updated 10/20/2010 9:46:05 PM ET 2010-10-21T01:46:05

WALLA WALLA, Wash., Oct. 20, 2010 (GLOBE NEWSWIRE) -- Banner Corporation (Nasdaq:BANR), the parent company of Banner Bank and Islanders Bank, today reported that it had a net loss of $42.7 million in the third quarter ended September 30, 2010, compared to a net loss of $4.9 million in the immediately preceding quarter and a net loss of $6.4 million in the third quarter a year ago. The current quarter's results include a previously announced $24.0 million non-cash provision for income taxes as a result of adjustments to its current and deferred tax assets, a $20.0 million provision for loan losses, an $8.6 million charge for valuation adjustments on real estate owned and an other-than-temporary impairment (OTTI) charge of $3.0 million.

"For the third quarter we had solid revenue growth, reflecting a further significant reduction in deposit costs, strong mortgage banking activity and an increase in our average interest-earning asset balances as a result of our recent common stock offering. We demonstrated improvement in our core business by continuing to change the composition of our deposit portfolio, increasing non-interest-bearing and other core deposit balances and customer relationships, while strengthening our on-balance-sheet liquidity and effectively managing controllable operating expenses," said Mark J. Grescovich, President and Chief Executive Officer. "While we are pleased with the progress in all of these areas during the quarter, the continuing high level of non-performing assets and related credit and operational costs have adversely affected our operating results, leading us to conclude that recording a valuation allowance for the deferred tax asset was appropriate at this time. Improving our asset quality through aggressive management of our problem assets, including appropriate valuation adjustments when necessary, remains the primary focus for Banner. We expect ultimately to recover this deferred tax valuation allowance in future periods when we sufficiently reduce the credit costs associated with non-performing assets and return to profitability."

In the third quarter, Banner paid a $1.6 million dividend on the $124 million of senior preferred stock it issued to the U.S. Treasury in the fourth quarter of 2008 in connection with its participation in the Treasury's Capital Purchase Program. In addition, Banner accrued $398,000 for related discount accretion. Including the preferred stock dividend and related accretion, the net loss to common shareholders was $0.40 per share for the quarter ended September 30, 2010, compared to a net loss to common shareholders of $0.28 per share in the second quarter of 2010 and a net loss to common shareholders of $0.44 per share for the third quarter a year ago.

For the first nine months of 2010, Banner reported a net loss of $49.2 million compared to a net loss of $32.2 million for the first nine months of 2009. For the first nine months of 2010, the net loss to common shareholders was $1.04 per share, compared to a net loss of $2.11 per share for the first nine months of 2009.

Common Stock Offering

On June 30, 2010, Banner announced the funding of its offering of 75,000,000 shares of its common stock and the sale of an additional 3,500,000 shares pursuant to the partial exercise of the underwriters' over-allotment option, at a price to the public of $2.00 per share. On July 2, 2010, Banner announced the completion of the capital raise as the underwriters had exercised their over-allotment option for an additional 7,139,000 shares, at a price to the public of $2.00 per share. In aggregate, Banner issued a total of 85,639,000 shares in the offering, resulting in net proceeds, after deducting underwriting discounts and commissions and estimated offering expenses, of approximately $161.6 million. 

Banner intends to use a significant portion of the net proceeds from the offering to strengthen Banner Bank's regulatory capital ratios and to support managed growth.  To that end, through September 30, 2010, the Company had invested $110.0 million of the net proceeds as additional paid-in common equity in Banner Bank. The Company expects to use the remaining net proceeds for general working capital purposes, including additional capital investments in its subsidiary banks if appropriate.

Income Statement Review

"We achieved a further significant reduction in our cost of funds during the quarter through changes in our deposit mix and additional re-pricing opportunities. The reduced cost of funds allowed our net interest margin to be nearly unchanged compared to the immediately preceding quarter and to increase by 33 basis points compared to the third quarter a year ago, despite significant pressure on asset yields," said Grescovich. "Loan yields, which have been relatively stable for a number of quarters, decreased modestly in the third quarter reflecting the impact of the continuing low interest rate environment on new loans and renewals. However, overall asset yields declined more meaningfully because we continued to build our on-balance-sheet liquidity, which is currently invested in short-term instruments that pay very low interest rates." Banner's net interest margin was 3.63% for the third quarter, compared to 3.65% in the preceding quarter and 3.30% in the third quarter a year ago. For the first nine months of 2010, Banner's net interest margin was 3.63%, a 36 basis point improvement compared to 3.27% for the first nine months of 2009.

