BANR - Banner Corporation Reports Net Income of $33.3 Million or $0.95 Per Diluted Share in First Quarter 2019; Revenue Grows by 11% from First Quarter of 2018; Completion of Skagit Bank Integration Complemented by Good Core Deposit Growth

WALLA WALLA, Wash., April 24, 2019 (GLOBE NEWSWIRE) -- Banner Corporation (NASDAQ GSM: BANR) ("Banner"), the parent company of Banner Bank and Islanders Bank, today reported net income in the first quarter of 2019 was $33.3 million, or $0.95 per diluted share, compared to $37.5 million, or $1.09 per diluted share, in the preceding quarter and $28.8 million, or $0.89 per diluted share, in the first quarter of 2018.  First quarter results include a $676,000 write-down on a former administration building as well as $2.1 million of acquisition related expenses, compared to $4.6 million of acquisition related expenses in the preceding quarter and no acquisition related expenses in the first quarter a year ago.  In addition, fourth quarter 2018 profits included a $5.5 million benefit from the revaluation of the Company’s deferred tax asset.

“Our first quarter operating performance continued to reflect the success of our super community bank strategy, which produced solid revenue and additional low-cost core deposit growth,” stated Mark J. Grescovich, President and Chief Executive Officer.  “During the quarter, we also benefited from the successful completion of the integration of the Skagit Bank acquisition, which further expands our presence in the growing communities of Northwest Washington.  The acquisition of Skagit Bank added $916 million in assets and, after consolidation, six banking locations along the I-5 corridor from Seattle to the Canadian border.”

At March 31, 2019, Banner Corporation had $11.73 billion in assets, $8.60 billion in net loans and $9.38 billion in deposits.  Banner operates 176 branch offices located in eight of the top 20 largest western Metropolitan Statistical Areas by population.

First Quarter 2019 Highlights

• Revenues were $134.2 million during the quarter ended March 31, 2019, compared to $138.5 million during the preceding quarter and increased 11% compared to $120.7 million during the first quarter a year ago.
• Net interest income, before the provision for loan losses, was $116.1 million, compared to $117.5 million in the preceding quarter and increased 17% from $99.4 million in the first quarter a year ago.
• Net interest margin was 4.37% for the current quarter, compared to 4.47% in the preceding quarter and 4.35% in the first quarter a year ago.
• Net loans receivable increased modestly to $8.60 billion at March 31, 2019, compared to $8.59 billion at December 31, 2018 and increased 15% when compared to $7.46 billion at March 31, 2018.
• Provision for loan losses was $2.0 million for the quarter, increasing the allowance for loan losses to $97.3 million, or 1.12% of total loans, as of March 31, 2019.
• Core deposits increased 1% to $8.21 billion compared to the preceding quarter and increased 9% compared to a year ago.  Core deposits represented 88% of total deposits at March 31, 2019.
• Quarterly dividends to shareholders for the current quarter were $0.41 per share, an increase of 17% from the quarterly dividend for the first quarter a year ago.
• Common shareholders’ equity per share increased to $42.99 at March 31, 2019, an increase of 2% from $42.03 at the preceding quarter end and an increase of 11% from $38.68 a year ago.
• Tangible common shareholders' equity per share* increased to $32.47 at March 31, 2019, an increase of 3% from $31.45 at the preceding quarter end and an increase of 6% from $30.54 a year ago.
• Non-performing assets increased to $22.0 million, or 0.19% of total assets, at March 31, 2019, compared to $18.9 million, or 0.16% of total assets three months earlier, but decreased when compared to $23.5 million, or 0.23% of total assets, at March 31, 2018.

*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), and references to revenue from core operations (which excludes fair value adjustments and gain (loss) on the sale of securities from the total of net interest income before provision for loan losses and non-interest income) and the adjusted efficiency ratio (which excludes acquisition related expenses, amortization of core deposit intangibles, real estate owned gain (loss) and state/municipal taxes from non-interest expense divided by 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 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.

Certain reclassifications have been made to the 2018 Consolidated Financial Statements and/or schedules to conform to the 2019 presentation.  These reclassifications have affected certain line items and ratios for the prior periods but have not changed net income or shareholders’ equity for those periods.  The effect of these reclassifications is considered immaterial.

Recent Events

On November 1, 2018, Banner completed its acquisition of Skagit Bancorp, Inc. ("Skagit") and its wholly-owned subsidiary, Skagit Bank, of Burlington, Washington.  As of the closing of the transaction, Skagit Bank had eleven retail branches along the I-5 corridor from Seattle to the Canadian border.  Pursuant to the previously announced terms of the acquisition, Skagit shareholders received 5.6664 shares of Banner common stock in exchange for each share of Skagit common stock, plus cash in lieu of any fractional shares and to cancel Skagit stock options for a total consideration paid of $180.0 million.

