Press Release

Banner Corporation Reports Fourth Quarter Results and Record Full Year Net Income.  Fourth Quarter Net Income of $37.5 Million, or $1.09 Per Diluted Share; Results Highlighted by Strong Organic Loan Growth and Completion of Skagit Bancorp, Inc. Acquisition

Company Release - 1/23/2019 4:00 PM ET

WALLA WALLA, Wash., Jan. 23, 2019 (GLOBE NEWSWIRE) -- Banner Corporation (NASDAQ GSM: BANR) ("Banner"), the parent company of Banner Bank and Islanders Bank, today reported strong organic loan growth exclusive of the Skagit Bancorp, Inc. ("Skagit") acquisition on November 1, 2018, combined with a stable net interest margin, contributed to solid fourth quarter financial results.  Net income in the fourth quarter of 2018 was $37.5 million, or $1.09 per diluted share, compared to $37.8 million, or $1.17 per diluted share, in the preceding quarter.  Fourth quarter results include $4.6 million of acquisition-related expense, compared to $1.0 million of acquisition-related expense in the preceding quarter.  In the fourth quarter of 2017, following a revaluation of deferred tax assets due to tax reforms enacted in 2017, Banner recorded additional tax expense of $42.6 million, or $1.30 per diluted share.  Consequently, the fourth quarter 2017 net loss was $13.5 million, or $0.41 per diluted share.  There was no acquisition-related expense in the fourth quarter of 2017.  For the year ended December 31, 2018, net income increased to $136.5 million, or $4.15 per diluted share, compared to $60.8 million, or $1.84 per diluted share, in 2017.

“Banner’s fourth quarter and full year 2018 performance reflects continued execution of our super community bank strategy, which is generating new client relationships, adding to our core funding position by growing core deposits, and promoting client loyalty through our responsive service model, while augmenting our growth with opportunistic acquisitions,” stated Mark J. Grescovich, President and Chief Executive Officer.  “During the fourth quarter, we announced the completion of the merger with Skagit.  This transaction expanded Banner’s presence and density in the attractive North Sound region in Northwest Washington State and represents a complementary fit, both strategically and culturally, with Banner’s business model.  The combination of our two organizations provides the opportunity to enhance operational efficiency while offering Skagit Bank customers a broader product offering, increased lending limits and an expanded branch delivery system that stretches throughout the four states of Washington, Oregon, Idaho and California.”

At December 31, 2018, Banner Corporation had $11.86 billion in assets, $8.59 billion in net loans and $9.48 billion in deposits.  Banner operates 182 branch offices located in eight of the top 20 largest western Metropolitan Statistical Areas by population.

Fourth Quarter 2018 Highlights

  • Revenues were $138.5 million during the quarter ended December 31, 2018, $129.5 million during the preceding quarter and $125.9 million during the fourth quarter a year ago.
  • Net interest income, before the provision for loan losses, increased 8% to $117.5 million, compared to $109.1 million in the preceding quarter and increased 20% from $98.3 million in the fourth quarter a year ago.
  • Net interest margin was 4.47% for the current quarter, compared to 4.48% in the preceding quarter and 4.18% in the fourth quarter a year ago.
  • Loans receivable increased $862.1 million, or 11%, to $8.68 billion at December 31, 2018, including $631.7 million of portfolio loans from the acquisition of Skagit, compared to $7.82 billion at September 30, 2018.
  • Provision for loan losses increased to $2.5 million from $2.0 million in the preceding quarter, increasing the allowance for loan losses to $96.5 million, or 1.11% of total loans, compared to an allowance for loan losses of $89.0 million, or 1.17% of total loans, as of December 31, 2017.
  • Core deposits increased $651.6 million, or 9%, to $8.16 billion, including $696.3 million of core deposits acquired from the Skagit acquisition, compared to September 30, 2018 and represented 86% of total deposits at December 31, 2018.
  • Quarterly dividends to shareholders for the current quarter were $0.38 per share, an increase of 52% from the quarterly dividend for the fourth quarter a year ago.
  • Common shareholders’ equity per share increased to $41.79 at December 31, 2018, compared to $39.26 at the preceding quarter end and $38.89 a year ago.  
  • Tangible common shareholders' equity per share* increased to $31.45 at December 31, 2018, compared to $31.20 at the preceding quarter end and $30.78 a year ago.
  • Non-performing assets improved to $18.9 million, or 0.16% of total assets, at December 31, 2018, compared to $27.5 million, or 0.28% of total assets, at December 31, 2017.

*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, net loss on the sale of securities and in the fourth quarter of 2017 gain on the sale of branches) and the adjusted efficiency ratio (which excludes fair value adjustments, net loss on the sale of securities and, in the fourth quarter of 2017, gain on the sale of branches from the total of net interest income before provision for loan losses and non-interest income and excludes acquisition-related costs, 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.

Recent Events

On November 1, 2018, Banner completed its acquisition of Skagit and its wholly-owned subsidiary, Skagit Bank, of Burlington, Washington.  As of the closing of the transaction, Skagit Bank had 11 retail branches along the I-5 corridor from Seattle to the Canadian border.  Pursuant to the previously announced terms of the acquisition, Skagit shareholders received 5.6664 shares of Banner common stock in exchange for each share of Skagit common stock, plus cash in lieu of any fractional shares and cash to buyout Skagit stock options for a total consideration paid of $171.8 million.

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

Income Statement Review

“Our net interest margin remained strong despite an increase in deposit costs,” said Grescovich.  Banner's net interest margin was 4.47% for the fourth quarter of 2018, a one basis-point decrease compared to 4.48% in the preceding quarter and a 29 basis-point improvement compared to 4.18% in the fourth quarter a year ago.  Acquisition accounting adjustments added 12 basis points to the net interest margin in both the current quarter and preceding quarters compared to six basis points in the fourth quarter a year ago.  The total purchase discount for acquired loans was $25.7 million at December 31, 2018, an increase from $15.4 million at September 30, 2018 and $21.1 million at December 31, 2017.  For the year ended December 31, 2018, Banner’s net interest margin expanded 19 basis points to 4.43% compared to 4.24% in 2017.  Acquisition accounting adjustments added ten basis points to the net interest margin for both years.

