Press Release

Banner Corporation Reports Second Quarter Net Income of $32.4 Million, or $1.00 Per Diluted Share; Results Highlighted by Solid Growth in Revenue and Net Interest Margin Expansion

Company Release - 7/25/2018 6:00 PM ET

WALLA WALLA, Wash., July 25, 2018 (GLOBE NEWSWIRE) -- Banner Corporation (NASDAQ GSM:BANR), the parent company of Banner Bank and Islanders Bank, today reported that growth in earning assets and improved net interest margin contributed to continuing solid revenue growth.  In addition, $2.1 million in miscellaneous non-interest income from the sale of its Poulsbo branch deposits and two former business locations contributed to the substantial increase in second quarter 2018 earnings.  Net income in the second quarter of 2018 increased 13% to $32.4 million, or $1.00 per diluted share, compared to $28.8 million, or $0.89 per diluted share, in the preceding quarter and increased 27% when compared to $25.5 million, or $0.77 per diluted share, in the second quarter a year ago when federal income tax rates were substantially higher.

In the first six months of 2018, net income increased 24% to $61.2 million, or $1.89 per diluted share, compared to $49.2 million, or $1.49 per diluted share, in the first six months of 2017.

“Banner’s second quarter 2018 performance clearly demonstrates that our strategic plan continues to be effective, as we complete the build-out of the company’s support infrastructure and improve operating leverage,” stated Mark J. Grescovich, President and Chief Executive Officer. “Due to the hard work of our employees, we are successfully executing on our strategies and priorities to deliver sustainable profitability and revenue growth to shareholders.  Our core operating performance continues to reflect the success of our proven client-acquisition strategies, which are producing strong core revenue and a healthy net interest margin.  These factors contributed to a return on average assets of 1.25% for the quarter.  Additionally, our continuing strong earnings trends allowed us to declare a special dividend of $0.50 per share in addition to the regular quarterly dividend of $0.35 per share, which were both paid on July 29, 2018, while effectively managing and maintaining a solid capital position.”

At June 30, 2018, Banner Corporation had $10.38 billion in assets, $7.59 billion in net loans and $8.53 billion in deposits.  Banner operates 177 branch offices located in eight of the top 20 largest western Metropolitan Statistical Areas by population.

Second Quarter 2018 Highlights

  • Net income increased 13% to $32.4 million, or $1.00 per diluted share, compared to $28.8 million, or $0.89 per diluted share, in the preceding quarter and increased 27% compared to $25.5 million, or $0.77 per diluted share, in the second quarter a year ago.
  • Net interest income, before the provision for loan losses, increased 6% to $105.1 million, compared to $99.4 million in the preceding quarter and increased 5% from $99.7 million in the second quarter a year ago.
  • Net interest margin was 4.39% for the current quarter, compared to 4.35% in the preceding quarter and 4.33% in the second quarter a year ago.
  • Revenues were $126.3 million during the quarter ended June 30, 2018, $120.7 million during the preceding quarter and $120.1 million during the second quarter a year ago.
  • Return on average assets was 1.25% in the current quarter, compared to 1.16% in the preceding quarter and 1.01% in the second quarter a year ago.
  • Return on average equity was 10.25% in the current quarter, compared to 9.14% in the preceding quarter and 7.60% in the second quarter a year ago.
  • Provision for loan losses remained steady at $2.0 million, increasing the allowance for loan losses to $93.9 million or 1.22% of total loans compared to an allowance for loan losses of $88.6 million or 1.17% of total loans as of June 30, 2017.
  • Net loans receivable were $7.59 billion at June 30, 2018, compared to $7.46 billion at both March 31, 2018, and June 30, 2017.
  • Core deposits increased 1% compared to June 30, 2017, and represented 87% of total deposits at June 30, 2018.
  • Quarterly dividends to shareholders were $0.35 per share, and a special cash dividend of $0.50 per share was also declared.
  • Tangible common shareholders' equity per share* was $30.57 at June 30, 2018, compared to $30.54 at the preceding quarter end and $31.21 a year ago.
  • The ratio of tangible common shareholders' equity to tangible assets* remained strong at 9.79% at June 30, 2018, compared to 9.85% at the preceding quarter end and 10.46% a year ago.
  • Non-performing assets declined by $7.0 million to $16.5 million or 0.16% of total assets at June 30, 2018 and were $24.5 million or 0.24% of total assets a year ago.

*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 revenues from core operations (which excludes fair value adjustments and gains and losses on the sale of securities) and adjusted efficiency ratio (which excludes fair value adjustments and gains and losses on the sale of securities from adjusted non-interest income and excludes amortization of core deposit intangibles, real estate owned, gain (loss) and state/municipal business and use taxes from adjusted non-interest expense) 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 2017 Consolidated Financial Statements and/or schedules to conform to the 2018 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 May 11, 2018, Banner Bank completed the sale of its Poulsbo, Washington, branch deposits totaling $20.4 million to Liberty Bay Bank, recording a deposit premium of $249,000.  In addition, during the second quarter of 2018 Banner Bank sold two former business locations, recording a combined net gain of $1.9 million.

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 (NASDAQ:PUB).  Under the terms of the purchase and assumption agreement, the sale included $253.8 million in loans and $160.3 million in deposits.

During the fourth quarter of 2017, Banner recorded a one-time net tax charge of $42.6 million, or $1.30 per diluted share, related to the revaluation of deferred tax items as a result of the Tax Cuts and Jobs Act.  This increase in income tax expense was reflected in operating results for the fourth quarter of 2017 and was in addition to the normal provision for income tax related to pre-tax net operating income.