Funding costs for the third quarter decreased 22 basis points compared to the previous quarter and 81 basis points from the third quarter a year ago. Deposit costs decreased by 25 basis points compared to the preceding quarter and 87 basis points compared to the third quarter a year earlier. Asset yields decreased 28 basis points from the prior linked quarter and 48 basis points from the third quarter a year ago.  Loan yields declined three basis points compared to the preceding quarter, and declined two basis points from the third quarter a year ago. Non-accruing loans reduced the margin by approximately 33 basis points in the third quarter compared to approximately 34 basis points in the preceding quarter and approximately 42 basis points in the third quarter of 2009. 

Net interest income before the provision for loan losses was $39.9 million in the third quarter of 2010, compared to $38.9 million in the preceding quarter and $36.4 million in the third quarter a year ago. In the first nine months of 2010, net interest income before the provision for loan losses increased 10% to $117.0 million, compared to $106.2 million in the first nine months of 2009. Revenues from core operations* (net interest income before the provision for loan losses plus total other operating income excluding fair value and OTTI adjustments) were $49.2 million in the third quarter of 2010, compared to $45.9 million in the second quarter of 2010 and $45.2 million for the third quarter a year ago. Revenues from core operations for the first nine months of 2010 increased 6% to $140.4 million, compared to $131.9 million in the first nine months of 2009.

During the quarter ended September 30, 2010, Banner recognized a $3.0 million other-than-temporary impairment charge on a trust preferred security issued by a single banking institution. The security had previously been reported as a non-accruing, non-performing asset. Publicly available information about the issuer of the security released during the third quarter caused management to believe that collection of this asset had become more uncertain resulting in the OTTI charge. There was no OTTI charge in the second quarter of 2010 and a $1.3 million charge in the third quarter of 2009. Third quarter 2010 results also included a net gain of $1.4 million ($1.4 million after tax, or $0.01 earnings per share) for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value, compared to a net loss of $821,000 ($525,000 after tax, or $0.02 loss per share) in the second quarter of 2010 and a net gain of $6.0 million ($3.8 million after tax, or $0.20 earnings per share) in the third quarter a year ago.

Total other operating income, which includes the changes in the valuation of financial instruments noted above, was $7.7 million in the third quarter of 2010, compared to $6.2 million in the preceding quarter and $13.5 million for the third quarter a year ago. For the first nine months of 2010, total other operating income was $21.6 million, compared to $38.1 million in the first nine months of 2009. Total other operating income from core operations* (other operating income excluding fair value and OTTI adjustments) for the current quarter was $9.3 million, compared to $7.0 million the preceding quarter, and $8.8 million for the third quarter a year ago.  For the first nine months of 2010, total other operating income from core operations decreased to $23.3 million, compared to $25.6 million in the first nine months of 2009, primarily as a result of a decline in mortgage banking revenues in the 2010 period despite the increase in the most recent quarter.

"Mortgage loan production levels increased meaningfully during the third quarter reflecting the very low mortgage interest rate environment and better integration of the origination process with our retail delivery channel. In addition, we sold a portion of the Great Northwest Home Rush loans that we had accumulated over the life of that program.   As a result, mortgage banking revenues increased 208% during the third quarter compared to the preceding quarter and 22% compared to the third quarter a year ago," said Grescovich. "Deposit fees and other service charges also increased modestly during the quarter, although activity levels for certain of these revenue sources, particularly merchant services, continue to be adversely impacted by the slow pace of economic recovery." Income from mortgage banking operations improved to $2.5 million in the quarter ended September 30, 2010, compared to $817,000 in the immediately preceding quarter and $2.1 million in the third quarter of 2009.  Deposit fees and other service charges were $5.7 million in the third quarter compared to $5.6 million in the preceding quarter and $5.7 million in the third quarter a year ago.

"Controllable operating expense remained well behaved and only modestly changed from the preceding quarter; however, expenses related to collection activities remained high. In addition, we recorded $8.6 million in valuation adjustments in our real estate owned portfolio as recent appraisals demonstrated further declines in certain property values," said Grescovich. "We expect collection expenses and costs associated with real estate owned to remain elevated for a number of future quarters as we work down our inventory of non-performing assets."

