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Banner Corporation Earns $23.9 Million, or $0.70 per Diluted Share, in the Third Quarter of 2016; Highlighted by Continued Revenue Growth

WALLA WALLA, Wash., Oct. 26, 2016 (GLOBE NEWSWIRE) -- Banner Corporation (NASDAQ GSM:BANR), the parent company of Banner Bank and Islanders Bank, today reported continued strong revenue generation fueled by growth from last year's acquisitions that contributed to solid third quarter results. Net income in the third quarter of 2016 increased to $23.9 million, or $0.70 per diluted share, compared to $21.0 million, or $0.61 per diluted share, in the preceding quarter and $12.9 million, or $0.62 per diluted share, in the third quarter a year ago. The current quarter results were impacted by $1.7 million of acquisition-related expenses which, net of tax benefit, reduced net income by $0.03 per diluted share, and the preceding quarter results were impacted by $2.4 million of acquisition-related expenses which, net of tax benefit, reduced net income by $0.05 per diluted share.

In the first nine months of 2016, net income increased to $62.6 million, or $1.83 per diluted share, compared to $38.3 million, or $1.87 per diluted share, in the first nine months of 2015. Acquisition-related expenses were $10.9 million (or $0.21 net of tax per diluted share) for the nine months ended September 30, 2016, compared to $7.7 million (or $0.27 net of tax per diluted share) for the nine months ended September 30, 2015.

“Our third quarter core operating performance continued to reflect the success of our proven client acquisition, balance sheet management and product pricing strategies, which produced additional core revenue and core deposit growth. We also benefited from the successful integration of last year’s AmericanWest Bank acquisition, which had a dramatic impact on the scale and reach of the Company and is providing enhanced opportunity for future client and revenue growth,” stated Mark J. Grescovich, President and Chief Executive Officer. “During the third quarter, we completed our electronic banking systems conversion and made additional progress in generating operating synergies as a result of the consolidation of overlapping locations and integration of operational activities. Through the hard work of our employees across the franchise, we are successfully executing on our strategies and priorities to deliver sustainable profitability and revenue growth to Banner.”

At September 30, 2016, Banner Corporation had $9.84 billion in assets, $7.31 billion in net loans and $8.11 billion in deposits. The Company operates 190 branch offices located in nine of the top 20 largest western Metropolitan Statistical Areas by population.

Third Quarter 2016 Highlights

  • Net income increased 14% to $23.9 million, compared to $21.0 million in the preceding quarter and increased 84% compared to $12.9 million in the third quarter of 2015.
  • Return on average assets was 0.96% in the current quarter, 0.86% in the preceding quarter and 0.97% in the same quarter a year ago.
  • Acquisition-related expenses were $1.7 million which, net of tax benefit, reduced net income by $0.03 per diluted share for the quarter ended September 30, 2016.
  • Revenues from core operations* increased 3% to $117.5 million, compared to $114.4 million in the preceding quarter and increased 74% compared to $67.4 million in the third quarter a year ago.
  • Net interest margin was 4.15% for the current quarter, compared to 4.20% in the second quarter of 2016 and 4.14% in the third quarter a year ago.
  • Excluding the impact of acquisition accounting adjustments, the net interest margin was 4.01%*, the same as in the preceding quarter and was 4.10%* in the third quarter a year ago.
  • Deposit fees and other service charges were $12.9 million, compared to $12.2 million in the preceding quarter and $9.7 million in the same quarter a year ago.
  • Revenues from mortgage banking operations were $8.1 million compared to $6.6 million in the preceding quarter and $4.4 million in the third quarter a year ago.
  • Provision for loan losses was $2.0 million.
  • Net loans increased by $3.02 billion, or 70% year-over-year and increased $69.8 million, or 1%, during the current quarter.
  • Total deposits increased by $3.72 billion, or 85%, compared to a year ago and increased $192.2 million, or 2%, during the current quarter.
  • Core deposits increased by $3.33 billion, or 91%, year-over-year, increased $277.9 million, or 4%, during the current quarter, and represented 86% of total deposits at September 30, 2016.
  • Quarterly dividend to shareholders increased 10% to $0.23 per share.
  • Repurchased 484,350 shares of common stock at a cost of $21.1 million and an average price of $43.56 per share.
  • Common shareholders' tangible equity per share* increased to $31.14 at September 30, 2016, compared to $30.86 at the preceding quarter end and $30.75 a year ago.
  • The ratio of tangible common shareholders' equity to tangible assets* remained strong at 11.03% at September 30, 2016 compared to 11.00% at the preceding quarter end and 12.20% a year ago.

