Unassociated Document

 
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 June 30, 2009.
 
 
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 has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).              Yes  [   ]   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.
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:
  
As of  July 31, 2009 
 Common Stock, $.01 par value per share
  
18,942,263 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
 
   
   
   
   
   
   
 
   
   
   
   
   
   
   
   
 
   
   
   
   
 
   
   
   
   
   
   
   
   

 
2 
 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares)
June 30, 2009 and December 31, 2008

   
June 30
    
December 31
  
ASSETS
    
2009
    
2008
  
               
Cash and due from banks
  
$
84,258
  
$
102,750
  
               
Securities—trading, cost $213,762 and $245,274, respectively
    
167,476
    
203,902
  
Securities—available-for-sale, cost $50,506 and $52,190, respectively
    
50,980
    
53,272
  
Securities—held-to-maturity, fair value $77,478 and $60,530, respectively
    
77,321
    
59,794
  
               
Federal Home Loan Bank (FHLB) stock
    
37,371
    
37,371
  
Loans receivable:
              
Held for sale, fair value $8,480 and $7,540, respectively
    
8,377
    
7,413
  
Held for portfolio
    
3,904,704
    
3,953,995
  
Allowance for loan losses
    
(90,694
)
  
(75,197
)
     
3,822,387
    
3,886,211
  
               
Accrued interest receivable
    
18,892
    
21,219
  
Real estate owned, held for sale, net
    
56,967
    
21,782
  
Property and equipment, net
    
103,709
    
97,647
  
Goodwill and other intangibles, net
    
12,365
    
13,716
  
Deferred income tax asset, net
    
8,942
    
5,528
  
Income taxes receivable, net
    
15,212
    
9,675
  
Bank-owned life insurance (BOLI)
    
53,341
    
52,680
  
Other assets
    
23,321
    
18,821
  
   
$
4,532,542
  
$
4,584,368
  
LIABILITIES
              
Deposits:
              
Non-interest-bearing
  
$
508,284
  
$
509,105
  
Interest-bearing transaction and savings accounts
    
1,131,093
    
1,137,878
  
Interest-bearing certificates
    
2,110,466
    
2,131,867
  
     
3,749,843
    
3,778,850
  
               
Advances from FHLB at fair value
    
115,946
    
111,415
  
Other borrowings
    
158,249
    
145,230
  
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
    
49,563
    
61,776
  
Accrued expenses and other liabilities
    
36,652
    
40,600
  
Deferred compensation
    
12,815
    
13,149
  
     
4,123,068
    
4,151,020
  
COMMITMENTS AND CONTINGENCIES (Note 13)
              
               
STOCKHOLDERS’ EQUITY
              
Preferred stock - $0.01 par value, 500,000 shares authorized; Series A – liquidation preference
              
$1,000 per share, 124,000 shares issued and outstanding
    
116,661
    
115,915
  
Common stock - $0.01 par value per share, 25,000,000 shares authorized, 18,426,458 shares issued:
18,186,077 shares and 16,911,657 shares outstanding at June 30, 2009 and December 31, 2008, respectively
    
322,582
    
316,740
  
Retained earnings (accumulated deficit)
    
(27,826
)
  
2,150
  
Accumulated other comprehensive income (loss):
              
Unrealized gain on securities available for sale and/or transferred to held to maturity
    
62
    
572
  
Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust at cost:
              
240,381 restricted shares outstanding at June 30, 2009 and December 31, 2008
    
(1,987
)
  
(1,987
)
               
Carrying value of shares held in trust for stock related compensation plans
    
(8,838
)
  
(8,850
)
Liability for common stock issued to deferred, stock related, compensation plans
    
8,820
    
8,808
  
     
(18
)
  
(42
)
     
409,474
    
433,348
  
   
$
4,532,542
  
$
4,584,368
  

See selected notes to consolidated financial statements
 
 
3
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands except for per share amounts)
For the Quarters and Six Months Ended June 30, 2009 and 2008

   
Quarters Ended
    
Six Months Ended
  
   
June 30
    
June 30
  
   
2009 
   
2008
    
2009 
   
2008
  
INTEREST INCOME:
                        
Loans receivable
   $ 55,500     $ 64,174     $ 111,847     $ 132,300  
Mortgage-backed securities
     1,569       1,087       3,370       2,240  
Securities and cash equivalents
     2,089       2,861       4,272       5,588  
      59,158       68,122       119,489       140,128  
INTEREST EXPENSE:
                                
Deposits
     21,638       27,565       44,730       57,628  
FHLB advances
     675       1,301       1,395       3,150  
Other borrowings
     671       530       898       1,140  
Junior subordinated debentures
     1,249       1,666       2,582       3,730  
      24,233       31,062       49,605       65,648  
                                 
Net interest income before provision for loan losses
     34,925       37,060       69,884       74,480  
                                 
