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Banner Corporation Earns $17.0 Million, or $0.88 Per Diluted Share, in Second Quarter 2014; Second Quarter Highlighted by Strong Loan Growth and Oregon Branch Acquisition

WALLA WALLA, Wash., July 23, 2014 (GLOBE NEWSWIRE) -- Banner Corporation (Nasdaq:BANR), the parent company of Banner Bank and Islanders Bank, today reported net income in the second quarter of 2014 of $17.0 million, or $0.88 per diluted share, compared to $10.6 million, or $0.54 per diluted share, in the preceding quarter and $11.8 million, or $0.60 per diluted share, for the second quarter a year ago. Banner's second quarter 2014 results were augmented by a bargain purchase gain related to the acquisition of six branches in Oregon, which net of related expenses added $0.23 per diluted share. In the first six months of 2014, net income was $27.6 million, or $1.42 per diluted share, compared to $23.3 million, or $1.20 per diluted share, in the first six months of 2013.

"Banner's results for the second quarter continue to reflect solid revenue generation driven by balance sheet growth, client acquisition and improved mortgage banking activity, as we continue to successfully execute our strategies designed to deliver sustainable profitability to our shareholders," said Mark J. Grescovich, President and Chief Executive Officer. "In the second quarter, our performance again resulted in significant loan growth and increased core deposits, which confirm that our value proposition is being well-received, and coupled with strong margins and further improvements in asset quality, demonstrate that our strategic execution is producing positive results."

"During the quarter and throughout the past four years, we have continued to invest in our franchise," Grescovich stated. "We have added talented commercial and retail bankers in all of our markets, and we recently completed the purchase of six branches from Umpqua Bank. This acquisition further expands our presence in Oregon with five of the six branches located in Coos County, Oregon and the sixth branch located in Douglas County, Oregon. In connection with the acquisition, as of June 20, 2014 Banner acquired approximately $211 million in deposits, $88 million in loans and 10,500 new customer relationships."

Second Quarter 2014 Highlights (compared to second quarter 2013, except as noted)

  • Net income was $17.0 million, or $0.88 per diluted share, compared to $11.8 million, or $0.60 per diluted share in the second quarter of 2013.
  • Annualized return on average assets was 1.51%.
  • Annualized return on average equity was 12.29%.
  • Revenues from core operations* increased 2% to $54.4 million, compared to $53.1 million in the second quarter a year ago.
  • Net interest margin was 4.06%, compared to 4.07% in the first quarter of 2014 and 4.20% in the second quarter a year ago.
  • Core deposits increased 19% and represent 76% of total deposits.
  • Deposit fees and other service charges increased 11% to $7.3 million.
  • Total loans increased $239.7 million during the quarter and increased 15% compared to a year ago.
  • Non-performing assets decreased 8% compared to three months earlier to $24.2 million, or 0.51% of total assets, at June 30, 2014, and declined 27% from a year earlier.
  • Common stockholders' tangible equity per share increased to $28.57 at June 30, 2014 compared to $27.87 in the preceding quarter and $26.49 in the second quarter a year ago.
  • The ratio of tangible common equity to tangible assets* remained strong at 11.79% at June 30, 2014.

*Earnings information excluding acquisition bargain purchase gain, gain on sale of securities, fair value and other-than-temporary impairment (OTTI) adjustments (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

Reflecting strong balance sheet growth, Banner's second quarter net interest income, before the provision for loan losses, improved to $43.8 million, compared to $42.3 million in the preceding quarter and $42.2 million in the second quarter a year ago. In the first six months of 2014, net interest income was $86.1 million, compared to $83.2 million in the first six months of 2013.

"Our second quarter net interest margin remained relatively strong as a result of further improvement in our earning asset mix as well as a nominal decline in our funding costs, which coupled with growth in earning assets produced increased net interest income," said Grescovich. Banner's net interest margin was 4.06% for the second quarter of 2014, compared to 4.07% in the preceding quarter and 4.20% in the second quarter a year ago. In the first six months of the year, Banner's net interest margin was 4.06% compared to 4.18% for the same period a year earlier.

Earning asset yields decreased two basis points compared to the preceding quarter and decreased 22 basis points from the second quarter a year ago. Loan yields decreased by four basis points compared to the preceding quarter and were 39 basis points lower than the second quarter a year ago. Deposit costs as well as the total cost of funds decreased by one basis point in the second quarter of 2014 compared to the preceding quarter and eight basis points compared to the second quarter a year ago.

