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Banner Corporation Announces Fourth Quarter and Year End Results

WALLA WALLA, Wash., Jan. 26, 2011 (GLOBE NEWSWIRE) -- Banner Corporation (Nasdaq:BANR), the parent company of Banner Bank and Islanders Bank, today reported that it had a net loss of $12.7 million in the quarter ended December 31, 2010, compared to a net loss of $42.7 million in the immediately preceding quarter and a net loss of $3.5 million in the fourth quarter a year ago.
/ Source: GlobeNewswire

WALLA WALLA, Wash., Jan. 26, 2011 (GLOBE NEWSWIRE) -- Banner Corporation (Nasdaq:BANR), the parent company of Banner Bank and Islanders Bank, today reported that it had a net loss of $12.7 million in the quarter ended December 31, 2010, compared to a net loss of $42.7 million in the immediately preceding quarter and a net loss of $3.5 million in the fourth quarter a year ago.

"Further margin expansion and increased net interest income supported strong revenue generation during the fourth quarter, despite a decline in income from mortgage banking operations. Throughout the year ended December 31, 2010, we have improved our core business by continuing to change the composition of our deposit portfolio, growing non-interest-bearing and other core deposit balances and adding customer relationships, while strengthening our on-balance-sheet liquidity and capital base, realigning and refocusing our delivery platforms and effectively managing controllable operating expenses," said Mark J. Grescovich, President and Chief Executive Officer. "The result has been meaningful improvement in our core operations and growth in recurring revenues compared to similar periods a year earlier. While we are pleased that we continued to make progress in these areas in the fourth quarter, our still too high level of non-performing assets and related credit costs again adversely affected our operating results.  Although we made modest progress during the quarter in reducing non-performing loans and selling acquired real estate, significantly improving our asset quality through aggressive management of our problem assets remains the primary focus for Banner that will allow us to return to profitability."

In the fourth 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 $0.13 per share for the quarter ended December 31, 2010, compared to a net loss to common shareholders of $0.40 per share in the third quarter of 2010 and $0.27 per share for the fourth quarter a year ago.

For the year 2010, Banner reported a net loss of $61.9 million compared to a net loss of $35.8 million for 2009. The full year 2010 results included an $18.0 million non-cash provision for income taxes as a result of adjustments to current and deferred tax assets.  Results for the full year 2009 included a tax benefit of $27.1 million. For the year ended December 31, 2010, the net loss to common shareholders, including the preferred stock dividend and related accretion, was $1.03 per share, compared to a net loss of $2.33 per share for 2009. 

Credit Quality

"Our credit quality metrics further stabilized during the quarter, with non-performing loans, real estate owned and total non-performing asset levels all decreasing at December 31, 2010 compared to the prior quarter end," said Grescovich. "However, the provision for loan losses and expenses related to real estate owned remained high in the fourth quarter. Charge-offs and delinquencies, as well as real estate expenses and valuation adjustments continued to be concentrated in loans for the construction of single-family homes and residential land development projects. Our exposure to one-to-four family residential construction and land development loans has continued to decline and at year-end had been reduced to just 9.4% of total loans outstanding. Although this is slightly below our long-term target range under improved market conditions, we do expect the land development portion of this portfolio to continue to decline over the near term. Our impairment analysis and charge-off actions reflect current appraisals and valuation estimates and our reserve levels are substantial, resulting in increased coverage ratios relative to both non-performing loans and total loans at quarter end. We will remain diligent in our efforts to reduce credit costs substantially in 2011and beyond as further problem asset resolution occurs and the economy continues to recover." 

Banner recorded a $20.0 million provision for loan losses in the fourth quarter of 2010, the same as in the preceding quarter. In the fourth quarter of 2009, Banner recorded a provision for loan losses of $17.0 million. For the year ended December 31, 2010, Banner's provision for loan losses was $70.0 million compared to $109.0 million for the year ended December 31, 2009. The allowance for loan losses at December 31, 2010 totaled $97.4 million, representing 2.86% of total loans outstanding and 64% of non-performing loans. Non-performing loans totaled $151.5 million at December 31, 2010, compared to $170.3 million in the preceding quarter and $213.9 million a year earlier. Banner's real estate owned and repossessed assets totaled $100.9 million at December 31, 2010, compared to $107.3 million three months earlier and $77.8 million a year ago. Net charge-offs in the fourth quarter of 2010 totaled $19.0 million, or 0.55% of average loans outstanding, compared to $19.1 million, or 0.53% of average loans outstanding for the third quarter of 2010 and $16.9 million, or 0.44% of average loans outstanding for the fourth quarter a year ago. Net charge-offs for the full year 2010 were $67.9 million, or 1.88% of average loans compared to $88.9 million, or 2.28% of average loans outstanding in 2009. Non-performing assets totaled $254.3 million at December 31, 2010, compared to $278.2 million in the preceding quarter and $295.9 million a year earlier. At year-end, Banner's non-performing assets were 5.77% of total assets, compared to 6.05% at the end of the preceding quarter and 6.27% a year ago.

