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Banner Corporation Reports Record 2019 Net Income,

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Highlights in Fourth Quarter of 2019 included

Strong Organic Loan and Core Deposit Growth and Completion of AltaPacific Bancorp Acquisition

WALLA WALLA, Wash., Jan. 23, 2020 (GLOBE NEWSWIRE) -- Banner Corporation (NASDAQ GSM: BANR) ("Banner"), the parent company of Banner Bank and Islanders Bank, today reported record 2019 net income, which increased 7% to $146.3 million, or $4.18 per diluted share, compared to $136.5 million, or $4.15 per diluted share, in 2018. In the fourth quarter of 2019, net income totaled $33.7 million, or $0.95 per diluted share, compared to $39.6 million, or $1.15 per diluted share, in the preceding quarter and $37.5 million, or $1.09 per diluted share, in the fourth quarter of 2018. Fourth quarter of 2019 results include $4.4 million of acquisition-related expenses, compared to $676,000 of acquisition-related expenses in the preceding quarter and $4.6 million in the fourth quarter of 2018. The 2019 results include $7.5 million of acquisition-related expenses compared to $5.6 million of acquisition-related expenses for 2018.

“Banner’s record 2019 operating results reflect the continued execution of our super community bank strategy. We are generating new client relationships and adding to our core funding position by growing core deposits while maintaining a moderate risk profile,” stated Mark J. Grescovich, President and Chief Executive Officer. “During the fourth quarter, we announced the completion of the merger with AltaPacific Bancorp. This combination is a complementary fit, both strategically and culturally, and provides scale to our California franchise with attractive core deposits and strong commercial banking relationships.”

At December 31, 2019, Banner Corporation had $12.61 billion in assets, $9.21 billion in net loans and $10.05 billion in deposits. Banner operates 178 branch offices, including branches located in eight of the top 20 largest western Metropolitan Statistical Areas by population.

Fourth Quarter 2019 Highlights

  • Revenues increased 2% to $139.8 million, compared to $137.5 million in the preceding quarter and increased nominally compared to $138.5 million in the fourth quarter a year ago.

  • Net interest income, before the provision for loan losses, was $119.5 million, compared to $116.6 million in the preceding quarter and $117.5 million in the fourth quarter a year ago.

  • Net interest margin was 4.20%, compared to 4.25% in the preceding quarter and 4.47% in the fourth quarter a year ago.

  • Mortgage banking revenues were $6.2 million, compared to $6.6 million in the preceding quarter and increased 4% compared to $6.0 million in the fourth quarter a year ago.

  • Return on average assets was 1.07% compared to 1.31% in the preceding quarter and 1.32% in the fourth quarter a year ago.

  • Net loans receivable increased 5% to $9.20 billion at December 31, 2019, compared to $8.74 billion at September 30, 2019, and increased 7% when compared to $8.59 billion at December 31, 2018.

  • Non-performing assets increased to $40.5 million, or 0.32% of total assets, at December 31, 2019, compared to $18.6 million, or 0.15% of total assets in the preceding quarter, and $18.9 million, or 0.16% of total assets, at December 31, 2018.

  • Provision for loan losses was $4.0 million, and the allowance for loan losses was $100.6 million, or 1.08% of total loans receivable, as of December 31, 2019.

  • Core deposits increased 5% to $8.93 billion at December 31, 2019, compared to $8.51 billion at September 30, 2019 and increased 10% compared to $8.16 billion a year ago. Core deposits represented 89% of total deposits at December 31, 2019.

  • Dividends to shareholders were $1.41 per share in the quarter ended December 31, 2019, including a $0.41 regular quarterly dividend and a $1.00 special cash dividend.

  • Common shareholders’ equity per share decreased slightly to $44.59 at December 31, 2019, compared to $44.80 at the preceding quarter end and increased 6% from $42.03 a year ago.

  • Tangible common shareholders' equity per share* decreased 2% to $33.33 at December 31, 2019, compared to $34.10 at the preceding quarter end and increased 6% from $31.45 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 adjusted revenue (which excludes fair value adjustments and net gain (loss) on the sale of securities from the total of net interest income before provision for loan losses and non-interest income) and the adjusted efficiency ratio (which excludes acquisition-related expenses, amortization of core deposit intangibles, real estate owned gain (loss), FHLB prepayment penalties and state/municipal taxes from non-interest expense divided by adjusted revenue) represent non-GAAP (Generally Accepted Accounting Principles) financial measures. Management has presented these non-GAAP financial measures in this earnings release because it believes that they provide useful and comparative information to assess trends in Banner's core operations reflected in the current quarter's results and facilitate the comparison of our performance with the performance of our peers. Where applicable, comparable earnings information using GAAP financial measures is also presented. See also Non-GAAP Financial Measures reconciliation tables on the last two pages of this press release.

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

Significant Recent Initiatives and Events

On November 1, 2019, Banner completed the acquisition of AltaPacific Bancorp (“AltaPacific”) and its wholly-owned subsidiary, AltaPacific Bank, of Santa Rosa, California. At closing AltaPacific Bank had six branch locations, including one in Northern California, and five in Southern California. Pursuant to the previously announced terms, AltaPacific shareholders received 0.2712 shares of Banner common stock in exchange for each share of AltaPacific common stock, plus cash in lieu of any fractional shares and cash to buyout AltaPacific stock options for a total consideration paid of $87.6 million.

The AltaPacific merger was accounted for using the acquisition method of accounting. Accordingly, the assets (including identifiable intangible assets) and the liabilities of AltaPacific 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 $426.6 million of assets, $332.4 million of loans, and $313.4 million of deposits to Banner.

Adoption of New Accounting Standard

In June 2016, Financial Accounting Standards Board issued Accounting Standard Update No. 2016-13, Measurement of Credit Losses on Financial Instruments (ASU 2016-13). Currently GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 became effective for Banner on January 1, 2020. Banner is in the process of finalizing the adoption of ASU 2016-13.

Based on the initial December 31, 2019 model results Banner estimates the adoption of ASU No. 2016-13 will result in a combined increase to its Allowance for Credit Loss and Reserve for Unfunded Commitments of 10% to 20%. The increase will be recorded as an adjustment to equity as of the adoption date.

Income Statement Review

Banner's net interest margin was 4.20% for the fourth quarter of 2019, a five basis-point decrease compared to 4.25% in the preceding quarter and a 27 basis-point decrease compared to 4.47% in the fourth quarter a year ago. The decrease in net interest margin during the quarter primarily reflects lower yields on average interest-earning assets largely as a result of three 25 basis point decreases by the Federal Reserve in the targeted Fed Funds Rate in the third and fourth quarter coupled with a longer-term decline in the 10-year treasury yield. Acquisition accounting adjustments added eight basis points to the net interest margin in the current quarter compared to six basis points in the preceding quarter and 12 basis points in the fourth quarter a year ago. The total purchase discount for acquired loans was $25.0 million at December 31, 2019, compared to $21.3 million at September 30, 2019, and $25.7 million at December 31, 2018. For the year ended December 31, 2019, Banner’s net interest margin was 4.30% compared to 4.43% in 2018.

