BANR - Banner Corporation Reports Net Income of $39.6 Million or $1.15 Per Diluted Share in Third Quarter 2019; Highlighted by Strong Core Deposit Growth

WALLA WALLA, Wash., Oct. 23, 2019 (GLOBE NEWSWIRE) -- Banner Corporation (NASDAQ GSM: BANR) ("Banner"), the parent company of Banner Bank and Islanders Bank, today reported net income of $39.6 million, or $1.15 per diluted share, in the third quarter of 2019, compared to $39.7 million, or $1.14 per diluted share, in the preceding quarter and a 5% increase when compared to $37.8 million, or $1.17 per diluted share, in the third quarter of 2018.  Third quarter of 2019 results include $676,000 of acquisition-related expenses, compared to $301,000 of acquisition-related expenses in the preceding quarter and $1.0 million in the third quarter of 2018.  In the first nine months of 2019, net income increased 14% to $112.6 million, or $3.23 per diluted share, compared to $99.0 million, or $3.05 per diluted share, in the first nine months a year ago.  The 2019 results include $3.1 million of acquisition-related expenses compared to $1.0 million of acquisition-related expenses for the 2018 period.

“Our third quarter 2019 performance continues to demonstrate the success of our super community bank model which is based on responsive service that generates client loyalty and attracts new client relationships," stated Mark J. Grescovich, President and Chief Executive Officer.  “We recently announced the pending acquisition of AltaPacific Bancorp, the holding company for AltaPacific Bank.  This transaction will increase Banner’s presence  in California by adding attractive core deposits and new commercial banking relationships within our existing geographic footprint.”

At September 30, 2019, Banner Corporation had $12.10 billion in assets, $8.74 billion in net loans and $9.73 billion in deposits.  Banner operates 172 branch offices, including branch offices located in eight of the top 20 largest western Metropolitan Statistical Areas by population.

Third Quarter 2019 Highlights

• Revenues decreased 1% to $137.5 million, compared to $139.4 million in the preceding quarter and increased 6% compared to $129.5 million in the third quarter a year ago.
  
• Net interest income, before the provision for loan losses, was $116.6 million, compared to $116.7 million in the preceding quarter and increased 7% from $109.1 million in the third quarter a year ago.
  
• Net interest margin was 4.25%, compared to 4.38% in the preceding quarter and 4.48% in the third quarter a year ago.
• Mortgage banking revenue increased to $6.6 million, compared to $5.9 million in the preceding quarter and increased 14% compared to $5.8 million in the third quarter a year ago.
  
• Return on average assets was 1.31% compared to 1.36% in the preceding quarter and 1.43% in the third quarter a year ago.
• Net loans receivable increased to $8.74 billion at September 30, 2019, compared to $8.65 billion at June 30, 2019, and increased 13% when compared to $7.73 billion at September 30, 2018.
  
• Non-performing assets remained low at $18.6 million, or 0.15% of total assets, at September 30, 2019, compared to $21.0 million, or 0.18% of total assets three months earlier, and $16.7 million, or 0.16% of total assets, at September 30, 2018.
  
• Provision for loan losses was $2.0 million, and the allowance for loan losses was $97.8 million, or 1.11% of total loans receivable, as of September 30, 2019.
  
• Core deposits increased 4% to $8.51 billion at September 30, 2019, compared to $8.22 billion at June 30, 2019 and increased 13% compared to $7.51 billion a year ago.  Core deposits represented 87% of total deposits at September 30, 2019.
  
• Quarterly dividends to shareholders were $0.41 per share.
• Common shareholders’ equity per share increased 2% to $44.80 at September 30, 2019, compared to $43.99 at the preceding quarter end and an increase of 14% from $39.26 a year ago.
  
• Tangible common shareholders' equity per share* increased 2% to $34.10 at September 30, 2019, compared to $33.36 at the preceding quarter end and an increase of 9% from $31.20 a year ago.
  