The Skagit merger was accounted for using the acquisition method of accounting.  Accordingly, the assets (including identifiable intangible assets) and the liabilities of Skagit were measured at their respective estimated fair values as of the merger date. The excess of the purchase price over the fair value of the net assets acquired was attributed to goodwill.  The fair value on the merger date represents management's best estimates based on available information and facts and circumstances in existence on the merger date.  The acquisition accounting is subject to adjustment within a measurement period of one year from the acquisition date.  The acquisition provided $915.8 million of assets, $632.4 million of loans, and $810.2 million of deposits to Banner.

Income Statement Review

“Our net interest margin increased slightly from a year ago and contracted during the quarter reflecting rising deposit costs and variability in the discount accretion on acquired loans,” said Grescovich.  Banner's net interest margin was 4.37% for the first quarter of 2019, a ten basis-point decrease compared to 4.47% in the preceding quarter and a two basis-point improvement compared to 4.35% in the first quarter a year ago.  Acquisition accounting adjustments added seven basis points to the net interest margin in the current quarter, compared to 12 basis points in the preceding quarter and eight basis points in the first quarter a year ago.  The total purchase discount for acquired loans was $24.2 million at March 31, 2019, compared to $25.7 million at December 31, 2018 and $19.4 million at March 31, 2018.

Average interest-earning asset yields decreased one basis point to 4.89% compared to 4.90% for the preceding quarter and increased 30 basis points compared to 4.59% in the first quarter a year ago.  Average loan yields decreased six basis points to 5.31% compared to 5.37% in the preceding quarter and increased 33 basis points compared to 4.98% in the first quarter a year ago.  Loan discount accretion added nine basis points to loan yields in the first quarter of 2019, compared to 16 basis points in the preceding quarter and ten basis points in the first quarter a year ago.  Deposit costs were 0.37% in the first quarter of 2019, a five basis-point increase compared to the preceding quarter and a 21 basis-point increase compared to the first quarter a year ago.  The total cost of funds was 0.56% during the first quarter of 2019, a ten basis-point increase compared to the preceding quarter and a 31 basis-point increase compared to the first quarter a year ago, largely reflecting an increase in the cost of deposits and in FHLB advances.

Primarily as a result of the origination of new loans, the renewal of acquired loans out of the discounted acquired loan portfolio and net charge-offs, Banner recorded a $2.0 million provision for loan losses in the current quarter, compared to $2.5 million recorded in the prior quarter and $2.0 million in the same quarter a year ago.

Deposit fees and other service charges were $12.6 million in the first quarter of 2019, compared to $12.5 million in the preceding quarter and $11.3 million in the first quarter a year ago.  Mortgage banking revenues, including gains on one- to four-family and multifamily loan sales and loan servicing fees, were $3.4 million in the first quarter, compared to $6.0 million in the preceding quarter and $4.9 million in the first quarter of 2018.  The lower fees reflected seasonal declines in multifamily and residential mortgage loan production combined with a compression in gain-on-sale spreads.  Home purchase activity accounted for 80% of one- to four-family mortgage loan originations in the first quarter of 2019, compared to 78% in the prior quarter and 72% in the first quarter of 2018.

Banner’s first quarter 2019 results included an $11,000 net gain for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value, principally comprised of certain investment securities held for trading and a $1,000 net gain on the sale of securities.  In the preceding quarter, results included a $198,000 net gain for fair value adjustments and an $885,000 net loss on the sale of securities.  In the first quarter a year ago, results included a $3.3 million net gain for fair value adjustments and a $4,000 net gain on the partial calls of securities.

Total revenues declined 3% to $134.2 million for the first quarter of 2019, compared to $138.5 million in the preceding quarter and increased 11% compared to $120.7 million in the first quarter a year ago.  Revenues from core operations* (revenues excluding gains and losses on the sale of securities and the net change in valuation of financial instruments) were $134.2 million in the first quarter of 2019, compared to $139.2 million in the preceding quarter and $117.4 million in the first quarter of 2018.

Total non-interest income was $18.1 million in the first quarter of 2019, compared to $21.0 million in the fourth quarter of 2018 and $21.4 million in the first quarter a year ago. The decline in non-interest income was primarily attributed to lower mortgage banking revenues, specifically lower gains on multifamily loan sales, during the first quarter of 2019 compared to prior periods.  In addition, fourth quarter 2018 miscellaneous non-interest income included $834,000 of non-recurring use tax refunds.

