Banner Corporation Reports Third Quarter Net Income of $25.1 Million, or $0.76 per Diluted Share; Highlighted by Strong Loan and Core Deposit Growth

WALLA WALLA, Wash., Oct. 25, 2017 (GLOBE NEWSWIRE) -- Banner Corporation (NASDAQ GSM:BANR), the parent company of Banner Bank and Islanders Bank, today reported that year-over-year revenue growth contributed to solid third quarter and year-to-date 2017 operating results.  Net income in the third quarter of 2017 was $25.1 million, or $0.76 per diluted share, compared to $25.5 million, or $0.77 per diluted share, in the preceding quarter and increased 5% compared to $23.9 million, or $0.70 per diluted share, in the third quarter a year ago.  There were no acquisition-related expenses in the third quarter of 2017 or the preceding quarter.  In the third quarter a year ago, acquisition-related expenses totaled $1.7 million.  In the first nine months of 2017, net income increased 19% to $74.3 million, or $2.25 per diluted share, compared to $62.6 million, or $1.83 per diluted share, in the first nine months of 2016.  There were no acquisition-related costs in the first nine months of 2017, compared to $10.9 million in acquisition-related expenses in the first nine months of 2016.

"Our third quarter financial results were highlighted by strong loan and core deposit growth and solid net interest income reflecting earning asset expansion and our strong net interest margin," stated Mark J. Grescovich, President and Chief Executive Officer.  "While we experienced a significant decrease in accretion income on loans acquired in merger transactions compared to recent quarters, strong business activity resulted in both loan and core deposit growth for the quarter and year to date, generating meaningful increases in contractual net interest income and deposit fees.  Earlier this year we crossed the threshold of $10.0 billion in total assets, incurring increased expenses related to enhanced infrastructure and regulatory compliance costs.  Although increasing regulatory costs are a significant headwind, we are continuing to successfully execute our strategies to deliver revenue growth, sustainable profitability and increasing value to our shareholders while still maintaining our moderate risk profile."

At September 30, 2017, Banner Corporation had $10.44 billion in assets, $7.77 billion in net loans and $8.54 billion in deposits.  Banner operates 178 branch offices located in eight of the top 20 largest western Metropolitan Statistical Areas by population.

Third Quarter 2017 Highlights

• Net income was $25.1 million, compared to $25.5 million in the preceding quarter and increased 5% compared to $23.9 million in the third quarter of 2016.
• Return on average assets was 0.97% in the current quarter, compared to 1.01% in the preceding quarter and 0.96% in the same quarter a year ago.
• Revenues from core operations* were $120.8 million, compared to $122.9 million in the preceding quarter, and increased 3% compared to $117.5 million in the third quarter a year ago.
• Net interest margin was 4.22% for the current quarter, compared to 4.33% in the preceding quarter and 4.15% in the third quarter a year ago.
• Deposit fees and other service charges were $13.3 million, compared to $13.2 million in the preceding quarter and a 3% increase compared to $12.9 million in the third quarter a year ago.
• Provision for loan losses was $2.0 million, increasing the allowance for loan losses to $89.1 million or 1.15% of total loans.
• Net loans receivable increased 3% to $7.69 billion at September 30, 2017, compared to $7.46 billion at June 30, 2017, and increased 5% compared to $7.31 billion a year ago.
• Core deposits increased 2% during the current quarter and increased 6% compared to September 30, 2016.
• Core deposits represented 87% of total deposits at September 30, 2017.
• Quarterly dividends to shareholders were $0.25 per share.  In addition, Banner paid a special dividend of $1.00 per share on July 18, 2017.
• Common shareholders' tangible equity per share* was $31.79 at September 30, 2017, compared to $31.21 at the preceding quarter end and $31.14 a year ago.
• The ratio of tangible common shareholders' equity to tangible assets* remained strong at 10.39% at September 30, 2017, compared to 10.46% at the preceding quarter end and 11.03% a year ago.

*Revenues from core operations and non-interest income from core operations (both of which exclude fair value adjustments and gains and losses on the sale of securities), and references to tangible common shareholders' equity per share and the ratio of tangible common equity to tangible assets (both of which exclude goodwill and other intangible assets, net) 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 Banner's core operations reflected in the current quarter's results and facilitate the comparison of our performance with the performance of our peers.  Where applicable, comparable earnings information using GAAP financial measures is also presented.  See also Non-GAAP Financial Measures reconciliation tables on the last two pages of this press release.

