,759
)
  
9,373
  
Net cash (used) provided by operating activities
              
(27,021
)
  
24,690
  
                         
INVESTING ACTIVITIES:
                        
Purchases of securities held to maturity
              
(2,176
)
  
--
  
Principal repayments and maturities of securities held to maturity
              
27
    
21
  
Origination of loans, net of principal repayments
              
(30,602
)
  
(43,669
)
Purchases of loans and participating interest in loans
              
(4,229
)
  
(10
)
Purchases of property and equipment, net
              
(3,286
)
  
(6,634
)
Proceeds from sale of real estate held for sale, net
              
400
    
33
  
Other
              
(414
)
  
(735
)
Net cash used by investing activities
              
(40,280
)
  
(50,994
)
                         
FINANCING ACTIVITIES:
                        
Increase in deposits
              
72,717
    
126,556
  
Proceeds from FHLB advances
              
92,800
    
--
  
Repayment of FHLB advances
              
(105,835
)
  
(83,500
)
Increase (decrease) in repurchase agreement borrowings, net
              
--
    
(7,802
)
Increase (decrease) in other borrowings, net
              
43,308
    
(1,013
)
Cash dividends paid
              
(3,204
)
  
(2,291
)
Repurchases of stock, net of forfeitures
              
(14,265
)
  
(335
)
Tax benefits realized from equity-based compensation
              
--
    
--
  
Cash proceeds from issuance of stock, net of registration costs
              
5,193
    
26,445
  
Exercise of stock options
              
551
    
502
  
Net cash provided by financing activities
              
91,265
    
58,562
  
                         
NET INCREASE  IN CASH AND DUE FROM BANKS
              
23,964
    
32,258
  
                         
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD
              
98,430
    
73,385
  
CASH AND DUE FROM BANKS, END OF PERIOD
            
$
122,394
  
$
105,643
  
 
 
(Continued on next page)
 
 
 
9
 
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Quarters Ended March 31, 2008 and 2007
 
 
               
2008
    
2007
  
                         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
                        
Interest paid in cash
            
$
35,362
  
$
29,664
  
Taxes paid in cash
              
544
    
163
  
Non-cash investing and financing transactions:
                        
Loans, net of discounts, specific loss allowances and unearned income,
  transferred to real estate owned and other repossessed assets
              
6,112
    
67
  
Net change in accrued dividends payable
              
73
    
138
  
Change in other assets/liabilities
              
141
    
805
  
Adoption of EITF 06-4
Accrual of liability for split-dollar life insurance
              
617
    
--
  
Adoption of SFAS Nos. 157 and 159:
                        
Securities available for sale
  transferred to fair value
                    
226,153
  
FHLB advances adjustment to fair value
                    
678
  
Junior subordinated debentures
  including unamortized origination costs adjustment to fair value
                    
2,079
  
Deferred tax asset related to fair value adjustments
                    
504
  
 
See selected notes to consolidated financial statements
 
 
 
 
 
 
 
 
 
 
10
 
BANNER CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1:  Basis of Presentation and Critical Accounting Policies
 
Banner Corporation (Banner or the Company) is a bank holding company incorporated in the State of Washington.  We are primarily engaged in the business of planning, directing and coordinating the business activities of our wholly owned subsidiaries, Banner Bank and, subsequent to May 1, 2007, Islanders Bank, a recent acquisition, as explained below.  Banner Bank is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington and, as of March 31, 2008, its 81 branch offices and 12 loan production offices located in Washington, Oregon and Idaho.  Islanders Bank is also a Washington-chartered commercial bank that conducts business from three locations in San Juan County, Washington.  Banner Corporation is subject to regulation by the Board of Governors of the Federal Reserve System.  Banner Bank and Islanders Bank (the Banks) are subject to regulation by the Washington State Department of Financial Institutions, Division of Banks and the Federal Deposit Insurance Corporation (FDIC).  The consolidated financial statements and results of operation presented in this report on Form 10-Q include financial information for Islanders Bank and our other recent acquisitions, F&M Bank, Spokane, Washington, and NCW Community Bank, Wenatchee, Washington, which were merged into Banner Bank in 2007.  (See Note 5 of the Selected Notes to the Consolidated Financial Statements for additional information with respect to these acquisitions.)
 