Total other operating expenses, or non-interest expenses, were $46.3 million in the third quarter of 2010, compared to $38.0 million in the preceding quarter and $36.6 million in the third quarter a year ago.  For the first nine months of the year, other operating expenses were $119.8 million compared to $107.3 million in the first nine months of 2009. The increase in operating expense for the nine-month period largely reflects charges related to our real estate owned, including valuation adjustments, which increased to $19.0 million for the nine months ended September 30, 2010, compared to $5.2 million for the same period a year ago.

*Earnings information excluding fair value adjustments (alternately referred to as total other operating income from core operation or revenues from core operations) represent non-GAAP (Generally Accepted Accounting Principles) financial measures. Management has presented these non-GAAP financial measures in this earnings release because it believes that they provide useful and comparative information to assess trends in the Company's core operations reflected in the current quarter's results. Where applicable, the Company has also presented comparable earnings information using GAAP financial measures.

Credit Quality

"Credit costs have been a persistent challenge throughout the past several quarters and continue to adversely impact our profitability," said Grescovich. "The provision for loan losses in the third quarter remains high, reflecting still significant levels of non-performing loans and net charge-offs. Charge-offs and delinquencies continue to be concentrated in loans for the construction of single-family homes and residential land development projects. However, our exposure to one-to-four family residential construction and land development loans has continued to decline and at September 30, 2010 had been reduced to $364 million, or 10.4% of total loans outstanding. Our reserve levels are substantial and both our impairment analysis and charge-off actions reflect current appraisals and valuation estimates. While economic weakness persists, we remain diligent in our efforts to reduce credit costs substantially in 2011 and beyond as the economy recovers." 

Banner recorded a $20.0 million provision for loan losses in the third quarter, compared to $16.0 million in the preceding quarter and $25.0 million in the third quarter a year ago. For the first nine months of 2010, the provision for loan losses was $50.0 million, compared to $92.0 million for the first nine months of 2009. The allowance for loan losses at September 30, 2010 totaled $96.4 million, representing 2.76% of total loans outstanding and 57% of non-performing loans. Non-performing loans totaled $170.3 million at September 30, 2010, compared to $177.9 million in the preceding quarter and $243.3 million at September 30, 2009. Banner's real estate owned and repossessed assets totaled $106.5 million at September 30, 2010, compared to $101.7 million three months earlier and $53.8 million a year ago. Net charge-offs in the quarter totaled $19.1 million, or 0.53% of average loans outstanding, compared to $16.2 million, or 0.44% of average loans outstanding for the second quarter of 2010 and $20.5 million, or 0.53% of average loans outstanding for the third quarter of last year. Non-performing assets totaled $277.4 million at September 30, 2010, compared to $283.1 million in the preceding quarter and $298.3 million a year earlier. At September 30, 2010, Banner's non-performing assets were 6.03% of total assets, compared to 6.02% at the end of the preceding quarter and 6.23% a year ago.

One-to-four family residential construction, land and land development loans were $364 million, or 10.4% of the total loan portfolio at September 30, 2010. The geographic distribution of these construction, land and land development loans was approximately $120 million, or 33%, in the greater Puget Sound market, $154 million, or 43%, in the greater Portland, Oregon market and $19 million, or 5%, in the greater Boise, Idaho market as of September 30, 2010. The remaining $71 million, or 19%, was distributed in the various eastern Washington, eastern Oregon and northern Idaho markets served by Banner Bank. 

Non-performing residential construction, land and land development loans and related real estate owned were $148 million, or 53.4% of non-performing assets at September 30, 2010. The geographic distribution of non-performing construction, land and land development loans and related real estate owned included approximately $64 million, or 43%, in the greater Puget Sound market, $58 million, or 39%, in the greater Portland market and $13 million, or 9%, in the greater Boise market, with the remaining $13 million, or 9%, distributed in the various eastern Washington, eastern Oregon and northern Idaho markets served by Banner Bank. 