"Banner's mortgage banking activities improved during the second quarter of 2014. While the mortgage refinance market is slower than the elevated pace of a year ago, our originations for home purchases increased compared to prior periods and led to an increase in mortgage banking activity and revenues during the current quarter compared to the preceding quarter," noted Grescovich. Mortgage banking operations contributed $2.6 million to second quarter revenues compared to $1.8 million in the preceding quarter and $3.6 million in the second quarter of 2013. In the first six months of the year, mortgage banking operations contributed $4.4 million to revenues, compared to $6.4 million in the first six months of 2013.

Deposit fees and other service charges were $7.3 million in the second quarter of 2014, an 11% increase compared to $6.6 million in both the preceding quarter and in the second 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. In the first six months of 2014, deposit fees and other service charges increased 8% to $13.9 million, compared to $12.9 million in the first six months of 2013.

Revenues from core operations* (revenues excluding the bargain purchase gain, gain on the sale of securities and fair value adjustments) were $54.4 million in the second quarter compared to $51.4 million in the preceding quarter and $53.1 million in the second quarter of 2013. In the first six months of 2014, revenues from core operations* were $105.8 million, compared to $104.0 million in the first six months of 2013.

Banner's second quarter 2014 results included a $9.1 million acquisition bargain purchase gain based upon preliminary estimates of the fair value of the assets acquired and liabilities assumed as a result of the completed purchase of six branches from Umpqua Bank, an Oregon state-chartered bank and successor to Sterling Savings Bank, a Washington state-chartered bank, as well as a $464,000 net gain 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 $255,000 for fair value adjustments and a $35,000 gain on sale of securities, and in the second quarter of 2013 Banner recorded a net loss of $255,000 for fair value adjustments and a $12,000 gain on sale of securities.

Total other operating income, which includes the acquisition bargain purchase gain, the gain on sale of securities and changes in the valuation of financial instruments, was $20.1 million in the second quarter of 2014, compared to $8.9 million in the first quarter of 2014 and $10.6 million in the second quarter a year ago. Year-to-date total other operating income was $29.0 million compared to $20.6 million in the first six months of 2013. Other operating income from core operations,* which excludes the acquisition bargain purchase gain, the gain on the sale of securities and fair value adjustments, was $10.6 million for the second quarter of 2014, compared to $9.1 million for the preceding quarter and $10.9 million for the second quarter a year ago. In the first six months of 2014, other operating income from core operations* was $19.7 million compared to $20.8 million in the first six months of 2013.

Banner's total other operating expenses (non-interest expenses) were $38.4 million in the second quarter of 2014, compared to $35.6 million in the preceding quarter and $35.5 million in the second quarter of 2013. Operating expenses for the current quarter increased largely as a result of $2.0 million in estimated acquisition-related costs. Year-to-date, Banner's operating expenses were $74.0 million compared to $69.6 million in the first six months of 2013 with almost half of the increase attributable to acquisition-related costs.

For the second quarter of 2014, Banner recorded $8.5 million in state and federal income tax expense for an effective tax rate of 33.3%, which reflects normal marginal tax rates reduced by the impact of tax-exempt income and certain tax credits.

Credit Quality

"Again this quarter, our credit quality metrics reflect our moderate risk profile, and our non-performing assets have been reduced another 8% compared to the first quarter of 2014, and 27% compared to June 30, 2013," said Grescovich. "Additionally, our reserve levels remain substantial, and no provision for loan losses was required during the second quarter despite significant loan growth."

Banner's allowance for loan losses was $74.3 million at June 30, 2014, or 1.97% of total loans outstanding and 376% of non-performing loans. Banner had net charge-offs of $61,000, or less than 0.01% of average loans outstanding in the second quarter, compared to net recoveries of $113,000 in the preceding quarter, and net charge-offs of $275,000 in the second quarter a year ago. As a result, Banner did not record a provision for loan losses for the second quarter of 2014 or for either the preceding or year-ago quarter. Non-performing loans decreased 14% to $19.7 million at June 30, 2014, compared to $22.9 million at March 31, 2014, and decreased 24% when compared to $26.1 million at June 30, 2013.

REO and repossessed assets increased slightly to $4.5 million at June 30, 2014, compared to $3.5 million at March 31, 2014, but decreased 35% when compared to $6.8 million a year ago.