In the opinion of management, the accompanying consolidated statements of financial condition and related interim consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows reflect all adjustments (which include reclassifications and normal recurring adjustments) that are necessary for a fair presentation in conformity with generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements.  Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments.  In particular, management has identified several accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements.  These policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for loan and lease losses and (iii) the valuation of financial assets and liabilities recorded at fair value, goodwill, mortgage servicing rights and real estate held for sale.  These policies and the judgments, estimates and assumptions are described in greater detail below in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission (SEC).  Management believes that the judgments, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate based on the factual circumstances at the time.  However, given the sensitivity of the financial statements to these critical accounting policies, the use of different judgments, estimates and assumptions could result in material differences in our results of operations or financial condition.  There have been no significant changes in our application of accounting policies since December 31, 2007 except for the adoption of Emerging Issues Task Force Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, and the adoption of this standard did not have a material effect on our financial condition or results of operations (for additional information, see Note 3 of the Selected Notes to the Consolidated Financial Statements).
 
Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the rules and regulations of the SEC.  Certain reclassifications have been made to the 2007 Consolidated Financial Statements and/or schedules to conform to the 2008 presentation. These reclassifications may have affected certain ratios for the prior periods. The effect of these reclassifications is considered immaterial. All significant intercompany transactions and balances have been eliminated.
 
The information included in this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC.  Interim results are not necessarily indicative of results for a full year.
 
Note 2:  Restatement under Securities and Exchange Commission Staff Accounting Bulletin (SAB) 108
 
In connection with reviewing our previous accounting for the tax (benefits) provisions related to stock-based compensation for our ESOP share releases, exercises of non-qualified stock options and distributions of stock from deferred compensation plans, we determined there were net immaterial errors in the reporting in prior period financial statements.  These errors resulted in the understatement of our previously reported income tax provisions as a result of the difference between the tax and book accounting basis for ESOP share releases to individual participants, as well as benefits to stockholders’ equity from the release of the Company’s shares of common stock in connection with the exercise of stock options and deferred compensation distributions.  We concluded that while the amounts related to individual years were immaterial, in the aggregate they resulted in cumulative adjustments that the Board of Directors and management felt required the restatement of previously reported financial statements.  The effects of these adjustments were 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 are reflected in the March 31, 2007 Consolidated Statement of Financial Condition and Consolidated Statement of Changes in Stockholder’s Equity that are shown for comparative purposes in these financial statements.  The restatement has had no impact on management’s previous conclusions regarding the effectiveness of internal controls over financial reporting and disclosure controls and procedures for the years ended December 31, 2006 and 2005, nor on our conclusions for the year ended December 31, 2007. These adjustments have immaterially affected certain previously reported ratios for the quarter ended March 31, 2007.
 

 
11
 

The following tables summarize the impact of the restatement discussed above on the previously issued Consolidated Financial Statements as of March 31, 2008 (dollars in thousands).
     
 
December 31, 2006 (January 1, 2007)
  
 
As Previously Reported Rate
  
Adjustment
  
Restated
  
Consolidated Statement of Financial Condition
                  
                   
Income taxes payable
$
2,504
  
$
(380
)
$
2,124
  
                   
Common stock
  
135,149
    
2,832
    
137,981
  
Retained earnings
  
120,206
    
(2,452
)
  
117,754
  
Total stockholders’ equity
  
250,227
    
380
    
250,607
  
                   
Consolidated Statements of Changes in Stockholders’ Equity
                  
                   
Common stock
$
135,149
    
2,832
    
137,981
  
Retained earnings
  
120,206
    
(2,452
)
  
117,754
  
Total stockholders’ equity
  
250,227
    
380
    
250,607
  
                   
 
Note 3:  Recent Developments and Significant Events
 
Stock Repurchase and Option Exercise Activity:  On July 26, 2007, our Board of Directors authorized the purchase of up to 750,000 shares of our outstanding common stock over the next twelve months.  As of March 31, 2008, we had repurchased 663,600 shares of stock under this program.  During the quarter ended March 31, 2008, we repurchased 605,800 shares of our common stock under this program at an average price of $23.19 per share.
 