• Repurchased 400,000 shares of common stock at an average cost of $54.62 per share.

*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 adjusted revenue (which excludes fair value adjustments and net 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 adjusted revenue) 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.

Significant Recent Initiatives and Events

On July 24, 2019, Banner and AltaPacific Bancorp ("AltaPacific"), the holding company for AltaPacific Bank, entered into a definitive merger agreement pursuant to which Banner will acquire AltaPacific in an all-stock transaction, subject to the terms and conditions set forth therein.  Under the merger agreement, AltaPacific will merge with and into Banner, and immediately thereafter AltaPacific Bank will merge with and into Banner Bank.  The merger agreement specifies AltaPacific shareholders will receive 0.2712 shares of Banner common stock in exchange for each share of AltaPacific common stock, subject to potential adjustment as provided in the merger agreement. Based on the closing price of $54.19 per share of Banner common stock on July 23, 2019, the merger consideration would have an aggregate value of approximately $87.4 million.  The transaction is expected to close in the fourth quarter of 2019, subject to customary closing conditions.

AltaPacific Bank is an independent business bank headquartered in Santa Rosa, California and has additional banking offices in Glendora, Ontario, Riverside, San Bernardino and Temecula, California. The bank is focused on meeting the specialized needs of small to medium-sized businesses and professionals throughout California. At September 30, 2019, AltaPacific Bank had assets of $420 million, a loan portfolio of $334 million, and a deposit base of $297 million.  Banner expects the transaction to be immediately accretive to earnings per share, excluding one-time transaction expenses.  The combined company will have approximately $12.5 billion in assets.

Income Statement Review

Banner's net interest margin was 4.25% for the third quarter of 2019, a 13 basis-point decrease compared to 4.38% in the preceding quarter and a 23 basis-point decrease compared to 4.48% in the third quarter a year ago.  The decrease in net interest margin during the quarter reflects lower yields on average interest-earning assets largely as a result of two 25 basis point decreases in the targeted Fed Funds Rate in the third quarter coupled with a longer term decline in the 10 year treasury yield.  Acquisition accounting adjustments added six basis points to the net interest margin in the current quarter compared to seven basis points in the preceding quarter and 12 basis points in the third quarter a year ago.  The total purchase discount for acquired loans was $21.3 million at September 30, 2019, compared to $22.6 million at June 30, 2019, and $15.4 million at September 30, 2018.  In the first nine months of the year, Banner’s net interest margin was 4.33% compared to 4.41% in the first nine months of 2018.

Average interest-earning asset yields decreased 12 basis points to 4.79% compared to 4.91% for the preceding quarter and decreased four basis points compared to 4.83% in the third quarter a year ago.  Average loan yields decreased 13 basis points to 5.20% compared to 5.33% in the preceding quarter and decreased 11 basis points compared to 5.31% in the third quarter a year ago.  Loan discount accretion added seven basis points to loan yields in the third quarter of 2019, compared to nine basis points in the preceding quarter, and 15 basis points in the third quarter a year ago.  Deposit costs were 0.42% in the third quarter of 2019, a three basis-point increase compared to the preceding quarter and a 17 basis-point increase compared to the third quarter a year ago.  The total cost of funds was 0.57% during the third quarter of 2019, a one basis-point increase compared to the preceding quarter and a 20 basis-point increase compared to the third quarter a year ago.

Banner recorded a $2.0 million provision for loan losses in the current quarter, the same as in the prior quarter and the year ago quarter.  The provision is primarily a result of new loan originations, the renewal of acquired loans out of the discounted acquired loan portfolio and net charge-offs.

