BANR - Banner Corporation Reports Net Income of $39.7 Million or $1.14 Per Diluted Share in Second Quarter 2019; Results Highlighted by 10% Year-Over-Year Revenue Growth and Improved Operating Efficiencies

WALLA WALLA, Wash., July 24, 2019 (GLOBE NEWSWIRE) -- Banner Corporation (NASDAQ GSM: BANR) ("Banner"), the parent company of Banner Bank and Islanders Bank, today reported net income increased 19% to $39.7 million, or $1.14 per diluted share, in the second quarter of 2019, compared to $33.3 million, or $0.95 per diluted share, in the preceding quarter and increased by 22% when compared to $32.4 million, or $1.00 per diluted share, in the second quarter of 2018.  Second quarter of 2019 results include $301,000 of acquisition-related expenses.  In the preceding quarter, Banner’s results included a $676,000 write-down on a former administration building as well as $2.1 million of acquisition-related expenses.  In the second quarter of 2018 there were no acquisition-related expenses.  In the first six months of 2019, net income increased 19% to $73.0 million, or $2.09 per diluted share, compared to $61.2 million, or $1.89 per diluted share, in the first six months a year ago.

“Banner’s second quarter financial results demonstrate the effectiveness of our strategic plan and the success of our super community bank model,” stated Mark J. Grescovich, President and Chief Executive Officer.  “Our operating performance generated solid revenue growth with increases in both net interest income and non-interest income compared to both the preceding quarter and the same quarter last year.  The ongoing benefits of the Skagit Bank acquisition also contributed to profitability, as expenses declined through the realization of synergies from the transaction.”

At June 30, 2019, Banner Corporation had $11.85 billion in assets, $8.65 billion in net loans and $9.29 billion in deposits.  Banner operates 176 branch offices, including branch offices located in eight of the top 20 largest western Metropolitan Statistical Areas by population.  The acquisition of Skagit Bancorp, Inc. and its wholly-owned subsidiary, Skagit Bank, (collectively "Skagit") on November 1, 2018, added $916 million in assets and, after consolidation, six banking locations along the I-5 corridor from Seattle to the Canadian border.

Second Quarter 2019 Highlights

• Revenues increased 4% to $139.4 million during the second quarter of 2019, compared to $134.2 million in the preceding quarter and increased 10% compared to $126.3 million in the second quarter a year ago.
• Net interest income, before the provision for loan losses, was $116.7 million, compared to $116.1 million in the preceding quarter and increased 11% from $105.1 million in the second quarter a year ago.
• Net interest margin was 4.38% for the current quarter, compared to 4.37% in the preceding quarter and 4.39% in the second quarter a year ago.
• Total cost of funds of 56 basis points was unchanged compared with the prior quarter.
• Return on average assets was 1.36% in the current quarter compared to 1.15% in the preceding quarter and 1.25% in the second quarter a year ago.
• Net loans receivable increased to $8.65 billion at June 30, 2019, compared to $8.60 billion at March 31, 2019 and increased 14% when compared to $7.59 billion at June 30, 2018.
• Provision for loan losses was $2.0 million for the quarter, increasing the allowance for loan losses to $98.3 million, or 1.12% of total loans receivable, as of June 30, 2019.
• Core deposits increased slightly to $8.22 billion compared to $8.21 billion at March 31, 2019 and increased 11% compared to a year ago.  Core deposits represented 88% of total deposits at June 30, 2019.
• Quarterly dividends to shareholders for the current quarter were $0.41 per share.
• Common shareholders’ equity per share increased to $43.99 at June 30, 2019, an increase of 2% from $42.99 at the preceding quarter end and an increase of 14% from $38.67 a year ago.
• Tangible common shareholders' equity per share* increased to $33.36 at June 30, 2019, an increase of 3% from $32.47 at the preceding quarter end and an increase of 9% from $30.57 a year ago.
• Repurchased 600,000 shares of common stock at an average cost of $53.46 per share.
• Non-performing assets remained low at $21.0 million, or 0.18% of total assets, at June 30, 2019, compared to $22.0 million, or 0.19% of total assets three months earlier, and $16.5 million, or 0.16% of total assets, at June 30, 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 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 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.