*Revenues from core operations and non-interest income from core operations (both of which exclude fair value adjustments and gains and losses on the sale of securities), acquisition accounting impact on net interest margin, non-interest expense from core operations (which excludes acquisition-related costs), the adjusted allowance for loan losses to adjusted loans (which includes net loan discounts on acquired loans) and references to tangible common stockholders' equity per share and the ratio of tangible common equity to tangible assets (both of which exclude goodwill and other intangible assets, net) 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 three pages of this press release.

Acquisition of AmericanWest Bank

Effective October 1, 2015, Banner completed the acquisition of Starbuck Bancshares, Inc. ("Starbuck") and its wholly owned subsidiary AmericanWest Bank. The merger was accounted for using the acquisition method of accounting. Accordingly, the acquired assets (including identifiable intangible assets) and assumed liabilities of Starbuck were recognized 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 allocated 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 post-closing measurement period. During the third quarter of 2016, there were no post-closing adjustments to goodwill; however, post-closing adjustments reduced goodwill by $3.2 million during the nine months ending September 30, 2016. The Company does not expect any additional adjustments to goodwill.

In addition to the acquisition of AmericanWest Bank, the acquisition of Siuslaw Financial Group and its wholly-owned subsidiary Siuslaw Bank ("Siuslaw") on March 6, 2015 had a significant impact on the current and historical operating results of Banner. For additional details regarding acquisitions and merger related expenses, see the tables under Business Combinations on page 12 of this press release.

Income Statement Review

Banner’s third quarter net interest income, before the provision for loan losses, increased to $93.7 million, compared to $93.1 million in the preceding quarter. Third quarter 2016 net interest income, before the provision for loan losses, increased 80% compared to $52.2 million in the third quarter a year ago, largely reflecting the acquisition of AmericanWest Bank but also reflecting continued client acquisition. In the first nine months of 2016, Banner’s net interest income, before the provision for loan losses, increased 85% to $277.9 million compared to $150.2 million in the first nine months of 2015.

“Our net interest margin contracted five basis points compared to the preceding quarter as a result of decreased accretion of acquisition accounting discounts,” said Grescovich. "The net interest margin increased one basis point compared to a year ago. Excluding the impact of acquisition accounting, the net interest margin was unchanged compared to the preceding quarter, but declined by nine basis points compared to a year ago.*”

Net interest margin is enhanced by the amortization of acquisition accounting discounts on loans acquired in the acquisitions, which are accreted into loan interest income, as well as by net premiums on non-market-rate certificate of deposit liabilities assumed, which are amortized as a reduction to deposit interest expense. Banner's net interest margin was 4.15% for the third quarter of 2016, which included 11 basis points as a result of accretion from acquisition accounting loan discounts, one basis point from the amortization of deposit premiums and two basis points as a result of the impact of the net loan acquisition discounts on average earning assets from both the AmericanWest Bank and Siuslaw acquisitions, compared to a net interest margin of 4.20% in the preceding quarter and 4.14% in the third quarter a year ago. Excluding the effects of acquisition accounting, the net interest margin was 4.01%* in the third quarter and the preceding quarter and 4.10%* in the third quarter a year ago. The decline compared to a year earlier primarily reflects lower average yields on the loans acquired in the AmericanWest Bank acquisition, as well as the proportionally larger size of the securities portfolio following that acquisition.