Total non-interest income was $20.9 million in the third quarter of 2019, compared to $22.7 million in the second quarter of 2019 and $20.4 million in the third quarter a year ago.  Deposit fees and other service charges were $10.3 million in the third quarter of 2019, compared to $14.0 million in the preceding quarter and $12.3 million in the third quarter a year ago.  The decrease in deposit fees and other service charges is primarily a result of Banner becoming subject to the Durbin Amendment on July 1, 2019, which reduced the amount of interchange fees Banner can charge for certain debit card transactions.  Mortgage banking revenues, including gains on one- to four-family and multifamily loan sales and loan servicing fees, increased to $6.6 million in the third quarter, compared to $5.9 million in the preceding quarter and $5.8 million in the third quarter of 2018.  The higher mortgage banking revenue reflected an increase in residential and multifamily mortgage held-for-sale loan production.  The increase in residential held-for-sale loan production was primarily due to increased refinance activity.  Home purchase activity accounted for 56% of one- to four-family mortgage loan originations in the third quarter of 2019, compared to 77% in the prior quarter and 82% in the third quarter of 2018.  In the first nine months of 2019, total non-interest income was $61.7 million, compared to $63.0 million in the first nine months of 2018.

Banner’s third quarter 2019 results included a $69,000 net loss 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 $2,000 net loss on the sale of securities.  In the preceding quarter, results included an $114,000 net loss for fair value adjustments and a $28,000 net loss on the sale of securities.  In the third quarter a year ago, results included a $45,000 net gain for fair value adjustments.

Total revenue was $137.5 million for the third quarter of 2019, compared to $139.4 million in the preceding quarter and increased 6% compared to $129.5 million in the third quarter a year ago.  Year-to-date, total revenue increased 9% to $411.1 million compared to $376.5 million for the same period one year earlier.  Adjusted revenue* (the total of net interest income before provision for loan losses and non-interest income revenue excluding the net gain and loss on the sale of securities and the net change in valuation of financial instruments) was $137.6 million in the third quarter of 2019, compared to $139.5 million in the preceding quarter and $129.4 million in the third quarter of 2018.  In the first nine months of the year, adjusted revenue* was $411.3 million, compared to $372.9 million in the first nine months of 2018.

Banner’s total non-interest expense was $87.3 million in the third quarter of 2019, compared to $86.7 million in the preceding quarter and $81.6 million in the third quarter of 2018.  Acquisition-related expenses were $676,000 for the third quarter of 2019, compared to $301,000 for the preceding quarter, and $1.0 million in the third quarter of 2018.  Other non-interest expense items of significance for the third quarter of 2019 include a credit of $2.7 million for previously paid deposit insurance premiums which resulted in a net deposit insurance benefit of $1.6 million for the quarter, which came as a result of the FDIC exceeding its stated Deposit Insurance Fund Reserve Ratio.  This net deposit insurance benefit compares to a deposit insurance expense of $1.4 million in the preceding quarter and a deposit insurance expense of $991,000 in the third quarter of 2018.  The current quarter also includes a $1.6 million adjustment to salary and employee benefits expense as a result of Banner decreasing the discount rate used to calculate its liability associated with deferred compensation plans.  Year-to-date, total non-interest expense was $264.0 million, compared to $246.0 million in the same period a year earlier.  Banner’s efficiency ratio was 63.50% for the current quarter, compared to 62.22% in the preceding quarter and 63.04% in the year ago quarter.  Banner’s adjusted efficiency ratio* was 60.71% for the current quarter, compared to 59.56% in the preceding quarter and 60.21% in the year ago quarter.

For the third quarter of 2019, Banner recorded $8.6 million in state and federal income tax expense for an effective tax rate of 17.9%, reflecting a refund of state income taxes totaling $1.2 million as well as adjustments related to filing its federal and state income tax returns and 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.

Balance Sheet Review

Total assets increased to $12.10 billion at September 30, 2019, compared to $11.85 billion at June 30, 2019, and $10.51 billion at September 30, 2018.  The total of securities and interest-bearing deposits held at other banks was $1.87 billion at both September 30, 2019 and June 30, 2019. The total of securities and interest-bearing deposits held at other banks was $1.76 billion at September 30, 2018.  The average effective duration of Banner's securities portfolio was approximately 3.1 years at September 30, 2019, compared to 4.2 years at September 30, 2018.