Banner's non-performing assets were 0.51% of total assets at June 30, 2014, compared to 0.59% at March 31, 2014 and 0.78% a year ago. Non-performing assets decreased 8% to $24.2 million at June 30, 2014, compared to $26.4 million at March 31, 2014, and decreased 27% compared to $32.9 million a year ago.

Balance Sheet Review

"Banner had another strong quarter for loan production," said Grescovich. "In addition, we acquired $88 million of loans in connection with the acquisition of the six branches from Umpqua Bank. As a result, total loans increased by $240 million, or 7%, compared to the prior quarter end and increased 15% compared to a year ago. Further, we continue to see significant potential for growth in our loan origination pipelines."

Net loans were $3.69 billion at June 30, 2014, compared to $3.45 billion at March 31, 2014, and $3.21 billion a year ago. Commercial real estate and multifamily real estate loans increased 10% to $1.54 billion at June 30, 2014 compared to $1.40 billion at March 31, 2014 and increased 25% compared to $1.23 billion a year ago. Commercial and agricultural business loans increased 6% to $980.9 million at June 30, 2014, compared to $925.4 million three months earlier and increased 12% compared to $873.8 million a year ago. Total construction and land and land development loans decreased 8% to $349.6 million at June 30, 2014, compared to $378.8 million at March 31, 2014, and decreased 1% compared to $353.7 million a year earlier.

Total assets increased 7% to $4.75 billion at June 30, 2014, compared to $4.49 billion at March 31, 2014 and increased 12% compared to $4.24 billion a year ago. The total of securities and interest-bearing deposits held at other banks was nearly unchanged at $709.7 million at June 30, 2014, compared to $704.1 million at March 31, 2014 and $696.1 million a year ago. The average effective duration of Banner's securities portfolio was approximately 3.3 years at June 30, 2014.

Banner's total deposits increased 6% to $3.92 billion at June 30, 2014, compared to $3.68 billion at March 31, 2014 primarily as a result of $211 million of deposits acquired through the branch acquisition, and increased 13% when compared to $3.46 billion a year ago. Non-interest-bearing account balances increased 10% to $1.21 billion at June 30, 2014, compared to $1.10 billion three months earlier and increased 26% compared to $958.7 million a year ago. Interest-bearing transaction and savings accounts increased 5% to $1.77 billion at June 30, 2014, compared to $1.68 billion at March 31, 2014 and increased 14% compared to $1.56 billion a year ago. Certificates of deposit increased to $937.0 million at June 30, 2014, compared to $905.0 million at March 31, 2014, but declined compared to $944.1 million a year earlier. The increase in certificate balances in the current quarter reflects a $28.9 million increase in brokered deposits to provide additional funding to support the strong loan growth. Brokered deposits totaled $88.2 million at June 30, 2014 compared to $7.2 million at June 30, 2013.

"We continue to focus on enhancing our core deposit franchise, which includes reducing our funding costs by remixing our deposits away from higher-priced CDs, adding new client relationships and improving our core funding position," said Grescovich. "To that point, our total non-certificate core deposits increased by 7% during the quarter and increased by 19% compared to a year ago.

Banner's core deposits represented 76% of total deposits at June 30, 2014, compared to 73% of total deposits a year earlier. The cost of deposits declined one basis point to 0.21% for the quarter ended June 30, 2014, compared to 0.22% for the quarter ended March 31, 2014, and declined eight basis points from 0.29% for the quarter ended June 30, 2013.

At June 30, 2014, total common stockholders' equity was $563.0 million, or $28.77 per share, compared to $547.5 million, or $27.97 per share at March 31, 2014, and to $520.3 million, or $26.66 per share, a year ago. Banner had 19.6 million shares of common stock outstanding at June 30, 2014, compared to 19.5 million shares one year earlier. At quarter end, tangible common stockholders' equity*, which excludes other intangible assets, was $559.1 million, or 11.79% of tangible assets, compared to $545.6 million, or 12.16% of tangible assets, at March 31, 2014, and $517.1 million, or 12.22% of tangible assets, a year ago. Banner's tangible book value per share increased to $28.57 at June 30, 2014, compared to $26.49 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 13.65% and its total capital to risk-weighted assets ratio was 16.45% at June 30, 2014.

Conference Call

Banner will host a conference call on Thursday, July 24, 2014, at 8:00 a.m. PDT, to discuss its second quarter results. To listen to the call on-line, go to the Company's website at www.bannerbank.com. Investment professionals are invited to dial (888) 317-6016 to participate in the call. A replay will be available for one month at (877) 344-7529 using access code 1004871, or at www.bannerbank.com.