Average interest-earning asset yields decreased four basis points to 4.34% compared to 4.38% for the preceding quarter and were unchanged compared to the third quarter a year ago. Loan yields decreased eight basis points compared to the preceding quarter and increased two basis points from the third quarter a year ago. The accretion of discounts and related balance sheet impact on the loans acquired through the acquisitions added 15 basis points to reported loan yields for the quarter. Deposit costs remained unchanged compared to the preceding quarter and decreased two basis points compared to the third quarter a year ago. Amortization of acquisition accounting net premiums on certificates of deposit reduced the cost of deposits by two basis points in the third quarter 2016. The total cost of funds decreased one basis point to 0.19% during the third quarter compared to the preceding quarter and declined three basis points compared to 0.22% for the third quarter a year ago.

“Our credit quality metrics continue to reflect our moderate risk profile,” said Grescovich. “As expected, due to loan growth and the renewal of acquired loans out of the discounted loan portfolio, we recorded a $2.0 million provision for loan losses during the third quarter, the same as in the preceding quarter.” In the third quarter a year ago, Banner did not record a provision.

“Revenues from mortgage banking were again strong, as home purchase activity continues to be robust in our markets, and low long term interest rates supported additional refinance activity,” said Grescovich. Mortgage banking revenues including gains on single and multifamily loan sales increased 23% to $8.1 million in the third quarter compared to $6.6 million in the preceding quarter and increased 84% compared to $4.4 million in the third quarter of 2015. Home purchase activity accounted for 65% of third quarter one- to four-family mortgage banking loan originations. In the first nine months of 2016, mortgage banking revenues increased 54% to $20.4 million compared to $13.2 million in the same period one year ago. Gains on the sale of multifamily loans were $1.4 million for the third quarter of 2016 and totaled $3.1 million for the first nine months of 2016.

Deposit fees and other service charges increased 6% to $12.9 million in the third quarter compared to $12.2 million in the preceding quarter and increased 33% compared to $9.7 million in the third quarter a year ago. Reflecting the significant increase in core deposits compared to a year earlier, deposit fees and other service charges increased 35% to $37.0 million for the nine months ended September 30, 2016, compared to $27.4 million in the first nine months of 2015.

Banner’s total revenues were $117.2 million for the quarter ended September 30, 2016, compared to $113.7 million in the preceding quarter and $66.3 million in the third quarter a year ago. Revenues from core operations* (revenues excluding gains and losses on the sale of securities and net change in valuation of financial instruments) increased 3% to $117.5 million in the third quarter ended September 30, 2016, compared to $114.4 million in the preceding quarter and increased 74% compared to $67.4 million in the third quarter of 2015. Total revenues for the first nine months of 2016 were $341.9 million compared to $194.1 million in the first nine months of 2015, with the significant increase largely attributable to the acquisition of AmericanWest Bank. Year-to-date, revenues from core operations* increased 77% to $342.8 million compared to $193.9 million in the first nine months of 2015.

Third quarter 2016 results included a $1.1 million net loss for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value that was partly offset by an $891,000 net gain on the sale of securities. In the preceding quarter, results included a $377,000 net loss for fair value adjustments, as well as a $380,000 net loss on the sale of securities. In the third quarter a year ago, results included a $1.1 million net loss for fair value adjustments.

Total non-interest income, which includes the changes in the valuation of financial instruments carried at fair value and gains and losses on the sale of securities, was $23.5 million in the third quarter of 2016, compared to $20.5 million in the second quarter of 2016 and $14.1 million in the third quarter a year ago. Non-interest income from core operations,* which excludes gains and losses on sale of securities and net changes in the valuation of financial instruments, was $23.7 million, compared to $21.3 million for the second quarter of 2016 and $15.2 million in the third quarter a year ago. For the first nine months of the year, Banner’s total non-interest income was $64.0 million compared to $43.9 million in the same period a year ago and non-interest income from core operations* was $64.9 million compared to $43.7 million for the same periods, respectively.