Income Statement Review

Banner's net interest margin was 4.38% for the second quarter of 2019, a one basis-point increase compared to 4.37% in the preceding quarter and a one basis-point decrease compared to 4.39% in the second quarter a year ago.  Acquisition accounting adjustments added seven basis points to the net interest margin in both the current quarter and the preceding quarter compared to six basis points in the second quarter a year ago.  The total purchase discount for acquired loans was $22.6 million at June 30, 2019, compared to $24.2 million at March 31, 2019 and $18.1 million at June 30, 2018.  In the first six months of the year, Banner’s net interest margin was 4.38% compared to 4.37% in the first six months of 2018.

Average interest-earning asset yields increased two basis points to 4.91% compared to 4.89% for the preceding quarter and increased 21 basis points compared to 4.70% in the second quarter a year ago.  Average loan yields increased two basis points to 5.33% compared to 5.31% in the preceding quarter and increased 18 basis points compared to 5.15% in the second quarter a year ago.  Loan discount accretion added nine basis points to loan yields in both the second quarter of 2019 and the preceding quarter, compared to eight basis points in the second quarter a year ago.  Deposit costs were 0.39% in the second quarter of 2019, a two basis-point increase compared to the preceding quarter and a 19 basis-point increase compared to the second quarter a year ago.  The total cost of funds was 0.56% during the second quarter of 2019, unchanged compared to the preceding quarter and a 23 basis-point increase compared to the second quarter a year ago, largely reflecting an increase in the cost of deposits and in FHLB advances.

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 $22.7 million in the second quarter of 2019, compared to $18.1 million in the first quarter of 2019 and $21.2 million in the second quarter a year ago.  Deposit fees and other service charges were $14.0 million in the second quarter of 2019, compared to $12.6 million in the preceding quarter and $12.0 million in the second quarter a year ago.  The increase in deposit fees and other service charges during the current quarter compared to the prior quarter was primarily due to seasonal increases in interchange fee income; the increase over the prior year period reflects an overall increase in deposit accounts including those acquired from the Skagit acquisition.  Mortgage banking revenues, including gains on one- to four-family and multifamily loan sales and loan servicing fees, increased to $5.9 million in the second quarter, compared to $3.4 million in the preceding quarter and $4.6 million in the second quarter of 2018.  The higher mortgage banking revenue reflected an increase in residential and multifamily mortgage held-for-sale loan production.  Home purchase activity accounted for 81% of one- to four-family mortgage loan originations in the second quarter of 2019, compared to 80% in the prior quarter and 81% in the second quarter of 2018.  In the first six months of 2019, total non-interest income was $40.8 million, compared to $42.6 million in the first six months of 2018.

Banner’s second quarter 2019 results included a $114,000 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 $28,000 net loss on the sale of securities.  In the preceding quarter, results included an $11,000 net gain for fair value adjustments and a $1,000 net gain on the sale of securities.  In the second quarter a year ago, results included a $224,000 net gain for fair value adjustments and a $44,000 net gain on the sale of securities.

Total revenues increased 4% to $139.4 million for the second quarter of 2019, compared to $134.2 million in the preceding quarter and increased 10% compared to $126.3 million in the second quarter a year ago.  Year-to-date, total revenues increased 11% to $273.6 million compared to $247.0 million for the same period one year earlier.  Revenues from core operations* (revenues excluding the net gain and loss on the sale of securities and the net change in valuation of financial instruments) were $139.5 million in the second quarter of 2019, compared to $134.2 million in the preceding quarter and $126.0 million in the second quarter of 2018.  In the first six months of the year, revenues from core operations* were $273.7 million, compared to $243.4 million in the first six months of 2018.

