Banner Corporation Earns $10.6 Million, or $0.54 Per Diluted Share, in First Quarter 2014; First Quarter Highlighted by Strong Loan Growth and Improved Net Interest Margin

WALLA WALLA, Wash., April 21, 2014 (GLOBE NEWSWIRE) -- Banner Corporation (Nasdaq:BANR), the parent company of Banner Bank and Islanders Bank, today reported net income available to common shareholders in the first quarter of 2014 of $10.6 million, or $0.54 per diluted share, compared to $11.6 million, or $0.60 per diluted share, in both the preceding quarter and the first quarter a year ago. The results for the fourth quarter of 2013 included a $3.0 million fee related to the termination of a proposed acquisition, which net of related expenses and taxes added $0.08 per share to earnings in that quarter.

"Banner's first quarter accomplishments were a good start to the year as we continue to successfully execute our growth strategies designed to deliver sustainable profitability to our shareholders. In the last 90 days we announced the acquisition of six Sterling Savings Bank branches, we increased our quarterly cash dividend by 20% to $0.18 per share, and we announced a 5% stock buyback authorization," said Mark J. Grescovich, President and Chief Executive Officer. "As expected, our first quarter results continued to be influenced by very low interest rates and modest economic growth, which pressured asset yields and reduced mortgage banking revenues. Nevertheless, our strong balance sheet and consistent revenue generation and earnings performance have positioned us well to meet those challenges. In the first quarter, our growth strategies again resulted in significant loan growth and increased core deposits which, coupled with further improvements in asset quality, confirm that our value proposition is being well-received and our strategic execution is producing positive results."

First Quarter 2014 Highlights (compared to first quarter 2013, except as noted)

• Net income was $10.6 million, or $0.54 per diluted share.
• Annualized return on average assets was 0.97%.
• Annualized return on average equity was 7.85%.
• Revenues from core operations* remained strong at $51.4 million, compared to $50.9 million in the first quarter a year ago.
• Net interest margin was 4.07%, compared to 4.01% in the preceding quarter and 4.16% in the first quarter a year ago.
• Core deposits increased 9% and represent 75% of total deposits.
• Deposit fees and other service charges increased 5% to $6.6 million.
• Total loans increased $104.5 million during the quarter and increased 9% compared to a year ago.
• Non-performing assets decreased 9% to $26.4 million, or 0.59% of total assets, at March 31, 2014, compared to three months earlier and declined 41% from a year earlier.
• Common stockholders' tangible equity per share increased to $27.87 at March 31, 2014 compared to $27.50 in the preceding quarter and $26.37 in the first quarter a year ago.
• The ratio of tangible common equity to tangible assets* remained strong at 12.16% at March 31, 2014.
• Banner increased its regular quarterly cash dividend 20% to $0.18 per share and authorized the repurchase of up to 5% of its common stock.
• Banner announced the attractively-priced acquisition of six Oregon branches, including approximately $226 million of deposits and $91 million of loans.

*Earnings information excluding gain on sale of securities, fair value and other-than-temporary impairment (OTTI) adjustments and, in the preceding quarter, a termination fee related to a canceled bank acquisition transaction (alternately referred to as other operating income from core operations or revenues from core operations) and the ratio of tangible common equity (which excludes other intangible assets) to tangible assets 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.

Income Statement Review

Banner's first quarter net interest income, before the provision for loan losses, was $42.3 million, compared to $41.6 million in the preceding quarter and $41.0 million in the first quarter a year ago. "Our solid first quarter net interest margin was a result of an improved earning asset mix, increased yield on securities and reduced cost of funds, which more than offset the decline in loan yields," said Grescovich. Banner's net interest margin was 4.07% for the first quarter of 2014, compared to 4.01% in the preceding quarter and 4.16% in the first quarter a year ago.

Earning asset yields increased three basis points compared to the preceding quarter but decreased 19 basis points from the first quarter a year ago. Loan yields decreased by five basis points compared to the preceding quarter and were 36 basis points lower than the first quarter a year ago. Deposit costs decreased by two basis points in the first quarter of 2014 compared to the preceding quarter and nine basis points compared to the first quarter a year ago. Total cost of funds decreased two basis points in the first quarter compared to the preceding quarter and 10 basis points compared to the first quarter a year ago.

Banner's mortgage banking activities declined again during the quarter, as higher mortgage rates resulted in a reduction in refinance activity and home purchases from the robust pace of the previous year. Mortgage banking operations contributed $1.8 million to first quarter revenues compared to $2.2 million in the preceding quarter and $2.8 million in the first quarter of 2013. Mortgage banking revenues in the preceding quarter include a $300,000 reversal of a valuation allowance for mortgage servicing rights.