Banner’s total non-interest expenses were $79.1 million in the third quarter of 2016, compared to $79.9 million in the preceding quarter and $46.7 million in the third quarter of 2015. The year-over-year increase in non-interest expenses was largely attributable to the incremental costs associated with operating the branches and the related operations acquired in the AmericanWest Bank merger on October 1, 2015, as well as generally increased compensation, occupancy and payment and card processing services reflecting increased transaction volume. The current quarter's non-interest expenses also included elevated costs for professional services largely as result of seasonal factors relating to accounting, audit and examination processes, costs incurred in anticipation of enhanced regulatory compliance requirements and costs associated with sales and registration of restricted shares issued in the AmericanWest Bank merger. There were $1.7 million in acquisition-related expenses in the current quarter compared to $2.4 million in the preceding quarter and $2.2 million in the third quarter a year ago. In the first nine months of 2016, total non-interest expenses were $243.0 million compared to $136.3 million in the first nine months of 2015.

For the third quarter of 2016, Banner recorded $12.3 million in state and federal income tax expense for an effective tax rate of 34.0%, which reflects normal statutory tax rates reduced by the effect of tax-exempt income and certain tax credits.

Balance Sheet Review

Reflecting our previously announced strategy to maintain total assets below $10.0 billion through December 31, 2016, Banner’s total assets decreased to $9.84 billion at September 30, 2016, from $9.92 billion at June 30, 2016; however total assets increased by 85% compared to $5.31 billion a year ago, largely as a result of the AmericanWest Bank acquisition but also due to strong organic growth. The total of securities and interest-bearing deposits held at other banks was $1.39 billion at September 30, 2016, compared to $1.54 billion at June 30, 2016 and $648.5 million a year ago. The decrease in the securities portfolio during the current quarter reflects the temporary deleveraging strategy, while the increase in the securities portfolio compared to a year earlier was primarily a result of securities held by AmericanWest Bank at the time of the merger. The average effective duration of Banner's securities portfolio was approximately 2.9 years at September 30, 2016 compared to 2.6 years at June 30, 2016.

“Net loans increased during the quarter, with good production in targeted loan types and seasonal growth in certain loan types, including meaningful increases in commercial real estate, construction and development, and agricultural business loans. Loan production remains solid, as does the regional economy, and we continue to see significant potential for growth in our loan origination pipelines,” said Grescovich.

Net loans increased 70% to $7.31 billion at September 30, 2016, compared to $4.29 billion a year ago. Net loans were $7.24 billion at June 30, 2016. Commercial real estate and multifamily real estate loans increased 1% to $3.53 billion at September 30, 2016, compared to $3.49 billion at June 30, 2016, and increased 86% compared to $1.90 billion a year ago. Commercial business loans decreased to $1.19 billion at September 30, 2016, compared to $1.23 billion three months earlier but increased 46% compared to $812.1 million a year ago. Agricultural business loans increased 3% to $383.3 million at September 30, 2016, compared to $370.5 million three months earlier and increased 58% compared to $242.6 million a year ago. Total construction, land and land development loans increased 12% to $797.3 million at September 30, 2016, compared to $713.3 million at June 30, 2016, and increased 61% compared to $493.8 million a year earlier.