Net loans receivable increased to $8.74 billion at September 30, 2019, compared to $8.65 billion at June 30, 2019, and increased 13% when compared to $7.73 billion at September 30, 2018.  The year-over-year increase in net loans included $631.7 million of portfolio loans acquired in the Skagit acquisition during the fourth quarter of 2018.  Commercial real estate and multifamily real estate loans were $4.01 billion at September 30, 2019, compared to $3.95 billion at June 30, 2019, and increased 14% compared to $3.52 billion a year ago.  Commercial business loans increased modestly to $1.62 billion at September 30, 2019, compared to $1.60 billion at June 30, 2019, and increased 19% compared to $1.36 billion a year ago.  Agricultural business loans increased by 3% to $390.5 million at September 30, 2019, compared to $380.8 million three months earlier and increased by 9% compared to $360.0 million a year ago.  Total construction, land and land development loans were $1.08 billion at September 30, 2019, unchanged from June 30, 2019, and a 6% increase compared to $1.02 billion a year earlier.  Consumer loans decreased slightly to $779.6 million at September 30, 2019, compared to $790.0 million at June 30, 2019, and increased 10% compared to $710.5 million a year ago.  One- to four-family loans increased modestly to $947.5 million at September 30, 2019, compared to $944.6 million at June 30, 2019, and increased 12% compared to $849.9 million a year ago.

Loans held for sale increased substantially to $244.9 million at September 30, 2019, compared to $170.7 million at June 30, 2019, and $72.9 million at September 30, 2018.  The volume of one- to four- family residential mortgage loans sold was $204.6 million in the current quarter, compared to $139.0 million in the preceding quarter and $134.1 million in the third quarter a year ago.  During the third quarter of 2019, Banner sold $79.4 million in multifamily loans.  Banner did not sell any multifamily loans in the preceding quarter and sold $94.0 million in the third quarter a year ago.

Total deposits increased 5% to $9.73 billion at September 30, 2019, compared to $9.29 billion at June 30, 2019, and increased 12% when compared to $8.69 billion a year ago.  Non-interest-bearing account balances increased 6% to $3.89 billion at September 30, 2019, compared to $3.67 billion at June 30, 2019, and increased 12% compared to $3.47 billion a year ago.  Core deposits (non-interest-bearing and interest-bearing transaction and savings accounts) increased 4% from the prior quarter and increased 13% compared to a year ago.  Core deposits represented 87% of total deposits at September 30, 2019, compared to 88% of total deposits at June 30, 2019, and 86% of total deposits a year earlier.  Certificates of deposit increased 14% to $1.22 billion at September 30, 2019, compared to $1.07 billion at June 30, 2019, and increased 3% compared to $1.18 billion a year earlier.  The increase in certificates of deposit primarily reflects the increase in brokered deposits to $299.5 million at September 30, 2019, compared to $138.4 million at June 30, 2019 and were $352.2 million a year ago.  The increase in brokered deposits reflects the decision to fund a smaller portion of the balance sheet with FHLB borrowings.  FHLB borrowings were reduced to $382.0 million at September 30, 2019 compared to $606.0 million at June 30, 2019 and were $221.2 million a year earlier.

At September 30, 2019, total common shareholders' equity was $1.53 billion, or 12.65% of assets, compared to $1.52 billion or 12.84% of assets at June 30, 2019, and $1.27 billion or 12.10% of assets a year ago.  At September 30, 2019, tangible common shareholders' equity*, which excludes goodwill and other intangible assets, net, was $1.17 billion, or 9.93% of tangible assets*, compared to $1.15 billion, or 10.05% of tangible assets, at June 30, 2019, and $1.01 billion, or 9.86% of tangible assets, a year ago.  Banner's tangible book value per share* increased to $34.10 at September 30, 2019, compared to $31.20 per share a year ago.