In addition, during the fourth quarter Banner implemented a number of strategic balance sheet initiatives designed to keep its assets below $10 billion at December 31, 2017, in order to postpone the adverse impact of certain enhanced regulatory requirements and the Durbin Amendment to the Dodd-Frank Act limits on, among other things, debit card interchange fees.  Based on current debit card transaction volumes, Banner anticipates that the Durbin Amendment will have a $13 million annualized negative impact on pre-tax revenues commencing in July 2019.

In December 2017, Banner sold approximately $470 million of investment securities in the available-for-sale portfolio, using the proceeds to fund loan originations and to pay down certain wholesale borrowings and maturing brokered deposits.  Banner incurred pre-tax net losses of $2.3 million in connection with the sale of these investment securities, which produced tax benefits based upon the 2017 marginal federal income tax rate of 35%.  Beginning in 2018 net interest income on investment securities is subject to the new lower marginal corporate federal income tax rate.  In recent periods Banner has incurred a blended effective federal and state tax rate of 33% to 34%.  As a result of the reduced marginal federal tax rate, Banner anticipates that its blended effective federal and state tax rate will be approximately 22% to 23% in 2018.

Income Statement Review

“We benefited from rising interest rates during the quarter, which produced higher yields on loans and improved our net interest margin,” said Grescovich.  Banner's net interest margin was 4.39% for the second quarter of 2018, a four basis point improvement compared to 4.35% in the preceding quarter and a six basis point improvement compared to 4.33% in the second quarter a year ago.  Acquisition accounting adjustments, principally loan discount accretion, added six basis points to the net interest margin in the current quarter compared to eight basis points in the preceding quarter and 15 basis points in the second quarter a year ago.  The total purchase discount for acquired loans was $18.1 million at June 30, 2018, a decrease from $19.4 million at March 31, 2018 and $25.8 million a year ago, primarily as a result of discount accretion.  In the first six months of the year, Banner’s net interest margin expanded eight basis points to 4.37% compared to 4.29% in the first six months a year ago.

Average interest-earning asset yields increased 11 basis points to 4.70% compared to 4.59% for the preceding quarter and increased 17 basis points compared to 4.53% in the second quarter a year ago.  Average loan yields increased 17 basis points to 5.15% compared to 4.98% for both the preceding quarter and second quarter a year ago.  Loan discount accretion added eight basis points to loan yields in the second quarter, compared to ten basis points in the preceding quarter and 18 basis points in the second quarter a year ago.  Deposit costs were 0.20% in the second quarter, a four basis point increase compared to the preceding quarter and a five basis point increase compared to the second quarter a year ago.  The total cost of funds was 0.33% during the second quarter, an eight basis point increase compared to the preceding quarter and an 11 basis point increase compared to the second quarter a year ago largely reflecting increased borrowing costs.

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 during the second quarter, the same as in both the preceding and year ago quarters as credit quality metrics remained very strong.

Deposit fees and other service charges were $12.0 million in the second quarter, compared to $11.3 million in the preceding quarter and $11.2 million in the second quarter a year ago.  Mortgage banking revenues, including gains on one- to four-family and multifamily loan sales and loan servicing fees, decreased to $4.6 million in the second quarter compared to $4.9 million in the preceding quarter and $6.8 million in the second quarter of 2017.  Home purchase activity accounted for 81% of second quarter 2018 one- to four-family mortgage loan originations.

Second quarter 2018 results included a $224,000 net gain for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value, principally certain investment securities held for trading, and $44,000 net gain on the sale of securities.  In the preceding quarter, results included a $3.3 million net gain for fair value adjustments. In the second quarter a year ago, results included a $650,000 net loss for fair value adjustments and a $54,000 net loss on the sale of securities.  Following the adoption of new accounting guidance, beginning in the preceding quarter, Banner no longer reflects changes in the fair value of its junior subordinated debentures related to instrument-specific credit risk in the Consolidated Statements of Operations, but rather reports those changes in the Consolidated Statements of Comprehensive Income and includes them in total shareholders’ equity in the Consolidated Statements of Financial Condition.

Total revenues increased 5% to $126.3 million for the second quarter of 2018, compared to $120.7 million in the preceding quarter and $120.1 million in the second quarter a year ago.  In the first six months of 2018, total revenues increased 6% to $247.0 million, compared to $234.0 million in the first six months of 2017.  Revenues from core operations* (revenues excluding gains and losses on the sale of securities and the net change in valuation of financial instruments) increased to $126.0 million in the second quarter of 2018, compared to $117.4 million in the preceding quarter, and $120.8 million in the second quarter of 2017.  In the first six months of 2018, revenues from core operations* increased to $243.4 million from $235.4 million in the first six months a year ago.

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 $21.2 million in the second quarter of 2018, compared to $21.4 million in the first quarter of 2018 and $20.4 million in the second quarter a year ago.  In the first six months of 2018, total non-interest income was $42.6 million, compared to $39.4 million in the same period a year ago.

Banner’s total non-interest expense was $82.6 million in the second quarter of 2018, compared to $81.7 million in the preceding quarter and $79.9 million in the second quarter of 2017.  In addition to normal wage increases, the current and preceding quarter's non-interest expenses included increased salary and employee benefits as compared to the second quarter a year ago largely due to enhanced regulatory requirements attributable to compliance and risk management infrastructure build-out.  Banner’s adjusted efficiency ratio* improved to 64.09% for the current quarter, compared to 67.42% in the prior quarter and 64.83% in the year ago quarter.