Banner’s total deposits were $8.11 billion at September 30, 2016, a 2% increase compared to $7.92 billion at June 30, 2016, and an 85% increase compared to $4.39 billion a year ago. In connection with certain product changes earlier in the year, Banner converted approximately $420 million of former AmericanWest Bank interest-bearing deposits to non-interest-bearing deposits during the first quarter of 2016. As a result of the acquisition and product changes as well as organic growth, non-interest-bearing account balances increased 104% to $3.19 billion at September 30, 2016, compared to $1.56 billion a year ago. Interest-bearing transaction and savings accounts increased 81% to $3.80 billion compared to $2.10 billion a year ago. Certificates of deposit increased 54% to $1.12 billion at September 30, 2016, compared to $730.7 million a year earlier. Brokered deposits totaled $60.3 million at September 30, 2016, compared to $93.0 million at June 30, 2016 and $10.1 million a year ago.

In part reflecting expected seasonal trends but also as a result of additional account growth, core deposits (non-interest bearing and interest-bearing transaction and savings accounts) increased by 4% during the current quarter. Core deposits represented 86% of total deposits at September 30, 2016, compared to 85% of total deposits at June 30, 2016 and 83% of total deposits a year earlier. As a result of this improved deposit mix as well as modest pricing adjustments, the cost of deposits was 0.14% for the quarter ended September 30, 2016 and for the preceding quarter, and declined two basis points from 0.16% for the quarter ended September 30, 2015.

At September 30, 2016, total common shareholders' equity was $1.33 billion, or $39.31 per share, compared to $1.34 billion at June 30, 2016 and $671.2 million a year ago. The decrease in shareholders’ equity compared to the prior quarter primarily reflects the repurchase of 484,350 shares of common stock at an average price of $43.56 per share as well as the $0.23 per share quarterly dividend, which was partially offset by net income for the quarter. The year-over-year increase was mostly due to 13.23 million shares of voting common and non-voting common stock issued on October 1, 2015 in connection with the AmericanWest Bank acquisition, which were valued at $47.67 per share and increased shareholders’ equity by $630.7 million. At September 30, 2016, tangible common shareholders' equity*, which excludes goodwill and other intangible assets, was $1.05 billion, or 11.03% of tangible assets*, compared to $1.06 billion, or 11.00% of tangible assets, at June 30, 2016, and $644.6 million, or 12.20% of tangible assets, a year ago. Banner's tangible book value per share* increased to $31.14 at September 30, 2016, compared to $30.75 per share a year ago.

Banner Corporation and its subsidiary banks continue to maintain capital levels in excess of the requirements to be categorized as “well-capitalized” under the Basel III and Dodd Frank regulatory standards. At September 30, 2016, Banner Corporation's common equity Tier 1 capital ratio was 11.68%, its Tier 1 leverage capital to average assets ratio was 11.40%, and its total capital to risk-weighted assets ratio was 13.39%.

Credit Quality

In accordance with acquisition accounting, loans acquired from AmericanWest Bank and Siuslaw were recorded at their estimated fair value, which resulted in a net discount to the loans’ contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value and as a result no allowance for loan and lease losses is recorded for acquired loans at the acquisition date. Although the discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios, we believe it should be considered when comparing the current ratios to similar ratios in periods prior to the acquisitions of AmericanWest Bank and Siuslaw.

The allowance for loan losses was $84.2 million at September 30, 2016, or 1.14% of total loans outstanding and 309% of non-performing loans compared to $77.3 million at September 30, 2015, or 1.77% of total loans outstanding and 329% of non-performing loans. Banner had net recoveries of $902,000 in the third quarter compared to net recoveries of $1.1 million in the second quarter of 2016 and net charge-offs of $9,000 in the third quarter a year ago. Primarily as a result of loan growth and the renewal of acquired loans out of the discounted loan portfolio, Banner recorded a $2.0 million provision for loan losses in the current quarter which was the same amount as recorded in the prior quarter. Banner did not record a provision for the quarter ended September 30, 2015. If the allowance for loan losses were grossed up for the remaining loan discount, the adjusted allowance for loan losses to adjusted loans would have been 1.60% as of September 30, 2016. Non-performing loans were $27.3 million at September 30, 2016, compared to $25.3 million at June 30, 2016 and $23.5 million a year ago. Real estate owned and other repossessed assets decreased to $4.9 million at September 30, 2016, compared to $6.4 million at June 30, 2016, and $6.4 million a year ago.