Average interest-earning asset yields decreased ten basis points to 4.69% compared to 4.79% for the preceding quarter and decreased 21 basis points compared to 4.90% in the fourth quarter a year ago. Average loan yields decreased seven basis points to 5.13% compared to 5.20% in the preceding quarter and decreased 24 basis points compared to 5.37% in the fourth quarter a year ago. Loan discount accretion added 11 basis points to loan yields in the fourth quarter of 2019, compared to seven basis points in the preceding quarter, and 16 basis points in the fourth quarter a year ago. Deposit costs were 0.40% in the fourth quarter of 2019, a two basis-point decrease compared to the preceding quarter and an eight basis-point increase compared to the fourth quarter a year ago. The decrease in deposit costs during the current quarter compared to the preceding quarter are the result of recent decreases in market interest rates; however, changes in the average rate paid on interest-bearing deposits tend to lag changes in market interest rates. The total cost of funds was 0.52% during the fourth quarter of 2019, a five basis-point decrease compared to the preceding quarter and a six basis-point increase compared to the fourth quarter a year ago.

Banner recorded a $4.0 million provision for loan losses in the current quarter, compared to $2.0 million in the prior quarter and $2.5 million in the same quarter a year ago. The provision is primarily a result of new loan originations, the increase in non-performing loans, the renewal of acquired loans out of the discounted acquired loan portfolio and net charge-offs.

Total non-interest income was $20.3 million in the fourth quarter of 2019, compared to $20.9 million in the third quarter of 2019 and $21.0 million in the fourth quarter a year ago. Deposit fees and other service charges were $9.6 million in the fourth quarter of 2019, compared to $10.3 million in the preceding quarter and $12.5 million in the fourth quarter a year ago. The decrease in deposit fees and other service charges from the fourth quarter a year ago is primarily a result of Banner becoming subject to the Durbin Amendment on July 1, 2019, which reduced interchange fee income by approximately $7 million during the second half of 2019. Mortgage banking revenues, including gains on one- to four-family and multifamily loan sales and loan servicing fees, were $6.2 million in the fourth quarter, compared to $6.6 million in the preceding quarter and $6.0 million in the fourth quarter of 2018. The higher mortgage banking revenue year-over-year reflected an increase in residential mortgage held-for-sale loan production. The increase in residential held-for-sale loan production was primarily due to increased refinance activity. Home purchase activity accounted for 56% of one- to four-family mortgage loan originations in both the fourth quarter of 2019 and in the prior quarter, compared to 78% in the fourth quarter of 2018. For the year, total non-interest income was $81.9 million, compared to $84.0 million in 2018.

Banner’s fourth quarter 2019 results included a $36,000 net loss for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value, principally comprised of certain investment securities held for trading, and a $62,000 net gain on the sale of securities. In the preceding quarter, results included a $69,000 net loss for fair value adjustments and a $2,000 net loss on the sale of securities. In the fourth quarter a year ago, results included a $198,000 net gain for fair value adjustments and a $885,000 net loss on the sale of securities.

Total revenue increased 2% to $139.8 million for the fourth quarter of 2019, compared to $137.5 million in the preceding quarter and increased nominally compared to $138.5 million in the fourth quarter a year ago. For the year, total revenue increased 7% to $550.9 million compared to $515.0 million in 2018. Adjusted revenue* (the total of net interest income before provision for loan losses and total non-interest income excluding the net gain and loss on the sale of securities and the net change in valuation of financial instruments) was $139.7 million in the fourth quarter of 2019, compared to $137.6 million in the preceding quarter and $139.2 million in the fourth quarter of 2018. For the year, adjusted revenue* was $551.0 million, compared to $512.0 million in 2018.

Banner’s total non-interest expense was $93.7 million in the fourth quarter of 2019, compared to $87.3 million in the preceding quarter and $95.4 million in the fourth quarter of 2018. Acquisition-related expenses were $4.4 million for the fourth quarter of 2019, compared to $676,000 for the preceding quarter, and $4.6 million in the fourth quarter of 2018. The fourth quarter of 2019 non-interest expenses include two months of expenses associated with the operations acquired in the AltaPacific acquisition. In addition, the fourth quarter of 2019 miscellaneous non-interest expense included $735,000 of expense related to the prepayment of $150 million of FHLB advances. For the year, total non-interest expense was $357.7 million, compared to $341.4 million in 2018. Banner’s efficiency ratio was 67.03% for the current quarter, compared to 63.50% in the preceding quarter and 68.89% in the year ago quarter. Banner’s adjusted efficiency ratio* was 61.19% for the current quarter, compared to 60.71% in the preceding quarter and 63.06% in the year ago quarter.

For the fourth quarter of 2019, Banner had $8.4 million in state and federal income tax expense for an effective tax rate of 20.0%, reflecting the benefits from tax exempt income. Banner’s statutory income tax rate is 23.5%, representing a blend of the statutory federal income tax rate of 21.0% and apportioned effects of the state income tax rates.

Balance Sheet Review

Total assets increased 4% to $12.60 billion at December 31, 2019, compared to $12.10 billion at September 30, 2019, and increased 6% when compared to $11.87 billion at December 31, 2018. The total of securities and interest-bearing deposits held at other banks was $1.89 billion at December 31, 2019, compared to $1.87 billion at September 30, 2019 and $1.94 billion at December 31, 2018. The average effective duration of Banner's securities portfolio was approximately 3.5 years at both December 31, 2019 and December 31, 2018.

Net loans receivable increased 5% to $9.20 billion at December 31, 2019, compared to $8.74 billion at September 30, 2019, and increased 7% when compared to $8.59 billion at December 31, 2018. The year-over-year increase in net loans included $332.4 million of portfolio loans acquired in the AltaPacific acquisition during the fourth quarter of 2019. Commercial real estate and multifamily real estate loans increased 9% to $4.36 billion at December 31, 2019, compared to $4.01 billion at September 30, 2019, and increased 11% compared to $3.93 billion a year ago. Commercial business loans increased 5% to $1.69 billion at December 31, 2019, compared to $1.62 billion at September 30, 2019, and increased 14% compared to $1.48 billion a year ago. Agricultural business loans decreased to $370.5 million at December 31, 2019, compared to $390.5 million three months earlier and $404.9 million a year ago. Total construction, land and land development loans were $1.17 billion at December 31, 2019, an 8% increase from $1.08 billion at September 30, 2019, and a 6% increase compared to $1.11 billion a year earlier. Consumer loans decreased to $762.8 million at December 31, 2019, compared to $779.6 million at September 30, 2019, and $785.0 million a year ago. One- to four-family loans decreased modestly to $945.6 million at December 31, 2019, compared to $947.5 million at September 30, 2019, and $973.6 million a year ago.