In addition to shares repurchased under this program, during the quarter ended March 31, 2008, we purchased 8,103 shares as consideration for the exercise of certain vested stock options at current market prices on the date of exercise.  In total, we issued 28,211 shares of common stock on exercise of vested options during the quarter ended March 31, 2008.
 
Issuance of Shares through Dividend Reinvestment and Direct Stock Purchase and Sale Plan:  During the year ended December 31, 2007, we issued 995,590 new shares of common stock at an average net price of $37.75 through our Dividend Reinvestment and Direct Stock Purchase and Sale Plan (DRIP).  On October 23, 2007, our Board of Directors authorized the registration and issuance of up to an additional 1,000,000 shares of common stock through continuation of our DRIP.  During the quarter ended March 31, 2008, we issued 223,180 shares at an average price, net of issuance costs, of $23.27 per share through our DRIP.
 
Acquisition of F&M Bank, San Juan Financial Holding Company and NCW Community Bank:  We completed the acquisitions of F&M Bank (F&M) and San Juan Financial Holding Company (SJFHC) effective May 1, 2007, and NCW Community Bank (NCW) effective October 10, 2007.  SJFHC was merged into Banner Corporation and its wholly owned subsidiary, Islanders Bank, has continued operations as a subsidiary of Banner Corporation.  F&M and NCW were merged into Banner Bank upon acquisition and now operate under the Banner Bank name.  The financial results for the quarter ended March 31, 2008 include the assets, liabilities and results of operations for all three of the acquired companies which were not in the comparable period a year earlier.  (See Note 5 of the Selected Notes to the Consolidated Financial Statements for additional information with respect to these acquisitions.)
 
Branch Expansion:  Over the past several years, we have invested significantly in expanding Banner Bank’s branch and distribution systems with a primary emphasis on the greater Boise, Idaho and Portland, Oregon markets and the Puget Sound region of Washington.  This branch expansion is a significant element in our strategy to grow loans, deposits and customer relationships.  This emphasis on growth has resulted in an elevated level of operating expenses; however, we believe that over time these new branches should help improve profitability by providing low cost core deposits which will allow Banner Bank to proportionately reduce higher cost borrowings as a source of funds.  From March 2004 through December 2007, Banner Bank opened 26 new branch offices, relocated eight additional branch offices and significantly refurbished its main office in Walla Walla.  Branch expansion activity included ten new offices opened at various times during 2007, including four during the quarter ended March 31, 2007.  We plan a more moderate pace of expansion going forward with just two new branches scheduled to open in 2008.
 
Recently Adopted Accounting Standards: In September 2006, the Emerging Issues Task Force (EITF) issued EITF 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.  EITF 06-4 implemented a change in accounting principle that required the recognition of a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to postretirement periods.  On January 1, 2008, the Company adopted EITF 06-4 and recognized the effects of this change in accounting principle through a cumulative effect adjustment charge to opening retained earnings and an increase in benefit plan reserve liability of $617,000, respectively.  The Company will record an annual charge in 2008 of approximately $64,000 from the adoption of EITF 06-4.
 

 
 
12
 

Banner Corporation elected early adoption of Statement of Financial Accounting Standards (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 GAAP, and expands disclosures about fair value measurement.  The Company made this election to allow more flexibility with respect to the management of our investment securities, wholesale borrowings and interest rate risk position in future periods.
 
Upon adoption of SFAS No. 159, the Company selected fair value measurement for all of its “available for sale” investment securities, FHLB advances and junior subordinated debentures, which had fair values of approximately $226.2 million, $176.8 million and $124.4 million, respectively, on January 1, 2007.  The initial fair value measurement of these instruments resulted in a $3.5 million adjustment for the cumulative effect, net of tax, as a result of the change in accounting, which was recorded as a reduction in retained earnings as of January 1, 2007, and which under SFAS No. 159 has not been recognized in earnings.  While the adjustment to retained earnings is permanent, approximately $2.6 million of the amount was previously reported as accumulated other comprehensive loss at December 31, 2006, so the reduction in total stockholders’ equity was $897,000 on January 1, 2007.  Following the initial election, changes in the value of financial instruments recorded at fair value are recognized as gains or losses in earnings in subsequent financial reporting periods.  As a result of the adoption of SFAS No. 159 and changes in the fair value measurement of the financial assets and liabilities noted above, the Company recorded net gains of $1.2 million ($755,000 after tax) and $823,000 ($527,000 after tax), respectively, for the quarters ended March 31, 2007 and 2008. (For further information, see Note 7 of the Selected Notes to the Consolidated Financial Statements.)
 