Banner's non-performing assets were 0.33% of total assets at September 30, 2016, compared to 0.32% at June 30, 2016 and 0.56% a year ago. Non-performing assets were $32.2 million at September 30, 2016, compared to $31.7 million at June 30, 2016 and $29.9 million a year ago. In addition to non-performing assets, purchased credit-impaired loans decreased to $38.7 million at September 30, 2016 compared to $45.4 million at June 30, 2016 and $5.4 million a year ago.

Conference Call

Banner will host a conference call on Thursday, October 27, 2016, at 8:00 a.m. PDT, to discuss its third 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 10093302, or at www.bannerbank.com.

About the Company

On October 1, 2015, Banner Corporation completed the acquisition of AmericanWest Bank which was merged into Banner Bank, a transformational merger that brought together two financially strong, well-respected institutions and created a leading Western bank. Banner Corporation is now a $9.8 billion bank holding company operating two commercial banks in five Western states through a network of branches offering a full range of deposit services and business, commercial real estate, construction, residential, agricultural and consumer loans. Visit Banner Bank on the Web at www.bannerbank.com.

Forward-Looking Statements

When used in this press release and in other documents filed with or furnished to the Securities and Exchange Commission (the “SEC”), in press releases or other public stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date such statements are made and based only on information then actually known to Banner. Banner does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These statements may relate to future financial performance, strategic plans or objectives, revenues or earnings projections, or other financial information. By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements and could negatively affect Banner's operating and stock price performance.

Important factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: (1) expected revenues, cost savings, synergies and other benefits from the merger of Banner Bank and Siuslaw Bank and the merger of Banner Bank and AmericanWest Bank 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 the Company'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, Utah and California in particular; (12) the costs, effects and outcomes of litigation; (13) new legislation or regulatory changes, including but not limited to the Dodd-Frank Act and regulations adopted thereunder, changes in capital requirements pursuant to the Dodd-Frank Act and the implementation of the Basel III capital standards, other governmental initiatives affecting the financial services industry and changes in federal and/or state tax laws or interpretations thereof by taxing authorities; (14) changes in accounting principles, policies or guidelines; (15) future acquisitions by Banner of other depository institutions or lines of business; (16) future goodwill impairment due to changes in Banner's business, changes in market conditions, or other factors and (17) other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed from time to time in our filings with the Securities and Exchange Commission including our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K.