Deposit fees and other service charges were $6.6 million in the first quarter of 2014, compared to $6.7 million in the preceding quarter, and increased 5% compared to $6.3 million in the first quarter a year ago. Primarily due to successful marketing initiatives, the increases in deposit fees and service charges continue to reflect additional client acquisition and growth in the number of deposit accounts.

Revenues in the preceding quarter were augmented by nearly $3.0 million as a result of a termination fee received related to the cancellation of the proposed acquisition of Home Federal Bank. Banner incurred approximately $550,000 of costs related to this canceled transaction, which are also reflected in its fourth quarter 2013 operating results. Revenues from core operations* (revenues excluding gain on the sale of securities, fair value adjustments and the termination fee) were $51.4 million in the first quarter compared to $51.6 million in the fourth quarter of 2013 and $50.9 million in the first quarter of 2013.

Banner's first quarter 2014 results included a $255,000 net loss for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value. In the preceding quarter, Banner recorded a net loss of $324,000 for fair value adjustments. In the first quarter of 2013, Banner's results included a gain on the sale of securities of $1.0 million and an other-than-temporary-impairment recovery of $409,000, both of which resulted from the sale of securities that had been fully written off in previous periods, as well as a $1.3 million net loss for fair value adjustments.

Total other operating income, including the gain on sale of securities, changes in the valuation of financial instruments and the termination fee, was $8.9 million in the first quarter of 2014, compared to $12.6 million in the fourth quarter of 2013 and $10.0 million in the first quarter a year ago. Other operating income from core operations,* which excludes gain on the sale of securities, fair value adjustments and the termination fee, was $9.1 million for the first quarter of 2014, compared to $9.9 million for both the preceding quarter and the first quarter a year ago, reflecting the declines in both mortgage banking revenue and miscellaneous income.

Banner's total other operating expenses (non-interest expenses) were $35.6 million in the first quarter of 2014, compared to $36.9 million in the preceding quarter and $34.1 million in the first quarter of 2013. Operating expenses for the current quarter declined compared to the immediately preceding quarter mainly due to lower advertising expenses and reduced professional fees, as well as lower expenses related to real estate owned. The increase compared to a year earlier primarily resulted from increased compensation expenses and a reduction in capitalized loan origination costs.

For the first quarter of 2014, Banner recorded $5.0 million in state and federal income tax expense for an effective tax rate of approximately 32.3%, which reflects normal marginal tax rates reduced by the impact of tax-exempt income and certain tax credits.

Credit Quality

"Banner's focused attention on maintaining a moderate risk profile was evident again during the current quarter, with non-performing loan balances and real estate owned declining modestly compared to the prior quarter end," said Grescovich. "Additionally, our reserve levels remain substantial, providing additional benefit in the current quarter's earnings as no provision for loan losses was required during the first quarter despite the significant loan growth."

Banner's allowance for loan losses was 2.11% of total loans outstanding at March 31, 2014. Banner had net recoveries in the first quarter of 2014 of $113,000, compared to net charge-offs of $1.7 million, or 0.05% of average loans outstanding in the fourth quarter of 2013 and $363,000 or 0.01% of average loans outstanding in the first quarter a year ago. As a result, Banner did not record a provision for loan losses for the first quarter of 2014 or for the preceding quarter or year ago quarter. The allowance for loan losses was $74.4 million at March 31, 2014, representing 325% of non-performing loans. Non-performing loans decreased 8% to $22.9 million at March 31, 2014, compared to $24.8 million at December 31, 2013, and decreased 32% when compared to $33.4 million at March 31, 2013.

REO and repossessed assets decreased 16% to $3.5 million at March 31, 2014, compared to $4.2 million at December 31, 2013, and decreased 69% when compared to $11.5 million a year ago.

Banner's non-performing assets were 0.59% of total assets at March 31, 2014, compared to 0.66% at December 31, 2013 and 1.06% a year ago. Non-performing assets decreased 9% to $26.4 million at March 31, 2014, compared to $28.9 million at December 31, 2013 and decreased 41% compared to $44.9 million a year ago.

Balance Sheet Review

"Banner had another strong quarter for loan growth, particularly with respect to targeted loan categories, and solid core deposit growth," said Grescovich. "Total loans outstanding increased 3% compared to the prior quarter end and increased 9% compared to a year ago. Further, we remain encouraged by the potential for growth in our loan origination pipelines." Although non-interest-bearing deposits experienced an expected seasonal decline, total non-certificate core deposits increased by 1% during the quarter and increased by 9% compared to a year ago. These core deposits represented 75% of total deposits at the end of the quarter, compared to 72% of total deposits a year earlier.