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainties in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48).  On January 1, 2007, the Company adopted FIN 48.  FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  Currently, the Company is subject to United States federal income tax and income tax of the States of Idaho and Oregon.  The years 2004 through 2006 remain open to examination for federal and state income taxes.  As of March 31, 2008 and December 31, 2007, the Company believes it had insignificant unrecognized tax benefits or uncertain tax positions.  In addition, the Company had no material accrued interest or penalties as of either date.  It is our policy to record interest and penalties as a component of income tax expense.  The amount of interest and penalties for the year ended December 31, 2007 was also immaterial.  The adoption of this accounting standard has not had a material impact on the Company’s Consolidated Financial Statements.
 
Note 4:  Business Segments
 
The Company is managed by legal entity and not by lines of business.  Each of the Banks is a community oriented commercial bank chartered in the State of Washington.  The Banks’ primary business is that of a traditional banking institution, gathering deposits and originating loans for portfolio in its respective primary market areas.  The Banks offer a wide variety of deposit products to its consumer and commercial customers.  Lending activities include the origination of real estate, commercial/agriculture business and consumer loans.  Banner Bank is also an active participant in the secondary market, originating residential loans for sale on both a servicing released and servicing retained basis.  In addition to interest income on loans and investment securities, the Banks receive other income from deposit service charges, loan servicing fees and from the sale of loans and investments.  The performance of the Banks is reviewed by the Company’s executive management and Board of Directors on a monthly basis.  All of the executive officers of the Company are members of Banner Bank’s management team.
 
Generally accepted accounting principles establish standards to report information about operating segments in annual financial statements and require reporting of selected information about operating segments in interim reports to stockholders.  The Company has determined that its current business and operations consist of a single business segment.
 
Note 5:  Acquisitions of F&M Bank, San Juan Financial Holding Company and NCW Community Bank
 
On May 1, 2007, we completed the acquisition of F&M Bank, Spokane, Washington (F&M), in a stock and cash transaction valued at approximately $98.1 million, with $19.4 million of cash and 1,773,402 shares of Banner common stock, for 100% of the outstanding common shares of F&M.  F&M was merged into Banner Bank and the results of its operations are included in those of Banner Bank starting in the quarter ended June 30, 2007.  The purchase of F&M allowed us to immediately expand Banner Bank’s franchise in the Spokane, Washington area, the fourth largest metropolitan market in the Pacific Northwest, by the addition of 13 branches and one loan office.
 
On May 1, 2007, we completed the acquisition of San Juan Financial Holding Company (SJFHC), the parent company of Islanders Bank, Friday Harbor, Washington, in a stock and cash transaction valued at approximately $41.6 million, with $6.2 million of cash and 819,209 shares of Banner common stock, for 100% of the outstanding common shares of SJFHC.  SJFHC was merged into Banner Corporation and Islanders Bank has continued to operate as a separate subsidiary of Banner.  The results of its operations are included in the Company’s consolidated operations beginning in the quarter ended June 30, 2007.  The acquisition of Islanders Bank, with its three branches located in the San Juan Islands, added to Banner Corporation’s presence in the North Puget Sound region.
 
On October 10, 2007, we completed the acquisition of NCW Community Bank, Wenatchee, Washington (NCW), in a stock and cash transaction valued at approximately $18.5 million, with $6.5 million of cash and 339,860 shares of Banner common stock, for 100% of the outstanding common shares of NCW.  NCW was merged into Banner Bank and the results of its operations are included in Banner Bank’s consolidated operations beginning in the fourth quarter of 2007.  The acquisition of NCW added two branches to our network and significantly enhanced our presence and market share within a desirable central Washington community.
 