Loans held for sale were $210.4 million at December 31, 2019, compared to $244.9 million at September 30, 2019, and $171.0 million at December 31, 2018. The volume of one- to four- family residential mortgage loans sold was $268.1 million in the current quarter, compared to $204.6 million in the preceding quarter and $130.1 million in the fourth quarter a year ago. During the fourth quarter of 2019, Banner sold $103.4 million in multifamily loans. Banner sold $79.4 million in multifamily loans in the preceding quarter and sold $26.8 million in the fourth quarter a year ago.

Total deposits increased 3% to $10.05 billion at December 31, 2019, compared to $9.73 billion at September 30, 2019, and increased 6% when compared to $9.48 billion a year ago. The increase in deposits included $313.4 million in deposits acquired in the AltaPacific acquisition during the fourth quarter of 2019. Non-interest-bearing account balances increased 2% to $3.95 billion at December 31, 2019, compared to $3.89 billion at September 30, 2019, and increased 8% compared to $3.66 billion a year ago. Core deposits (non-interest-bearing and interest-bearing transaction and savings accounts) increased 5% from the prior quarter and increased 9% compared to a year ago. Core deposits represented 89% of total deposits at December 31, 2019, compared to 87% of total deposits at September 30, 2019, and 86% of total deposits a year earlier. Certificates of deposit decreased 8% to $1.12 billion at December 31, 2019, compared to $1.22 billion at September 30, 2019, and decreased 15% compared to $1.32 billion a year earlier. The decrease in certificates of deposit primarily reflects the decrease in brokered deposits to $202.9 million at December 31, 2019, compared to $299.5 million at September 30, 2019 and $377.3 million a year ago. FHLB borrowings totaled $450.0 million at December 31, 2019 compared to $382.0 million at September 30, 2019 and $540.2 million a year earlier.

At December 31, 2019, total common shareholders' equity was $1.59 billion, or 12.65% of assets, compared to $1.53 billion or 12.65% of assets at September 30, 2019, and $1.48 billion or 12.46% of assets a year ago. At December 31, 2019, tangible common shareholders' equity*, which excludes goodwill and other intangible assets, net, was $1.19 billion, or 9.77% of tangible assets*, compared to $1.17 billion, or 9.93% of tangible assets, at September 30, 2019, and $1.11 billion, or 9.62% of tangible assets, a year ago. Banner's tangible book value per share* increased to $33.33 at December 31, 2019, compared to $31.45 per share a year ago.

Banner and its subsidiary banks continue to maintain capital levels in excess of the requirements to be categorized as “well-capitalized.” At December 31, 2019, Banner's common equity Tier 1 capital ratio was 10.63%, its Tier 1 leverage capital to average assets ratio was 10.71%, and its total capital to risk-weighted assets ratio was 12.93%.

Credit Quality

The allowance for loan losses was $100.6 million at December 31, 2019, or 1.08% of total loans receivable outstanding and 254% of non-performing loans compared to $97.8 million at September 30, 2019, or 1.11% of total loans receivable outstanding and 536% of non-performing loans, and $96.5 million at December 31, 2018, or 1.11% of total loans receivable outstanding and 616% of non-performing loans. Net loan charge-offs totaled $1.2 million in the fourth quarter, compared to net loan charge-offs of $2.5 million in the preceding quarter and net loan charge-offs of $1.3 million in the fourth quarter a year ago. Banner recorded a $4.0 million provision for loan losses in the current quarter primarily as a result of the origination of new loans, the increase in non-performing loans, the renewal of acquired loans out of the discounted acquired loan portfolio and net charge-offs, compared to $2.0 million in the prior quarter and $2.5 million in the year ago quarter. Non-performing loans were $39.6 million at December 31, 2019, compared to $18.3 million at September 30, 2019, and $15.7 million a year ago. The increase in non-performing loans during the quarter was largely due to one commercial banking relationship moving to nonaccrual. Real estate owned and other repossessed assets were $936,000 at December 31, 2019, compared to $343,000 at September 30, 2019, and $3.2 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 losses is recorded for acquired loans at the acquisition date. At December 31, 2019, the total purchase discount for acquired loans was $25.0 million.

Banner's total non-performing assets were $40.5 million, or 0.32% of total assets, at December 31, 2019, compared to $18.6 million, or 0.15% of total assets, at September 30, 2019, and $18.9 million, or 0.16% of total assets, a year ago. In addition to non-performing assets, there were $15.9 million of purchased credit-impaired loans at December 31, 2019, compared to $12.6 million at September 30, 2019 and $14.4 million at December 31, 2018.

Conference Call

Banner will host a conference call on Friday, January 24, 2020, at 8:00 a.m. PST, to discuss its fourth 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 10137616, or at www.bannerbank.com.

About the Company

Banner Corporation is a $12.61 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 AltaPacific acquisition might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected; (2) the credit risks of lending activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses, which could necessitate additional provisions for loan losses, resulting both from loans originated and loans acquired from other financial institutions; (3) results of examinations by regulatory authorities, including the possibility that any such regulatory authority may, among other things, require increases in the allowance for loan losses or writing down of assets or impose restrictions or penalties with respect to Banner's activities; (4) competitive pressures among depository institutions; (5) interest rate movements and their impact on customer behavior and net interest margin; (6) the impact of repricing and competitors' pricing initiatives on loan and deposit products; (7) fluctuations in real estate values; (8) the ability to adapt successfully to technological changes to meet customers' needs and developments in the market place; (9) the ability to access cost-effective funding; (10) changes in financial markets; (11) changes in economic conditions in general and in Washington, Idaho, Oregon and California in particular; (12) the costs, effects and outcomes of litigation; (13) legislation or regulatory changes, including but not limited to the impact of the Dodd-Frank Act and regulations adopted thereunder, changes in regulatory capital requirements pursuant to the implementation of the Basel III capital standards, other governmental initiatives affecting the financial services industry and changes in federal and/or state tax laws or interpretations thereof by taxing authorities; (14) changes in accounting principles, policies or guidelines; (15) future acquisitions by Banner of other depository institutions or lines of business; (16) future goodwill impairment due to changes in Banner's business, changes in market conditions, or other factors; and (17) other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed from time to time in our filings with the Securities and Exchange Commission including our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K.

