BANR

Banner Corporation (BANR)

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Banner Corporation (BANR)

Q2 2008 Earnings Call

July 29, 2008 10:00 am ET

Executives

D. Michael Jones – President & Chief Executive Officer

Albert H. Marshall – Secretary

Lloyd W. Baker – Executive Vice President & Chief Financial Officer

Analysts

Jeffrey Rulis – D.A. Davidson & Co.

Sara Hasan - McAdams Wright Ragen

Greg Eisen - ICM Asset Management

Joseph Fenech - Sandler O’Neill & Partners L.P.

Kipling J. Peterson - Columbia Ventures Corporation

Presentation

Operator

Welcome to the Banner Corporation second quarter 2008 conference call. (Operator Instructions) I would now like to turn the conference over to Mike Jones.

D. Michael Jones

First of all I wanted to be able to apologize to all you for somewhat lateness of our release of earnings which normally would have been a week earlier than today. However, at the end of June the FDIC in the State of Washington were conducting their annual examination of our bank and we wanted to make sure that they were done with that examination, which they completed prior to last week and to be sure that they would not object to our assessments and estimates and provisions that were in the second quarter results. They’ve completed our examination and therefore were comfortable having this conference call with you to release our earnings yesterday afternoon.

I actually want to start off and talk about three areas but before I do that I need Al Marshall to read a paragraph if you would please. He’s the Secretary of the corporation.

Albert H. Marshall

Our presentation today discusses Banner’s business outlook and it will include forward-looking statements. Those statements include descriptions of management’s plans, objectives or goals for future operations, products or services, forecasts of financial or other performance measures and statements about Banner’s general outlook for economic and other conditions. We also may make other forward-looking statements in the question and answer period following management’s discussion. These forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ are available from the earnings press release that was released yesterday and a recently filed Form 10Q for the quarter ended March 31, 2008. Forward-looking statements are effective only as of the date they are made and Banner assumes no obligation to update information concerning its expectations.

D. Michael Jones

I should also mention before I get started that sitting here with me is Lloyd Baker, the Chief Financial Officer of the company and Lloyd will have some comments here in a minute. But before we get started I really have wanted to address three major areas in this quarterly earnings release and talk a little bit about those. The first and probably the most important one is the loan loss provision and the level of non-performing loans and charge offs. As you’re probably were somewhat surprised we decided to significantly increase our provision for loan losses to the area of approximately $15 million for the quarter and except for the provision that’s in there as it relates to the growth that’s taken place in other segments of our loan portfolio, except for one-to-four residential and lots, all of the additional provision relates to the activities taking forth in that one-to-four construction area and related A&D loans.

The level of charge offs of $7 million, which is a very high number for us, is frankly a way of us being proactive in recognizing the change in values that were taking place in some of this real estate as we went forward and we have elected to write down some of these loans as we see these new appraisals at lower levels than they previously were at. The level of $90 million of non-performing loans is extraordinarily high for us but it also almost all relates to the one-to-four construction and related A&D loans that we have in the portfolio. By way of refreshing you peoples’ memory 80% of our A&D and one-to-four construction portfolio is done west of the Cascade in the greater Seattle/Puget Sound area and in the greater Portland, Oregon area and approximately that’s split a little bit 50/50, maybe slightly larger in the Puget Sound area than it is in the Portland area at the end of June.

However, during that and frankly the biggest growth that took place in our non-performing loans in the second quarter was in the Puget Sound area and in and around the greater Seattle area. Actually as we look at it very much more closely geographically it’s the classic case that always happens in real estate of the puddle tends to dry from the edges and the edges around greater Seattle are in the areas south of Tacoma and the area going south and bounce up towards our state capital, Olympia, but in the lazy Thurston County area over in the area of Puyallup and out into the area of Auburn and that particular area out there. And then going north you run into an area of north of Paine Field which is where Boeing builds their airplanes, area called Marysville and Arlington; those are the edges of the puddle for us. We don’t have a lot in those areas but whatever we have in that area is troubled and as a result of that that’s primarily the build up that’s taking place in our non-performing loans.

We, on the other hand, are feeling much better about how things are going in Portland and Boise as it relates to our portfolios there. The collection activities have been robust and we’ve actually had some significant successes in collecting a number of those loans in those two markets. We actually think at the end of the day as it turns out that the one-to-four construction portfolio in Boise, Idaho will clear up faster than any of the others. But in a way that’s to be expected because that’s a market we sensed a problem in first and backed away from it some 18 months ago versus some of the other markets where we continued to go for a few months beyond that. But nevertheless, Boise’s seeming to clear itself up fairly nicely and Portland also is making real progress in those particular areas. Properties are selling and they’re selling at a more rapid rate than they were earlier this year.

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