Average interest-earning asset yields increased seven basis points to 4.90% compared to 4.83% for the preceding quarter and increased 50 basis points compared to 4.40% in the fourth quarter a year ago.  Average loan yields increased six basis points to 5.37% compared to 5.31% in the preceding quarter and increased 55 basis points compared to 4.82% in the fourth quarter a year ago.  Loan discount accretion added 16 basis points to loan yields in the fourth quarter of 2018, compared to 15 basis points in the preceding quarter and five basis points in the fourth quarter a year ago.  Deposit costs were 0.32% in the fourth quarter of 2018, a seven basis-point increase compared to the preceding quarter and a 17 basis-point increase compared to the fourth quarter a year ago.  The total cost of funds was 0.46% during the fourth quarter of 2018, a nine basis-point increase compared to the preceding quarter and a 23 basis-point increase compared to the fourth quarter a year ago, largely reflecting increased use of brokered deposits and the impact of the rising interest rate environment.

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 $2.5 million provision for loan losses in the current quarter, compared to $2.0 million recorded in both the prior quarter and in the same quarter a year ago.

Deposit fees and other service charges were $12.5 million in the fourth quarter of 2018, compared to $12.3 million in the preceding quarter and $10.8 million in the fourth quarter a year ago.  Mortgage banking revenues, including gains on one- to four-family and multifamily loan sales and loan servicing fees, increased to $6.0 million in the fourth quarter, compared to $5.8 million in the preceding quarter and $5.0 million in the fourth quarter of 2017.  Home purchase activity accounted for 78% of one- to four-family mortgage loan originations in the fourth quarter of 2018, compared to 78% in the prior quarter and 71% in the fourth quarter of 2017.

Banner’s fourth quarter 2018 results included a $198,000 net gain for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value, principally comprised of certain investment securities held for trading and an $885,000 net loss on the sale of securities.  In the preceding quarter, results included a $45,000 net gain for fair value adjustments.  In the fourth quarter a year ago, results included a $1.0 million net loss for fair value adjustments and a $2.3 million net loss on the sale of securities.  Following the adoption of new accounting guidance, beginning in the first quarter of 2018, 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 7% to $138.5 million for the fourth quarter of 2018, compared to $129.5 million in the preceding quarter and increased 10% compared to $125.9 million in the fourth quarter a year ago.  For the year, total revenues increased 8% to $515.0 million, compared to $478.2 million in 2017.  Revenues from core operations* (revenues excluding gains and losses on the sale of securities, the net change in valuation of financial instruments and, in the fourth quarter of 2017, the gain on sale of the Utah branches) increased to $139.2 million in the fourth quarter of 2018, compared to $129.4 million in the preceding quarter and $117.1 million in the fourth quarter of 2017.  For 2018, revenues from core operations* increased 9% to $512.0 million from $471.0 million in 2017.

Total non-interest income was $21.0 million in the fourth quarter of 2018, compared to $20.4 million in the third quarter of 2018 and $27.7 million in the fourth quarter a year ago.  For 2018, total non-interest income was $84.0 million, compared to $85.2 million in 2017.

Banner’s total non-interest expense was $95.4 million in the fourth quarter of 2018, compared to $81.6 million in the preceding quarter and $82.5 million in the fourth quarter of 2017.  Acquisition-related expenses were $4.6 million for the fourth quarter of 2018, compared to $1.0 million for the preceding quarter and no acquisition expenses for the year ago quarter.  The increase in non-interest expense during the quarter also reflects the expenses associated with operating the branches acquired in the Skagit acquisition.  Other non-interest expense items of significance for the fourth quarter of 2018 included a $4.0 million accrual for pending litigation.  Banner’s efficiency ratio was 68.89% for the current quarter, compared to 63.04% in the preceding quarter and 65.51% in the year ago quarter.  Banner’s adjusted efficiency ratio*, which is calculated by dividing core non-interest expense by core revenue, was 63.06% for the current quarter, compared to 60.21% in the preceding quarter and 69.40% in the year ago quarter.

For the fourth quarter of 2018, Banner recorded $3.1 million in state and federal income tax expense for an effective tax rate of 7.5%, reflecting the new lower federal corporate income tax rate beginning in 2018, as well as the benefits from tax exempt income sources.  In addition, Banner recorded $5.5 million of tax benefit adjustments, which included the release of a $4.2 million valuation reserve previously recorded in the fourth quarter of 2017 as a provisional amount related to the enactment of the Tax Cuts and Jobs Act.  Our 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.  For the year ago quarter, Banner recorded $55.0 million in state and federal income tax expense primarily due to a $42.6 million charge for the revaluation of its deferred tax assets as a result of the passage of the Tax Cuts and Jobs Act.

Balance Sheet Review

Largely as a result of the Skagit acquisition, but also as a result of organic growth, Banner’s total assets increased to $11.86 billion at December 31, 2018, compared to $10.51 billion at September 30, 2018 and $9.76 billion at December 31, 2017.  The total of securities and interest-bearing deposits held at other banks was $1.94 billion at December 31, 2018, compared to $1.76 billion at September 30, 2018 and $1.26 billion at December 31, 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.  During 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 in order to postpone the adverse impact of the Durbin Amendment.  The average effective duration of Banner's securities portfolio was approximately 3.5 years at December 31, 2018, compared to 4.1 years at December 31, 2017.

Net loans receivable increased 11% to $8.59 billion at December 31, 2018, compared to $7.73 billion at September 30, 2018 and increased 14% when compared to $7.51 billion at December 31, 2017.  The $860.9 million increase in net loans during the current quarter included $631.7 million of portfolio loans acquired in the Skagit acquisition as well as $230.4 million of organic loan growth.  Organic loan growth was 12% on an annualized basis during the quarter.  Commercial real estate and multifamily real estate loans increased 11% to $3.93 billion at December 31, 2018, compared to $3.52 billion at September 30, 2018, and $3.54 billion a year ago.  Commercial business loans increased 9% to $1.48 billion at December 31, 2018, compared to $1.36 billion three months earlier and increased 16% compared to $1.28 billion a year ago.  Reflecting normal seasonal trends, agricultural business loans increased by 12% to $404.9 million at December 31, 2018, compared to $360.0 million three months earlier and increased by 20% compared to $338.4 million a year ago.  Total construction, land and land development loans increased 9% to $1.11 billion at December 31, 2018, compared to $1.02 billion at September 30, 2018 and increased 22% compared to $907.5 million a year earlier.  Consumer loans increased 10% to $785.0 million at December 31, 2018, compared to $710.5 million at September 30, 2018 and increased 14% compared to $688.8 million a year ago.  One- to four-family loans increased 15% to $973.6 million, compared to both $849.9 million at September 30, 2018 and $848.3 million a year ago.