RESULTS OF OPERATIONS

Quarters Ended

Twelve Months Ended

(in thousands except shares and per share data)

Dec 31, 2019

Sep 30, 2019

Dec 31, 2018

Dec 31, 2019

Dec 31, 2018

INTEREST INCOME:

Loans receivable

$

120,915

$

118,096

$

114,627

$

471,473

$

413,370

Mortgage-backed securities

8,924

9,415

9,931

38,640

35,076

Securities and cash equivalents

3,570

3,925

4,183

15,566

15,186

133,409

131,436

128,741

525,679

463,632

INTEREST EXPENSE:

Deposits

9,950

10,014

7,503

37,630

20,642

Federal Home Loan Bank advances

2,281

3,107

2,072

12,234

5,636

Other borrowings

121

82

66

330

245

Junior subordinated debentures

1,566

1,612

1,641

6,574

6,136

13,918

14,815

11,282

56,768

32,659

Net interest income before provision for loan losses

119,491

116,621

117,459

468,911

430,973

PROVISION FOR LOAN LOSSES

4,000

2,000

2,500

10,000

8,500

Net interest income

115,491

114,621

114,959

458,911

422,473

NON-INTEREST INCOME:

Deposit fees and other service charges

9,637

10,331

12,539

46,632

48,074

Mortgage banking operations

6,248

6,616

6,019

22,215

21,343

Bank-owned life insurance

1,170

1,076

994

4,645

4,505

Miscellaneous

3,201

2,914

2,153

8,632

7,148

20,256

20,937

21,705

82,124

81,070

Net gain (loss) on sale of securities

62

(2

)

(885

)

33

(837

)

Net change in valuation of financial instruments carried at fair value

(36

)

(69

)

198

(208

)

3,775

Total non-interest income

20,282

20,866

21,018

81,949

84,008

NON-INTEREST EXPENSE:

Salary and employee benefits

57,050

59,090

52,122

226,409

202,613

Less capitalized loan origination costs

(8,797

)

(7,889

)

(4,863

)

(28,934

)

(17,925

)

Occupancy and equipment

13,377

12,566

13,490

52,390

49,215

Information / computer data services

6,202

5,657

5,112

22,458

18,823

Payment and card processing services

4,638

4,330

4,233

16,993

15,412

Professional and legal expenses

2,262

2,704

6,669

9,736

17,945

Advertising and marketing

2,021

2,221

2,588

7,836

8,346

Deposit insurance expense (benefit)

1,608

(1,604

)

1,093

2,840

4,446

State/municipal business and use taxes

917

1,011

854

3,880

3,284

Real estate operations

40

126

251

303

804

Amortization of core deposit intangibles

2,061

1,985

1,935

8,151

6,047

Miscellaneous

7,892

6,435

7,310

28,122

26,754

89,271

86,632

90,794

350,184

335,764

Acquisition-related expenses

4,419

676

4,602

7,544

5,607

Total non-interest expense

93,690

87,308

95,396

357,728

341,371

Income before provision for income taxes

42,083

48,179

40,581

183,132

165,110

PROVISION FOR INCOME TAXES

8,428

8,602

3,053

36,854

28,595

NET INCOME

$

33,655

$

39,577

$

37,528

$

146,278

$

136,515

Earnings per share available to common shareholders:

Basic

$

0.96

$

1.15

$

1.10

$

4.20

$

4.16

Diluted

$

0.95

$

1.15

$

1.09

$

4.18

$

4.15

Cumulative dividends declared per common share

$

1.41

$

0.41

$

0.38

$

2.64

$

1.96

Weighted average common shares outstanding:

Basic

35,188,399

34,407,462

34,221,048

34,868,434

32,784,724

Diluted

35,316,736

34,497,994

34,342,641

34,967,684

32,894,425

Increase (decrease) in common shares outstanding

1,578,219

(400,286

)

2,780,015

568,804

2,456,287


FINANCIAL CONDITION

Percentage Change

(in thousands except shares and per share data)

Dec 31, 2019

Sep 30, 2019

Dec 31, 2018

Prior
Qtr

Prior Yr
Qtr

ASSETS

Cash and due from banks

$

234,359

$

250,671

$

231,029

(6.5

)%

1.4

%

Interest-bearing deposits

73,376

73,785

41,167

(0.6

)%

78.2

%

Total cash and cash equivalents

307,735

324,456

272,196

(5.2

)%

13.1

%

Securities - trading

25,636

25,672

25,896

(0.1

)%

(1.0

)%

Securities - available for sale

1,551,557

1,539,908

1,636,223

0.8

%

(5.2

)%

Securities - held to maturity

236,094

230,056

234,220

2.6

%

0.8

%

Total securities

1,813,287

1,795,636

1,896,339

1.0

%

(4.4

)%

Federal Home Loan Bank stock

28,342

25,623

31,955

10.6

%

(11.3

)%

Loans held for sale

210,447

244,889

171,031

(14.1

)%

23.0

%

Loans receivable

9,305,357

8,835,368

8,684,595

5.3

%

7.1

%

Allowance for loan losses

(100,559

)

(97,801

)

(96,485

)

2.8

%

4.2

%

Net loans receivable

9,204,798

8,737,567

8,588,110

5.3

%

7.2

%

Accrued interest receivable

37,962

40,033

38,593

(5.2

)%

(1.6

)%

Real estate owned held for sale, net

814

228

2,611

257.0

%

(68.8

)%

Property and equipment, net

178,008

171,279

171,809

3.9

%

3.6

%

Goodwill

373,121

339,154

339,154

10.0

%

10.0

%

Other intangibles, net

29,158

26,610

32,924

9.6

%

(11.4

)%

Bank-owned life insurance

192,088

179,076

177,467

7.3

%

8.2

%

Other assets

228,271

213,291

149,128

7.0

%

53.1

%

Total assets

$

12,604,031

$

12,097,842

$

11,871,317

4.2

%

6.2

%

LIABILITIES

Deposits:

Non-interest-bearing

$

3,945,000

$

3,885,210

$

3,657,817

1.5

%

7.9

%

Interest-bearing transaction and savings accounts

4,983,238

4,624,970

4,498,966

7.7

%

10.8

%

Interest-bearing certificates

1,120,403

1,218,591

1,320,265

(8.1

)%

(15.1

)%

Total deposits

10,048,641

9,728,771

9,477,048

3.3

%

6.0

%

Advances from Federal Home Loan Bank

450,000

382,000

540,189

17.8

%

(16.7

)%

Customer repurchase agreements and other borrowings

118,474

120,014

118,995

(1.3

)%

(0.4

)%

Junior subordinated debentures at fair value

119,304

113,417

114,091

5.2

%

4.6

%

Accrued expenses and other liabilities

227,889

181,351

102,061

25.7

%

123.3

%

Deferred compensation

45,689

41,354

40,338

10.5

%

13.3

%

Total liabilities

11,009,997

10,566,907

10,392,722

4.2

%

5.9

%

SHAREHOLDERS' EQUITY

Common stock

1,373,940

1,286,711

1,337,436

6.8

%

2.7

%

Retained earnings

186,838

203,704

134,055

(8.3

)%

39.4

%

Other components of shareholders' equity

33,256

40,520

7,104

(17.9

)%

nm

Total shareholders' equity

1,594,034

1,530,935

1,478,595

4.1

%

7.8

%

Total liabilities and shareholders' equity

$

12,604,031

$

12,097,842

$

11,871,317

4.2

%

6.2

%

Common Shares Issued:

Shares outstanding at end of period

35,751,576

34,173,357

35,182,772

Common shareholders' equity per share (1)

$

44.59

$

44.80

$

42.03

Common shareholders' tangible equity per share (1) (2)

$

33.33

$

34.10

$

31.45

Common shareholders' tangible equity to tangible assets (2)

9.77

%

9.93

%

9.62

%

Consolidated Tier 1 leverage capital ratio

10.71

%

10.70

%

10.98

%


(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 final two pages of the press release tables.