PROVISION FOR LOAN LOSSES
     45,000       15,000       67,000       21,500  
Net interest income (loss)
     (10,075 )     22,060       2,884       52,980  
                                 
OTHER OPERATING INCOME:
                                
Deposit fees and other service charges
     5,408       5,494       10,344       10,507  
Mortgage banking operations
     2,860       1,579       5,575       3,194  
Loan servicing fees
     248       467       (22 )     816  
Miscellaneous
     412       363       932       694  
      8,928       7,903       16,829       15,211  
Net change in valuation of financial instruments carried at fair value
     11,049       649       7,796       1,472  
Total other operating income
     19,977       8,552       24,625       16,683  
                                 
OTHER OPERATING EXPENSES:
                                
Salary and employee benefits
     17,528       19,744       35,129       39,382  
Less capitalized loan origination costs
     (2,834 )     (2,728 )     (4,950 )     (4,969 )
Occupancy and equipment
     5,928       5,989       11,982       11,857  
Information/computer data services
     1,599       1,840       3,133       3,829  
Payment and card processing expenses
     1,555       1,768       3,008       3,299  
Professional services
     1,183       1,331       2,377       2,086  
Advertising and marketing
     2,207       1,677       4,039       3,095  
Deposit insurance
     4,102       633       5,599       960  
State/municipal business and use taxes
     532       576       1,072       1,140  
Real estate owned expenses
     1,805       678       2,428       834  
Miscellaneous
     3,286       3,714       6,867       7,417  
      36,891       35,222       70,684       68,930  
Goodwill write-off
     --       50,000       --       50,000  
Total other operating expenses
     36,891       85,222       70,684       118,930  
                                 
Income (loss) before provision for (benefit from) income taxes
     (26,989 )     (54,610 )     (43,175 )     (49,267 )
                                 
PROVISION FOR (BENEFIT FROM) INCOME TAXES
     (10,478 )     (2,305 )     (17,401 )     (796 )
                                 
NET INCOME (LOSS)
   $ (16,511 )   $ (52,305 )   $ (25,774 )   $ (48,471 )
                                 
PREFERRED STOCK DIVIDEND AND DISCOUNT ACCRETION
                                
Preferred stock dividend
   $ 1,550     $ --     $ 3,100     $ --  
Preferred stock discount accretion
     373       --       746       --  
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
   $ (18,434 )   $ (52,305 )   $ (29,620 )   $ (48,471 )
                                 
Earnings (loss) per common share (see Note 11):
                                
Basic
   $ (1.04 )   $ (3.31 )   $ (1.70 )   $ (3.06 )
Diluted
   $ (1.04 )   $ (3.31 )   $ (1.70 )   $ (3.06 )
Cumulative dividends declared per common share:
   $ 0.01     $ 0.20     $ 0.02     $ 0.40  
See selected notes to consolidated financial statements

 
4 
 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) (In thousands)
For the Quarters and Six Months Ended June 30, 2009 and 2008


   
Quarters Ended
June 30
    
Six Months Ended
June 30
  
         
   
2009 
   
2008 
   
2009 
   
2008 
 
NET INCOME (LOSS)
$
(16,511 
)
$
(52,305 
)
$
(25,774 
)
$
(48,471 
)
                         
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
                        
Unrealized holding gain (loss) during the period, net of deferred
income tax (benefit) of $220, $0, $70 and $0, respectively
  
(802 
)
  
-- 
   
(538 
)
  
-- 
 
                         
Amortization of unrealized loss on tax exempt securities transferred from available-for-sale to held-to-maturity
  
  14
    
14 
   
28 
   
28 
 
Other comprehensive income (loss)
  
(788 
)
  
14 
   
(510 
)
  
28 
 
                         
COMPREHENSIVE INCOME (LOSS)
$
(17,299 
)
$
(52,291 
)
$
(26,284 
)
$
(48,443 
)

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 Six Months Ended June 30, 2009 and 2008

 
Preferred Stock
  
Common
Stock and
Paid in
Capital
  
Retained
Earnings
(Accumulated Deficit)
  
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, 2009
$
115,915
  
$
316,740
  
$
2,150
  
$
572
  
$
(1,987
)
$
(42
)
$
433,348
  
                                           
Net income (loss)
              
(25,774
)
                    
(25,774
)
                                           
Change in valuation of securities—available-for-sale, net of income tax
                    
(538
)
              
(538
)
                                           
Amortization of unrealized loss on tax exempt securities transferred from available-for-sale to held-to-maturity, net of income taxes
                    
28
                
28
  
                                           
Additional registration costs for issuance of preferred stock
        
(46
)
                          
(46
)
                                           
    Accretion of preferred stock discount
  
746
          
(746
)
                    
--
  
    Accrual of dividends on preferred stock
              
(3,100
)
                    
(3,100
)
Accrual of dividends on common stock ($.02/share cumulative)
              
(356
)
                    
(356
)
                                           