Loans held for sale increased substantially to $171.0 million at December 31, 2018, compared to $72.9 million at September 30, 2018 and $40.7 million at December 31, 2017.  The volume of one- to four- family residential mortgage loans sold was $130.1 million in the current quarter, compared to $134.1 million in the preceding quarter and was $141.1 million in the fourth quarter a year ago.  During the fourth quarter of 2018, Banner sold $26.8 million in multifamily loans, compared to $94.0 million in the preceding quarter.  Loans held for sale at December 31, 2018 included $130.7 million of multifamily loans and $40.3 million of one- to four-family loans.

Total deposits increased 9% to $9.48 billion at December 31, 2018, compared to $8.69 billion at September 30, 2018 and increased 16% when compared to $8.18 billion a year ago, as core deposit growth over the last year, coupled with the addition of both deposits from the Skagit acquisition and brokered certificates of deposit, was partially offset by continuing declines in retail, or non-brokered, certificates of deposit.  Total deposits at December 31, 2018 were negatively impacted by the sale of $20.4 million of Poulsbo Branch deposits during the second quarter of 2018.  Non-interest-bearing account balances increased 5% to $3.66 billion at December 31, 2018, compared to $3.47 billion at September 30, 2018 and increased 12% compared to $3.27 billion a year ago.  Core deposits (non-interest-bearing and interest-bearing transaction and savings accounts) increased $651.6 million, or 9%, from the prior quarter and increased 13% compared to a year ago.  The core deposit balance at December 31, 2018 was positively impacted by $696.3 million of core deposits acquired in the Skagit acquisition.  Core deposits represented 86% of total deposits at December 31, 2018, the same as three months earlier, and were 88% of total deposits a year earlier.  Certificates of deposit increased 12% to $1.32 billion at December 31, 2018, compared to $1.18 billion at September 30, 2018 and increased 37% compared to $966.9 million a year earlier.  Brokered deposits increased to $377.3 million at December 31, 2018, compared to $325.2 million at September 30, 2018 and $40.7 million a year earlier.

At December 31, 2018, total common shareholders' equity was $1.47 billion, or 12.39% of assets, compared to $1.27 billion or 12.10% of assets at September 30, 2018 and $1.27 billion or 13.03% of assets a year ago.  At December 31, 2018, tangible common shareholders' equity*, which excludes goodwill and other intangible assets, was $1.11 billion, or 9.62% of tangible assets*, compared to $1.01 billion, or 9.86% of tangible assets, at September 30, 2018 and $1.01 billion, or 10.61% of tangible assets, a year ago.  Banner's tangible book value per share* increased to $31.45 at December 31, 2018, compared to $30.78 per share a year ago.

During the first quarter of 2018, Banner repurchased 269,711 shares of its common stock and during the fourth quarter of 2018, Banner repurchased 325,000 shares of its common stock.  There were no repurchases of common stock during the second or third quarters of 2018.  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 regulatory standards.  At December 31, 2018, Banner's common equity Tier 1 capital ratio was 10.75%, its Tier 1 leverage capital to average assets ratio was 10.98%, and its total capital to risk-weighted assets ratio was 13.12%.

Credit Quality

The allowance for loan losses was $96.5 million at December 31, 2018, or 1.11% of total loans outstanding and 616% of non-performing loans compared to $95.3 million at September 30, 2018, or 1.22% of total loans outstanding and 603% of non-performing loans, and $89.0 million at December 31, 2017, or 1.17% of total loans outstanding and 329% of non-performing loans.  Net loan charge-offs totaled $1.3 million in the fourth quarter, compared to $612,000 in the preceding quarter and $2.1 million in the fourth 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 $2.5 million provision for loan losses in the current quarter, compared to $2.0 million recorded in both the prior quarter and in the year ago quarter.  Non-performing loans decreased to $15.7 million at December 31, 2018, compared to $15.8 million at September 30, 2018 and $27.0 million a year ago.  Real estate owned and other repossessed assets were $3.2 million at December 31, 2018, compared to $937,000 at September 30, 2018 and $467,000 a year ago.  The increase in the current quarter primarily reflects $2.6 million of real estate owned acquired in the Skagit acquisition.

In accordance with acquisition accounting, loans acquired from acquisitions were recorded at their estimated fair value, which resulted in a net discount to the loans’ contractual amounts, a portion of which reflects a discount for possible credit losses.  Credit discounts are included in the determination of fair value, and as a result, no allowance for loan and lease losses is recorded for acquired loans at the acquisition date.  At December 31, 2018, the total purchase discount for acquired loans was $25.7 million.

Banner's non-performing assets were $18.9 million, or 0.16% of total assets, at December 31, 2018, compared to $16.7 million, or 0.16% of total assets, at September 30, 2018 and $27.5 million, or 0.28% of total assets, a year ago.  In addition to non-performing assets, purchased credit-impaired loans increased due to the Skagit acquisition to $14.4 million at December 31, 2018, compared to $12.9 million at September 30, 2018 and decreased when compared to $21.3 million at December 31, 2017.

Conference Call

Banner will host a conference call on Thursday, January 24, 2019, at 8:00 a.m. PST, to discuss its fourth quarter and year end 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 10127071, or at www.bannerbank.com.

About the Company

Banner Corporation is a $11.86 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) 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; (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.


     
RESULTS OF OPERATIONS Quarters Ended Twelve months ended
(in thousands except shares and per share data) Dec 31, 2018 Sep 30, 2018 Dec 31, 2017 Dec 31, 2018 Dec 31, 2017
           