For the second quarter of 2018, Banner recorded $9.2 million in state and federal income tax expense for an effective tax rate of 22.1%, reflecting the new lower federal corporate income tax rate beginning in 2018, and for the year ago quarter, Banner recorded $12.8 million in state and federal income tax expense for an effective tax rate of 33.4%.

Balance Sheet Review

Banner’s total assets were $10.38 billion at June 30, 2018, compared to $10.32 billion at March 31, 2018, and $10.20 billion at June 30, 2017.  The total of securities and interest-bearing deposits held at other banks was $1.74 billion at June 30, 2018, compared to $1.75 billion at March 31, 2018 and $1.66 billion at June 30, 2017.  The increase in the securities portfolio during both the current quarter and preceding quarter compared to December 31, 2017, reflects Banner's renewed leveraging strategy as it crossed the $10 billion in total assets threshold.  In the fourth quarter of 2017, 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, 2017, to postpone the adverse impact of the Durbin Amendment.  The average effective duration of Banner's securities portfolio was approximately 4.0 years at June 30, 2018, compared to 3.5 years at June 30, 2017.

Net loans receivable increased 2% to $7.59 billion at June 30, 2018, compared to $7.46 billion at both March 31, 2018 and June 30, 2017.  The sale of our Utah branches in the fourth quarter of 2017 included the sale of $253.8 million of loans.  Commercial real estate and multifamily real estate loans increased slightly to $3.51 billion at June 30, 2018, compared to $3.48 billion at March 31, 2018, but decreased compared to $3.62 billion a year ago, reflecting significant payoffs of both owner occupied and investment commercial real estate loans, partially offset by growth in multifamily real estate loans.  Commercial business loans increased modestly to $1.31 billion at June 30, 2018, compared to $1.30 billion three months earlier and increased 2% compared to $1.29 billion a year ago.  Reflecting normal seasonal trends, agricultural business loans increased by 10% to $336.7 million at June 30, 2018, compared to $307.2 million three months earlier and were $344.4 million a year ago.  Total construction, land and land development loans increased 3% to $980.4 million at June 30, 2018, compared to $948.7 million at March 31, 2018, and increased 21% compared to $811.5 million a year earlier.  Consumer loans increased 2% to $706.8 million at June 30, 2018, compared to $693.0 million at March 31, 2018, and increased 3% compared to $687.8 million a year ago.  One- to four-family loans increased modestly to $840.5 million compared to $833.6 million at March 31, 2018, and increased 5% compared to $800.0 million a year ago.

Loans held for sale decreased 44% to $78.8 million at June 30, 2018, compared to $141.8 million at March 31, 2018, but increased 19% compared to $66.2 million at June 30, 2017.  The volume of one- to four- family residential mortgage loans sold remained relatively constant at $124.1 million in the current quarter compared to $124.5 million in the preceding quarter and was $131.1 million in the second quarter a year ago.  During the current quarter Banner sold $135.7 million in multifamily loans compared to none during the quarter ended March 31, 2018, and $114.8 million in multifamily loans sold during the second quarter a year ago.  Loans held for sale at June 30, 2018 included $51.3 million of multifamily loans and $27.6 million of one- to four-family loans.

Total deposits were $8.53 billion at June 30, 2018, compared to $8.54 billion at March 31, 2018, and increased modestly compared to $8.48 billion a year ago, as strong core deposit growth over the last year was partially offset by continuing declines in retail or non-brokered certificates of deposit.  The sale of $20.4 million of Poulsbo Branch deposits during the current quarter contributed to the slight decline in deposits compared to the prior quarter.  Compared to a year earlier, total deposits at June 30, 2018, were negatively impacted by the sale of the Utah branches during the fourth quarter of 2017 which included $160.3 million of deposits.  Non-interest-bearing account balances decreased slightly to $3.35 billion at June 30, 2018, compared to $3.38 billion at March 31, 2018, and increased 3% compared to $3.25 billion a year ago.  Core deposits (non-interest-bearing and interest-bearing transaction and savings accounts) decreased 2% from the prior quarter and increased 1% compared to June 30, 2017, despite the sale of the Utah branches.  Core deposits represented 87% of total deposits at June 30, 2018, compared to 88% of total deposits at March 31, 2018, and 86% of total deposits a year earlier.  Certificates of deposit were $1.15 billion at June 30, 2018, compared to $1.02 million at March 31, 2018, and $1.21 billion a year earlier.  Brokered deposits increased to $280.1 million at June 30, 2018, compared to $169.5 million at March 31, 2018, and were $250.0 million a year earlier.  The average cost of deposits was 0.20% for the quarter ended June 30, 2018, compared to 0.16% in the preceding quarter and 0.15% in the quarter ended June 30, 2017.

At June 30, 2018, total common shareholders' equity was $1.25 billion, or $38.67 per share, compared to $1.25 billion at March 31, 2018, and $1.31 billion a year ago.  At June 30, 2018, tangible common shareholders' equity*, which excludes goodwill and other intangible assets, was $990.5 million, or 9.79% of tangible assets*, compared to $990.2 million, or 9.85% of tangible assets, at March 31, 2018 and $1.04 billion, or 10.46% of tangible assets, a year ago.  Banner's tangible book value per share* was $30.57 at June 30, 2018, compared to $31.21 per share a year ago.

During the first quarter of 2018, Banner repurchased 269,711 shares of its common stock at an average price per share of $56.93 for a total purchase price of $15.4 million.  There were no repurchases during the second quarter of 2018.  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 June 30, 2018, Banner Corporation's common equity Tier 1 capital ratio was 11.05%, its Tier 1 leverage capital to average assets ratio was 10.80%, and its total capital to risk-weighted assets ratio was 13.73%.