Proceeds from issuance of common stock for stockholder reinvestment program, net of registration expenses
        
5,814
                            
5,814
  
                                           
    Amortization of compensation related to MRP
                                
24
    
24
  
                                           
Amortization of compensation related to stock options
        
74
                            
74
  
                                           
BALANCE, June 30, 2009
$
116,661
  
$
322,582
  
$
(27,826
)
$
62
  
$
(1,987
)
$
(18
)
$
409,474
  

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 Six Months Ended June 30, 2009 and 2008

 
Preferred Stock
  
Common
Stock and
Paid in
Capital
  
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 (loss)
              
(48,471
)
                    
(48,471
)
                                           
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, net of income taxes
                    
28
                
28
  
                                           
Accrual of dividends on common stock ($.40/share cumulative)
              
(6,344
)
                    
(6,344
)
                                           
    Purchase and retirement of common stock
        
(14,265
)
                          
(14,265
)
                                           
Proceeds from issuance of common stock for exercise of stock options
        
594
                            
594
  
                                           
Proceeds from issuance of common stock for stockholder reinvestment program, net of registration expenses
        
12,425
                            
12,425
  
                                           
Net issuance of stock through employer’s stock plans, including tax benefits
        
4
                            
4
  
                                           
    Amortization of compensation related to MRP
                                
32
    
32
  
                                           
    Forfeiture of MRP stock
                                          
                                           
Amortization of compensation related to stock options
        
181
                            
181
  
                                           
BALANCE, June 30, 2008
$
--
  
$
299,425
  
$
84,204
  
$
(148
)
$
(1,987
)
$
(81
)
$
381,413
  

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 Six Months Ended June 30, 2009 and 2008

               
Six Months Ended
June 30
  
               
2009 
   
2008 
 
                         
COMMON STOCK—SHARES ISSUED AND OUTSTANDING:
                        
Common stock, shares issued, beginning of period
              
17,152 
   
16,266 
 
                         
Purchase and retirement of common stock
              
-- 
   
(614 
)
Issuance of common stock for exercised stock options and/or employee stock plans
              
-- 
   
31 
 
Issuance of common stock for stockholder reinvestment program
              
1,274 
   
622 
 
Net number of shares issued during the period
              
1,274 
   
39 
 
                         
COMMON SHARES ISSUED AND OUTSTANDING, END OF PERIOD
              
18,426 
   
16,305 
 
                         
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 COMMON STOCK—SHARES OUTSTANDING
              
18,186 
   
16,065 
 

See selected notes to consolidated financial statements

 
8 
 

BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Six Months Ended June 30, 2009 and 2008

   
Six Months Ended
June 30
  
   
2009
    
2008
  
OPERATING ACTIVITIES:
            
Net income (loss)
   $ (25,774 )   $ (48,471 )
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
                
Depreciation
     4,998       5,198  
Deferred income and expense, net of amortization
     (749 )     (652 )
Amortization of core deposit intangibles
     1,351       1,462  
Net change in valuation of financial instruments carried at fair value
     (7,796 )     (1,472 )
Purchases of securities—trading
     (64,761 )     (74,600 )
Principal repayments and maturities of securities—trading
     96,104       26,201  
Proceeds from sales of securities—trading
     --       2,598  
Deferred taxes
     (3,343 )     (4,593 )
Equity-based compensation
     98       213  
Tax benefits realized from equity-based compensation
     --       (4 )
Increase in cash surrender value of bank-owned life insurance
     (661 )     (730 )
Gain on sale of loans, excluding capitalized servicing rights
     (2,294 )     (2,550 )
Loss (gain) on disposal of real estate held for sale and property
and equipment
     607       136  
Provision for losses on loans and real estate held for sale
     67,113       21,868  
Origination of loans held for sale
     (345,007 )     (196,850 )
Proceeds from sales of loans held for sale
     344,043       194,629  
Goodwill write-off
     --       50,000  
Net change in:
                
Other assets
     (5,855 )     384  
Other liabilities
     (3,565 )     (9,790 )
Net cash provided (used) by operating activities
     54,509       (37,023 )
                 
INVESTING ACTIVITIES:
                
Purchases of securities available for sale
     (18,672 )     --  
Principal repayments and maturities of securities available for sale
     13,992       --  
Proceeds from sales of securities available for sale
     6,459       --  
Purchases of securities held to maturity
     (17,975 )     (2,617 )
Principal repayments and maturities of securities held to maturity
     408       487  
Origination of loans, net of principal repayments
     (52,937 )     (169,448 )
Purchases of loans and participating interest in loans
     (27 )     (8,825 )
Purchases of property and equipment, net
     (11,445 )     (5,144 )
Proceeds from sale of real estate held for sale, net
     16,663       1,331  
Cost of acquisitions, net of cash acquired
     --       (150 )
Other
     (225 )     (671 )
Net cash used by investing activities
     (63,759 )     (185,037 )
                 