INTEREST INCOME:          
Loans receivable $114,627  $104,868  $93,145  $413,370  $374,449 
Mortgage-backed securities 9,931  8,915  7,006  35,076  24,535 
Securities and cash equivalents 4,183  3,865  3,324  15,186  13,300 
  128,741  117,648  103,475  463,632  412,284 
INTEREST EXPENSE:          
Deposits 7,503  5,517  3,111  20,642  12,273 
Federal Home Loan Bank advances 2,072  1,388  766  5,636  1,908 
Other borrowings 66  60  77  245  317 
Junior subordinated debentures 1,641  1,605  1,257  6,136  4,752 
  11,282  8,570  5,211  32,659  19,250 
Net interest income before provision for loan losses 117,459  109,078  98,264  430,973  393,034 
PROVISION FOR LOAN LOSSES 2,500  2,000  2,000  8,500  8,000 
Net interest income 114,959  107,078  96,264  422,473  385,034 
NON-INTEREST INCOME:          
Deposit fees and other service charges 12,539  12,255  10,840  48,074  43,452 
Mortgage banking operations 6,019  5,816  5,025  21,343  20,880 
Bank owned life insurance 994  1,726  1,020  4,505  4,618 
Miscellaneous 2,153  569  1,923  7,148  8,985 
  21,705  20,366  18,808  81,070  77,935 
Net loss on sale of securities (885)   (2,310) (837) (2,080)
Net change in valuation of financial instruments carried at fair value 198  45  (1,013) 3,775  (2,844)
Gain on sale of branches, including related loans and deposits     12,189    12,189 
Total non-interest income 21,018  20,411  27,674  84,008  85,200 
NON-INTEREST EXPENSE:          
Salary and employee benefits 52,122  48,930  48,082  202,613  192,096 
Less capitalized loan origination costs (4,863) (4,318) (4,134) (17,925) (17,379)
Occupancy and equipment 13,490  12,385  12,088  49,215  47,866 
Information / computer data services 5,112  4,766  4,731  18,823  17,245 
Payment and card processing services 4,233  3,748  3,807  15,412  14,330 
Professional and legal expenses 6,669  3,010  5,301  17,945  17,534 
Advertising and marketing 2,588  1,786  3,412  8,346  8,637 
Deposit insurance 1,093  991  1,251  4,446  4,689 
State/municipal business and use taxes 854  902  737  3,284  2,594 
Real estate operations 251  433  (941) 804  (2,030)
Amortization of core deposit intangibles 1,935  1,348  1,457  6,047  6,246 
Miscellaneous 7,310  6,646  6,710  26,754  27,142 
  90,794  80,627  82,501  335,764  318,970 
Acquisition related expenses 4,602  1,005    5,607   
Total non-interest expense 95,396  81,632  82,501  341,371  318,970 
Income before provision for income taxes 40,581  45,857  41,437  165,110  151,264 
PROVISION FOR INCOME TAXES 3,053  8,084  54,985  28,595  90,488 
NET INCOME $37,528  $37,773  $(13,548) $136,515  $60,776 
Earnings (loss) per share available to common shareholders:          
Basic $1.10  $1.17  $(0.41) $4.16  $1.85 
Diluted $1.09  $1.17  $(0.41) $4.15  $1.84 
Cumulative dividends declared per common share $0.38  $0.38  $0.25  $1.96  $2.00 
Weighted average common shares outstanding:          
Basic 34,221,048  32,256,789  32,655,973  32,784,724  32,888,007 
Diluted 34,342,641  32,376,623  32,766,335  32,894,425  32,986,707 
Increase (decrease) in common shares outstanding 2,780,015  (2,939) (528,299) 2,456,287  (466,902)
                


         
FINANCIAL CONDITION       Percentage Change
(in thousands except shares and per share data) Dec 31, 2018 Sep 30, 2018 Dec 31, 2017 Prior Qtr Prior Yr Qtr
           
ASSETS          
Cash and due from banks $231,029  $184,417  $199,624  25.3% 15.7%
Interest-bearing deposits 41,167  64,244  61,576  (35.9)% (33.1)%
Total cash and cash equivalents 272,196  248,661  261,200  9.5% 4.2%
Securities - trading 25,896  25,764  22,318  0.5% 16.0%
Securities - available for sale 1,636,223  1,412,273  919,485  15.9% 77.9%
Securities - held to maturity 234,220  258,699  260,271  (9.5)% (10.0)%
Total securities 1,896,339  1,696,736  1,202,074  11.8% 57.8%
Federal Home Loan Bank stock 31,955  19,196  10,334  66.5% 209.2%
Loans held for sale 171,031  72,850  40,725  134.8% 320.0%
Loans receivable 8,684,595  7,822,519  7,598,884  11.0% 14.3%
Allowance for loan losses (96,485) (95,263) (89,028) 1.3% 8.4%
Net loans receivable 8,588,110  7,727,256  7,509,856  11.1% 14.4%
Accrued interest receivable 38,593  37,676  31,259  2.4% 23.5%
Real estate owned held for sale, net 2,611  364  360  617.3% 625.3%
Property and equipment, net 171,809  151,212  154,815  13.6% 11.0%
Goodwill 330,874  242,659  242,659  36.4% 36.4%
Other intangibles, net 32,924  18,499  22,655  78.0% 45.3%
Bank-owned life insurance 177,467  163,265  162,668  8.7% 9.1%
Other assets 149,128  135,929  124,604  9.7% 19.7%
Total assets $11,863,037  $10,514,303  $9,763,209  12.8% 21.5%
LIABILITIES          
Deposits:          
Non-interest-bearing $3,657,817  $3,469,294  $3,265,544  5.4% 12.0%
Interest-bearing transaction and savings accounts 4,498,966  4,035,856  3,950,950  11.5% 13.9%
Interest-bearing certificates 1,320,265  1,180,674  966,937  11.8% 36.5%
Total deposits 9,477,048  8,685,824  8,183,431  9.1% 15.8%
Advances from Federal Home Loan Bank at fair value 540,189  221,184  202  144.2% nm 
Customer repurchase agreements and other borrowings 118,995  98,979  95,860  20.2% 24.1%
Junior subordinated debentures at fair value 114,091  113,110  98,707  0.9% 15.6%
Accrued expenses and other liabilities 102,061  82,530  71,344  23.7% 43.1%
Deferred compensation 40,338  40,478  41,039  (0.3)% (1.7)%
Total liabilities 10,392,722  9,242,105  8,490,583  12.4% 22.4%
SHAREHOLDERS' EQUITY          
Common stock 1,329,156  1,175,250  1,187,127  13.1% 12.0%
Retained earnings 134,055  109,942  90,535  21.9% 48.1%
Other components of shareholders' equity 7,104  (12,994) (5,036) nm  nm 
Total shareholders' equity 1,470,315  1,272,198  1,272,626  15.6% 15.5%
Total liabilities and shareholders' equity $11,863,037  $10,514,303  $9,763,209  12.8% 21.5%
Common Shares Issued:          
Shares outstanding at end of period 35,182,772  32,402,757  32,726,485     
Common shareholders' equity per share (1) $41.79  $39.26  $38.89     
Common shareholders' tangible equity per share (1) (2) $31.45  $31.20  $30.78     
Common shareholders' tangible equity to tangible assets (2) 9.62% 9.86% 10.61%    
Consolidated Tier 1 leverage capital ratio 10.98% 11.04% 11.33%    