 
13
 

The acquisitions were accounted for as purchases in accordance with SFAS No. 141.  Accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the acquisition date as summarized in the following table:
 
 
 
Date of acquisition   F&M
May 1, 2007
(in thousands) 
   SJFHC
May 1, 2007
(in thousands) 
   NCW
October 10, 2007
(in thousands) 
    
Total
(in thousands)
New shares issued in acquisition
  1,773,402   819,209    339,860    2,932,471 
               
Cash paid to shareholders 
 $               19,404    $               6,159    $               6,505    $               32,068 
Total value of Banner’s common stock exchange with
 acquiree’s shareholders 
 
78,030 
  
 
35,177 
  
 
11,813 
  
 
125,020 
Transaction closing costs 
 680    253    143    1,076 
Total purchase price 
 $               98,114    41,589    18,461    158,164 
               
Allocation of purchase price 
              
Acquisitions’ equity 
 $               32,849    $                16,782    $               9,601    $               59,232 
Adjustments to record assets and liabilities at estimated
 fair value 
              
Loans 
 (195 )  (604  )  (90  )  (889) 
Premises and equipment 
 3,315    1,800    --    5,115 
Core deposit intangible (CDI) 
 10,867    6,147    1,245    18,259 
Deposits 
 (336  )  37    (197  )  (496) 
Deferred taxes, net 
 (4,916  )  (2,659  )  (345  )  (7,920) 
Estimated fair value of net assets acquired 
 41,584    21,503    10,214    73,301 
               
Goodwill resulting from acquisition 
 $               56,530    $               20,086    $               8,247    $                84,863 
               
               
 
The fair value of assets and liabilities of acquired institutions at the date of acquisition follows:
 
 
 
Date of acquisition
    F&M
May 1, 2007
(in thousands)
    SJFHC
May 1, 2007
(in thousands)
    NCW
October 10, 2007
(in thousands)
  
 
 Total
(in thousands)
  
Cash 
 $   12,056  $  7,449   $  2,916  $  22,421   
Securities –available for sale 
    6,768    26,263    1,200    34,231  
Federal funds sold and interest bearing deposits at banks 
    137    --    --    137  
Loans-net of allowance for loan losses of $4,528, $1,429 and
  $1,319, respectively 
    389,290    116,999    90,522    596,811  
Premises and equipment, net 
    11,872    5,756    3,012    20,640  
BOLI 
    8,662    2,315        10,977  
Other assets    7,529    2,082    1,597    11,208  
Goodwill 
    56,530    20,086    8,247    84,863  
Core deposit intangible (CDI) 
    10,867    6,298    1,245    18,410  
Total assets 
    503,711    187,248    108,739    799,698  
                   
Deposits 
    (348,822  )   (124,264  )  (86,756  )  (559,842  )
Advances from Federal Home Loan Bank 
    (20,000  )  15,726  )  --    (35,726  )
Federal funds purchased and other borrowings 
    (19,625  )  --    (1,590  )  (21,215  )
Other liabilities 
    (17,150 )   (5,669 )   (1,932 )   (24,751  ) 
        Total liabilities    (405,597 )   (145,659 )   (90,278 )   (641,534  )
                   
               Net assets acquired  $ 98,114   $ 41,589  $ 18,461  $ 158,164  
                   
                   
 
 
Additional adjustments to the purchase price allocation may be required, specifically related to other assets and taxes.  The CDI asset shown in the table above represents the value ascribed to the long-term deposit relationships acquired.  This intangible asset is being amortized using an accelerated method over an estimated useful life of eight years.  The core deposit intangible asset is not estimated to have a significant residual value.  Goodwill represents the excess of the total purchase price paid for the banks over the fair values of the assets acquired, net of the fair values of the liabilities assumed.  Goodwill is not amortized, but is evaluated for possible impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired.  No impairment losses have been recognized in connection with core deposit intangible or goodwill assets during the period from acquisition to the end of the current reporting period.
 

 
14
 

Note 6:  Additional Information Regarding Interest-Bearing Deposits and Securities
 
The following table sets forth additional detail on our interest-bearing deposits and securities at the dates indicated (at carrying value) (in thousands):
 
 
March 31
  
December 31
  
March 31
  
 
2008
  
2007
  
2007
  
             
Interest-bearing deposits included in Cash and due from banks
$
28,760
  
$
310
  
$
46,122
  
                   
Mortgage-backed securities
  
94,954
    
99,775
    
145,490
  
Other securities—taxable
  
123,864
    
98,067
    
74,577
  
Other securities—tax exempt
  
56,653
    
50,812
    
42,777
  
Equity securities with dividends
  
7,086
    
7,725
    
3,464
  
Total securities
  
282,557
    
256,379
    
266,308
  
                   
FHLB stock
  
37,371
    
37,371
    
35,844
  
                   
 