FINANCING ACTIVITIES:
                
Increase (decrease) in deposits
     (29,007 )     136,160  
Proceeds from FHLB advances
     91,200       102,800  
Repayment of FHLB advances
     (86,203 )     (87,837 )
Increase (decrease) in other borrowings, net
     13,016       72,468  
Cash dividends paid
     (4,016 )     (6,336 )
Repurchases of stock, net of forfeitures
     --       (14,265 )
Tax benefits realized from equity-based compensation
     --       4  
Cash proceeds from issuance of stock, net of registration costs
     5,768       12,425  
Exercise of stock options
     --       594  
Net cash provided (used) by financing activities
     (9,242 )     216,013  
                 
NET (DECREASE) INCREASE  IN CASH AND DUE FROM BANKS
     (18,492 )     (6,047 )
                 
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD
     102,750       98,430  
CASH AND DUE FROM BANKS, END OF PERIOD
   $ 84,258     $ 92,383  

(Continued on next page)
 
9
 
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Six Months Ended June 30, 2009 and 2008

   
Six Months Ended
June 30
  
   
2009
    
2008
  
             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
            
Interest paid in cash
   $ 49,668     $ 67,780  
Taxes paid in cash
     (6,377 )     5,916  
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
     52,160       11,232  
Net decrease in accrued dividends payable
     (560 )     8  
Change in other assets/liabilities
     169       967  
Adoption of EITF 06-4
Accrual of liability for split-dollar life insurance
     --       617  

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 Islanders Bank.  Banner Bank is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington and, as of June 30, 2009, its 84 branch offices and eight 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).

In the opinion of management, the accompanying consolidated statements of financial condition and related interim consolidated statements of operations, comprehensive income (loss), 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, because of the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements.  Those policies relate to (i) the methodology for the recognition of interest income, (ii) determination of the provision and allowance for loan and lease losses, (iii) the valuation of financial assets and liabilities recorded at fair value, (iv) the valuation of intangibles, such as goodwill and core deposit intangibles and mortgage servicing rights and (v) the valuation of 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 (Critical Accounting Policies) and in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2008 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 other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition.  Further, subsequent changes in economic or market conditions could have a material impact on these estimates and our financial condition and operating results in future periods.  There have been no significant changes in our application of accounting policies since December 31, 2008 (for additional information, see Note 3, Accounting Standards Recently Adopted or Issued, of the Selected Notes to Consolidated Financial Statements).

Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC.  Certain reclassifications have been made to the 2008 Consolidated Financial Statements and/or schedules to conform to the 2009 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, 2008 filed with the SEC.  Interim results are not necessarily indicative of results for a full year.

Subsequent Events:  We evaluated subsequent events for reporting and disclosure in these financial statements through August 7, 2009, which is the dare this June 30, 2009 Form 10-Q was available to be issued.

Note 2:  RECENT DEVELOPMENTS AND SIGNIFICANT EVENTS

FDIC Special Assessment:  On May 22, 2009, the FDIC adopted a final rule imposing a five basis point special assessment on each insured depository institution’s total assets minus Tier 1 capital as of June 30, 2009, with the maximum amount of the special assessment for any institution not to exceed ten basis points times the institution’s assessment base for the second quarter 2009 risk-based assessment.  The special assessment will be collected on September 30, 2009 at the same time the regular quarterly risk based assessment for the second quarter of 2009 is collected.  For Banner Corporation, this assessment was $2.1 million, which was recognized in other operating expenses during the quarter ended June 30, 2009.  The FDIC has indicated an additional special assessment of up to five basis points later in 2009 is probable, but the amount is uncertain.  The FDIC Board may vote to impose such an additional special assessment if the FDIC estimates that the Deposit Insurance Fund reserve ratio will fall to a level that the Board believes would adversely affect public confidence or to a level that will be close to or below zero.

FDIC Temporary Liquidity Guarantee Program:  Banner Corporation, Banner Bank and Islanders Bank have chosen to participate in the FDIC’s Temporary Liquidity Guarantee Program (the “TLGP”), which applies to all U.S. depository institutions insured by the FDIC and all United States bank holding companies, unless they have opted out.  Under the TLGP, the FDIC guarantees certain senior unsecured debt of insured institutions and their holding companies, as well as non-interest-bearing transaction account deposits.  Under the transaction account guarantee component of the TLGP, all non-interest-bearing and certain interest-bearing transaction accounts maintained at Banner Bank and Islanders Bank are insured in full by the FDIC until December 31, 2013, regardless of the standard maximum deposit insurance amounts.  The Banks are required to pay a 10 basis point fee (annualized) on balances of each covered account in excess of $250,000 while the extra deposit insurance is in place.  On March 31, 2009, Banner Bank completed an offering of $50 million of qualifying senior bank notes covered by the TLGP at a fixed rate of 2.625% which mature on March 31, 2012.  Under the debt guarantee component of the TLGP, the FDIC will pay the
 
 
11
 
unpaid principal and interest on an FDIC-guaranteed debt instrument upon the uncured failure of the participating entity to make a timely payment of principal or interest.  Under the terms of the TLGP, the Bank is not permitted to use the proceeds from the sale of securities guaranteed under the TLGP to prepay any of its other debt that is not guaranteed by the FDIC.  Banner Bank is required to pay a 1.00% fee (annualized) on this debt, which will result in a total fee of $1.5 million over three years.  Subject to FDIC approval, we have remaining capacity under the TLGP to issue approximately $30 million of additional guaranteed notes.  None of the senior notes are redeemable prior to maturity.