One-to-four family residential construction, land and land development loans were $321.1 million, or 9.4% of the total loan portfolio at December 31, 2010, compared to $523.5 million, or 13.8% of the total loan portfolio a year earlier. The geographic distribution of these residential construction, land and land development loans was approximately $102.9 million, or 32%, in the greater Puget Sound market, $142.3 million, or 44%, in the greater Portland, Oregon market and $13.4 million, or 4%, in the greater Boise, Idaho market as of December 31, 2010. The remaining $62.5 million, or 20%, 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 $134.1 million, or 53% of non-performing assets at December 31, 2010. The geographic distribution of non-performing construction, land and land development loans and related real estate owned included approximately $54.5 million, or 41%, in the greater Puget Sound market, $56.1 million, or 42%, in the greater Portland market and $13.6 million, or 10%, in the greater Boise market, with the remaining $9.9 million, or 7%, distributed in the various eastern Washington, eastern Oregon and northern Idaho markets served by Banner Bank. 

Income Statement Review

"We further significantly reduced our cost of funds during the quarter through changes in our deposit mix and additional re-pricing opportunities. The reduced cost of funds made it possible for us to improve our net interest margin by 18 basis points compared to the immediately preceding quarter and to increase it by 32 basis points compared to the fourth 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 slightly in the fourth quarter, reflecting the impact of the continuing low interest rate environment on new loans and renewals. However, overall asset yields declined more meaningfully as securities yields declined sharply throughout the year and we continued to maintain a strong level of on-balance-sheet liquidity that is currently invested in short-term instruments that pay very low interest rates." Banner's net interest margin was 3.81% for the fourth quarter, compared to 3.63% in the preceding quarter and 3.49% in the fourth quarter a year ago. For the year, Banner's net interest margin was 3.67%, a 34 basis point improvement compared to 3.33% in 2009.

Funding costs for the fourth quarter decreased 25 basis points compared to the previous quarter and 75 basis points from the fourth quarter a year ago. Deposit costs decreased by 26 basis points compared to the preceding quarter and 80 basis points compared to the fourth quarter a year earlier. Asset yields decreased five basis points from the prior quarter and 43 basis points from the fourth quarter a year ago.  Loan yields declined two basis points compared to the preceding quarter, and declined three basis points from the fourth quarter a year ago. Non-accruing loans reduced the margin by approximately 33 basis points in both the fourth quarter and  in the preceding third quarter and approximately 37 basis points in the fourth quarter of 2009. 

Net interest income before the provision for loan losses was $40.8 million in the fourth quarter of 2010, compared to $39.9 million in the preceding quarter and $38.3 million in the fourth quarter a year ago. For the year, net interest income before the provision for loan losses increased 9% to $157.8 million, compared to $144.6 million in 2009. Revenues from core operations* (net interest income before the provision for loan losses plus total other operating income excluding fair value and other-than-temporary impairment (OTTI) adjustments) were $49.0 million in the fourth quarter of 2010, compared to $49.2 million in the third quarter of 2010 and $45.4 million for the fourth quarter a year ago. Revenues from core operations for the year increased 7% to $189.4 million, compared to $177.2 million in 2009.

Banner's fourth quarter 2010 results included a net loss of $706,000 ($706,000 after tax, or $0.01 loss 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 gain of $1.4 million ($1.4 million after tax, or $0.02 earnings per share) in the third quarter of 2010 and a net loss of $1.4 million ($0.9 million after tax, or $0.04 loss per share) in the fourth quarter a year ago.  For the year ended December 31, 2010, fair value adjustments resulted in a net gain of $1.7 million ($1.4 million after tax, or $0.02 earnings per share), compared to a net gain of $12.5 million ($8.0 million after tax, or $0.43 earnings per share) for the year ended December 31, 2009.

Total other operating income, which includes the changes in the valuation of financial instruments noted above and OTTI adjustments, was $7.6 million in the fourth quarter of 2010, compared to $7.7 million in the preceding quarter and $5.6 million for the fourth quarter a year ago. For the year, total other operating income was $29.1 million, compared to $43.7 million in 2009. There were no OTTI charges during the current fourth quarter as compared to $3.0 million in the prior quarter and none for the fourth quarter a year ago. OTTI charges for the year totaled $4.2 million as compared to $1.5 million in 2009. Total other operating income from core operations* (other operating income excluding fair value and OTTI adjustments) for the current quarter was $8.3 million, compared to $9.3 million the preceding quarter, and $7.0 million for the fourth quarter a year ago.  For the year, total other operating income from core operations* decreased to $31.6 million, compared to $32.7 million in 2009, primarily as a result of a decline in mortgage banking revenues in 2010.

"Mortgage loan production levels increased modestly during the fourth quarter, although gains on loan sales declined compared to the level recorded in the third quarter when we sold a portion of the loans we had accumulated through our Great Northwest Home Rush program," said Grescovich. "Deposit fees and other service charges decreased modestly during the quarter as activity levels for certain of these revenue sources declined slightly; however, these fees increased compared to the fourth quarter a year ago, primarily reflecting account growth and increased volumes of debit and credit card activity, which more than offset decreased overdraft charges." Income from mortgage banking operations was $2.1 million in the quarter ended December 31, 2010, compared to $2.5 million in the immediately preceding quarter and $1.3 million in the fourth quarter of 2009.  Deposit fees and other service charges were $5.5 million in the fourth quarter compared to $5.7 million in the preceding quarter and $5.3 million in the fourth quarter a year ago.