About the Company

Banner Corporation is a $4.74 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 Banner'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, increased competitive pressures; changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; and other factors described in Banner's latest annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other filings with the Securities and Exchange Commission-which are available on our website at www.bannerbank.com and on the SEC's website at www.sec.gov. 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.

RESULTS OF OPERATIONS Quarters Ended Six Months Ended
(in thousands except shares and per share data) June 30, 2014 March 31, 2014 June 30, 2013 June 30, 2014 June 30, 2013
INTEREST INCOME:
Loans receivable $ 43,199 $ 41,743 $ 42,292 $ 84,942 $ 83,781
Mortgage-backed securities 1,446 1,471 1,394 2,917 2,566
Securities and cash equivalents 1,895 1,892 1,885 3,787 3,733
46,540 45,106 45,571 91,646 90,080
INTEREST EXPENSE:
Deposits 1,910 1,964 2,490 3,874 5,210
Federal Home Loan Bank advances 51 38 40 90 64
Other borrowings 45 44 51 89 107
Junior subordinated debentures 726 721 742 1,446 1,482
2,732 2,767 3,323 5,499 6,863
Net interest income before provision for loan losses 43,808 42,339 42,248 86,147 83,217
PROVISION FOR LOAN LOSSES
Net interest income 43,808 42,339 42,248 86,147 83,217
OTHER OPERATING INCOME:
Deposit fees and other service charges 7,346 6,602 6,628 13,947 12,928
Mortgage banking operations 2,600 1,840 3,574 4,440 6,412
Miscellaneous 644 636 664 1,281 1,455
10,590 9,078 10,866 19,668 20,795
Gain on sale of securities 35 12 35 1,018
Other-than-temporary impairment recovery 409
Net change in valuation of financial instruments carried at fair value 464 (255) (255) 209 (1,601)
Acquisition bargain purchase gain 9,079 9,079
Total other operating income 20,133 8,858 10,623 28,991 20,621
OTHER OPERATING EXPENSE:
Salary and employee benefits 22,330 21,156 21,224 43,486 41,953
Less capitalized loan origination costs (3,282) (2,195) (3,070) (5,477) (5,941)
Occupancy and equipment 5,540 5,696 5,415 11,236 10,744
Information / computer data services 1,918 1,935 1,923 3,853 3,643
Payment and card processing services 2,746 2,515 2,449 5,261 4,753
Professional services 1,109 1,038 820 2,115 1,726
Advertising and marketing 1,370 1,055 1,798 2,425 3,297
Deposit insurance 637 576 617 1,213 1,263
State/municipal business and use taxes 388 159 538 547 1,003
Real estate operations (109) 39 (195) (70) (446)
Amortization of core deposit intangibles 450 479 477 929 982
Acquisition related costs 1,979 45 2,024
Miscellaneous 3,359 3,083 3,461 6,473 6,580
Total other operating expense 38,435 35,581 35,457 74,015 69,557
Income before provision for income taxes 25,506 15,616 17,414 41,123 34,281
PROVISION FOR INCOME TAXES 8,499 5,046 5,661 13,545 10,945
NET INCOME $ 17,007 $ 10,570 $ 11,753 $ 27,578 $ 23,336
Earnings per share available to common shareholders:
Basic $ 0.88 $ 0.55 $ 0.61 $ 1.43 $ 1.21
Diluted $ 0.88 $ 0.54 $ 0.60 $ 1.42 $ 1.20
Cumulative dividends declared per common share $ 0.18 $ 0.18 $ 0.12 $ 0.36 $ 0.24
Weighted average common shares outstanding:
Basic 19,342,023 19,345,732 19,333,470 19,343,867 19,323,204
Diluted 19,409,601 19,409,584 19,397,171 19,406,215 19,385,389
Change in common shares (7,831) 32,766 92,133 24,935 99,651
FINANCIAL CONDITION
(in thousands except shares and per share data) June 30, 2014 March 31, 2014 June 30, 2013 December 31, 2013
ASSETS
Cash and due from banks $ 83,571 $ 73,316 $ 54,368 $ 69,711
Federal funds and interest-bearing deposits 62,990 71,459 67,080 67,638
Securities - at fair value 61,393 58,387 65,524 62,472