Income Statement Review

Banner's third quarter net interest income, before the provision for loan losses, increased modestly to $100.2 million, compared to $99.7 million in the preceding quarter and increased 7% compared to $93.7 million in the third quarter a year ago.  In the first nine months of 2017, net interest income, before the provision for loan losses, increased 6% to $294.8 million compared to $277.9 million in the first nine months of 2016.

"Our net interest margin decreased compared to the preceding quarter, largely reflecting decreased purchased loan discount accretion," said Grescovich.  Banner's net interest margin was 4.22% for the third quarter of 2017, compared to 4.33% in the preceding quarter and reflected a seven basis point improvement compared to 4.15% in the third quarter a year ago.  Acquisition accounting adjustments, principally loan discount accretion, added 10 basis points to the net interest margin in the current quarter compared to 15 basis points in the preceding quarter and 11 basis points in the third quarter a year ago.  In the first nine months of 2017, Banner's net interest margin improved 11 basis points to 4.27% compared to 4.16% in the first nine months of 2016.  Purchase accounting adjustments added 12 basis points to the net interest margin for the first nine months of 2017 compared to 14 basis points for the first nine months of 2016.  The total purchase discount for acquired loans was $23.4 million at September 30, 2017, down from $25.8 million at June 30, 2017 and $34.9 million a year ago due to discount accretion.

Average interest-earning asset yields decreased ten basis points to 4.43% compared to 4.53% for the preceding quarter and increased nine basis points compared to 4.34% in the third quarter a year ago.  Average loan yields decreased ten basis points to 4.88% compared to the preceding quarter and increased ten basis points from the third quarter a year ago.  Loan discount accretion added 12 basis points to loan yields in the third quarter, compared to 18 basis points in the preceding quarter and 15 basis points in the third quarter a year ago.  Deposit costs were 0.15% in the third quarter, the same as in the preceding quarter and a one basis point increase compared to the third quarter a year ago.  The total cost of funds increased one basis point to 0.23% during the third quarter compared to 0.22% for the preceding quarter and 0.19% for the third quarter a year ago.

"While our asset quality metrics remain strong, we modestly increased the loan loss allowance during the quarter and expect to continue adding to the allowance as we strive to maintain solid reserves and a moderate risk profile," said Grescovich.  Largely as a result of the addition of new loans and the renewal of acquired loans out of the discounted loan portfolio as well as net charge-offs, Banner recorded a $2.0 million provision for loan losses during the third quarter, the same as in the preceding quarter and the year ago quarter.

Deposit fees and other service charges were $13.3 million in the third quarter, a modest increase compared to $13.2 million in the preceding quarter and a 3% increase compared to $12.9 million in the third quarter a year ago.

Banner's mortgage banking revenues, including gains on one- to four-family and multifamily loan sales and loan servicing fees, decreased to $4.5 million in the third quarter compared to $6.8 million in the preceding quarter and $8.1 million in the third quarter of 2016.  Sales of one- to four-family loans in the current quarter resulted in gains of $3.7 million compared to $4.4 million in the preceding quarter.  The decrease was due to a decline in spreads on one- to four-family loan originations and sales during the quarter.  Home purchase activity accounted for 77% of third quarter one- to four-family mortgage loan originations.  Sales of multifamily loans in the current quarter resulted in gains of $268,000, while sales of multifamily loans generated $1.8 million of gains in the preceding quarter.  The decline in multifamily gain on sale income was due to a combination of declining market spreads on sold loans in the current quarter and the transition to hedge accounting in previous quarter.

Third quarter 2017 results included a $493,000 net loss for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value that was partially offset by a $270,000 net gain on the sale of securities.  In the preceding quarter, results included a $650,000 net loss for fair value adjustments and a $54,000 net loss on the sale of securities.  In the third quarter a year ago, results included a $1.1 million net loss for fair value adjustments that was partially offset by an $891,000 net gain on the sale of securities.