(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 Dec 31, 2018 Sep 30, 2018 Dec 31, 2017 Prior Qtr Prior Yr Qtr
           
Commercial real estate:          
Owner occupied $1,430,097  $1,271,363  $1,284,363  12.5% 11.3%
Investment properties 2,131,059  1,943,793  1,937,423  9.6% 10.0%
Multifamily real estate 368,836  309,809  314,188  19.1% 17.4%
Commercial construction 172,410  154,071  148,435  11.9% 16.2%
Multifamily construction 184,630  172,433  154,662  7.1% 19.4%
One- to four-family construction 534,678  498,549  415,327  7.2% 28.7%
Land and land development:          
Residential 188,508  171,610  164,516  9.8% 14.6%
Commercial 27,278  22,382  24,583  21.9% 11.0%
Commercial business 1,483,614  1,358,149  1,279,894  9.2% 15.9%
Agricultural business including secured by farmland 404,873  359,966  338,388  12.5% 19.6%
One- to four-family real estate 973,616  849,928  848,289  14.6% 14.8%
Consumer:          
Consumer secured by one- to four-family real estate 568,979  539,143  522,931  5.5% 8.8%
Consumer-other 216,017  171,323  165,885  26.1% 30.2%
Total loans receivable $8,684,595  $7,822,519  $7,598,884  11.0% 14.3%
Restructured loans performing under their restructured terms $13,422  $13,328  $16,115     
Loans 30 - 89 days past due and on accrual (1) $25,108  $8,688  $29,278     
Total delinquent loans (including loans on non-accrual), net (2) $38,721  $21,191  $50,503     
Total delinquent loans / Total loans receivable 0.45% 0.27% 0.66%    


(1) Includes $3,000 of purchased credit-impaired loans at December 31, 2018 compared to $5,000 at September 30, 2018 and $943,000 at December 31, 2017.
(2) Delinquent loans include $519,000 of delinquent purchased credit-impaired loans at December 31, 2018 compared to $568,000 at September 30, 2018 and $2.2 million at December 31, 2017.
   


           
LOANS BY GEOGRAPHIC LOCATION         Percentage Change
  Dec 31, 2018 Sep 30, 2018 Dec 31, 2017 Prior Qtr Prior Yr Qtr
  Amount Percentage Amount Amount    
             
Washington $4,324,588  49.8% $3,640,209  $3,508,542  18.8% 23.3%
Oregon 1,636,152  18.8% 1,628,703  1,590,233  0.5% 2.9%
California 1,596,604  18.4% 1,496,817  1,415,076  6.7% 12.8%
Idaho 521,026  6.0% 504,297  492,603  3.3% 5.8%
Utah 57,318  0.7% 63,053  73,382  (9.1)% (21.9)%
Other 548,907  6.3% 489,440  519,048  12.2% 5.8%
Total loans receivable $8,684,595  100.0% $7,822,519  $7,598,884  11.0% 14.3%
                      

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)

The following table shows loan originations (excluding loans held for sale) activity for the three months ending December 31, 2018, September 30, 2018, and December 31, 2017 and for the twelve months ending December 31, 2018 and 2017 (in thousands):

LOAN ORIGINATIONSThree Months Ended Twelve Months Ended
 Dec 31, 2018 Sep 30, 2018 Dec 31, 2017 Dec 31, 2018 Dec 31, 2017
Commercial real estate$172,885 $142,393 $105,313 $536,784 $537,825
Multifamily real estate16,731 2,215 6,033 25,771 77,409
Construction and land397,702 370,484 303,414 1,460,536 1,216,227
Commercial business206,922 303,472 148,004 839,290 647,079
Agricultural business18,901 36,747 36,947 123,702 117,186
One-to four-family residential81,522 51,459 69,541 177,332 249,558
Consumer72,500 74,339 64,104 331,661 344,407
Total loan originations (excluding loans held for sale)$967,163 $981,109 $733,356 $3,495,076 $3,189,691
               


           
ADDITIONAL FINANCIAL INFORMATION          
(dollars in thousands)          
    Quarters Ended Twelve months ended
CHANGE IN THE Dec 31, 2018 Sep 30, 2018 Dec 31, 2017 Dec 31, 2018 Dec 31, 2017
ALLOWANCE FOR LOAN LOSSES          
Balance, beginning of period $95,263  $93,875  $89,100  $89,028  $85,997 
Provision for loan losses 2,500  2,000  2,000  8,500  8,000 
Recoveries of loans previously charged off:          
Commercial real estate 66  12  19  1,646  372 
Multifamily real estate         11 
Construction and land 23  5  57  213  1,237 
One- to four-family real estate 18  86  8  750  270 
Commercial business 193  586  305  1,049  1,226 
Agricultural business, including secured by farmland 23    1  64  134 
Consumer 102  46  188  366  481 
  425  735  578  4,088  3,731 
Loans charged off:          
Commercial real estate   (102) (549) (401) (1,180)
Construction and land   (479)   (479)  
One- to four-family real estate   (27) (38) (43) (38)
Commercial business (684) (473) (517) (2,051) (3,803)
Agricultural business, including secured by farmland (415) (5) (1,110) (756) (2,374)
Consumer (604) (261) (436) (1,401) (1,305)
  (1,703) (1,347) (2,650) (5,131) (8,700)
Net charge-offs (1,278) (612) (2,072) (1,043) (4,969)
Balance, end of period $96,485  $95,263  $89,028  $96,485  $89,028 
Net charge-offs / Average loans receivable (0.015)% (0.008)% (0.027)% (0.013)% (0.065)%


ALLOCATION OF      
ALLOWANCE FOR LOAN LOSSES Dec 31, 2018 Sep 30, 2018 Dec 31, 2017
Specific or allocated loss allowance:      
Commercial real estate $27,132  $25,147  $22,824 
Multifamily real estate 3,818  3,745  1,633 
Construction and land 24,442  24,564  27,568 
One- to four-family real estate 4,714  4,423  2,055 
Commercial business 19,438  17,948  18,311 
Agricultural business, including secured by farmland 3,778  3,505  4,053 
Consumer 7,972  8,110  3,866 
Total allocated 91,294  87,442  80,310 
Unallocated 5,191  7,821  8,718 
Total allowance for loan losses $96,485  $95,263  $89,028 
Allowance for loan losses / Total loans receivable 1.11% 1.22% 1.17%
Allowance for loan losses / Non-performing loans 616% 603% 329%