Securities - available for sale 455,353 464,657 469,137 470,280
Securities - held to maturity 133,186 109,567 94,336 102,513
Federal Home Loan Bank stock 31,191 33,288 36,040 35,390
Loans receivable:
Held for sale 7,322 3,239 6,393 2,734
Held for portfolio 3,755,277 3,519,673 3,283,808 3,415,711
Allowance for loan losses (74,310) (74,371) (76,853) (74,258)
3,688,289 3,448,541 3,213,348 3,344,187
Accrued interest receivable 15,579 15,202 14,648 13,996
Real estate owned held for sale, net 4,388 3,236 6,714 4,044
Property and equipment, net 91,912 89,440 87,896 90,267
Other intangibles, net 3,892 1,970 3,247 2,449
Bank-owned life insurance 62,815 62,377 60,894 61,945
Other assets 50,740 56,856 63,058 64,006
$ 4,745,299 $ 4,488,296 $ 4,236,290 $ 4,388,898
LIABILITIES
Deposits:
Non-interest-bearing $ 1,210,068 $ 1,095,665 $ 958,674 $ 1,115,346
Interest-bearing transaction and savings accounts 1,771,865 1,681,854 1,557,513 1,629,885
Interest-bearing certificates 936,986 905,016 944,137 872,695
3,918,919 3,682,535 3,460,324 3,617,926
Advances from Federal Home Loan Bank at fair value 45,251 48,351 54,262 27,250
Customer repurchase agreements 88,946 89,921 90,779 83,056
Junior subordinated debentures at fair value 77,313 74,135 73,471 73,928
Accrued expenses and other liabilities 35,619 29,189 22,010 31,324
Deferred compensation 16,238 16,641 15,111 16,442
4,182,286 3,940,772 3,715,957 3,849,926
STOCKHOLDERS' EQUITY
Common stock 567,483 566,964 568,408 569,028
Retained earnings (accumulated deficit) (4,541) (18,026) (42,440) (25,073)
Other components of stockholders' equity 71 (1,414) (5,635) (4,983)
563,013 547,524 520,333 538,972
$ 4,745,299 $ 4,488,296 $ 4,236,290 $ 4,388,898
Common Shares Issued:
Shares outstanding at end of period 19,568,704 19,576,535 19,553,189 19,543,769
Less unearned ESOP shares at end of period 34,340 34,340
Shares outstanding at end of period excluding unearned ESOP shares 19,568,704 19,576,535 19,518,849 19,509,429
Common stockholders' equity per share (1) $ 28.77 $ 27.97 $ 26.66 $ 27.63
Common stockholders' tangible equity per share (1) (2) $ 28.57 $ 27.87 $ 26.49 $ 27.50
Common stockholders' tangible equity to tangible assets (2) 11.79% 12.16% 12.22% 12.23%
Consolidated Tier 1 leverage capital ratio 13.65% 13.53% 13.26% 13.64%
(1) Calculation is based on number of common shares outstanding at the end of the period rather than weighted average shares outstanding and excludes unallocated shares in the ESOP.
(2) Common stockholders' tangible equity excludes other intangibles. Tangible assets excludes other intangible assets. These ratios represent non-GAAP financial measures.
ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
June 30, 2014 March 31, 2014 June 30, 2013 December 31, 2013
LOANS (including loans held for sale):
Commercial real estate:
Owner occupied $ 541,558 $ 504,429 $ 500,812 $ 502,601
Investment properties 807,499 746,670 595,896 692,457
Multifamily real estate 188,792 153,003 137,027 137,153
Commercial construction 12,638 11,146 25,629 12,168
Multifamily construction 39,864 63,862 39,787 52,081
One- to four-family construction 213,414 219,169 191,003 200,864
Land and land development:
Residential 73,030 73,733 86,037 75,695
Commercial 10,679 10,864 11,228 10,450
Commercial business 735,128 716,546 639,840 682,169
Agricultural business including secured by farmland 245,742 208,817 233,967 228,291
One- to four-family real estate 558,744 517,621 552,698 529,494
Consumer:
Consumer secured by one- to four-family real estate 209,511 177,855 163,339 173,188
Consumer-other 126,000 119,197 112,938 121,834