Credit Quality

“Credit quality remained strong again during the quarter, which further solidifies the moderate risk profile of our loan portfolio and positions us well for the future,” said Grescovich.  The allowance for loan losses was $93.9 million at June 30, 2018, or 1.22% of total loans outstanding and 613% of non-performing loans compared to $92.2 million at March 31, 2018, or 1.22% of total loans outstanding and 410% of non-performing loans, and $88.6 million at June 30, 2017, or 1.17% of total loans outstanding and 405% of non-performing loans.  Net loan charge-offs totaled $332,000 in the second quarter compared to net loan recoveries of $1.2 million in the preceding quarter and $59,000 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 declined to $15.3 million at June 30, 2018, compared to $22.5 million at March 31, 2018 and $21.9 million a year ago.  Real estate owned and other repossessed assets were $1.2 million at June 30, 2018, compared to $1.0 million at March 31, 2018 and $2.6 million 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 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.  At June 30, 2018, the total purchase discount for acquired loans was $18.1 million.

Banner's non-performing assets were $16.5 million, or 0.16% of total assets, at June 30, 2018, compared to $23.5 million, or 0.23% of total assets, at March 31, 2018 and $24.5 million, or 0.24% of total assets, a year ago.  In addition to non-performing assets, purchased credit-impaired loans decreased to $18.1 million at June 30, 2018, compared to $19.3 million at March 31, 2018 and $26.3 million a year ago.

Conference Call

Banner will host a conference call on Thursday, July 26, 2018, 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 10121440, or at www.bannerbank.com.

About the Company

Banner Corporation is a $10.38 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.

     
RESULTS OF OPERATIONS Quarters Ended Six months ended
(in thousands except shares and per share data) Jun 30, 2018 Mar 31, 2018 Jun 30, 2017 Jun 30, 2018 Jun 30, 2017
           
INTEREST INCOME:          
Loans receivable $99,853  $94,022  $94,795  $193,875  $186,083 
Mortgage-backed securities 8,899  7,331  6,239  16,230  10,886 
Securities and cash equivalents 3,671  3,467  3,402  7,138  6,563 
  112,423  104,820  104,436  217,243  203,532 
INTEREST EXPENSE:          
Deposits 4,264  3,358  3,182  7,622  5,973 
Federal Home Loan Bank advances 1,499  677  301  2,177  574 
Other borrowings 49  70  83  119  157 
Junior subordinated debentures 1,548  1,342  1,164  2,889  2,268 
  7,360  5,447  4,730  12,807  8,972 
Net interest income before provision for loan losses 105,063  99,373  99,706  204,436  194,560 
PROVISION FOR LOAN LOSSES 2,000  2,000  2,000  4,000  4,000 
Net interest income 103,063  97,373  97,706  200,436  190,560 
NON-INTEREST INCOME:          
Deposit fees and other service charges 11,985  11,296  11,165  23,281  21,553 
Mortgage banking operations 4,643  4,864  6,754  9,507  11,357 
Bank owned life insurance 933  853  1,461  1,785  2,556 
Miscellaneous 3,388  1,037  1,720  4,426  5,356 
  20,949  18,050  21,100  38,999  40,822 
Net gain (loss) on sale of securities 44  4  (54) 48  (41)
Net change in valuation of financial instruments carried at fair value 224  3,308  (650) 3,532  (1,338)
Total non-interest income 21,217  21,362  20,396  42,579  39,443 
NON-INTEREST EXPENSE:          
Salary and employee benefits 51,494  50,067  49,019  101,561  95,083 
Less capitalized loan origination costs (4,733) (4,011) (4,598) (8,744) (8,914)
Occupancy and equipment 11,574  11,766  12,045  23,340  24,041 
Information / computer data services 4,564  4,381  4,100  8,945  8,094 
Payment and card processing services 3,731  3,700  3,719  7,431  6,942 
Professional services 3,838  4,428  3,732  8,266  8,885 
Advertising and marketing 2,141  1,830  1,766  3,971  3,095 
Deposit insurance 1,021  1,341  1,071  2,362  2,337 
State/municipal business and use taxes 816  713  279  1,529  1,078 
Real estate operations (319) 439  (363) 121  (1,329)
Amortization of core deposit intangibles 1,382  1,382  1,624  2,764  3,248 
Miscellaneous 7,128  5,670  7,463  12,797  13,577 
Total non-interest expense 82,637  81,706  79,857  164,343  156,137 
Income before provision for income taxes 41,643  37,029  38,245  78,672  73,866 
PROVISION FOR INCOME TAXES 9,219  8,239  12,791  17,458  24,619 
NET INCOME $32,424  $28,790  $25,454  $61,214  $49,247 
           
Earnings per share available to common shareholders:          
Basic $1.01  $0.89  $0.77  $1.89  $1.49 
Diluted $1.00  $0.89  $0.77  $1.89  $1.49 
Cumulative dividends declared per common share $0.85  $0.35  $1.25  $1.20  $1.50 
                     
Weighted average common shares outstanding:          
Basic 32,250,514  32,397,568  32,982,126  32,323,635  32,957,920 
Diluted 32,331,609  32,516,456  33,051,527  32,422,287  33,052,205 
                
(Decrease) increase in common shares outstanding (17,977) (302,812) 125,167  (320,789) 84,644 
                


           
FINANCIAL CONDITION         Percentage Change
(in thousands except shares and per share data) Jun 30, 2018 Mar 31, 2018 Dec 31, 2017 Jun 30, 2017 Prior
Qtr
 Prior
Yr Qtr
             