Net loans were $3.45 billion at March 31, 2014, compared to $3.34 billion at December 31, 2013, and $3.16 billion a year ago. Commercial real estate and multifamily real estate loans increased 5% to $1.40 billion at March 31, 2014 compared to $1.33 billion at December 31, 2013 and increased 14% compared to $1.23 billion a year ago. Commercial and agricultural business loans increased 2% to $925.3 million at March 31, 2014, compared to $910.5 million three months earlier and increased 12% compared to $829.7 million a year ago. Total construction and development loans increased 8% to $378.8 million at March 31, 2014, compared to $351.3 million at December 31, 2013, and increased 14% compared to $331.7 million a year earlier.

The total of securities and interest-bearing deposits was $704.1 million at March 31, 2014, compared to $702.9 million at December 31, 2013, and $729.2 million a year ago. The average effective duration of Banner's securities portfolio was approximately 3.3 years at March 31, 2014. Total assets increased 2% to $4.49 billion at March 31, 2014, compared to $4.39 billion at December 31, 2013 and increased 6% compared to $4.24 billion a year ago.

Total deposits increased modestly to $3.68 billion at March 31, 2014, compared to $3.62 billion at December 31, 2013 and $3.52 billion a year ago. Non-interest-bearing account balances decreased to $1.10 billion at March 31, 2014, compared to $1.12 billion at December 31, 2013, but increased 14% compared to $962.2 million a year ago. Interest-bearing transaction and savings accounts increased 3% to $1.68 billion at March 31, 2014, compared to $1.63 billion at December 31, 2013 and increased 7% compared to $1.58 billion a year ago. Certificates of deposit increased to $905.0 million at March 31, 2014, compared to $872.7 million at December 31, 2013, but declined compared to $982.9 million a year earlier. The increase in certificate balances in the current quarter reflects a $55.0 million increase in brokered deposits to provide additional funding to support the strong loan growth.

"We continue to focus on enhancing our core deposit franchise, which includes lowering our funding costs, adding new client relationships, and improving our core funding position," said Grescovich. "As a result, Banner's cost of deposits declined another two basis points to 0.22% for the quarter ended March 31, 2014, compared to 0.24% for the quarter ended December 31, 2013, and declined nine basis points from 0.31% for the quarter ended March 31, 2013."

At March 31, 2014, total common stockholders' equity was $547.5 million, or $27.97 per share, compared to $516.1 million, or $26.56 per share, a year ago. Banner had 19.6 million shares of common stock outstanding at March 31, 2014, compared to 19.4 million shares one year earlier. At quarter end, tangible common stockholders' equity, which excludes other intangible assets, was $545.6 million, or 12.16% of tangible assets, compared to $536.5 million, or 12.23% of tangible assets, at December 31, 2013, and $512.3 million, or 12.10% of tangible assets, a year ago. Banner's tangible book value per share increased to $27.87 at March 31, 2014, compared to $26.37 per share a year ago.

Banner Corporation and its subsidiary banks continue to maintain capital levels significantly in excess of the requirements to be categorized as "well-capitalized" under applicable regulatory standards. Banner Corporation's Tier 1 leverage capital to average assets ratio was 13.53% and its total capital to risk-weighted assets ratio was 16.95% at March 31, 2014.

Conference Call

Banner will host a conference call on Tuesday, April 22, 2014, at 8:00 a.m. PDT, to discuss its first quarter results. The conference call can be accessed live by telephone at (480) 629-9692 to participate in the call. To listen to the call on-line, go to the Company's website at www.bannerbank.com. A replay will be available at www.bannerbank.com.

About the Company

Banner Corporation is a $4.49 billion bank holding company operating two commercial banks in Washington, Oregon and Idaho. Banner serves the Pacific Northwest region with 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. 

This press release contains statements that the Company believes are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to the Company's financial condition, liquidity, results of operations, plans, objectives, future performance or business. You should not place undue reliance on these statements, as they are subject to risks and uncertainties. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Company may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors which could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements include, but are not limited to, the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and non-performing assets and may result in our allowance for loan losses not being adequate to cover actual losses and require us to materially increase our reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates and the relative differences between short and long-term interest rates, loan and deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System and of our bank subsidiaries by the Federal Deposit Insurance Corporation, the Washington State Department of Financial Institutions or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or any of the Banks which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules including changes related to Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuations; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; the failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock and interest or principal payments on our junior subordinated debentures; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed in Banner Corporation's reports filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2013. We do not undertake and specifically disclaim 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 whether as a result of new information, future events or otherwise. These risks could cause our actual results for 2014 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect our operating and stock price performance.