Banner’s total non-interest expense was $86.7 million in the second quarter of 2019, compared to $90.0 million in the preceding quarter and $82.6 million in the second quarter of 2018.  The decrease in non-interest expense during the current quarter reflects the first full quarter of synergies from the integration and consolidation of the Skagit systems and operations.  In addition, the decrease in acquisition-related expenses, which were $301,000 for the second quarter of 2019, compared to $2.1 million for the preceding quarter, contributed to the decrease in non-interest expense for the quarter.  There were no acquisition-related expenses for the year ago quarter. Higher loan originations and annual updates to our loan deferred origination cost models resulted in a $2.6 million increase in capitalized loan origination costs, offsetting  increases in salary and benefits driven by increased commissions on loan originations.  Year-to-date, total non-interest expense was $176.7 million, compared to $164.3 million in the same period a year earlier.  Banner’s efficiency ratio improved to 62.22% for the current quarter, compared to 67.06% in the preceding quarter and 65.44% in the year ago quarter.  Banner’s adjusted efficiency ratio* was 59.56% for the current quarter, compared to 63.32% in the preceding quarter and 64.09% in the year ago quarter.

For the second quarter of 2019, Banner recorded $11.0 million in state and federal income tax expense for an effective tax rate of 21.6%, 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.

Balance Sheet Review

Total assets increased to $11.85 billion at June 30, 2019, compared to $11.74 billion at March 31, 2019 and $10.38 billion at June 30, 2018.  The total of securities and interest-bearing deposits held at other banks was $1.85 billion at June 30, 2019, compared to $1.89 billion at March 31, 2019 and $1.74 billion at June 30, 2018.  The average effective duration of Banner's securities portfolio was approximately 2.6 years at June 30, 2019, compared to 4.0 years at June 30, 2018.

Net loans receivable increased modestly to $8.65 billion at June 30, 2019, compared to $8.60 billion at March 31, 2019 and increased 14% when compared to $7.59 billion at June 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 $3.95 billion at June 30, 2019, unchanged from March 31, 2019, and increased 13% compared to $3.51 billion a year ago.  Commercial business loans increased 5% to $1.60 billion at June 30, 2019, compared to $1.52 billion at March 31, 2019, and increased 22% compared to $1.31 billion a year ago.  Agricultural business loans increased by 2% to $380.8 million at June 30, 2019, compared to $373.3 million three months earlier and increased by 13% compared to $336.7 million a year ago.  Total construction, land and land development loans decreased slightly to $1.08 billion at June 30, 2019, compared to $1.10 billion at March 31, 2019 and increased 10% compared to $980.4 million a year earlier.  Consumer loans increased 2% to $790.0 million at June 30, 2019, compared to $777.4 million at March 31, 2019 and increased 12% compared to $706.8 million a year ago.  One- to four-family loans declined modestly to $944.6 million at June 30, 2019, compared to $967.6 million at March 31, 2019 and increased 12% compared to $840.5 million a year ago.

Loans held for sale increased substantially to $170.7 million at June 30, 2019, compared to $45.9 million at March 31, 2019 and $78.8 million at June 30, 2018.  The volume of one- to four- family residential mortgage loans sold was $139.0 million in the current quarter, compared to $107.2 million in the preceding quarter and $124.1 million in the second quarter a year ago.  During the second quarter of 2019, Banner did not sell any multifamily loans, compared to $149.9 million in the preceding quarter and $135.7 million in the second quarter a year ago.