$
348,688
  
$
294,060
  
$
348,274
  
 
 
The following table provides additional detail on income from deposits and securities for the periods indicated (in thousands):
 
     
Quarters Ended
March 31
  
     
               
2008
    
2007
  
Mortgage-backed securities interest
            
$
1,153
  
$
1,775
  
                         
Taxable interest income
              
1,916
    
1,302
  
Tax-exempt interest income
              
583
    
465
  
Other stock—dividend income
              
135
    
40
  
FHLB stock dividends
              
93
    
36
  
               
2,727
    
1,843
  
                         
             
$
3,880
  
$
3,618
  
 

 
15
 

Note 7:  Fair Value Accounting and Measurement
 
The Company elected early adoption of 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 (FV) at specified election dates.  Upon adoption of SFAS No. 159, the Company selected fair value measurement for all of our “available for sale” investment securities, FHLB advances and junior subordinated debentures, which had fair values of approximately $226.2 million, $176.8 million and $124.4 million, respectively, on January 1, 2007.  The initial fair value measurement of these instruments resulted in a $3.5 million adjustment for the cumulative effect, net of tax, as a result of the change in accounting, which was recorded as a reduction in retained earnings as of January 1, 2007, and which under SFAS No. 159 has not been recognized in current earnings.  While the adjustment to retained earnings is permanent, approximately $2.6 million of the amount was previously reported as accumulated other comprehensive loss at December 31, 2006, so the reduction in the January 1, 2007 opening stockholders’ equity was $897,000 when SFAS No. 159 was adopted.  The following tables detail the financial instruments measured at fair value, on a recurring basis, on the dates indicated (in thousands):
 
  
Cumulative Adjustment on Adoption of SFAS 159
    
 
January 1, 2007
  
March 31, 2007
   
Amortized Cost
    
Fair Market Valuation Adjustment
    
Fair Value
    
Related Taxes
    
Cumulative Effect of Adoption
    
Amortized Cost
    
Fair Market Valuation Adjustment
    
Fair Value
  
Assets:
                                                
Securities available for sale  
    reclassified to fair value
   $ 230,189     $ (4,036 )   $ 226,153     $ 1,413     $ (2,623 )   $ 221,427     $ (2,950 )   $ 218,477  
                                                                 
Liabilities:
                                                                
Advances from FHLB
   $ 177,430     $ (678 )   $ 176,752     $ 244     $ (434 )   $ 93,930     $ (499 )   $ 93,431  
Junior subordinated debentures,
                                                               
net of unamortized deferred
origination costs
     122,287       2,079       124,366       (748 )     1,331       122,313       1,806       124,119  
    $ 299,717     $ 1,401     $ 301,118     $ (504 )   $ 897     $ 216,243     $ 1,307     $ 217,051  
                                                                 
Total adjustment
           $ (5,437 )                   $ (3,520 )           $ (4,257 )        
                                                                 
Less transfer from accumulated other comprehensive loss to retained earnings
                                     2,623                          
Cumulative reduction of opening stockholders’ equity at January 1, 2007 upon adoption of SFAS No. 159
                                   $ (897 )                        
                                                                 
 
December 31, 2007
                  
March 31, 2008
  
 
Amortized
Cost
  
Fair Market Valuation Adjustment
  
Basis at
FMV
                  
Amortized
Cost
  
Fair Market Valuation Adjustment
  
Basis at
FMV
  
                                                                 
Assets:
                                                                
Securities available for sale reclassified
     to fair value
   $ 204,279     $ (1,416 )   $ 202,863                     $ 233,869     $ (6,959 )   $ 226,910  
                                                                 
Liabilities:
                                                                
Advances from FHLB
   $ 167,073     $ (28 )   $ 167,045                     $ 154,036     $ 1,369     $ 155,405  
Junior subordinated debentures,
                                                               
net of unamortized deferred
origination costs
     122,884       (9,614 )     113,270                       122,898       (17,382 )     105,516  
    $ 289,957     $ (9,642 )   $ 280,315