ASSETS            
Cash and due from banks $195,652  $188,418  $199,624  $196,178  3.8% (0.3)%
Interest-bearing deposits 53,773  53,630  61,576  77,370  0.3% (30.5)%
Total cash and cash equivalents 249,425  242,048  261,200  273,548  3.0% (8.8)%
                   
Securities - trading 25,640  25,574  22,318  24,950  0.3% 2.8%
Securities - available for sale 1,400,312  1,406,505  919,485  1,290,159  (0.4)% 8.5%
Securities - held to maturity 263,176  262,645  260,271  268,050  0.2% (1.8)%
Federal Home Loan Bank stock 19,916  18,036  10,334  12,334  10.4% 61.5%
Loans held for sale 78,833  141,808  40,725  66,164  (44.4)% 19.1%
Loans receivable 7,684,732  7,556,046  7,598,884  7,551,563  1.7% 1.8%
Allowance for loan losses (93,875) (92,207) (89,028) (88,586) 1.8% 6.0%
Net loans receivable 7,590,857  7,463,839  7,509,856  7,462,977  1.7% 1.7%
                   
Accrued interest receivable 34,004  32,824  31,259  30,722  3.6% 10.7%
Real estate owned held for sale, net 473  328  360  2,427  44.2% (80.5)%
Property and equipment, net 153,224  156,005  154,815  161,095  (1.8)% (4.9)%
Goodwill 242,659  242,659  242,659  244,583  % (0.8)%
Other intangibles, net 19,858  21,251  22,655  26,813  (6.6)% (25.9)%
Bank-owned life insurance 164,225  163,519  162,668  160,609  0.4% 2.3%
Other assets 136,592  140,223  124,604  175,389  (2.6)% (22.1)%
                       
Total assets $10,379,194  $10,317,264  $9,763,209  $10,199,820  0.6% 1.8%
LIABILITIES            
Deposits:            
Non-interest-bearing $3,346,777  $3,383,439  $3,265,544  $3,254,581  (1.1)% 2.8%
Interest-bearing transaction and savings accounts 4,032,283  4,141,268  3,950,950  4,022,909  (2.6)% 0.2%
Interest-bearing certificates 1,148,607  1,018,355  966,937  1,206,241  12.8% (4.8)%
Total deposits 8,527,667  8,543,062  8,183,431  8,483,731  (0.2)% 0.5%
                   
Advances from Federal Home Loan Bank at fair value 239,190  192,195  202  50,212  24.5% nm 
Customer repurchase agreements and other borrowings 112,458  101,844  95,860  116,455  10.4% (3.4)%
Junior subordinated debentures at fair value 112,774  112,516  98,707  96,852  0.2% 16.4%
Accrued expenses and other liabilities 93,281  72,497  71,344  102,511  28.7% (9.0)%
Deferred compensation 40,814  41,027  41,039  40,208  (0.5)% 1.5%
Total liabilities 9,126,184  9,063,141  8,490,583  8,889,969  0.7% 2.7%
                   
SHAREHOLDERS' EQUITY            
Common stock 1,173,656  1,172,960  1,187,127  1,215,316  0.1% (3.4)%
Retained earnings 84,485  79,773  90,535  94,541  5.9% (10.6)%
Other components of shareholders' equity (5,131) 1,390  (5,036) (6) nm  nm 
Total shareholders' equity 1,253,010  1,254,123  1,272,626  1,309,851  (0.1)% (4.3)%
                       
Total liabilities and shareholders' equity $10,379,194  $10,317,264  $9,763,209  $10,199,820  0.6% 1.8%
Common Shares Issued:            
Shares outstanding at end of period 32,405,696  32,423,673  32,726,485  33,278,031     
Common shareholders' equity per share (1) $38.67  $38.68  $38.89  $39.36     
Common shareholders' tangible equity per share (1) (2) $30.57  $30.54  $30.78  $31.21     
Common shareholders' tangible equity to tangible assets (2) 9.79% 9.85% 10.61% 10.46%    
Consolidated Tier 1 leverage capital ratio 10.80% 11.06% 11.33% 11.51%    


(1) Calculation is based on number of common shares outstanding at the end of the period rather than weighted average shares outstanding.
(2) Common shareholders' tangible equity excludes goodwill and other intangible assets. Tangible assets exclude goodwill and other intangible assets. These ratios represent non-GAAP financial measures.  See also Non-GAAP Financial Measures reconciliation tables on the last two pages of the press release tables.
   


             
ADDITIONAL FINANCIAL INFORMATION            
(dollars in thousands)            
          Percentage Change
LOANS Jun 30, 2018 Mar 31, 2018 Dec 31, 2017 Jun 30, 2017 Prior
Qtr
 Prior
Yr Qtr
             
Commercial real estate:            
Owner occupied $1,256,730  $1,278,814  $1,284,363  $1,358,094  (1.7)% (7.5)%
Investment properties 1,920,790  1,876,937  1,937,423  1,975,075  2.3% (2.7)%
Multifamily real estate 330,384  321,039  314,188  288,442  2.9% 14.5%
Commercial construction 166,089  163,314  148,435  144,092  1.7% 15.3%
Multifamily construction 147,576  159,108  154,662  111,562  (7.2)% 32.3%
One- to four-family construction 480,591  434,204  415,327  380,782  10.7% 26.2%
Land and land development:            
Residential 163,335  167,783  164,516  147,149  (2.7)% 11.0%
Commercial 22,849  24,331  24,583  27,917  (6.1)% (18.2)%
Commercial business 1,312,424  1,296,691  1,279,894  1,286,204  1.2% 2.0%
Agricultural business including secured by farmland 336,709  307,243  338,388  344,412  9.6% (2.2)%
One- to four-family real estate 840,470  833,598  848,289  800,008  0.8% 5.1%
Consumer:            
Consumer secured by one- to four-family real estate 536,007  522,826  522,931  527,623  2.5% 1.6%
Consumer-other 170,778  170,158  165,885  160,203  0.4% 6.6%
                       