ADDITIONAL FINANCIAL INFORMATION

(dollars in thousands)

Percentage Change

LOANS

Dec 31,
2019

Sep 30,
2019

Dec 31,
2018

Prior
Qtr

Prior
Yr Qtr

Commercial real estate:

Owner occupied

$

1,580,650

$

1,463,303

$

1,430,097

8.0

%

10.5

%

Investment properties

2,309,221

2,150,938

2,131,059

7.4

%

8.4

%

Multifamily real estate

473,152

399,814

368,836

18.3

%

28.3

%

Commercial construction

210,668

190,532

172,410

10.6

%

22.2

%

Multifamily construction

233,610

214,878

184,630

8.7

%

26.5

%

One- to four-family construction

544,308

488,945

534,678

11.3

%

1.8

%

Land and land development:

Residential

154,688

163,829

188,508

(5.6

)%

(17.9

)%

Commercial

26,290

26,119

27,278

0.7

%

(3.6

)%

Commercial business

1,693,824

1,619,391

1,483,614

4.6

%

14.2

%

Agricultural business including secured by farmland

370,549

390,505

404,873

(5.1

)%

(8.5

)%

One- to four-family real estate

945,622

947,475

973,616

(0.2

)%

(2.9

)%

Consumer:

Consumer secured by one- to four-family real estate

550,960

566,792

568,979

(2.8

)%

(3.2

)%

Consumer-other

211,815

212,847

216,017

(0.5

)%

(1.9

)%

Total loans receivable

$

9,305,357

$

8,835,368

$

8,684,595

5.3

%

7.1

%

Restructured loans performing under their restructured terms

$

6,466

$

6,721

$

13,422

Loans 30 - 89 days past due and on accrual (1)

$

20,178

$

11,496

$

25,108

Total delinquent loans (including loans on non-accrual), net (2)

$

38,322

$

26,830

$

38,721

Total delinquent loans / Total loans receivable

0.41

%

0.30

%

0.45

%

(1) Includes $2.5 million of purchased credit-impaired loans at December 31, 2019 compared to $112,000 at September 30, 2019 and $3,000 at December 31, 2018.
(2) Delinquent loans include $2.8 million of delinquent purchased credit-impaired loans at December 31, 2019 compared to $412,000 at September 30, 2019 and $519,000 at December 31, 2018.

LOANS BY GEOGRAPHIC LOCATION

Percentage Change

Dec 31, 2019

Sep 30,
2019

Dec 31,
2018

Prior
Qtr

Prior
Yr Qtr

Amount

Percentage

Amount

Amount

Washington

$

4,364,764

46.9

%

$

4,313,972

$

4,324,588

1.2

%

0.9

%

Oregon

1,650,704

17.7

%

1,615,192

1,636,152

2.2

%

0.9

%

California

2,129,789

22.9

%

1,729,208

1,596,604

23.2

%

33.4

%

Idaho

530,016

5.7

%

552,523

521,026

(4.1

)%

1.7

%

Utah

60,958

0.7

%

62,197

57,318

(2.0

)%

6.4

%

Other

569,126

6.1

%

562,276

548,907

1.2

%

3.7

%

Total loans receivable

$

9,305,357

100.0

%

$

8,835,368

$

8,684,595

5.3

%

7.1

%

ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)

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

LOAN ORIGINATIONS

Quarters Ended

Twelve Months Ended

Dec 31, 2019

Sep 30, 2019

Dec 31, 2018

Dec 31, 2019

Dec 31, 2018

Commercial real estate

$

190,584

$

114,528

$

172,885

$

480,669

$

536,784

Multifamily real estate

21,848

29,645

16,731

80,761

25,771

Construction and land

530,632

303,151

397,702

1,435,501

1,460,536

Commercial business

196,069

194,606

206,922

757,721

839,290

Agricultural business

27,926

12,363

18,901

93,050

123,702

One-to four-family residential

31,564

27,734

81,522

117,297

177,332

Consumer

71,683

101,613

72,500

357,040

331,661

Total loan originations (excluding loans held for sale)

$

1,070,306

$

783,640

$

967,163

$

3,322,039

$

3,495,076


ADDITIONAL FINANCIAL INFORMATION

(dollars in thousands)

Quarters Ended

Twelve Months Ended

CHANGE IN THE

Dec 31, 2019

Sep 30, 2019

Dec 31, 2018

Dec 31, 2019

Dec 31, 2018

ALLOWANCE FOR LOAN LOSSES

Balance, beginning of period

$

97,801

$

98,254

$

95,263

$

96,485

$

89,028

Provision for loan losses

4,000

2,000

2,500

10,000

8,500

Recoveries of loans previously charged off:

Commercial real estate

199

107

66

476

1,646

Construction and land

156

23

208

213

One- to four-family real estate

159

129

18

561

750

Commercial business

225

162

193

625

1,049

Agricultural business, including secured by farmland

10

2

23

47

64

Consumer

61

154

102

548

366

654

710

425

2,465

4,088

Loans charged off:

Commercial real estate

(314

)

(1,138

)

(401

)

Construction and land

(45

)

(45

)

(479

)

One- to four-family real estate

(86

)

(86

)

(43

)

Commercial business

(1,180

)

(1,599

)

(684

)

(4,171

)

(2,051

)

Agricultural business, including secured by farmland

(4

)

(741

)

(415

)

(911

)

(756

)

Consumer

(667

)

(423

)

(604

)

(2,040

)

(1,401

)

(1,896

)

(3,163

)

(1,703

)

(8,391

)

(5,131

)

Net charge-offs

(1,242

)

(2,453

)

(1,278

)

(5,926

)

(1,043

)

Balance, end of period

$

100,559

$

97,801

$

96,485

$

100,559

$

96,485

Net charge-offs / Average loans receivable

(0.013

)%

(0.027

)%

(0.015

)%

(0.066

)%

(0.013

)%


ALLOCATION OF

ALLOWANCE FOR LOAN LOSSES

Dec 31, 2019

Sep 30, 2019

Dec 31, 2018

Specific or allocated loss allowance:

Commercial real estate

$

30,591

$

28,515

$

27,132

Multifamily real estate

4,754

4,283

3,818

Construction and land

22,994

22,569

24,442

One- to four-family real estate

4,136

4,569

4,714

Commercial business

23,370

21,147

19,438

Agricultural business, including secured by farmland

4,120

3,895

3,778

Consumer

8,202

8,441

7,972

Total allocated

98,167

93,419

91,294

Unallocated

2,392

4,382

5,191

Total allowance for loan losses

$

100,559

$

97,801

$

96,485

Allowance for loan losses / Total loans receivable

1.08

%

1.11

%

1.11

%

Allowance for loan losses / Non-performing loans

254

%

536

%

616

%


ADDITIONAL FINANCIAL INFORMATION

(dollars in thousands)