Total deposits decreased slightly to $9.29 billion at June 30, 2019, compared to $9.38 billion at March 31, 2019 and increased 9% when compared to $8.53 billion a year ago, as the addition of deposits from the Skagit acquisition was partially offset by a $101.0 million decline in the use of brokered certificates of deposit from March 31, 2019 and a $141.7 million decline from a year ago.  Non-interest-bearing account balances decreased slightly to $3.67 billion at June 30, 2019, compared to $3.68 billion at March 31, 2019 and increased 10% compared to $3.35 billion a year ago.  Core deposits (non-interest-bearing and interest-bearing transaction and savings accounts) increased slightly from the prior quarter and increased 11% compared to a year ago.  Core deposits represented 88% of total deposits at June 30, 2019, the same as the prior period and 87% of total deposits a year earlier.  Certificates of deposit decreased 8% to $1.07 billion at June 30, 2019, compared to $1.16 billion at March 31, 2019 and decreased 7% compared to $1.15 billion a year earlier.  The decrease in certificates of deposit primarily reflects the decrease in brokered deposits to $138.4 million at June 30, 2019, compared to $239.4 million at March 31, 2019 and $280.1 million a year earlier.

At June 30, 2019, total common shareholders' equity was $1.52 billion, or 12.84% of assets, compared to $1.51 billion or 12.87% of assets at March 31, 2019 and $1.25 billion or 12.07% of assets a year ago.  At June 30, 2019, tangible common shareholders' equity*, which excludes goodwill and other intangible assets, net, was $1.15 billion, or 10.05% of tangible assets*, compared to $1.14 billion, or 10.04% of tangible assets, at March 31, 2019 and $990.5 million, or 9.79% of tangible assets, a year ago.  Banner's tangible book value per share* increased to $33.36 at June 30, 2019, compared to $30.57 per share a year ago.

Banner repurchased 600,000 shares of its common stock in the second quarter of 2019 at an average cost of $53.46 per share.  During the first quarter there were no repurchases of 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 June 30, 2019, Banner's common equity Tier 1 capital ratio was 10.98%, its Tier 1 leverage capital to average assets ratio was 10.83%, and its total capital to risk-weighted assets ratio was 13.37%.

Credit Quality

The allowance for loan losses was $98.3 million at June 30, 2019, or 1.12% of total loans receivable outstanding and 534% of non-performing loans compared to $97.3 million at March 31, 2019, or 1.12% of total loans receivable outstanding and 504% of non-performing loans, and $93.9 million at June 30, 2018, or 1.22% of total loans receivable outstanding and 613% of non-performing loans.  Net loan charge-offs totaled $1.1 million in the second quarter, compared to net loan charge-offs of $1.2 million in the preceding quarter and net loan charge-offs of $332,000 in the second 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 $18.4 million at June 30, 2019, compared to $19.3 million at March 31, 2019 and $15.3 million a year ago.  Real estate owned and other repossessed assets were $2.6 million at June 30, 2019, compared to $2.7 million at March 31, 2019 and $1.2 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 losses is recorded for acquired loans at the acquisition date.  At June 30, 2019, the total purchase discount for acquired loans was $22.6 million.

Banner's total non-performing assets were $21.0 million, or 0.18% of total assets, at June 30, 2019, compared to $22.0 million, or 0.19% of total assets, at March 31, 2019, and $16.5 million, or 0.16% of total assets, a year ago.  In addition to non-performing assets, there were $12.9 million purchased credit-impaired loans at June 30, 2019, compared to $13.3 million at March 31, 2019, and $18.1 million at June 30, 2018.

Conference Call

Banner will host a conference call on Thursday, July 25, 2019, at 8:00 a.m. PDT, to discuss its second 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 10132624, or at www.bannerbank.com.

About the Company

Banner Corporation is an $11.85 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.

 ⁽¹⁾ Includes $21,000 of purchased credit-impaired loans at June 30, 2019 compared to $3,000 at December 31, 2018 and $6,000 at June 30, 2018.
 ⁽²⁾ Delinquent loans include $330,000 of delinquent purchased credit-impaired loans at June 30, 2019 compared to $519,000 at December 31, 2018 and $1.0 million at June 30, 2018.

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)

The following table shows loan originations (excluding loans held for sale) activity for the quarters ending June 30, 2019, March 31, 2019, and June 30, 2018 and the six months ending June 30, 2019 and June 30, 2018 (in thousands):