Banner’s total non-interest expense was $90.0 million in the first quarter of 2019, compared to $95.4 million in the preceding quarter and $81.7 million in the first quarter of 2018.  Acquisition related expenses were $2.1 million for the first quarter of 2019, compared to $4.6 million for the preceding quarter and no acquisition related expenses for the year ago quarter.  Banner’s efficiency ratio improved to 67.06% for the current quarter, compared to 68.89% in the preceding quarter and 67.67% in the year ago quarter.  Banner’s adjusted efficiency ratio* was 63.32% for the current quarter, compared to 63.06% in the preceding quarter and 67.42% in the year ago quarter.

For the first quarter of 2019, Banner recorded $8.9 million in state and federal income tax expense for an effective tax rate of 21.0%, reflecting in part the benefits from tax exempt income sources.  Banner’s normal, expected statutory income tax rate is 23.7%, representing a blend of the statutory federal income tax rate of 21.0% and apportioned effects of the state income tax rates.  Fourth quarter 2018 income tax expense included a $5.5 million benefit from the revaluation of the company’s deferred tax asset.

Balance Sheet Review

Total assets were $11.73 billion at March 31, 2019, compared to $11.87 billion at December 31, 2018 and $10.32 billion at March 31, 2018.  The total of securities and interest-bearing deposits held at other banks was $1.89 billion at March 31, 2019, compared to $1.94 billion at December 31, 2018 and $1.75 billion at March 31, 2018.  The average effective duration of Banner's securities portfolio was approximately 3.0 years at March 31, 2019, compared to 3.9 years at March 31, 2018.

Net loans receivable increased modestly to $8.60 billion at March 31, 2019, compared to $8.59 billion at December 31, 2018 and increased 15% when compared to $7.46 billion at March 31, 2018.  The year-over-year increase in net loans included $631.7 million of portfolio loans acquired in the Skagit acquisition during the preceding quarter.  Commercial real estate and multifamily real estate loans increased modestly to $3.95 billion at March 31, 2019, compared to $3.93 billion at December 31, 2018, and increased 14% compared to $3.48 billion a year ago.  Commercial business loans increased 3% to $1.52 billion at March 31, 2019, compared to $1.48 billion at December 31, 2018, and increased 18% compared to $1.30 billion a year ago.  Agricultural business loans decreased by 8% to $373.3 million at March 31, 2019, compared to $404.9 million three months earlier and increased by 22% compared to $307.2 million a year ago.  Total construction, land and land development loans decreased slightly to $1.10 billion at March 31, 2019, compared to $1.11 billion at December 31, 2018 and increased 16% compared to $948.7 million a year earlier.  Consumer loans decreased slightly to $777.4 million at March 31, 2019, compared to $785.0 million at December 31, 2018 and increased 12% compared to $693.0 million a year ago.  One- to four-family loans were $967.6 million at March 31, 2019, compared to $973.6 million at December 31, 2018 and increased 16% compared to $833.6 million a year ago.

Loans held for sale decreased substantially to $45.9 million at March 31, 2019, compared to $171.0 million at December 31, 2018 and $141.8 million at March 31, 2018.  The volume of one- to four- family residential mortgage loans sold was $107.2 million in the current quarter, compared to $130.1 million in the preceding quarter and $124.5 million in the first quarter a year ago.  During the first quarter of 2019, Banner sold $149.9 million in multifamily loans, compared to $26.8 million in the preceding quarter and no sales of multifamily loans in the first quarter a year ago.

Total deposits decreased slightly to $9.38 billion at March 31, 2019, compared to $9.48 billion at December 31, 2018 and increased 10% when compared to $8.54 billion a year ago, as the addition of both deposits from the Skagit acquisition and brokered certificates of deposit was partially offset by continuing declines in retail, or non-brokered, certificates of deposit.  Non-interest-bearing account balances increased 1% to $3.68 billion at March 31, 2019, compared to $3.66 billion at December 31, 2018 and increased 9% compared to $3.38 billion a year ago.  Core deposits (non-interest-bearing and interest-bearing transaction and savings accounts) increased 1% from the prior quarter and increased 9% compared to a year ago.  The core deposit balance at December 31, 2018 was positively impacted by $696.3 million of core deposits acquired in the Skagit acquisition.  Core deposits represented 88% of total deposits at March 31, 2019, compared to 86% of total deposits three months earlier and 88% of total deposits a year earlier.  Certificates of deposit decreased 12% to $1.16 billion at March 31, 2019, compared to $1.32 billion at December 31, 2018 and increased 14% compared to $1.02 billion a year earlier.  Brokered deposits decreased to $239.4 million at March 31, 2019, compared to $377.3 million at December 31, 2018 and increased 41% when compared to $169.5 million a year earlier.