Dec 31, 2019

Sep 30, 2019

Dec 31, 2018

NON-PERFORMING ASSETS

Loans on non-accrual status:

Secured by real estate:

Commercial

$

5,952

$

5,092

$

4,088

Multifamily

85

87

Construction and land

1,905

1,318

3,188

One- to four-family

3,410

3,007

1,544

Commercial business

23,015

3,035

2,936

Agricultural business, including secured by farmland

661

757

1,751

Consumer

2,473

2,473

1,241

37,501

15,769

14,748

Loans more than 90 days delinquent, still on accrual:

Secured by real estate:

Commercial

89

89

Construction and land

332

1,141

One- to four-family

877

652

658

Commercial business

401

358

1

Consumer

398

247

247

2,097

2,487

906

Total non-performing loans

39,598

18,256

15,654

Real estate owned (REO)

814

228

2,611

Other repossessed assets

122

115

592

Total non-performing assets

$

40,534

$

18,599

$

18,857

Total non-performing assets to total assets

0.32

%

0.15

%

0.16

%

Purchased credit-impaired loans, net

$

15,938

$

12,575

$

14,413


Quarters Ended

Twelve Months Ended

REAL ESTATE OWNED

Dec 31, 2019

Sep 30, 2019

Dec 31, 2018

Dec 31, 2019

Dec 31, 2018

Balance, beginning of period

$

228

$

2,513

$

364

$

2,611

$

360

Additions from loan foreclosures

48

139

109

641

Additions from acquisitions

650

2,593

650

2,593

Proceeds from dispositions of REO

(105

)

(2,333

)

(453

)

(2,588

)

(838

)

Gain on sale of REO

41

168

32

242

Valuation adjustments in the period

(200

)

(387

)

Balance, end of period

$

814

$

228

$

2,611

$...

814

$

2,611


ADDITIONAL FINANCIAL INFORMATION

(dollars in thousands)

DEPOSIT COMPOSITION

Percentage Change

Dec 31, 2019

Sep 30, 2019

Dec 31, 2018

Prior Qtr

Prior Yr
Qtr

Non-interest-bearing

$

3,945,000

$

3,885,210

$

3,657,817

1.5

%

7.9

%

Interest-bearing checking

1,280,003

1,209,826

1,191,016

5.8

%

7.5

%

Regular savings accounts

1,934,041

1,863,839

1,842,581

3.8

%

5.0

%

Money market accounts

1,769,194

1,551,305

1,465,369

14.0

%

20.7

%

Total interest-bearing transaction and savings accounts

4,983,238

4,624,970

4,498,966

7.7

%

10.8

%

Total core deposits

8,928,238

8,510,180

8,156,783

4.9

%

9.5

%

Interest-bearing certificates

1,120,403

1,218,591

1,320,265

(8.1

)%

(15.1

)%

Total deposits

$

10,048,641

$

9,728,771

$

9,477,048

3.3

%

6.0

%


GEOGRAPHIC CONCENTRATION OF DEPOSITS

Percentage Change

Dec 31, 2019

Sep 30, 2019

Dec 31, 2018

Prior Qtr

Prior Yr
Qtr

Amount

Percentage

Amount

Amount

Washington

$

5,861,809

58.3

%

$

5,833,547

$

5,674,328

0.5

%

3.3

%

Oregon

2,006,163

20.0

%

1,990,155

1,891,145

0.8

%

6.1

%

California

1,698,289

16.9

%

1,429,939

1,434,033

18.8

%

18.4

%

Idaho

482,380

4.8

%

475,130

477,542

1.5

%

1.0

%

Total deposits

$

10,048,641

100.0

%

$

9,728,771

$

9,477,048

3.3

%

6.0

%


INCLUDED IN TOTAL DEPOSITS

Dec 31, 2019

Sep 30, 2019

Dec 31, 2018

Public non-interest-bearing accounts

$

111,015

$

114,879

$

96,009

Public interest-bearing transaction & savings accounts

133,403

119,729

121,392

Public interest-bearing certificates

35,184

26,609

30,089

Total public deposits

$

279,602

$

261,217

$

247,490

Total brokered deposits

$

202,884

$

299,496

$

377,347


ADDITIONAL FINANCIAL INFORMATION

(in thousands)

ACQUISITION OF ALTAPACIFIC BANCORP

The following table* provides the estimated fair value of the assets acquired and liabilities assumed in the AltaPacific acquisition at November 1, 2019 (in thousands):

November 1, 2019

Cash paid

$

2,360

Fair value of common shares issued

85,200

Total consideration

87,560

Fair value of assets acquired:

Cash and cash equivalents

39,686

Securities

20,348

Federal Home Loan Bank stock

2,005

Loans receivable

332,355

Real estate owned held for sale

650

Property and equipment

3,809

Core deposit intangible

4,610

Bank-owned life insurance

11,890

Deferred tax asset

166

Other assets

11,090

Total assets acquired

426,609

Fair value of liabilities assumed:

Deposits

313,374

Advances from FHLB

40,226

Junior subordinated debentures

5,814

Deferred compensation

4,508

Other liabilities

9,094

Total liabilities assumed

373,016

Net assets acquired

53,593

Goodwill

$

33,967

* 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, 2019

Amount

Ratio

Amount

Ratio

Amount

Ratio

Banner Corporation-consolidated:

Total capital to risk-weighted assets

$

1,386,483

12.93

%

$

857,555

8.00

%

$

1,071,943

10.00

%

Tier 1 capital to risk-weighted assets

1,283,208

11.97

%

643,166

6.00

%

643,166

6.00

%

Tier 1 leverage capital to average assets

1,283,208

10.71

%

479,458

4.00

%

n/a

n/a

Common equity tier 1 capital to risk-weighted assets

1,139,708

10.63

%

482,375

4.50

%

n/a

n/a

Banner Bank:

Total capital to risk-weighted assets

1,321,580

12.55

%

842,227

8.00

%

1,052,784

10.00

%

Tier 1 capital to risk-weighted assets

1,220,811

11.60

%

631,670

6.00

%

842,227

8.00

%

Tier 1 leverage capital to average assets

1,220,811

10.45

%

467,330

4.00

%

584,163

5.00

%

Common equity tier 1 capital to risk-weighted assets

1,220,811

11.60

%

473,753

4.50

%

684,310

6.50

%

Islanders Bank:

Total capital to risk-weighted assets

37,044

19.42

%

15,258

8.00

%

19,073

10.00

%

Tier 1 capital to risk-weighted assets

34,658

18.17

%

11,444

6.00

%

15,258

8.00

%

Tier 1 leverage capital to average assets

34,658

11.66

%

11,887

4.00

%

14,859

5.00

%

Common equity tier 1 capital to risk-weighted assets

34,658

18.17

%

8,583

4.50

%

12,397

6.50

%


ADDITIONAL FINANCIAL INFORMATION

(dollars in thousands)