Total loans outstanding $ 3,762,599 $ 3,522,912 $ 3,290,201 $ 3,418,445
Restructured loans performing under their restructured terms $ 37,462 $ 40,165 $ 51,732 $ 47,428
Loans 30 - 89 days past due and on accrual $ 7,670 $ 12,662 $ 5,902 $ 8,784
Total delinquent loans (including loans on non-accrual) $ 27,415 $ 24,602 $ 32,002 $ 22,010
Total delinquent loans / Total loans outstanding 0.73% 0.70% 0.97% 0.64%
GEOGRAPHIC CONCENTRATION OF LOANS AT
June 30, 2014 Washington Oregon Idaho Other Total
Commercial real estate:
Owner occupied $ 388,662 $ 85,787 $ 54,529 $ 12,580 $ 541,558
Investment properties 535,393 116,493 59,700 95,913 807,499
Multifamily real estate 146,291 27,175 14,932 394 188,792
Commercial construction 11,770 868 12,638
Multifamily construction 33,454 6,410 39,864
One- to four-family construction 127,627 83,832 1,955 213,414
Land and land development:
Residential 40,492 31,358 1,180 73,030
Commercial 5,163 2,605 2,911 10,679
Commercial business 397,570 120,286 66,940 150,332 735,128
Agricultural business including secured by farmland 134,477 59,120 52,145 245,742
One- to four-family real estate 332,850 202,853 22,025 1,016 558,744
Consumer:
Consumer secured by one- to four-family real estate 125,888 68,272 14,314 1,037 209,511
Consumer-other 81,884 37,708 6,000 408 126,000
Total loans outstanding $ 2,361,521 $ 841,899 $ 297,499 $ 261,680 $ 3,762,599
Percent of total loans 62.7% 22.4% 7.9% 7.0% 100.0%
ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
Quarters Ended Six Months Ended
CHANGE IN THE June 30, 2014 March 31, 2014 June 30, 2013 June 30, 2014 June 30, 2013
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of period $ 74,371 $ 74,990 $ 76,396 $ 74,990 $ 76,759
Provision
Recoveries of loans previously charged off:
Commercial real estate 274 296 378 570 1,964
Construction and land 472 232 337 704 438
One- to four-family real estate 204 188 3 392 119
Commercial business 286 293 666 579 1,052
Agricultural business, including secured by farmland 311 350 310 661 347
Consumer 58 282 117 340 219
1,605 1,641 1,811 3,246 4,139
Loans charged off:
Commercial real estate (1,001) (238) (418) (1,239) (766)
Construction and land (207) (419) (207) (854)
One- to four-family real estate (14) (379) (402) (393) (1,053)
Commercial business (260) (738) (398) (998) (1,327)
Consumer (184) (173) (449) (357) (777)
(1,666) (1,528) (2,086) (3,194) (4,777)
Net (charge-offs) recoveries (61) 113 (275) 52 (638)
Balance, end of period $ 74,310 $ 74,371 $ 76,121 $ 74,310 $ 76,121
Net charge-offs / Average loans outstanding 0.002% (0.003)% 0.008% (0.001)% 0.020%
ALLOCATION OF
ALLOWANCE FOR LOAN LOSSES June 30, 2014 March 31, 2014 June 30, 2013 December 31, 2013
Specific or allocated loss allowance:
Commercial real estate $ 18,884 $ 17,412 $ 14,898 $ 16,759
Multifamily real estate 5,765 5,652 4,973 5,306
Construction and land 17,837 18,620 16,625 17,640
One- to four-family real estate 9,270 10,913 14,974 11,486
Commercial business 12,014 11,363 10,806 11,773
Agricultural business, including secured by farmland 2,824 2,636 3,805 2,841
Consumer 748 912 1,011 1,335
Total allocated 67,342 67,508 67,092 67,140
Unallocated 6,968 6,863 9,029 7,118
Total allowance for loan losses $ 74,310 $ 74,371 $ 76,121 $ 74,258
Allowance for loan losses / Total loans outstanding 1.97% 2.11% 2.31% 2.17%
Allowance for loan losses / Non-performing loans 376.% 325.% 292.% 300.%
ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
June 30, 2014 March 31, 2014 June 30, 2013 December 31, 2013
NON-PERFORMING ASSETS
Loans on non-accrual status:
Secured by real estate:
Commercial $ 2,692 $ 6,201 $ 4,810 $ 6,287
Multifamily 422 335