"Operating expenses decreased during the quarter compared to the preceding quarter, primarily due to a lower amount of valuation adjustments in the real estate owned portfolio than was recorded during the third quarter of 2010," said Grescovich. "Aside from the costs associated with real estate owned, our operating expenses were little changed from recent quarters. While we are working diligently to keep controllable operating expenses in line, we expect collection expenses and costs associated with real estate owned to remain elevated for a few more quarters as we work down our inventory of non-performing assets."

Total other operating expenses, or non-interest expenses, were $41.0 million in the fourth quarter of 2010, compared to $46.3 million in the preceding quarter and $34.8 million in the fourth quarter a year ago.  For the year, other operating expenses were $160.8 million compared to $142.1 million in 2009. The increase in operating expense for the year largely reflects charges, including valuation adjustments, related to Banner's real estate owned, which increased to $26.0 million for the year compared to $7.1 million a year ago.

*Earnings information excluding fair value and OTTI 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.

Balance Sheet Review

"Loan demand remained soft as both businesses and consumers continued to deleverage their balance sheets and remain very cautious in the current economic environment. In addition, we have continued to intentionally reduce our construction and land development loans during the past year, including additional reductions in the most recent quarter. As a result, total loans declined further in the fourth quarter," said Grescovich. 

Net loans were $3.31 billion at December 31, 2010, compared to $3.40 billion at September 30, 2010 and $3.69 billion a year ago. At December 31, 2010, our one-to-four family construction loans totaled $153.4 million, an $85.8 million reduction over the past year and a reduction of $501.6 million from their peak quarter-end balance of $655.0 million at June 30, 2007. Similarly, total construction, land and land development loans have declined by $796.4 million from their peak quarter-end balance of $1.24 billion at June 30, 2007.   

Total assets were $4.41 billion at December 31, 2010, compared to $4.60 billion at the end of the preceding quarter and $4.72 billion a year ago. Deposits totaled $3.59 billion at year-end, compared to $3.76 billion at the end of the preceding quarter and $3.87 billion a year ago. Non-interest-bearing accounts totaled $600 million at December 31, 2010, compared to $613 million at the end of the preceding quarter and $582 million a year ago, a year-over-year increase of 3%. At December 31, 2010, interest-bearing transaction and savings accounts were $1.43 billion, compared to $1.46 billion at the end of the preceding quarter and $1.34 billion a year ago, a year-over-year increase of 7%.  

"We made further progress in implementing our strategies to strengthen the franchise through our super community bank model," said Grescovich. "We have significantly reduced our reliance on higher cost certificates of deposit by emphasizing core deposit activity in non-interest-bearing and other transaction and savings deposit products. This strategy continues to help improve our cost of funds and increase 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 are expected to provide a substantial benefit in future periods."

Tangible stockholders' equity at December 31, 2010 was $502.9 million, including $119.0 million attributable to preferred stock. Tangible book value per common share was $3.40 at year-end. During 2010, Banner completed a common stock offering, issuing a total of 85,639,000 shares in the offering, resulting in net proceeds of approximately $161.6 million. At December 31, 2010, Banner had 113.2 million shares outstanding, compared to 21.5 million shares outstanding a year ago. Tangible common stockholders' equity was $383.9 million at December 31, 2010, or 8.73% of tangible assets, compared to $397.0 million, or 8.65% of tangible assets at September 30, 2010 and $276.7 million, or 5.87% of tangible assets a year ago. 

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 used a significant portion of the net proceeds from the offering to strengthen Banner Bank's regulatory capital ratios while retaining the balance for general working capital purposes, including additional capital investments in its subsidiary banks if appropriate. Through December 31, 2010, Banner Corporation had invested $110.0 million of the net proceeds as additional paid-in common equity in Banner Bank, although no additional equity investment was made during the most recent quarter. Banner Corporation's Tier 1 leverage capital to average assets ratio was 12.24% and its total capital to risk-weighted assets ratio was 16.88% at December 31, 2010. Banner Bank's Tier 1 leverage ratio was 10.84% at December 31, 2010, and in excess of the minimum level of 10% targeted in our Memorandum of Understanding agreed to with the FDIC.

Conference Call

Banner will host a conference call on Thursday, January 27, 2011, at 8:00 a.m. PST, to discuss fourth quarter and year-end results. The conference call can be accessed live by telephone at (480) 629-9723 to participate in the call. To listen to the call online, go to the Company's website at . A replay will be available for a week at (303) 590-3030, using access code 4399064.

About the Company

Banner Corporation is a $4.41 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 . 

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 and may lead to increased losses and non-performing assets and may result in our allowance for loan losses not being adequate to cover actual losses; 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 and 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; our ability to manage loan delinquency rates; 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; the economic impact of 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 2011 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.

CONTACT: Mark J. Grescovich, President & CEO Lloyd W. Baker, CFO (509) 527-3636