Participation in the U.S. Treasury’s Capital Purchase Program:  On November 21, 2008, we received $124 million from the U.S. Treasury Department as part of the Treasury’s Capital Purchase Program.  We issued $124 million in senior preferred stock, with a related warrant to purchase up to $18.6 million in common stock, to the U.S. Treasury.  The warrant provides the Treasury the option to purchase up to 1,707,989 shares of Banner Corporation common stock at a price of $10.89 per share at any time during the next ten years.  The preferred stock will pay a 5% dividend for the first five years, after which the rate will increase to 9% if the preferred shares are not redeemed by the Company.  The terms and conditions of the transaction and the preferred stock conform to those provided by the U.S. Treasury.  A summary of the Capital Purchase Program can be found on the Treasury’s web site at www.financialstability.gov/roadtostability/capitalpurchaseprogram.html.  The additional capital enhances our capacity to support the communities we serve through expanded lending activities and economic development.  This capital also creates additional flexibility in considering strategic opportunities that may be available to us as the financial services industry continues to consolidate.

Goodwill write-off:  As a result of the significant decline in our stock price and market capitalization over the course of 2008 and in conjunction with similar declines in the value of most financial institutions and the ongoing disruption in related financial markets, we determined it was appropriate to reduce the carrying value of goodwill in our Consolidated Statements of Financial Condition by recording a $50 million write-down in the second quarter of 2008 and, in response to worsening economic indicators and further price declines, an additional $71 million write-down in the fourth quarter of 2008.  The total $121 million write-off of goodwill was a non-cash charge that did not affect the Company’s or the Banks’ liquidity or operations.  The adjustment brought our book value and tangible book value more closely in line with each other and more accurately reflected current market conditions.  Also, since goodwill is excluded from regulatory capital, the impairment charge (which was not deductible for tax purposes) did not have an adverse effect on the regulatory capital ratios of the Company or either of our subsidiary banks, each of which continues to remain “well capitalized” under the regulatory requirements.  (See Note 10 of the Selected Notes to Consolidated Financial Statements for additional information with respect to our valuation of intangible assets.)

Note 3:  ACCOUNTING STANDARDS RECENTLY ADOPTED OR ISSUED

Recently Adopted Accounting Standards:  On April 9, 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSB) Financial Accounting Standard (FAS) 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.  FSP FAS 157-4 provides guidance to help an entity determine whether the market for an asset is not active and when a price for a transaction is not distressed.  In this two-step model, an entity must first determine whether there are factors present that indicate that the market for the asset is not active at the measurement date.  Second, an entity must evaluate whether a quoted price is representative of a transaction that is not orderly.  If determined that a quoted price is distressed (not orderly), and thereby not representative of fair value under SFAS 157, the entity must make adjustments to the quoted price or utilize an alternative valuation technique (e.g., income approach or multiple valuation techniques) to determine fair value.  Additionally, an entity must incorporate appropriate risk premium adjustments, reflective of an orderly transaction under current market conditions, due to uncertainty in cash flows.  This FSP is effective for interim reporting periods ending after June 15, 2009.  We adopted FSP FAS 157-4 for the quarter ended June 30, 2009 and the effect of the adoption on the consolidated financial statements was not material.

On April 9, 2009, FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“OTTI”), that changes the OTTI model for debt securities.  Under previous guidance, an entity was required to assess whether it has the intent and ability to hold a security to recovery in determining whether an impairment of that security is other-than-temporary.  If the impairment was deemed other-than temporarily impaired, the investment was written-down to fair value through earnings.  Under the new guidance, OTTI is triggered if an entity has the intent to sell the security, it is more likely than not that it will be required to sell the security before recovery, or if the entity does not expect to recover the entire amortized cost basis of the security.  If the entity intends to sell the security or it is more likely than not that it will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI.  If the entity does not intend to sell the security and it is not likely that the entity will be required to sell the security before recovering its cost basis, only the portion of the impairment loss representing credit losses would be recognized in earnings as an OTTI.  The remaining impairment loss would be recognized as a charge to other comprehensive income (“OCI”).  The FSP also results in a new category within OCI for the portion of the OTTI that is unrelated to credit losses for securities held to maturity.  The impairment recognized in OCI would be amortized over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows, unless there is an indication of additional credit losses.  The amortization of the OTTI amount recorded in OCI will increase the carrying value of the investment, and would not affect earnings.  Upon adoption of the FSP, the noncredit portion of previously recognized OTTI shall be reclassified to accumulated OCI by a cumulative-effect adjustment to the opening balance of retained earnings.  This FSP is effective for interim reporting periods ended after June 15, 2009.  We adopted FSP FAS 115-2 and FAS 124-2 for the quarter ended June 30, 2009 and the effect of the adoption on the consolidated financial statements was not material.