Total loans receivable $7,684,732  $7,556,046  $7,598,884  $7,551,563  1.7% 1.8%
                     
Restructured loans performing under their restructured terms $13,793  $14,264  $16,115  $13,531     
                     
Loans 30 - 89 days past due and on accrual (1) $8,040  $23,557  $29,278  $15,564     
                     
Total delinquent loans (including loans on non-accrual), net (2) $22,620  $42,186  $50,503  $32,961     
                 
Total delinquent loans / Total loans receivable 0.29% 0.56% 0.66% 0.44%    
                 


(1) Includes $6,000 of purchased credit-impaired loans at June 30, 2018 compared to $1.5 million at March 31, 2018, $943,000 at December 31, 2017, and $835,000 at June 30, 2017.
(2) Delinquent loans include $1.0 million of delinquent purchased credit-impaired loans at June 30, 2018 compared to $2.3 million at March 31, 2018, $2.2 million at December 31, 2017, and $2.5 million at June 30, 2017.
   


         
LOANS BY GEOGRAPHIC LOCATION Jun 30, 2018 Mar 31, 2018 Dec 31, 2017 Jun 30, 2017
  Amount Percentage Amount Percentage Amount Percentage Amount Percentage
                 
Washington $3,550,945  46.2% $3,490,646  46.2% $3,508,542  46.2% $3,425,627  45.3%
Oregon 1,601,939  20.9% 1,580,278  20.9% 1,590,233  20.9% 1,532,460  20.3%
California 1,477,293  19.2% 1,405,411  18.6% 1,415,076  18.6% 1,304,194  17.3%
Idaho 500,201  6.5% 481,972  6.4% 492,603  6.5% 487,378  6.5%
Utah 76,414  1.0% 83,637  1.1% 73,382  1.0% 294,467  3.9%
Other 477,940  6.2% 514,102  6.8% 519,048  6.8% 507,437  6.7%
Total loans receivable $7,684,732  100.0% $7,556,046  100.0% $7,598,884  100.0% $7,551,563  100.0%
                             


ADDITIONAL FINANCIAL INFORMATION          
(dollars in thousands)          
    Quarters Ended Six months ended
CHANGE IN THE Jun 30, 2018 Mar 31, 2018 Jun 30, 2017 Jun 30, 2018 Jun 30, 2017
ALLOWANCE FOR LOAN LOSSES          
Balance, beginning of period $92,207  $89,028  $86,527  $89,028  $85,997 
                     
Provision for loan losses 2,000  2,000  2,000  4,000  4,000 
                
Recoveries of loans previously charged off:          
Commercial real estate 216  1,352  264  1,568  334 
Multifamily real estate     11    11 
Construction and land 11  174  1,024  185  1,107 
One- to four-family real estate 356  290  109  646  254 
Commercial business 100  170  171  270  344 
Agricultural business, including secured by farmland 41    19  41  132 
Consumer 106  112  101  218  195 
  830  2,098  1,699  2,928  2,377 
Loans charged off:          
Commercial real estate (299)   (47) (299) (47)
One- to four-family real estate   (16)   (16)  
Commercial business (375) (519) (1,169) (894) (2,795)
Agricultural business, including secured by farmland (329) (7) (104) (336) (263)
Consumer (159) (377) (320) (536) (683)
  (1,162) (919) (1,640) (2,081) (3,788)
Net (charge-offs) recoveries (332) 1,179  59  847  (1,411)
                
Balance, end of period $93,875  $92,207  $88,586  $93,875  $88,586 
                     
Net (charge-offs) recoveries / Average loans receivable (0.004)% 0.015% 0.001% 0.011% (0.018)%
                


         
ALLOCATION OF        
ALLOWANCE FOR LOAN LOSSES Jun 30, 2018 Mar 31, 2018 Dec 31, 2017 Jun 30, 2017
Specific or allocated loss allowance:        
Commercial real estate $24,413  $23,461  $22,824  $24,232 
Multifamily real estate 3,718  2,592  1,633  1,562 
Construction and land 27,034  28,766  27,568  27,312 
One- to four-family real estate 3,932  3,779  2,055  2,010 
Commercial business 19,141  19,885  18,311  19,126 
Agricultural business, including secured by farmland 3,162  2,999  4,053  3,808 
Consumer 5,725  5,514  3,866  3,987 
Total allocated 87,125  86,996  80,310  82,037 
Unallocated 6,750  5,211  8,718  6,549 
                 
Total allowance for loan losses $93,875  $92,207  $89,028  $88,586 
             
Allowance for loan losses / Total loans receivable 1.22% 1.22% 1.17% 1.17%
             
Allowance for loan losses / Non-performing loans 613% 410% 329% 405%
             


        
ADDITIONAL FINANCIAL INFORMATION       
(dollars in thousands)       
 Jun 30, 2018 Mar 31, 2018 Dec 31, 2017 Jun 30, 2017
NON-PERFORMING ASSETS       
Loans on non-accrual status:       
Secured by real estate:       
Commercial$4,341  $6,877  $10,646  $6,267 
Construction and land1,176  984  798  1,726 
One- to four-family2,281  2,815  3,264  2,955 
Commercial business2,673  3,037  3,406  7,037 
Agricultural business, including secured by farmland1,712  6,120  6,132  1,456 
Consumer1,176  1,237  1,297  1,494 
 13,359  21,070  25,543  20,935 
Loans more than 90 days delinquent, still on accrual:       
Secured by real estate:       
Construction and land784    298   
One- to four-family905  591  1,085  754 
Commercial business1  1  18  77 
Agricultural business, including secured by farmland  820     
Consumer253  7  85  108 
 1,943  1,419  1,486  939 
Total non-performing loans15,302  22,489  27,029  21,874 
Real estate owned (REO)473  328  360  2,427 
Other repossessed assets733  694  107  181 
            