Total revenues decreased slightly to $120.5 million for the third quarter of 2017, compared to $122.2 million in the preceding quarter but increased 3% compared to $117.2 million in the third quarter a year ago.  In the first nine months of 2017, total revenues increased 5% to $358.4 million, compared to $341.9 million in the first nine months of 2016.  Revenues from core operations* (revenues excluding gains and losses on the sale of securities and net change in valuation of financial instruments) decreased to $120.8 million in the third quarter of 2017, compared to $122.9 million in the preceding quarter, but increased 3% compared to $117.5 million in the third quarter of 2016.  In the first nine months of 2017, revenues from core operations* increased 5% to $360.0 million, compared to $342.8 million in the first nine months of 2016.

Total non-interest income, which includes the changes in the valuation of financial instruments carried at fair value and gains and losses on the sale of securities, was $20.3 million in the third quarter of 2017, compared to $22.5 million in the second quarter of 2017 and $23.5 million in the third quarter a year ago.  In the first nine months of 2017, total non-interest income was $63.7 million compared to $64.0 million in the first nine months of 2016.  Non-interest income from core operations,* which excludes gains and losses on sale of securities and net changes in the valuation of financial instruments, was $20.6 million in the third quarter of 2017, compared to $23.2 million for the second quarter of 2017 and $23.7 million in the third quarter a year ago.  In the first nine months of 2017, non-interest income from core operations* was $65.3 million, compared to $64.9 million in the first nine months of 2016.

Banner's total non-interest expenses were $82.6 million in the third quarter of 2017, compared to $81.9 million in the preceding quarter and $79.1 million in the third quarter of 2016.  The current and preceding quarter's non-interest expenses included increased salary and employee benefits and elevated costs for professional services as compared to the third quarter a year ago largely due to enhanced regulatory requirements attributable to compliance and risk management infrastructure build-out as a result of crossing the $10 billion asset threshold.  There were no acquisition-related expenses in the current quarter or in the preceding quarter, compared to $1.7 million in the third quarter a year ago.  In the first nine months of 2017, non-interest expense was $242.6 million compared to $243.0 million in the first nine months of 2016.  The first nine months of 2016 included $10.9 million of acquisition-related expenses.  There were no acquisition-related expenses in the first nine months of 2017.

For the third quarter of 2017, Banner recorded $10.9 million in state and federal income tax expense for an effective tax rate of 30.3%, which reflects normal statutory tax rates reduced by the effect of tax-exempt income, certain tax credits and  a $1.3 million annual return to provision adjustment related to filing our federal and state income tax returns.

Balance Sheet Review

Banner's total assets increased to $10.44 billion at September 30, 2017, from $10.20 billion at June 30, 2017 and $9.84 billion a year ago.  The total of securities and interest-bearing deposits held at other banks was $1.68 billion at September 30, 2017, compared to $1.66 billion at June 30, 2017 and $1.16 billion at December 31, 2016.  The increase in the securities portfolio during the year reflects Banner's leveraging strategy as it crossed the $10 billion in assets threshold in 2017.  In the third and fourth quarters of 2016, Banner reduced its holdings of securities and use of wholesale funding to ensure that it remained below $10 billion in total assets at December 31, 2016.  The average effective duration of Banner's securities portfolio was approximately 3.6 years at September 30, 2017, compared to 3.8 years at December 31, 2016 and 2.9 years at September 30, 2016.

"Net loans increased $222.4 million during the quarter and increased 5% year over year, with solid production in targeted loan types, including commercial business, commercial real estate, construction and development loans, residential real estate and consumer loans," said Grescovich.  "We see significant potential for growth in our loan origination pipelines due to the robust economic activity in the markets that we serve, particularly in the Pacific Northwest."

Net loans receivable increased 3% to $7.69 billion at September 30, 2017, compared to $7.46 billion at June 30, 2017, and increased 5% compared to $7.31 billion a year ago.  Commercial real estate and multifamily real estate loans increased slightly to $3.67 billion at September 30, 2017, compared to $3.62 billion at June 30, 2017, and increased 4% compared to $3.53 billion a year ago.  Commercial business loans increased 2% to $1.31 billion at September 30, 2017, compared to $1.29 billion three months earlier and increased 10% compared to $1.19 billion a year ago.  Agricultural business loans declined to $339.9 million at September 30, 2017, compared to $344.4 million three months earlier and $383.3 million a year ago.  Total construction, land and land development loans increased 8% to $878.4 million at September 30, 2017, compared to $811.5 million at June 30, 2017, and increased 10% compared to $797.3 million a year earlier.  Consumer loans increased to $701.2 million at September 30, 2017, compared to $687.8 million at June 30, 2017, and increased 7% compared to $657.2 million a year ago largely as a result of a successful second quarter campaign to generate additional home equity lines of credit.  One- to four-family loans increased $69.5 million during the quarter to $869.6 million as a result of an increase in the amount of loans originated for the portfolio compared to loans sold in the secondary market.