On April 9, 2009, FASB issued FSP FAS 107-1 and Accounting Principles Board Opinion (APB) 28-1, Interim Disclosures about Fair Value of Financial Instruments.  This FSP requires SFAS 107, Disclosures about Fair Value of Financial Instruments, disclosures in the notes of an entity’s interim financial statements for all financial instruments, whether or not recognized in the statement of financial position.  This FSP is effective for interim reporting periods ending after June 15, 2009.  We adopted FSP 107-1 and APB 28-1 for the quarter ended June 30, 2009 and the effect of the adoption on the consolidated financial statements was not material.
 
 
12

On January 12, 2009, FASB issued FSP Emerging Issues Task Force (EITF) 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20. FSP EITF 99-20-1 addresses certain practical issues in EITF No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, by making its other-than-temporary impairment assessment guidance consistent with Statement of Financial Accounting Standard (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities.  FSP EITF 99-20-1 removes the reference to the consideration of a market participant’s estimates of cash flows in EITF 99-20, and instead requires an assessment of whether it is probable, based on current information and events, that the holder of the security will be unable to collect all amounts due according to the contractual terms.  If it is probable that there has been an adverse change in estimated cash flows, an other-than-temporary impairment is deemed to exist, and a corresponding loss shall be recognized in earnings equal to the entire difference between the investment’s carrying value and its fair value at the balance sheet date of the reporting period for which the assessment is made. This FSP is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively.  We adopted FSP 99-20-1 for the quarter ended March 31, 2009 and the effect of the adoption on our consolidated financial statements was not material.

In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3).  FSP 157-3 clarifies the application of FAS 157 in a market that is not active.  The FSP is intended to address the following application issues: (a) how the reporting entity’s own assumptions (that is, expected cash flows and appropriately risk-adjusted discount rates) should be considered when measuring fair value when relevant observable inputs do not exist; (b) how available observable inputs in a market that is not active should be considered when measuring fair value; and (c) how the use of market quotes (for example, broker quotes or pricing services for the same or similar financial assets) should be considered when assessing the relevance of observable and unobservable inputs available to measure fair value.  FSP 157-3 was effective on issuance, including prior periods for which financial statements had not been issued.  We adopted FSP 157-3 for the quarter ended December 31, 2008 and the effect of adoption on the consolidated financial statements was not material.

Recently Issued Accounting Pronouncements:  In June 2009, the FASB issued FAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162 (FAS 168), which pertains to the authority of United States generally accepted accounting standards.  With the issuance of FAS 168, the FASB Accounting Standards Codification (Codification) will become the source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.  FAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  We plan to adopt FAS 168 in the third quarter; however, we do not expect the adoption to have a material effect on the results of operations or consolidated financial statements of the Company.

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 its 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.


 
13 
 

Note 5:  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 (includes securities—trading, available-for-sale and held-to-maturity, all at carrying value) (dollars in thousands):

 
June 30
  
December 31
  
June 30
  
 
2009
  
2008
  
2008
  
             
Interest-bearing deposits included in Cash and due from banks
$
16,919
  
$
12,786
  
$
430
  
                   
Mortgage-backed or related securities
                  
GNMA
  
21,186
    
33,729
    
--
  
FHLMC
  
53,153
    
45,544
    
37,986
  
FNMA
  
43,501
    
45,491
    
51,450
  
Private issuer
  
7,641
    
9,537
    
--
  
Total mortgage-backed securities
  
125,481
    
134,301
    
89,436
  
                   
U.S. Agency obligations
  
46,704
    
70,389
    
61,922
  
Taxable municipal bonds
  
4,608
    
4,967
    
5,087
  
Corporate bonds
  
43,065
    
48,470
    
75,120
  
Total other taxable securities
  
94,377
    
123,826
    
142,129
  
                   
Tax-exempt municipal bonds
  
75,573
    
58,607
    
55,883
  
                   
Equity securities (excludes FHLB stock)
  
346
    
234
    
6,834
  
                   
Total securities
  
295,777
    
316,968
    
294,282
  
                   
FHLB stock
  
37,371
    
37,371
    
37,371
  
                   
 
$
350,067
  
$
367,125
  
$
332,083
  

The following table provides additional detail on income from deposits and securities for the periods indicated (dollars in thousands):