Balance Sheet Review

"Loan demand was modest during the quarter, as both businesses and consumers remain very cautious in the current economic environment. In addition, we have continued to intentionally reduce our construction and land development loans over the past year. As a result, total loans declined further in the third quarter," said Grescovich. "At September 30, 2010, our one-to-four family construction loans totaled $174 million, a $103 million reduction over the past year and a reduction of $481 million from their peak quarter-end balance of $655 million at June 30, 2007. Similarly, total construction, land and land development loans have declined by $733 million from their peak quarter-end balance of $1.24 billion, also at June 30, 2007." Net loans were $3.40 billion at September 30, 2010, compared to $3.54 billion at June 30, 2010 and $3.80 billion a year ago. 

Total assets were $4.60 billion at September 30, 2010, compared to $4.70 billion at the end of the preceding quarter and $4.79 billion a year ago. Deposits totaled $3.76 billion at September 30, 2010, compared to $3.84 billion at the end of the preceding quarter and $3.86 billion a year ago. Non-interest-bearing accounts totaled $613 million at September 30, 2010, compared to $548 million at the end of the preceding quarter and $547 million a year ago, a year-over-year increase of 12%. At September 30, 2010, interest-bearing transaction and savings accounts were $1.46 billion, compared to $1.40 billion at the end of the preceding quarter and $1.31 billion a year ago, also a year-over-year increase of 12%.  

"We made further progress in implementing our strategies to strengthen the franchise through our super community bank model," said Grescovich. "As a result, although we encouraged a significant reduction in higher cost certificate of deposit balances, Banner's retail deposit franchise had another solid quarter of core deposit growth, significantly increasing non-interest-bearing and other transaction and savings deposit products, which helped improve our cost of funds and increased the opportunity for deposit fee revenue.  Much lower rates on renewed and retained certificates of deposit also significantly contributed to the decline in the cost of deposits and will provide a substantial benefit in future periods."

Augmented by the recent stock offering, Banner Corporation and its subsidiary banks continue to maintain capital levels significantly in excess of the requirements to be categorized as "well-capitalized" under applicable regulatory standards. Banner Corporation's Tier 1 leverage capital to average assets ratio was 12.12% and its total capital to risk-weighted assets ratio was 16.95% at September 30, 2010. Banner Bank's Tier 1 leverage ratio was 10.77% at September 30, 2010, equal to the ratio at June 30, 2010 and in excess of the minimum level targeted in our Memorandum of Understanding agreed to with the FDIC.

Tangible stockholders' equity at September 30, 2010 was $515.6 million, including $118.6 million attributable to preferred stock. Tangible book value per common share was $3.57 at quarter-end. At September 30, 2010, Banner had 111.2 million shares outstanding, compared to 19.7 million shares outstanding a year ago. Tangible common stockholders' equity was $397.0 million at September 30, 2010, or 8.65% of tangible assets, compared to $425.9 million, or 9.08% of tangible assets at June 30, 2010 and $278.0 million, or 5.82% of tangible assets a year ago. 

Conference Call

Banner will host a conference call on Thursday, October 21, 2010, at 8:00 a.m. PDT, to discuss third quarter 2010 results. The conference call can be accessed live by telephone at 480-629-9770 to participate in the call. To listen to the call online, go to the Company's website at www.bannerbank.com . A replay will be available for a week at (303) 590-3030, using access code 4367087.

About the Company

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

This press release contains statements that the Company believes are "forward-looking statements." These statements relate to the Company's financial condition, results of operations, plans, objectives, future performance or business. You should not place undue reliance on these statements, as they are subject to risks and uncertainties. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Company may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors which could cause actual results to differ materially include, but are not limited to, the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System and of our bank subsidiaries by the Federal Deposit Insurance Corporation, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or any of the Banks which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; our compliance with regulatory enforcement actions; the requirements and restrictions that have been imposed upon Banner and Banner Bank under the memoranda of understanding with the Federal Reserve Bank of San Francisco (in the case of Banner) and the FDIC and the Washington DFI (in the case of Banner Bank) and the possibility that Banner and Banner Bank will be unable to fully comply with the memoranda of understanding, which could result in the imposition of additional requirements or restrictions; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules; our ability to attract and retain deposits; further increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect or result in significant declines in valuation; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; the failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common and preferred stock and interest or principal payments on our junior subordinated debentures; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; war or terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; future legislative changes in the United States Department of Treasury Troubled Asset Relief Program Capital Purchase Program; and other risks detailed in Banner's reports filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2009. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 2010 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect our operating and stock price performance.

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