Construction and land 1,296 2,135 2,775 1,193
One- to four-family 9,354 10,587 11,465 12,532
Commercial business 925 977 2,819 723
Agricultural business, including secured by farmland 104
Consumer 1,205 1,399 1,938 1,173
15,998 21,299 24,142 21,908
Loans more than 90 days delinquent, still on accrual:
Secured by real estate:
Commercial 993
One- to four-family 2,181 1,465 1,897 2,611
Commercial business 280 4
Agricultural business, including secured by farmland 104 105
Consumer 293 58 144
3,747 1,569 1,959 2,860
Total non-performing loans 19,745 22,868 26,101 24,768
Real estate owned (REO) 4,388 3,236 6,714 4,044
Other repossessed assets 69 273 118 115
Total non-performing assets $ 24,202 $ 26,377 $ 32,933 $ 28,927
Total non-performing assets / Total assets 0.51% 0.59% 0.78% 0.66%
DETAIL & GEOGRAPHIC CONCENTRATION OF
NON-PERFORMING ASSETS AT
June 30, 2014 Washington Oregon Idaho Total
Secured by real estate:
Commercial $ 3,685 $ — $ — $ 3,685
Multifamily 422 422
Construction and land:
Residential land acquisition & development 750 750
Residential land improved lots 546 546
Total construction and land 1,296 1,296
One- to four-family 8,279 2,672 584 11,535
Commercial business 1,163 42 1,205
Agricultural business, including secured by farmland 104 104
Consumer 1,356 6 136 1,498
Total non-performing loans 15,009 4,016 720 19,745
Real estate owned (REO) 1,801 2,380 207 4,388
Other repossessed assets 69 69
Total non-performing assets at end of the period $ 16,879 $ 6,396 $ 927 $ 24,202
ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
Quarters Ended Six Months Ended
REAL ESTATE OWNED June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013
Balance, beginning of period $ 3,236 $ 11,160 $ 4,044 $ 15,778
Additions from loan foreclosures 1,996 418 2,703 1,504
Additions from capitalized costs 33 37 46
Proceeds from dispositions of REO (1,034) (5,305) (2,675) (11,787)
Gain on sale of REO 157 667 316 1,472
Valuation adjustments in the period (226) (37) (299)
Balance, end of period $ 4,388 $ 6,714 $ 4,388 $ 6,714
REAL ESTATE OWNED- BY TYPE AND STATE
June 30, 2014 Washington Oregon Idaho Total
Commercial real estate $ — $ — $ 175 $ 175
Land development- residential 614 1,637 32 2,283
One- to four-family real estate 1,187 743 1,930
Total $ 1,801 $ 2,380 $ 207 $ 4,388
ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
DEPOSITS & OTHER BORROWINGS
June 30, 2014 March 31, 2014 June 30, 2013 December 31, 2013
DEPOSIT COMPOSITION
Non-interest-bearing $ 1,210,068 $ 1,095,665 $ 958,674 $ 1,115,346
Interest-bearing checking 437,810 435,910 399,302 422,910
Regular savings accounts 843,950 829,282 751,475 798,764
Money market accounts 490,105 416,662 406,736 408,211
Interest-bearing transaction & savings accounts 1,771,865 1,681,854 1,557,513 1,629,885
Interest-bearing certificates 936,986 905,016 944,137 872,695
Total deposits $ 3,918,919 $ 3,682,535 $ 3,460,324 $ 3,617,926
GEOGRAPHIC CONCENTRATION OF DEPOSITS AT
June 30, 2014 Washington Oregon Idaho Total
$ 2,835,383 $ 848,991 $ 234,545 $ 3,918,919
72.3% 21.7% 6.0% 100.0%
INCLUDED IN TOTAL DEPOSITS June 30, 2014 March 31, 2014 June 30, 2013 December 31, 2013
Public non-interest-bearing accounts $ 23,886 $ 18,931 $ 22,160 $ 21,699
Public interest-bearing transaction & savings accounts 69,664 65,909 56,429 65,822
Public interest-bearing certificates 48,180 57,202 51,759 51,465
Total public deposits $ 141,730 $ 142,042 $ 130,348 $ 138,986
Total brokered deposits $ 88,209 $ 59,304 $ 7,152 $ 4,291
OTHER BORROWINGS
Customer repurchase agreements / "Sweep accounts" $ 88,946 $ 89,921 $ 90,779 $ 83,056
Minimum for Capital Adequacy
REGULATORY CAPITAL RATIOS AT Actual or "Well Capitalized"