 
Quarters Ended
June 30
  
Six Months Ended
June 30
  
     
   
2009
    
2008
    
2009
    
2008
  
Mortgage-backed securities interest
$
1,569
  
$
1,087
  
$
3,370
  
$
2,240
  
                         
Other taxable interest income
  
1,276
    
1,950
    
2,756
    
3,866
  
Tax-exempt interest income
  
814
    
633
    
1,518
    
1,216
  
Equity securities—dividend / (premium amortization)
  
(1)
    
147
    
(2)
    
282
  
FHLB stock dividends
  
--
    
131
    
--
    
224
  
   
2,089
    
2,861
    
4,272
    
5,588
  
                         
 
$
3,658
  
$
3,948
  
$
7,642
  
$
7,828
  

Note 6:  LOANS RECEIVABLE

We originate residential mortgage loans for both portfolio investment and sale in the secondary market.  At the time of origination, mortgage loans are designated as held for sale or held for investment.  Loans held for sale are stated at lower of cost or estimated fair value determined on an aggregate basis.  Net unrealized losses on loans held for sale are recognized through a valuation allowance by charges to income.  We also originate construction and land, commercial and multifamily real estate, commercial business, agricultural and consumer loans for portfolio investment.  Loans receivable not designated as held for sale are recorded at the principal amount outstanding, net of allowance for loan losses, deferred fees, discounts and premiums.  Premiums, discounts and deferred loan fees are amortized to maturity using the level-yield methodology.

Interest is accrued as earned unless management doubts the collectability of the loan or the unpaid interest.  Interest accruals are generally discontinued when loans become 90 days past due for scheduled interest payments.  All previously accrued but uncollected interest is deducted from interest income upon transfer to nonaccrual status.  Future collection of interest is included in interest income based upon an assessment of the likelihood that the loans will be repaid or recovered.  A loan may be put on nonaccrual status sooner than this policy would dictate if, in management’s judgment, the loan may be uncollectable.  Such interest is then recognized as income only if it is ultimately collected.


 
14 
 

Our loans receivable, including loans held for sale, at June 30, 2009 and 2008 and December 31, 2008 are summarized as follows (dollars in thousands):

 
June 30
2009
  
December 31
2008
  
June 30
2008
  
 
 
Amount
  
Percent
of Total
  
 
Amount
  
Percent
of Total
  
 
Amount
  
Percent
of Total
  
                                     
Loans (including loans held for sale):
                                    
Commercial real estate
$
1,049,921
    
26.8
%
$
1,013,709
    
25.6
%
$
983,732
    
24.8
%
Multifamily real estate
  
150,168
    
3.8
    
151,274
    
3.8
    
145,016
    
3.6
  
Commercial construction
  
90,762
    
2.3
    
104,495
    
2.6
    
103,009
    
2.6
  
Multifamily construction
  
56,968
    
1.5
    
33,661
    
0.8
    
17,681
    
0.4
  
One- to four-family construction
  
337,368
    
8.6
    
420,673
    
10.6
    
540,718
    
13.6
  
Land and land development
  
403,697
    
10.3
    
486,130
    
12.3
    
494,944
    
12.5
  
Commercial business
  
678,273
    
17.3
    
679,867
    
17.2
    
709,109
    
17.8
  
Agricultural business, including
secured by farmland
  
215,339
    
5.5
    
204,142
    
5.2
    
212,397
    
5.3
  
One- to four-family real estate
  
653,513
    
16.7
    
599,169
    
15.1
    
511,611
    
12.9
  
                                     
Consumer
  
91,173
    
2.4
    
92,642
    
2.4
    
97,473
    
2.5
  
Consumer secured by one- to four-family real estate
  
185,899
    
4.8
    
175,646
    
4.4
    
157,609
    
4.0
  
Total consumer
  
277,072
    
7.2
    
268,288
    
6.8
    
255,082
    
6.5
  
Total loans outstanding
  
3,913,081
    
100.0
%
  
3,961,408
    
100.0
%
  
3,973,299
    
100.0
%
                                     
Less allowance for loan losses
  
(90,694
)
        
(75,197
)
        
(58,570
)
      
                                     
Total net loans outstanding at end of period
 
$
3,822,387
        
 
$
3,886,211
        
 
$
3,914,729
        

Loans are net of unearned, unamortized loan fees or discounts of $7,991,000, $7,105,000, and $7,253,000, respectively, at June 30, 2009, December 31, 2008 and June 30, 2008.