ADDITIONAL FINANCIAL INFORMATION     
(dollars in thousands)     
 Dec 31, 2018 Sep 30, 2018 Dec 31, 2017
NON-PERFORMING ASSETS     
Loans on non-accrual status:     
Secured by real estate:     
Commercial$4,088  $3,728  $10,646 
Construction and land3,188  2,095  798 
One- to four-family1,544  1,827  3,264 
Commercial business2,936  2,921  3,406 
Agricultural business, including secured by farmland1,751  1,645  6,132 
Consumer1,241  1,703  1,297 
 14,748  13,919  25,543 
Loans more than 90 days delinquent, still on accrual:     
Secured by real estate:     
Commercial  428   
Construction and land    298 
One- to four-family658  1,076  1,085 
Commercial business1  87  18 
Consumer247  296  85 
 906  1,887  1,486 
Total non-performing loans15,654  15,806  27,029 
Real estate owned (REO)2,611  364  360 
Other repossessed assets592  573  107 
Total non-performing assets$18,857  $16,743  $27,496 
Total non-performing assets to total assets0.16% 0.16% 0.28%
Purchased credit-impaired loans, net$14,413  $12,944  $21,310 
            


    
 Quarters Ended Twelve months ended
REAL ESTATE OWNEDDec 31, 2018 Sep 30, 2018 Dec 31, 2017 Dec 31, 2018 Dec 31, 2017
Balance, beginning of period$364  $473  $1,496  $360  $11,081 
Additions from loan foreclosures139      641  46 
Additions from acquisitions2,593      2,593   
Additions from capitalized costs        54 
Proceeds from dispositions of REO(453) (90) (2,092) (838) (13,474)
Gain on sale of REO168  8  956  242  2,909 
Valuation adjustments in the period(200) (27)   (387) (256)
Balance, end of period$2,611  $364  $360  $2,611  $360 
                    


ADDITIONAL FINANCIAL INFORMATION          
(dollars in thousands)          
           
DEPOSIT COMPOSITION       Percentage Change
  Dec 31, 2018 Sep 30, 2018 Dec 31, 2017 Prior Qtr Prior Yr Qtr
           
Non-interest-bearing $3,657,817  $3,469,294  $3,265,544  5.4% 12.0%
Interest-bearing checking 1,191,016  1,034,678  971,137  15.1% 22.6%
Regular savings accounts 1,842,581  1,627,560  1,557,500  13.2% 18.3%
Money market accounts 1,465,369  1,373,618  1,422,313  6.7% 3.0%
Total interest-bearing transaction and savings accounts 4,498,966  4,035,856  3,950,950  11.5% 13.9%
Total core deposits 8,156,783  7,505,150  7,216,494  8.7% 13.0%
Interest-bearing certificates 1,320,265  1,180,674  966,937  11.8% 36.5%
Total deposits $9,477,048  $8,685,824  $8,183,431  9.1% 15.8%
                   


           
GEOGRAPHIC CONCENTRATION OF DEPOSITS         Percentage Change
  Dec 31, 2018 Sep 30, 2018 Dec 31, 2017 Prior Qtr Prior Yr Qtr
  Amount Percentage Amount Amount    
Washington $5,674,328  59.9% $4,849,807  $4,506,249  17.0% 25.9%
Oregon 1,891,145  20.0% 1,916,183  1,797,147  (1.3)% 5.2%
California 1,434,033  15.1% 1,462,417  1,432,819  (1.9)% 0.1%
Idaho 477,542  5.0% 457,417  447,216  4.4% 6.8%
Total deposits $9,477,048  100.0% $8,685,824  $8,183,431  9.1% 15.8%
                      


       
INCLUDED IN TOTAL DEPOSITS Dec 31, 2018 Sep 30, 2018 Dec 31, 2017
Public non-interest-bearing accounts $96,009  $76,957  $86,987 
Public interest-bearing transaction & savings accounts 121,392  110,802  111,732 
Public interest-bearing certificates 30,089  25,367  23,685 
Total public deposits $247,490  $213,126  $222,404 
Total brokered deposits $377,347  $325,154  $40,748 
             


   
ADDITIONAL FINANCIAL INFORMATION  
(in thousands)  
   
ACQUISITION OF SKAGIT BANCORP, INC.  
The following table provides the estimated fair value of the assets acquired and liabilities assumed in the Skagit acquisition at November 1, 2018 (in thousands):  
 November 1, 2018
   
Cash paid 329
Fair value of common shares issued 171,429
Total consideration 171,758
   
Fair value of assets acquired:  
Cash and cash equivalents19,167 
Securities210,326 
Loans receivable632,374 
Real estate owned held for sale2,594 
Property and equipment15,788 
Core deposit intangible16,368 
Deferred tax asset95 
Other assets19,109 
Total assets acquired915,821 
   
Fair value of liabilities assumed:  
Deposits810,209 
Other liabilities22,070 
Total liabilities assumed832,279 
   
Net assets acquired 83,542
   
Goodwill $88,216
   
* Amounts recorded in this table are preliminary estimates of fair value.  Additional adjustments to the acquisition accounting may be required with a measurement period of one-year from the acquisition date.
 


             
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 DECEMBER 31, 2018 Amount Ratio Amount Ratio Amount Ratio
             
Banner Corporation-consolidated:            
  Total capital to risk-weighted assets $1,302,239  13.12% $794,072 8.00% $992,590 10.00%
  Tier 1 capital to risk-weighted assets 1,203,155  12.12% 595,554 6.00% 595,554 6.00%
  Tier 1 leverage capital to average assets 1,203,155  10.98% 438,379 4.00% n/a n/a 
  Common equity tier 1 capital to risk-weighted assets 1,067,155  10.75% 446,665 4.50% n/a n/a 
Banner Bank:            
  Total capital to risk-weighted assets 1,217,173  12.50% 778,766 8.00% 973,457 10.00%
  Tier 1 capital to risk-weighted assets 1,120,523  11.51% 584,074 6.00% 778,766 8.00%
  Tier 1 leverage capital to average assets 1,120,523  10.50% 426,799 4.00% 533,498 5.00%
  Common equity tier 1 capital to risk-weighted assets 1,120,523  11.51% 438,056 4.50% 632,747 6.50%
Islanders Bank:            
  Total capital to risk-weighted assets 34,567  18.26% 15,142 8.00% 18,928 10.00%
  Tier 1 capital to risk-weighted assets 32,200  17.01% 11,357 6.00% 15,142 8.00%
  Tier 1 leverage capital to average assets 32,200  11.16% 11,543 4.00% 14,428 5.00%
  Common equity tier 1 capital to risk-weighted assets 32,200  17.01% 8,518 4.50% 12,303 6.50%