Loans held for sale increased to $71.9 million at September 30, 2017, compared to $66.2 million at June 30, 2017, but decreased compared to $123.1 million at September 30, 2016.  The volume of residential mortgage loans sold was $141.0 million in the current quarter compared to $131.0 million in the preceding quarter.  Banner sold $86.0 million of multifamily loans during the quarter ended September 30, 2017 and $114.8 million during the preceding quarter.  Loans held for sale at September 30, 2017 included $47.0 million of multifamily loans and $24.9 million of one- to four-family loans.

Total deposits were $8.54 billion at September 30, 2017, a modest increase compared to $8.48 billion at June 30, 2017, and a 5% increase compared to $8.11 billion a year ago, as strong core deposit growth was partially offset by continuing declines in certificates of deposit.  Non-interest-bearing account balances were $3.38 billion at September 30, 2017, compared to $3.25 billion at June 30, 2017 and increased 6% compared to $3.19 billion a year ago.  Interest-bearing transaction and savings accounts were $4.06 billion at September 30, 2017, compared to $4.02 billion at June 30, 2017 and increased 7% compared to $3.80 billion a year ago.  Certificates of deposit were $1.10 billion at September 30, 2017, compared to $1.21 billion at June 30, 2017 and $1.12 billion a year earlier.  Brokered deposits totaled $171.7 million at September 30, 2017, compared to $250.0 million at June 30, 2017 and $60.3 million a year ago.  The increase in brokered deposits compared to a year ago provided funding for the purchase of investment securities in connection with Banner's leveraging strategy subsequent to December 31, 2016.

Core deposits (non-interest bearing and interest-bearing transaction and savings accounts) increased 2% during the current quarter and increased 6% compared to September 30, 2016, reflecting additional account growth as well as increased balances from existing clients.  Core deposits represented 87% of total deposits September 30, 2017 compared to 86% of total deposits both at June 30, 2017 and a year earlier.  The average cost of deposits was 0.15% for the quarter ended September 30, 2017, the same as in the preceding quarter and a one basis point increase compared to the quarter ended September 30, 2016.

At September 30, 2017, total common shareholders' equity was $1.33 billion, or $39.90 per share, compared to $1.31 billion at June 30, 2017 and $1.33 billion a year ago.  At September 30, 2017, tangible common shareholders' equity*, which excludes goodwill and other intangible assets, was $1.06 billion, or 10.39% of tangible assets*, compared to $1.04 billion, or 10.46% of tangible assets, at June 30, 2017 and $1.05 billion, or 11.03% of tangible assets, a year ago.  Banner's tangible book value per share* increased to $31.79 at September 30, 2017, compared to $31.14 per share a year ago.

Banner Corporation and its subsidiary banks continue to maintain capital levels in excess of the requirements to be categorized as "well-capitalized" under the Basel III and Dodd Frank regulatory standards.  At September 30, 2017, Banner Corporation's common equity Tier 1 capital ratio was 11.16%, its Tier 1 leverage capital to average assets ratio was 11.49%, and its total capital to risk-weighted assets ratio was13.52%.

Credit Quality

The allowance for loan losses was $89.1 million at September 30, 2017, or 1.15% of total loans outstanding and 296% of non-performing loans compared to $84.2 million at September 30, 2016, or 1.14% of total loans outstanding and 309% of non-performing loans.  Banner had net charge-offs of $1.5 million in the third quarter compared to net recoveries of $59,000 in the preceding quarter and net recoveries of $902,000 in the third quarter a year ago.  Primarily as a result of the addition of new loans and the renewal of acquired loans out of the discounted loan portfolio, as well as the net charge offs, Banner recorded a $2.0 million provision for loan losses in the current quarter which was the same amount as recorded in the prior quarter and in the year ago quarter.  Non-performing loans were $30.1 million at September 30, 2017, compared to $21.9 million at June 30, 2017 and $27.3 million a year ago.  Real estate owned and other repossessed assets were $1.6 million at September 30, 2017, compared to $2.6 million at June 30, 2017 and $4.9 million a year ago.