June 30, 2014 Amount Ratio Amount Ratio
Banner Corporation-consolidated:
Total capital to risk-weighted assets $ 667,027 16.45% $ 324,294 8.00%
Tier 1 capital to risk-weighted assets 616,055 15.20% 162,147 4.00%
Tier 1 leverage capital to average assets 616,055 13.65% 180,496 4.00%
Banner Bank:
Total capital to risk-weighted assets 582,843 15.08% 386,574 10.00%
Tier 1 capital to risk-weighted assets 534,223 13.82% 231,945 6.00%
Tier 1 leverage capital to average assets 534,223 12.50% 213,685 5.00%
Islanders Bank:
Total capital to risk-weighted assets 35,697 19.26% 18,538 10.00%
Tier 1 capital to risk-weighted assets 33,376 18.00% 11,123 6.00%
Tier 1 leverage capital to average assets 33,376 13.96% 11,954 5.00%
ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
(rates / ratios annualized)
Quarters Ended Six Months Ended
OPERATING PERFORMANCE June 30, 2014 March 31, 2014 June 30, 2013 June 30, 2014 June 30, 2013
Average loans $ 3,588,654 $ 3,475,369 $ 3,250,808 $ 3,532,324 $ 3,233,116
Average securities 689,323 687,764 718,948 688,548 696,249
Average interest earning cash 54,887 58,352 68,130 56,610 87,930
Average non-interest-earning assets 197,796 200,227 212,661 199,005 215,006
Total average assets $ 4,530,660 $ 4,421,712 $ 4,250,547 $ 4,476,487 $ 4,232,301
Average deposits $ 3,700,736 $ 3,619,299 $ 3,489,625 $ 3,660,242 $ 3,495,764
Average borrowings 279,266 262,378 249,692 270,869 230,185
Average non-interest-bearing other liabilities (1) (4,204) (6,083) (12,390) (5,138) (12,888)
Total average liabilities 3,975,798 3,875,594 3,726,927 3,925,973 3,713,061
Total average stockholders' equity 554,862 546,118 523,620 550,514 519,240
Total average liabilities and equity $ 4,530,660 $ 4,421,712 $ 4,250,547 $ 4,476,487 $ 4,232,301
Interest rate yield on loans 4.83% 4.87% 5.22% 4.85% 5.23%
Interest rate yield on securities 1.92% 1.96% 1.80% 1.94% 1.79%
Interest rate yield on cash 0.31% 0.31% 0.27% 0.31% 0.26%
Interest rate yield on interest-earning assets 4.31% 4.33% 4.53% 4.32% 4.52%
Interest rate expense on deposits 0.21% 0.22% 0.29% 0.21% 0.30%
Interest rate expense on borrowings 1.18% 1.24% 1.34% 1.21% 1.45%
Interest rate expense on interest-bearing liabilities 0.28% 0.29% 0.36% 0.28% 0.37%
Interest rate spread 4.03% 4.04% 4.17% 4.04% 4.15%
Net interest margin 4.06% 4.07% 4.20% 4.06% 4.18%
Other operating income / Average assets 1.78% 0.81% 1.00% 1.31% 0.98%
Core operating income / Average assets (2) 0.94% 0.83% 1.03% 0.89% 0.99%
Other operating expense / Average assets 3.40% 3.26% 3.35% 3.33% 3.31%
Efficiency ratio (other operating expense / revenue) 60.11% 69.50% 67.06% 64.28% 66.99%
Efficiency ratio (other operating expense / core operating revenue)(2) 67.02% 69.11% 66.76% 68.03% 66.87%
Return on average assets 1.51% 0.97% 1.11% 1.24% 1.11%
Return on average equity 12.29% 7.85% 9.00% 10.10% 9.06%
Return on average tangible equity (3) 12.33% 7.88% 9.06% 10.14% 9.13%
Average equity / Average assets 12.25% 12.35% 12.32% 12.30% 12.27%
(1) Average non-interest-bearing liabilities include fair value adjustments related to FHLB advances and Junior Subordinated Debentures.
(2) Core operating income (or core operating revenue) excludes gain/(loss) on sale of securities, fair value and other-than-temporary impairment (OTTI) adjustments and, in the current quarter and year, an acquisition bargain purchase gain and related expenses, which represents non-GAAP financial measures.
(3) Average tangible equity excludes other intangibles and represents a non-GAAP financial measure.

CONTACT: MARK J. GRESCOVICH, PRESIDENT & CEO LLOYD W. BAKER, CFO (509) 527-3636Source:Banner Corporation