On January 1, 2019, Banner adopted Accounting Standard Update (ASU) No. 2016-02, Leases (Topic 842).  In connection with the adoption of this ASU, Banner recorded a $51 million lease right of use asset and a $53 million lease liability.  These amounts are presented in the Statement of Financial Condition in other assets and other liabilities.

At March 31, 2019, total common shareholders' equity was $1.51 billion, or 12.88% of assets, compared to $1.48 billion or 12.46% of assets at December 31, 2018 and $1.25 billion or 12.16% of assets a year ago.  At March 31, 2018, tangible common shareholders' equity*, which excludes goodwill and other intangible assets, was $1.14 billion, or 10.05% of tangible assets*, compared to $1.11 billion, or 9.62% of tangible assets, at December 31, 2018 and $990.2 million, or 9.85% of tangible assets, a year ago.  Banner's tangible book value per share* increased to $32.47 at March 31, 2019, compared to $30.54 per share a year ago.

There were no repurchases of common stock during the first quarter of 2019.  During the fourth quarter of 2018, Banner repurchased 325,000 shares of its common stock and during the first quarter of 2018, Banner repurchased 269,711 shares of its common stock .  Banner 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 Act regulatory standards.  At March 31, 2019, Banner's common equity Tier 1 capital ratio was 12.53%, its Tier 1 leverage capital to average assets ratio was 10.73%, and its total capital to risk-weighted assets ratio was 13.55%.

Credit Quality

The allowance for loan losses was $97.3 million at March 31, 2019, or 1.12% of total loans outstanding and 504% of non-performing loans compared to $96.5 million at December 31, 2018, or 1.11% of total loans outstanding and 616% of non-performing loans, and $92.2 million at March 31, 2018, or 1.22% of total loans outstanding and 410% of non-performing loans.  Net loan charge-offs totaled $1.2 million in the first quarter, compared to net loan charge-offs of $1.3 million in the preceding quarter and net loan recoveries of $1.2 million in the first quarter a year ago.  Primarily as a result of the origination of new loans, the renewal of acquired loans out of the discounted acquired loan portfolio and net charge-offs, Banner recorded a $2.0 million provision for loan losses in the current quarter, compared to $2.5 million recorded in the prior quarter and $2.0 million in the year ago quarter.  Non-performing loans were $19.3 million at March 31, 2019, compared to $15.7 million at December 31, 2018 and $22.5 million a year ago.  Real estate owned and other repossessed assets were $2.7 million at March 31, 2019, compared to $3.2 million at December 31, 2018 and $1.0 million a year ago.  The increase compared to a year ago primarily reflects $2.6 million of real estate owned acquired in the Skagit acquisition.

In accordance with acquisition accounting, loans acquired from acquisitions 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.  At March 31, 2019, the total purchase discount for acquired loans was $24.2 million.

Banner's non-performing assets were $22.0 million, or 0.19% of total assets, at March 31, 2019, compared to $18.9 million, or 0.16% of total assets, at December 31, 2018, and $23.5 million, or 0.23% of total assets, a year ago.  In addition to non-performing assets, purchased credit-impaired loans decreased to $13.3 million at March 31, 2019, when compared to $14.4 million at December 31, 2018, and $19.3 million at March 31, 2018.

Conference Call

Banner will host a conference call on Thursday, April 25, 2019, at 8:00 a.m. PDT, to discuss its first 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 10129817, or at www.bannerbank.com.

About the Company

Banner Corporation is an $11.73 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 "may," “believe,” “will,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” "potential," 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) expected revenues, cost savings, synergies and other benefits from the Skagit acquisition might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected; (2) 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; (3) 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; (4) competitive pressures among depository institutions; (5) interest rate movements and their impact on customer behavior and net interest margin; (6) the impact of repricing and competitors' pricing initiatives on loan and deposit products; (7) fluctuations in real estate values; (8) the ability to adapt successfully to technological changes to meet customers' needs and developments in the market place; (9) the ability to access cost-effective funding; (10) changes in financial markets; (11) changes in economic conditions in general and in Washington, Idaho, Oregon and California in particular; (12) the costs, effects and outcomes of litigation; (13) legislation or regulatory changes, including but not limited to the impact of the Dodd-Frank Act and regulations adopted thereunder, changes in regulatory capital requirements pursuant to 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; (14) changes in accounting principles, policies or guidelines; (15) future acquisitions by Banner of other depository institutions or lines of business; (16) future goodwill impairment due to changes in Banner's business, changes in market conditions, or other factors and (17) 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.

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)

The following table shows loan originations (excluding loans held for sale) activity for the three months ending March 31, 2019, December 31, 2018, and March 31, 2018 (in thousands):