In accordance with acquisition accounting, loans acquired from AmericanWest Bank and Siuslaw Bank in 2015 were recorded at their estimated fair value, which resulted in a net discount to the loans' contractual amounts, a portion of which reflects a discount for possible credit losses.  Credit discounts are included in the determination of fair value, and as a result, no allowance for loan and lease losses is recorded for acquired loans at the acquisition date.  Although the discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios, we believe it should be considered when comparing the current ratios to similar ratios in periods prior to the acquisitions of AmericanWest Bank and Siuslaw Bank.

Banner's non-performing assets were $31.7 million, or 0.30% of total assets, at September 30, 2017, compared to $24.5 million, or 0.24% of total assets, at June 30, 2017 and $32.2 million, or 0.33% of total assets, a year ago.  In addition to non-performing assets, purchased credit-impaired loans decreased to $23.2 million at September 30, 2017, compared to $26.3 million at June 30, 2017 and $38.7 million a year ago.

Subsequent Event

On October 6, 2017, Banner Bank completed the sale of its seven branches and related assets and liabilities in Utah to People's Intermountain Bank, a banking subsidiary of People's Utah Bancorp PUB.  Under the terms of the purchase and assumption agreement, the sale included approximately $255 million in loans and $160 million in deposits.  The deposit premium is estimated to be approximately $13.8 million based on average deposits at closing.

Conference Call

Banner will host a conference call on Thursday, October 26, 2017, at 8:00 a.m. PDT, to discuss its third quarter results.  To listen to the call on-line, go to www.bannerbank.com.  Investment professionals are invited to dial (866) 235-9915 to participate in the call.  A replay will be available for one week at (877) 344-7529 using access code 10112453, or at www.bannerbank.com.

About the Company

Banner Corporation is a $10.4 billion bank holding company operating two commercial banks in four Western states through a network of branches offering 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.

Forward-Looking Statements

When used in this press release and in other documents filed with or furnished to the Securities and Exchange Commission (the "SEC"), in press releases or other public stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "believe," "will," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "plans," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.  You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date such statements are made and based only on information then actually known to Banner.  Banner does not undertake and specifically disclaims 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 statements may relate to future financial performance, strategic plans or objectives, revenues or earnings projections, or other financial information.  By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements and could negatively affect Banner's operating and stock price performance.

Important factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: (1) the credit risks of lending activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses, which could necessitate additional provisions for loan losses, resulting both from loans originated and loans acquired from other financial institutions; (2) results of examinations by regulatory authorities, including the possibility that any such regulatory authority may, among other things, require increases in the allowance for loan losses or writing down of assets or impose restrictions or penalties with respect to Banner's activities; (3) competitive pressures among depository institutions; (4) interest rate movements and their impact on customer behavior and net interest margin; (5) the impact of repricing and competitors' pricing initiatives on loan and deposit products; (6) fluctuations in real estate values; (7) the ability to adapt successfully to technological changes to meet customers' needs and developments in the market place; (8) the ability to access cost-effective funding; (9) changes in financial markets; (10) changes in economic conditions in general and in Washington, Idaho, Oregon and California in particular; (11) the costs, effects and outcomes of litigation; (12) new legislation or regulatory changes, including but not limited to the Dodd-Frank Act and regulations adopted thereunder, changes in capital requirements pursuant to the Dodd-Frank Act and the implementation of the Basel III capital standards, other governmental initiatives affecting the financial services industry and changes in federal and/or state tax laws or interpretations thereof by taxing authorities; (13) changes in accounting principles, policies or guidelines; (14) future acquisitions by Banner of other depository institutions or lines of business; (15) future goodwill impairment due to changes in Banner's business, changes in market conditions, or other factors and (16) other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed from time to time in our filings with the Securities and Exchange Commission including our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K.

⁽¹⁾ Includes $1.0 million of purchased credit-impaired loans at September 30, 2017 compared to $835,000 at June 30, 2017, $470,000 at December 31, 2016 and $486,000 at September 30, 2016.
⁽²⁾ Delinquent loans include $2.9 million of delinquent purchased credit-impaired loans September 30, 2017 compared to $2.5 million at June 30, 2017, $1.7 million at December 31, 2016 and $3.6 million at September 30, 2016.