Total non-performing assets$16,508  $23,511  $27,496  $24,482 
                
Total non-performing assets to total assets0.16% 0.23% 0.28% 0.24%
                
Purchased credit-impaired loans, net$18,063  $19,316  $21,310  $26,267 
                


    
 Quarters Ended Six months ended
REAL ESTATE OWNEDJun 30, 2018 Mar 31, 2018 Jun 30, 2017 Jun 30, 2018 Jun 30, 2017
Balance, beginning of period$328  $360  $3,040  $360  $11,081 
Additions from loan foreclosures393  128  46  521  46 
Additions from capitalized costs    54    54 
Proceeds from dispositions of REO(314)   (1,228) (314) (10,421)
Gain on sale of REO66    721  66  1,923 
Valuation adjustments in the period  (160) (206) (160) (256)
               
Balance, end of period$473  $328  $2,427  $473  $2,427 
                    


             
ADDITIONAL FINANCIAL INFORMATION            
(dollars in thousands)            
             
DEPOSIT COMPOSITION         Percentage Change
  Jun 30, 2018 Mar 31, 2018 Dec 31, 2017 Jun 30, 2017 Prior Qtr Prior Yr
             
Non-interest-bearing $3,346,777  $3,383,439  $3,265,544  $3,254,581  (1.1)% 2.8%
Interest-bearing checking 1,012,519  1,043,840  971,137  953,227  (3.0)% 6.2%
Regular savings accounts 1,635,080  1,637,814  1,557,500  1,530,517  (0.2)% 6.8%
Money market accounts 1,384,684  1,459,614  1,422,313  1,539,165  (5.1)% (10.0)%
Total interest-bearing transaction and savings accounts 4,032,283  4,141,268  3,950,950  4,022,909  (2.6)% 0.2%
                   
Interest-bearing certificates 1,148,607  1,018,355  966,937  1,206,241  12.8% (4.8)%
                   
Total deposits $8,527,667  $8,543,062  $8,183,431  $8,483,731  (0.2)% 0.5%
                       


         
GEOGRAPHIC CONCENTRATION OF DEPOSITS Jun 30, 2018 Mar 31, 2018 Dec 31, 2017 Jun 30, 2017
  Amount Percentage Amount Percentage Amount Percentage Amount Percentage
Washington $4,735,357  55.6% $4,766,646  55.8% $4,506,249  55.0% $4,615,284  54.4%
Oregon 1,886,435  22.1% 1,868,043  21.9% 1,797,147  22.0% 1,806,639  21.3%
California 1,444,413  16.9% 1,454,421  17.0% 1,432,819  17.5% 1,445,621  17.0%
Idaho 461,462  5.4% 453,952  5.3% 447,216  5.5% 416,933  4.9%
Utah   %   %   % 199,254  2.3%
Total deposits $8,527,667  100.0% $8,543,062  100.0% $8,183,431  100.0% $8,483,731  100.0%
                             


         
INCLUDED IN TOTAL DEPOSITS Jun 30, 2018 Mar 31, 2018 Dec 31, 2017 Jun 30, 2017
Public non-interest-bearing accounts $86,040  $78,714  $86,987  $85,760 
Public interest-bearing transaction & savings accounts 114,457  111,597  111,732  124,075 
Public interest-bearing certificates 24,390  24,928  23,685  30,496 
                 
Total public deposits $224,887  $215,239  $222,404  $240,331 
                 
Total brokered deposits $280,055  $169,523  $57,228  $250,001 
                 


       


ADDITIONAL FINANCIAL INFORMATION            
(dollars in thousands)            
  Actual Minimum to be
categorized as
"Adequately Capitalized"
 Minimum to be
categorized as
"Well Capitalized"
REGULATORY CAPITAL RATIOS AS OF JUNE 30, 2018 Amount Ratio Amount Ratio Amount Ratio
             
Banner Corporation-consolidated:            
  Total capital to risk-weighted assets $1,190,024  13.73% $693,399  8.00% $866,749 10.00%
  Tier 1 capital to risk-weighted assets 1,093,700  12.62% 520,049  6.00% 520,049 6.00%
  Tier 1 leverage capital to average assets 1,093,700  10.80% 404,968  4.00% n/a n/a 
  Common equity tier 1 capital to risk-weighted assets 957,700  11.05% 390,037  4.50% n/a n/a 
                  
Banner Bank:            
  Total capital to risk-weighted assets 1,108,529  13.08% 677,868  8.00% 847,335 10.00%
  Tier 1 capital to risk-weighted assets 1,014,649  11.97% 508,401  6.00% 677,868 8.00%
  Tier 1 leverage capital to average assets 1,014,649  10.31% 393,726  4.00% 492,157 5.00%
  Common equity tier 1 capital to risk-weighted assets 1,014,649  11.97% 381,301  4.50% 550,768 6.50%
                  