Banner repurchased 400,000 shares of its common stock in the third quarter of 2019 at an average cost of $54.62 per share.  In the second quarter of 2019, Banner repurchased 600,000 shares of its common stock at an average cost of $53.46 per share.  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 September 30, 2019, Banner's common equity Tier 1 capital ratio was 10.86%, its Tier 1 leverage capital to average assets ratio was 10.70%, and its total capital to risk-weighted assets ratio was 13.20%.

Credit Quality

The allowance for loan losses was $97.8 million at September 30, 2019, or 1.11% of total loans receivable outstanding and 536% of non-performing loans compared to $98.3 million at June 30, 2019, or 1.12% of total loans receivable outstanding and 534% of non-performing loans, and $95.3 million at September 30, 2018, or 1.22% of total loans receivable outstanding and 603% of non-performing loans.  Net loan charge-offs totaled $2.5 million in the third quarter, compared to net loan charge-offs of $1.1 million in the preceding quarter and net loan charge-offs of $612,000 in the third 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, which was the same amount as recorded in the prior quarter and in the year ago quarter.  Non-performing loans were $18.3 million at September 30, 2019, compared to $18.4 million at June 30, 2019, and $15.8 million a year ago.  Real estate owned and other repossessed assets were $343,000 at September 30, 2019, compared to $2.6 million at June 30, 2019, and $937,000 a year ago.

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 losses is recorded for acquired loans at the acquisition date.  At September 30, 2019, the total purchase discount for acquired loans was $21.3 million.

Banner's total non-performing assets were $18.6 million, or 0.15% of total assets, at September 30, 2019, compared to $21.0 million, or 0.18% of total assets, at June 30, 2019, and $16.7 million, or 0.16% of total assets, a year ago.  In addition to non-performing assets, there were $12.6 million of purchased credit-impaired loans at September 30, 2019, compared to $12.9 million at both June 30, 2019 and September 30, 2018.

Conference Call

Banner will host a conference call on Thursday, October 24, 2019, 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 10135112, or at www.bannerbank.com.

About the Company

Banner Corporation is a $12.10 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 proposed merger of Banner  and AltaPacific 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 requisite regulatory approvals for the proposed merger of Banner and AltaPacific may be delayed or may not be obtained (or may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the proposed merger); (3) the requisite approval of AltaPacific shareholders may be delayed or may not be obtained, the other closing conditions to the merger may be delayed or may not be obtained, or the merger agreement may be terminated; (4) business disruption may occur following or in connection with the proposed merger of Banner and AltaPacific; (5) Banner’s or AltaPacific’s businesses may experience disruptions due to transaction-related uncertainty or other factors making it more difficult to maintain relationships with employees, customers, other business partners or governmental entities; (6) the possibility that the proposed merger is more expensive to complete than anticipated, including as a result of unexpected factors or events; diversion of managements’ attention from ongoing business operations and opportunities as a result of the proposed merger or otherwise; (7) 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; (8) 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; (9) competitive pressures among depository institutions; (10) interest rate movements and their impact on customer behavior and net interest margin; (11) the impact of repricing and competitors' pricing initiatives on loan and deposit products; (12) fluctuations in real estate values; (13) the ability to adapt successfully to technological changes to meet customers' needs and developments in the market place; (14) the ability to access cost-effective funding; (15) changes in financial markets; (16) changes in economic conditions in general and in Washington, Idaho, Oregon and California in particular; (17) the costs, effects and outcomes of litigation; (18) 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; (19) changes in accounting principles, policies or guidelines; (20) future acquisitions by Banner of other depository institutions or lines of business; (21) future goodwill impairment due to changes in Banner's business, changes in market conditions, or other factors; and (22) 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 quarters ending September 30, 2019, June 30, 2019, and September 30, 2018 and the nine months ending September 30, 2019 and September 30, 2018 (in thousands):