            
ADDITIONAL FINANCIAL INFORMATION           
(dollars in thousands)           
(rates / ratios annualized)           
            
ANALYSIS OF NET INTEREST SPREADQuarters Ended
 December 31, 2018 September 30, 2018 December 31, 2017
 Average
Balance
Interest and
Dividends
Yield / Cost(3) Average
Balance
Interest and
Dividends
Yield / Cost(3) Average
Balance
Interest and
Dividends
Yield / Cost(3)
Interest-earning assets:           
Held for sale loans$83,741 $1,056 5.00% $72,249 $895 4.91% $75,359 $822 4.33%
Mortgage loans6,573,278 88,560 5.35% 6,117,299 81,130 5.26% 5,989,291 72,527 4.80%
Commercial/agricultural loans1,631,133 22,257 5.41% 1,511,077 20,545 5.39% 1,454,639 17,549 4.79%
Consumer and other loans172,934 2,754 6.32% 141,503 2,298 6.44% 144,412 2,247 6.17%
Total loans(1)8,461,086 114,627 5.37% 7,842,128 104,868 5.31% 7,663,701 93,145 4.82%
Mortgage-backed securities1,400,508 9,931 2.81% 1,266,862 8,915 2.79% 1,131,692 7,006 2.46%
Other securities474,659 3,633 3.04% 462,048 3,279 2.82% 459,065 3,028 2.62%
Interest-bearing deposits with banks54,577 305 2.22% 65,191 332 2.02% 60,109 191 1.26%
FHLB stock22,791 245 4.26% 20,345 254 4.95% 18,496 105 2.25%
Total investment securities1,952,535 14,114 2.87% 1,814,446 12,780 2.79% 1,669,362 10,330 2.46%
Total interest-earning assets10,413,621 128,741 4.90% 9,656,574 117,648 4.83% 9,333,063 103,475 4.40%
Non-interest-earning assets903,165    799,083    861,232   
Total assets$11,316,786    $10,455,657    $10,194,295   
Deposits:           
Interest-bearing checking accounts$1,131,030 403 0.14% $1,006,010 270 0.11% $964,306 222 0.09%
Savings accounts1,779,288 1,505 0.34% 1,631,158 1,002 0.24% 1,567,845 550 0.14%
Money market accounts1,440,889 1,638 0.45% 1,381,943 1,011 0.29% 1,471,875 645 0.17%
Certificates of deposit1,287,114 3,957 1.22% 1,153,403 3,234 1.11% 1,024,069 1,694 0.66%
Total interest-bearing deposits5,638,321 7,503 0.53% 5,172,514 5,517 0.42% 5,028,095 3,111 0.25%
Non-interest-bearing deposits3,608,930  % 3,424,587  % 3,325,452  %
Total deposits9,247,251 7,503 0.32% 8,597,101 5,517 0.25% 8,353,547 3,111 0.15%
Other interest-bearing liabilities:           
FHLB advances311,046 2,072 2.64% 249,896 1,388 2.20% 204,502 766 1.49%
Other borrowings117,724 66 0.22% 110,868 60 0.21% 106,678 77 0.29%
Junior subordinated debentures140,212 1,641 4.64% 140,212 1,605 4.54% 140,212 1,257 3.56%
Total borrowings568,982 3,779 2.64% 500,976 3,053 2.42% 451,392 2,100 1.85%
Total funding liabilities9,816,233 11,282 0.46% 9,098,077 8,570 0.37% 8,804,939 5,211 0.23%
Other non-interest-bearing liabilities(2)92,003    85,485    63,654   
Total liabilities9,908,236    9,183,562    8,868,593   
Shareholders' equity1,408,550    1,272,095    1,325,702   
Total liabilities and shareholders' equity$11,316,786    $10,455,657    $10,194,295   
Net interest income/rate spread $117,459 4.44%  $109,078 4.46%  $98,264 4.17%
Net interest margin  4.47%   4.48%   4.18%
Additional Key Financial Ratios:           
Return on average assets  1.32%   1.43%   (0.53)%
Return on average equity  10.57%   11.78%   (4.05)%
Average equity/average assets  12.45%   12.17%   13.00%
Average interest-earning assets/average interest-bearing liabilities  167.76%   170.21%   170.33%
Average interest-earning assets/average funding liabilities  106.09%   106.14%   106.00%
Non-interest income/average assets  0.74%   0.77%   1.08%
Non-interest expense/average assets  3.34%   3.10%   3.21%
Efficiency ratio(4)  68.89%   63.04%   65.51%
Adjusted efficiency ratio(5)  63.06%   60.21%   69.40%


(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 this press release.
   


        
ADDITIONAL FINANCIAL INFORMATION       
(dollars in thousands)       
(rates / ratios annualized)       
        