(rates / ratios annualized)

ANALYSIS OF NET INTEREST SPREAD

Quarters Ended

December 31, 2019

September 30, 2019

December 31, 2018

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

$

202,686

$

2,048

4.01

%

$

154,529

$

1,607

4.13

%

$

83,741

$

1,055

5.00

%

Mortgage loans

7,134,231

92,926

5.17

%

6,872,426

89,948

5.19

%

6,573,278

88,561

5.35

%

Commercial/agricultural loans

1,853,447

23,256

4.98

%

1,809,397

23,750

5.21

%

1,631,133

22,257

5.41

%

Consumer and other loans

169,197

2,685

6.30

%

173,342

2,791

6.39

%

172,934

2,754

6.32

%

Total loans(1)

9,359,561

120,915

5.13

%

9,009,694

118,096

5.20

%

8,461,086

114,627

5.37

%

Mortgage-backed securities

1,371,438

8,924

2.58

%

1,358,448

9,415

2.75

%

1,400,508

9,931

2.81

%

Other securities

418,767

2,663

2.52

%

414,994

3,058

2.92

%

474,659

3,633

3.04

%

Interest-bearing deposits with banks

107,959

531

1.95

%

82,836

489

2.34

%

54,577

305

2.22

%

FHLB stock

26,036

376

5.73

%

29,400

378

5.10

%

22,791

245

4.26

%

Total investment securities

1,924,200

12,494

2.58

%

1,885,678

13,340

2.81

%

1,952,535

14,114

2.87

%

Total interest-earning assets

11,283,761

133,409

4.69

%

10,895,372

131,436

4.79

%

10,413,621

128,741

4.90

%

Non-interest-earning assets

1,152,751

1,078,277

903,165

Total assets

$

12,436,512

$

11,973,649

$

11,316,786

Deposits:

Interest-bearing checking accounts

$

1,228,936

564

0.18

%

$

1,194,633

621

0.21

%

$

1,131,030

403

0.14

%

Savings accounts

1,999,656

2,027

0.40

%

1,854,967

2,244

0.48

%

1,779,288

1,505

0.34

%

Money market accounts

1,607,954

2,842

0.70

%

1,542,264

2,944

0.76

%

1,440,889

1,638

0.45

%

Certificates of deposit

1,189,530

4,517

1.51

%

1,155,710

4,205

1.44

%

1,287,114

3,957

1.22

%

Total interest-bearing deposits

6,026,076

9,950

0.66

%

5,747,574

10,014

0.69

%

5,638,321

7,503

0.53

%

Non-interest-bearing deposits

3,959,097

%

3,786,143

%

3,608,930

%

Total deposits

9,985,173

9,950

0.40

%

9,533,717

10,014

0.42

%

9,247,251

7,503

0.32

%

Other interest-bearing liabilities:

FHLB advances

387,435

2,281

2.34

%

476,435

3,107

2.59

%

311,046

2,072

2.64

%

Other borrowings

126,782

121

0.38

%

122,035

82

0.27

%

117,724

66

0.22

%

Junior subordinated debentures

145,339

1,566

4.27

%

140,212

1,612

4.56

%

140,212

1,641

4.64

%

Total borrowings

659,556

3,968

2.39

%

738,682

4,801

2.58

%

568,982

3,779

2.64

%

Total funding liabilities

10,644,729

13,918

0.52

%

10,272,399

14,815

0.57

%

9,816,233

11,282

0.46

%

Other non-interest-bearing liabilities(2)

189,682

163,809

92,003

Total liabilities

10,834,411

10,436,208

9,908,236

Shareholders' equity

1,602,101

1,537,785

1,408,550

Total liabilities and shareholders' equity

$

12,436,512

$

11,973,993

$

11,316,786

Net interest income/rate spread

$

119,491

4.17

%

$

116,621

4.22

%

$

117,459

4.44

%

Net interest margin

4.20

%

4.25

%

4.47

%

Additional Key Financial Ratios:

Return on average assets

1.07

%

1.31

%

1.32

%

Return on average equity

8.33

%

10.21

%

10.57

%

Average equity/average assets

12.88

%

12.84

%

12.45

%

Average interest-earning assets/average interest-bearing liabilities

168.78

%

167.98

%

167.76

%

Average interest-earning assets/average funding liabilities

106.00

%

106.06

%

106.09

%

Non-interest income/average assets

0.65

%

0.69

%

0.74

%

Non-interest expense/average assets

2.99

%

2.89

%

3.34

%

Efficiency ratio(4)

67.03

%

63.50

%

68.89

%

Adjusted efficiency ratio(5)

61.19

%

60.71

%

63.06

%


(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 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 expenses, amortization of core deposit intangibles (CDI), REO gain (loss), FHLB prepayment penalties 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 SPREAD

Twelve Months Ended

December 31, 2019

December 31, 2018

Average
Balance

Interest and
Dividends

Yield/Cost(3)

Average
Balance

Interest and
Dividends

Yield/Cost(3)

Interest-earning assets:

Held for sale loans

$

126,086

$

5,343

4.24

%

$

81,873

$

3,926

4.80

%

Mortgage loans

6,911,067

361,158

5.23

%

6,188,279

320,264

5.18

%

Commercial/agricultural loans

1,784,468

93,742

5.25

%

1,519,871

79,605

5.24

%

Consumer and other loans

176,373

11,230

6.37

%

149,184

9,575

6.42

%

Total loans(1)

8,997,994

471,473

5.24

%

7,939,207

413,370

5.21

%

Mortgage-backed securities

1,368,927

38,640

2.82

%

1,247,758

35,076

2.81

%

Other securities

441,402

12,510

2.83

%

468,416

13,332

2.85

%

Interest-bearing deposits with banks

72,579

1,649

2.27

%

59,031

1,080

1.83

%

FHLB stock

29,509

1,407

4.77

%

20,496

774

3.78

%

Total investment securities

1,912,417

54,206

2.83

%

1,795,701

50,262

2.80

%

Total interest-earning assets

10,910,411

525,679

4.82

%

9,734,908

463,632

4.76

%

Non-interest-earning assets

1,078,277

828,184

Total assets

$

11,988,688

$

10,563,092

Deposits:

Interest-bearing checking accounts

$

1,188,985

2,224

0.19

%

$

1,048,327

1,200

0.11

%

Savings accounts

1,890,467

8,310

0.44

%

1,665,608

3,944

0.24

%

Money market accounts

1,534,909

10,693

0.70

%

1,421,161

4,107

0.29

%

Certificates of deposit

1,175,942

16,403

1.39

%

1,127,612

11,391

1.01

%

Total interest-bearing deposits

5,790,303

37,630

0.65

%

5,262,708

20,642

0.39

%

Non-interest-bearing deposits

3,751,878

%

3,411,010

%

Total deposits

9,542,181

37,630

0.39

%

8,673,718

20,642

0.24

%

Other interest-bearing liabilities:

FHLB advances

477,796

12,234

2.56

%

253,661

5,636

2.22

%

Other borrowings

122,343

330

0.27

%

108,730

245

0.23

%

Junior subordinated debentures

141,504

6,574

4.65

%

140,212

6,136

4.38

%

Total borrowings

741,643

19,138

2.58

%

502,603

12,017

2.39

%

Total funding liabilities

10,283,824

56,768

0.55

%

9,176,321

32,659

0.36

%

Other non-interest-bearing liabilities(2)

164,318

79,901

Total liabilities

10,448,142

9,256,222

Shareholders' equity

1,540,546

1,306,870

Total liabilities and shareholders' equity

$

11,988,688

$

10,563,092

Net interest income/rate spread

$

468,911

4.27

%

$

430,973

4.40

%

Net interest margin

4.30

%

4.43

%

Additional Key Financial Ratios:

Return on average assets

1.22

%

1.29

%

Return on average equity

9.50

%

10.45

%

Average equity/average assets

12.85

%

12.37

%

Average interest-earning assets/average interest-bearing liabilities

167.03

%

168.85

%

Average interest-earning assets/average funding liabilities

106.09

%

106.09

%

Non-interest income/average assets

0.68

%

0.80

%

Non-interest expense/average assets

2.98

%

3.23

%

Efficiency ratio(4)

64.94

%

66.29

%

Adjusted efficiency ratio(5)

61.18

%

63.59

%


(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 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 expenses, amortization of CDI, REO gain (loss), FHLB prepayment penalties 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:

ADJUSTED REVENUE

Quarters Ended

Twelve Months Ended

Dec 31, 2019

Sep 30, 2019

Dec 31, 2018

Dec 31, 2019

Dec 31, 2018

Net interest income before provision for loan losses

$

119,491

$

116,621

$

117,459

$

468,911

$

430,973

Total non-interest income

20,282

20,866

21,018

81,949

84,008

Total GAAP revenue

139,773

137,487

138,477

550,860

514,981

Exclude net (gain) loss on sale of securities

(62

)

2

885

(33

)

837

Exclude net change in valuation of financial instruments carried at fair value

36

69

(198

)

208

(3,775

)

Adjusted revenue (non-GAAP)

$

139,747

$

137,558

$

139,164

$

551,035

$

512,043


ADJUSTED EARNINGS

Quarters Ended

Twelve Months Ended

Dec 31, 2019

Sep 30, 2019

Dec 31, 2018

Dec 31, 2019

Dec 31, 2018

Net income (GAAP)

$

33,655

$

39,577

$

37,528

$

146,278

$

136,515

Exclude net (gain) loss on sale of securities

(62

)

2

885

(33

)

837

Exclude net change in valuation of financial instruments carried at fair value

36

69

(198

)

208

(3,775

)

Exclude acquisition-related expenses

4,419

676

4,602

7,544

5,607

Exclude related tax (benefit) expense

(1,074

)

(49

)

(1,159

)

(1,741

)

(426

)

Exclude FHLB prepayment penalties

735

735

Exclude tax adjustments related to tax reform and valuation reserves

(4,207

)

(4,207

)

Total adjusted earnings (non-GAAP)

$

37,709

$

40,275

$

37,451

$

152,991

$

134,551

Diluted earnings per share (GAAP)

$

0.95

$

1.15

$

1.09

$

4.18

$

4.15

Diluted adjusted earnings per share (non-GAAP)

$

1.07

$

1.17

$

1.09

$

4.38

$

4.09


ADDITIONAL FINANCIAL INFORMATION

(dollars in thousands)

ADJUSTED EFFICIENCY RATIO

Quarters Ended

Twelve Months Ended

Dec 31, 2019

Sep 30, 2019

Dec 31, 2018

Dec 31, 2019

Dec 31, 2018

Non-interest expense (GAAP)

$

93,690

$

87,308

$

95,396

$

357,728

$

341,371

Exclude acquisition-related expenses

(4,419

)

(676

)

(4,602

)

(7,544

)

(5,607

)

Exclude CDI amortization

(2,061

)

(1,985

)

(1,935

)

(8,151

)

(6,047

)

Exclude state/municipal tax expense

(917

)

(1,011

)

(854

)

(3,880

)

(3,284

)

Exclude REO loss

(40

)

(126

)

(251

)

(303

)

(804

)

Exclude FHLB prepayment penalties

(735

)

(735

)

$

Adjusted non-interest expense (non-GAAP)

$

85,518

$

83,510

$

87,754

$

337,115

$

325,629

Net interest income before provision for loan losses (GAAP)

$

119,491

$

116,621

$

117,459

$

468,911

$

430,973

Non-interest income (GAAP)

20,282

20,866

21,018

81,949

84,008

Total revenue

139,773

137,487

138,477

550,860

514,981

Exclude net (gain) loss on sale of securities

(62

)

2

885

(33

)

837

Exclude net change in valuation of financial instruments carried at fair value

36

69

(198

)

208

(3,775

)

Adjusted revenue (non-GAAP)

$

139,747

$

137,558

$

139,164

$

551,035

$

512,043

Efficiency ratio (GAAP)

67.03

%

63.50

%

68.89

%

64.94

%

66.29

%

Adjusted efficiency ratio (non-GAAP)

61.19

%

60.71

%

63.06

%

61.18

%

63.59

%


TANGIBLE COMMON SHAREHOLDERS' EQUITY TO TANGIBLE ASSETS

Dec 31, 2019

Sep 30, 2019

Dec 31, 2018

Shareholders' equity (GAAP)

$

1,594,034

$

1,530,935

$

1,478,595

Exclude goodwill and other intangible assets, net

402,279

365,764

372,078

Tangible common shareholders' equity (non-GAAP)

$

1,191,755

$

1,165,171

$

1,106,517

Total assets (GAAP)

$

12,604,031

$

12,097,842

$

11,871,317

Exclude goodwill and other intangible assets, net

402,279

365,764

372,078

Total tangible assets (non-GAAP)

$

12,201,752

$

11,732,078

$

11,499,239

Common shareholders' equity to total assets (GAAP)

12.65

%

12.65

%

12.46

%

Tangible common shareholders' equity to tangible assets (non-GAAP)

9.77

%

9.93

%

9.62

%

TANGIBLE COMMON SHAREHOLDERS' EQUITY PER SHARE

Tangible common shareholders' equity (non-GAAP)

$

1,191,755

$

1,165,171

$

1,106,517

Common shares outstanding at end of period

35,751,576

34,173,357

35,182,772

Common shareholders' equity (book value) per share (GAAP)

$

44.59

$

44.80

$

42.03

Tangible common shareholders' equity (tangible book value) per share (non-GAAP)

$

33.33

$

34.10

$

31.45


CONTACT:

MARK J. GRESCOVICH,

PRESIDENT & CEO

PETER J. CONNER, CFO

(509) 527-3636