Islanders Bank:            
  Total capital to risk-weighted assets 33,330  16.98% 15,701  8.00% 19,627 10.00%
  Tier 1 capital to risk-weighted assets 30,886  15.74% 11,776  6.00% 15,701 8.00%
  Tier 1 leverage capital to average assets 30,886  11.03% 11,202  4.00% 14,002 5.00%
  Common equity tier 1 capital to risk-weighted assets 30,886  15.74% 8,832  4.50% 12,757 6.50%
                  


            
ADDITIONAL FINANCIAL INFORMATION           
(dollars in thousands)           
(rates / ratios annualized)           
            
ANALYSIS OF NET INTEREST SPREADQuarters Ended
 June 30, 2018 March 31, 2018 June 30, 2017
 Average BalanceInterest and DividendsYield / Cost(3) Average
Balance
Interest and DividendsYield / Cost(3) Average BalanceInterest and DividendsYield / Cost(3)
Interest-earning assets:           
Mortgage loans$6,163,224 $78,203 5.09% $6,065,199 $74,346 4.97% $5,987,295 $74,459 4.99%
Commercial/agricultural loans1,479,148 19,381 5.26% 1,456,303 17,423 4.85% 1,503,548 18,179 4.85%
Consumer and other loans141,401 2,269 6.44% 140,627 2,253 6.50% 138,724 2,157 6.24%
Total loans(1)7,783,773 99,853 5.15% 7,662,129 94,022 4.98% 7,629,567 94,795 4.98%
Mortgage-backed securities1,261,809 8,899 2.83% 1,057,878 7,331 2.81% 1,067,255 6,239 2.34%
Other securities473,953 3,331 2.82% 462,947 3,090 2.71% 471,894 3,192 2.71%
Interest-bearing deposits with banks51,886 211 1.63% 64,512 231 1.45% 54,051 139 1.03%
FHLB stock22,231 129 2.33% 16,549 146 3.58% 14,472 71 1.97%
Total investment securities1,809,879 12,570 2.79% 1,601,886 10,798 2.73% 1,607,672 9,641 2.41%
Total interest-earning assets9,593,652 112,423 4.70% 9,264,015 104,820 4.59% 9,237,239 104,436 4.53%
Non-interest-earning assets804,229    805,503    896,136   
Total assets$10,397,881    $10,069,518    $10,133,375   
Deposits:           
Interest-bearing checking accounts$1,051,409 281 0.11% $1,003,929 246 0.10% $927,375 210 0.09%
Savings accounts1,648,739 811 0.20% 1,601,671 627 0.16% 1,553,019 527 0.14%
Money market accounts1,419,578 792 0.22% 1,442,685 666 0.19% 1,534,551 689 0.18%
Certificates of deposit1,067,742 2,380 0.89% 998,738 1,819 0.74% 1,200,435 1,756 0.59%
Total interest-bearing deposits5,187,468 4,264 0.33% 5,047,023 3,358 0.27% 5,215,380 3,182 0.24%
Non-interest-bearing deposits3,324,104  % 3,282,686  % 3,158,727  %
Total deposits8,511,572 4,264 0.20% 8,329,709 3,358 0.16% 8,374,107 3,182 0.15%
Other interest-bearing liabilities:           
FHLB advances296,495 1,499 2.03% 155,540 677 1.77% 103,848 301 1.16%
Other borrowings105,013 49 0.19% 101,111 70 0.28% 116,513 83 0.29%
Junior subordinated debentures140,212 1,548 4.43% 140,212 1,342 3.88% 140,212 1,164 3.33%
Total borrowings541,720 3,096 2.29% 396,863 2,089 2.13% 360,573 1,548 1.72%
Total funding liabilities9,053,292 7,360 0.33% 8,726,572 5,447 0.25% 8,734,680 4,730 0.22%
Other non-interest-bearing liabilities(2)75,784    65,978    56,175   
Total liabilities9,129,076    8,792,550    8,790,855   
Shareholders' equity1,268,805    1,276,968    1,342,520   
Total liabilities and shareholders' equity$10,397,881    $10,069,518    $10,133,375   
Net interest income/rate spread $105,063 4.37%  $99,373 4.34%  $99,706 4.31%
Net interest margin  4.39%   4.35%   4.33%
Additional Key Financial Ratios:           
Return on average assets  1.25%   1.16%   1.01%
Return on average equity  10.25%   9.14%   7.60%
Average equity/average assets  12.20%   12.68%   13.25%
Average interest-earning assets/average interest-bearing liabilities  167.45%   170.17%   165.66%
Average interest-earning assets/average funding liabilities  105.97%   106.16%   105.75%
Non-interest income/average assets  0.82%   0.86%   0.81%
Non-interest expense/average assets  3.19%   3.29%   3.16%
Efficiency ratio(4)  65.44%   67.67%   66.49%
Adjusted efficiency ratio(5)  64.09%   67.42%   64.83%
               


(1) Average balances include loans accounted for on a nonaccrual basis and loans 90 days or more past due.  Amortization of net deferred loan fees/costs is included with interest on loans.
(2) Average other non-interest-bearing liabilities include fair value adjustments related to FHLB advances and junior subordinated debentures.
(3) Yields and costs have not been adjusted for the effect of tax-exempt interest.
(4) Non-interest expense divided by the total of net interest income (before provision for loan losses) and non-interest income.
(5) Adjusted non-interest expense divided by adjusted revenue.  Adjusted revenue excludes net gain (loss) on sale of securities and fair value adjustments.  Adjusted non-interest expense excludes amortization of core deposit intangibles (CDI), REO gain (loss), and state/municipal business and use taxes.  These represent non-GAAP financial measures.  See also Non-GAAP Financial Measures reconciliation tables on the last two pages of the press release tables.
   


        
ADDITIONAL FINANCIAL INFORMATION