ANALYSIS OF NET INTEREST SPREADTwelve months ended
 December 31, 2018 December 31, 2017
 Average
Balance
Interest and
Dividends
Yield/Cost(3) Average
Balance
Interest and
Dividends
Yield/Cost(3)
Interest-earning assets:       
Held for sale loans$81,873 $3,926 4.80% $128,480 $5,245 4.08%
Mortgage loans6,188,279 320,264 5.18% 5,932,300 290,132 4.89%
Commercial/agricultural loans1,519,871 79,605 5.24% 1,485,985 70,266 4.73%
Consumer and other loans149,184 9,575 6.42% 140,500 8,806 6.27%
Total loans(1)7,939,207 413,370 5.21% 7,687,265 374,449 4.87%
Mortgage-backed securities1,247,758 35,076 2.81% 1,043,599 24,535 2.35%
Other securities468,416 13,332 2.85% 464,680 12,448 2.68%
Interest-bearing deposits with banks59,031 1,080 1.83% 49,573 583 1.18%
FHLB stock20,496 774 3.78% 16,379 269 1.64%
Total investment securities1,795,701 50,262 2.80% 1,574,231 37,835 2.40%
Total interest-earning assets9,734,908 463,632 4.76% 9,261,496 412,284 4.45%
Non-interest-earning assets828,184    892,052   
Total assets$10,563,092    $10,153,548   
Deposits:       
Interest-bearing checking accounts$1,048,327 1,200 0.11% $933,978 850 0.09%
Savings accounts1,665,608 3,944 0.24% 1,559,042 2,138 0.14%
Money market accounts1,421,161 4,107 0.29% 1,515,854 2,638 0.17%
Certificates of deposit1,127,612 11,391 1.01% 1,116,304 6,647 0.60%
Total interest-bearing deposits5,262,708 20,642 0.39% 5,125,178 12,273 0.24%
Non-interest-bearing deposits3,411,010  % 3,233,889  %
Total deposits8,673,718 20,642 0.24% 8,359,067 12,273 0.15%
Other interest-bearing liabilities:       
FHLB advances253,661 5,636 2.22% 151,295 1,908 1.26%
Other borrowings108,730 245 0.23% 111,903 317 0.28%
Junior subordinated debentures140,212 6,136 4.38% 140,212 4,752 3.39%
Total borrowings502,603 12,017 2.39% 403,410 6,977 1.73%
Total funding liabilities9,176,321 32,659 0.36% 8,762,477 19,250 0.22%
Other non-interest-bearing liabilities(2)79,901    61,592   
Total liabilities9,256,222    8,824,069   
Shareholders' equity1,306,870    1,329,479   
Total liabilities and shareholders' equity$10,563,092    $10,153,548   
Net interest income/rate spread $430,973 4.40%  $393,034 4.23%
Net interest margin  4.43%   4.24%
Additional Key Financial Ratios:       
Return on average assets  1.29%   0.60%
Return on average equity  10.45%   4.57%
Average equity/average assets  12.37%   13.09%
Average interest-earning assets/average interest-bearing liabilities  168.85%   167.52%
Average interest-earning assets/average funding liabilities  106.09%   105.69%
Non-interest income/average assets  0.80%   0.84%
Non-interest expense/average assets  3.23%   3.14%
Efficiency ratio(4)  66.29%   66.70%
Adjusted efficiency ratio(5)  63.59%   66.28%


(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 acquisition related costs, amortization of CDI, real estate operations expense, 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 this press release.
   


          
ADDITIONAL FINANCIAL INFORMATION         
(dollars in thousands)         
          
* Non-GAAP Financial Measures         
In addition to results presented in accordance with generally accepted accounting principles in the United States of America (GAAP), this press release contains certain non-GAAP 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.  However, these non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP.  Where applicable, comparable earnings information using GAAP financial measures is also presented.  Because not all companies use the same calculations, our presentation may not be comparable to other similarly titled measures as calculated by other companies. For a reconciliation of these non-GAAP financial measures, see the tables below:
          
REVENUE FROM CORE OPERATIONSQuarters Ended Twelve months ended
 Dec 31, 2018 Sep 30, 2018 Dec 31, 2017 Dec 31, 2018 Dec 31, 2017
Net interest income before provision for loan losses$117,459  $109,078  $98,264  $430,973  $393,034 
Total non-interest income21,018  20,411  27,674  84,008  85,200 
Total GAAP revenue138,477  129,489  125,938  514,981  478,234 
Exclude net loss on sale of securities885    2,310  837  2,080 
Exclude change in valuation of financial instruments carried at fair value(198) (45) 1,013  (3,775) 2,844 
Exclude gain on sale of branches    (12,189)   (12,189)
Revenue from core operations (non-GAAP)$139,164  $129,444  $117,072  $512,043  $470,969 


EARNINGS FROM CORE OPERATIONS Quarters Ended Twelve months ended
  Dec 31, 2018 Sep 30, 2018 Dec 31, 2017 Dec 31, 2018 Dec 31, 2017
Net income (GAAP) $37,528  $37,773  $(13,548) $136,515  $60,776 
 Exclude net loss on sale of securities 885    2,310  837  2,080 
Exclude change in valuation of financial instruments carried at fair value (198) (45) 1,013  (3,775) 2,844 
Exclude acquisition-related costs 4,602  1,005    5,607   
 Exclude gain on sale of branches     (12,189)   (12,189)
Exclude related tax (benefit) expense (1,159) (126) 3,192  (426) 2,615 
Exclude tax adjustments related to tax reform and valuation reserves (4,207)   42,630  (4,207) 42,630 
Total earnings from core operations (non-GAAP) $37,451  $38,607  $23,408  $134,551  $98,756 
           
Diluted earnings (loss) per share (GAAP) $1.09  $1.17  $(0.41) $4.15  $1.84 
Diluted core earnings per share (non-GAAP) $1.09  $1.19  $0.71  $4.09  $2.99 


ADDITIONAL FINANCIAL INFORMATION          
(dollars in thousands)          
ADJUSTED EFFICIENCY RATIO Quarters Ended Twelve months ended
  Dec 31, 2018 Sep 30, 2018 Dec 31, 2017 Dec 31, 2018 Dec 31, 2017
Non-interest expense (GAAP) $95,396  $81,632  $82,501  $341,371  $318,970 
Exclude acquisition-related costs (4,602) (1,005)   (5,607)  
Exclude CDI amortization (1,935) (1,348) (1,457) (6,047) (6,246)
Exclude state/municipal tax expense (854) (902) (737) (3,284) (2,594)
Exclude REO (loss) gain (251) (433) 941  (804) 2,030 
Adjusted non-interest expense (non-GAAP) $87,754  $77,944  $81,248  $325,629  $312,160 
           
Net interest income before provision for loan losses (GAAP) $117,459  $109,078  $98,264  $430,973  $393,034 
Non-interest income (GAAP) 21,018  20,411  27,674  84,008  85,200 
Total revenue 138,477  129,489  125,938  514,981  478,234 
Exclude net loss on sale of securities 885    2,310  837  2,080 
Exclude net change in valuation of financial instruments carried at fair value (198) (45) 1,013  (3,775) 2,844 
Exclude gain on sale of branches     (12,189)   (12,189)
Adjusted revenue (non-GAAP) $139,164  $129,444  $117,072  $512,043  $470,969 
           
Efficiency ratio (GAAP) 68.89% 63.04% 65.51% 66.29% 66.70%
Adjusted efficiency ratio (non-GAAP)