The geographic concentration of our loans at June 30, 2009 was as follows (dollars in thousands):

   
Washington
  
Oregon
  
Idaho
  
Other
  
Total
                                 
Commercial real estate
  
$
785,186
  
$
172,632
  
$
81,478
  
$
10,625
  
$
1,049,921
  
Multifamily real estate
    
125,599
    
12,405
    
8,813
    
3,351
    
150,168
  
Commercial construction
    
65,357
    
15,171
    
10,234
    
--
    
90,762
  
Multifamily construction
    
31,431
    
25,537
    
--
    
--
    
56,968
  
One- to four-family construction
    
166,637
    
151,704
    
19,027
    
--
    
337,368
  
Land and land development
    
195,192
    
155,902
    
52,603
    
--
    
403,697
  
Commercial business
    
496,605
    
93,752
    
70,818
    
17,098
    
678,273
  
Agricultural business, including
secured by farmland
    
101,717
    
48,807
    
64,815
    
--
    
215,339
  
One- to four-family real estate
    
486,614
    
131,853
    
31,766
    
3,280
    
653,513
  
                                 
Consumer
    
63,283
    
23,663
    
4,227
    
--
    
91,173
  
Consumer secured by one- to four-family
real estate
    
134,094
    
37,996
    
13,308
    
501
    
185,899
  
                                 
Total loans outstanding
  
$
2,651,715
  
$
869,422
  
$
357,089
  
$
34,855
  
$
3,913,081
  
                                 
Percent of total loans
    
67.8
%
  
22.2
%
  
9.1
%
  
0.9
%
  
100.0
%



 
15 
 

The geographic concentration of our land and land development loans at June 30, 2009 was as follows (dollars in thousands):

   
Washington
  
Oregon
  
Idaho
  
Total
                           
Residential
                          
Acquisition and development
  
$
94,895
  
$
102,198
  
$
22,088
  
$
219,181
  
Improved lots
    
48,448
    
30,581
    
4,107
    
83,136
  
Unimproved land
    
25,523
    
10,988
    
21,167
    
57,678
  
Commercial and industrial
                          
Acquisition and development
    
4,013
    
--
    
197
    
4,210
  
Improved land
    
11,366
    
10,652
    
398
    
22,416
  
Unimproved land
    
10,947
    
1,483
    
4,646
    
17,076
  
Total land and land development loans outstanding
  
$
195,192
  
$
155,902
  
$
52,603
  
$
403,697
  
Percent of total land and land development loans
    
48.4
 %
  
38.6
 %
  
13.0
 %
  
100.0
 %

As noted in the tables above, substantially all of our loans are to borrowers in the states of Washington, Oregon and Idaho.  Accordingly, their ultimate collectability is particularly susceptible to, among other things, changes in market and economic conditions within these states.

The amount of impaired loans, net of any charge-offs recorded as a result of specific impairment analysis, and the related allocated reserve for loan losses were as follows (dollars in thousands):

 
June 30, 2009
  
December 31, 2008
  
 
Loan
amount
  
Allocated
reserves
  
Loan
amount
  
Allocated
reserves
  
         
Impaired loans:
                        
Non-accrual
$
223,444
  
$
19,303
  
$
186,978
  
$
13,053
  
Accrual
  
56,655
    
821
    
23,635
    
1,195
  
 
$
280,099
  
$
20,124
  
$
210,613
  
$
14,248
  

The Company originates both adjustable- and fixed-rate loans.  The maturity and repricing composition of those loans, less undisbursed amounts and deferred fees, were as follows (dollars in thousands):

 
June 30
2009
  
December 31
2008
  
June 30
2008
  
Fixed-rate (term to maturity):
      
Due in one year or less
$
155,756
  
$
130,958
  
$
88,318
  
Due after one year through three years
  
204,129
    
206,455
    
184,977
  
Due after three years through five years
  
221,595
    
246,897
    
208,773
  
Due after five years through ten years
  
165,129
    
157,621
    
230,831
  
Due after ten years
  
497,054
    
425,213
    
420,040
  
 
$
1,243,663
  
$
1,167,144
  
$
1,132,939
  
Adjustable-rate (term to rate adjustment):
                  
Due in one year or less
$
1,802,578
  
$
1,912,755
  
$
1,921,983
  
Due after one year through three years
  
375,608
    
402,482
    
394,703
  
Due after three years through five years
  
454,586
    
440,555
    
359,500
  
Due after five years through ten years
  
36,646
    
38,472
    
164,174
  
   
2,669,418
    
2,794,264
    
2,840,360
  
 
$
3,913,081
  
$
3,961,408
  
$
3,973,299
  

The adjustable-rate loans may have interest rate adjustment limitations and are generally indexed to various Prime or LIBOR rates, or One to Five Year Constant Maturity Treasury Indices or FHLB borrowing rates.  Future market factors may affect the correlation of the interest rate adjustment with the rates the Banks pay on the short-term deposits that primarily have been utilized to fund these loans.



 
16 
 

Note 7:  ALLOWANCE FOR LOAN LOSSES

The following is a schedule of our allocation of the allowance for loan losses at the dates indicated (dollars in thousands):

 
June 30
2009
  
December 31
2008
  
June 30
2008
  
       
Specific or allocated loss allowances:
                  
Commercial real estate
$
5,333
  
$
4,199