RESULTS OF OPERATIONS Quarters Ended Nine months ended
(in thousands except shares and per share data) Sep 30, 2016 Jun 30, 2016 Sep 30, 2015 Sep 30, 2016 Sep 30, 2015
INTEREST INCOME:
Loans receivable $89,805 $88,935 $51,749 $265,697 $149,192
Mortgage-backed securities 4,803 5,274 1,307 15,467 3,609
Securities and cash equivalents 3,241 3,112 1,737 9,306 5,138
97,849 97,321 54,793 290,470 157,939
INTEREST EXPENSE:
Deposits 2,784 2,771 1,738 8,501 5,240
Federal Home Loan Bank advances 256 339 4 874 24
Other borrowings 82 78 47 234 137
Junior subordinated debentures 1,019 985 816 2,962 2,357
4,141 4,173 2,605 12,571 7,758
Net interest income before provision for loan losses 93,708 93,148 52,188 277,899 150,181
PROVISION FOR LOAN LOSSES 2,000 2,000 4,000
Net interest income 91,708 91,148 52,188 273,899 150,181
NON-INTEREST INCOME:
Deposit fees and other service charges 12,927 12,213 9,746 36,957 27,435
Mortgage banking operations 8,141 6,625 4,426 20,409 13,238
Bank owned life insurance 1,333 1,128 550 3,646 1,441
Miscellaneous 1,344 1,328 489 3,936 1,623
23,745 21,294 15,211 64,948 43,737
Net gain (loss) on sale of securities 891 (380) 531 (537)
Net change in valuation of financial instruments carried at fair value (1,124) (377) (1,113) (1,472) 735
Total non-interest income 23,512 20,537 14,098 64,007 43,935
NON-INTEREST EXPENSE:
Salary and employee benefits 44,758 45,175 27,026 136,497 78,057
Less capitalized loan origination costs (4,953) (4,907) (3,747) (14,110) (10,372)
Occupancy and equipment 10,979 11,052 6,470 32,419 18,833
Information / computer data services 4,836 4,852 2,219 14,607 6,744
Payment and card processing services 5,878 5,501 4,168 16,164 10,926
Professional services 2,258 865 951 5,736 2,489
Advertising and marketing 2,282 2,474 1,959 6,489 5,767
Deposit insurance 890 1,311 713 3,539 1,905
State/municipal business and use taxes 956 770 475 2,564 1,383
Real estate operations (21) 137 (2) 513 190
Amortization of core deposit intangibles 1,724 1,808 286 5,339 1,268
Miscellaneous 7,785 8,437 3,972 22,311 11,416
77,372 77,475 44,490 232,068 128,606
Acquisition related costs 1,720 2,412 2,207 10,945 7,741
Total non-interest expense 79,092 79,887 46,697 243,013 136,347
Income before provision for income taxes 36,128 31,798 19,589 94,893 57,769
PROVISION FOR INCOME TAXES 12,277 10,841 6,642 32,312 19,440
NET INCOME $23,851 $20,957 $12,947 $62,581 $38,329
Earnings per share available to common shareholders:
Basic $0.70 $0.62 $0.62 $1.84 $1.88
Diluted $0.70 $0.61 $0.62 $1.83 $1.87
Cumulative dividends declared per common share $0.23 $0.21 $0.18 $0.65 $0.54
Weighted average common shares outstanding:
Basic 34,045,225 34,069,234 20,755,394 34,050,459 20,417,601
Diluted 34,124,611 34,116,498 20,821,377 34,104,875 20,467,609
Increase (decrease) in common shares outstanding (483,249) 129,109 (8,381) (374,944) 1,390,752


FINANCIAL CONDITION Percentage Change
(in thousands except shares and per share data) Sep 30, 2016 Jun 30, 2016 Dec 31, 2015 Sep 30, 2015 Prior
Qtr
Prior
Yr Qtr
ASSETS
Cash and due from banks $161,710 $158,446 $117,657 $74,695 2.1% 116.5%
Interest-bearing deposits 84,207 76,210 144,260 60,544 10.5% 39.1%
Total cash and cash equivalents 245,917 234,656 261,917 135,239 4.8% 81.8%
Securities - trading 30,889 33,753 34,134 37,515 (8.5)% (17.7)%
Securities - available for sale 1,006,414 1,177,757 1,138,573 418,254 (14.5)% 140.6%
Securities - held to maturity 271,975 254,666 220,666 132,150 6.8% 105.8%
Federal Home Loan Bank stock 12,826 23,347 16,057 6,767 (45.1)% 89.5%
Loans held for sale 123,144 113,230 44,712 3,136 8.8% nm
Loans receivable 7,398,637 7,325,925 7,314,504 4,369,458 1.0% 69.3%
Allowance for loan losses (84,220) (81,318) (78,008) (77,320) 3.6% 8.9%
Net loans 7,314,417 7,244,607 7,236,496 4,292,138 1.0% 70.4%
Accrued interest receivable 30,345 30,052 29,627 17,966 1.0% 68.9%
Real estate owned held for sale, net 4,717 6,147 11,627 6,363 (23.3)% (25.9)%
Property and equipment, net 167,621 167,597 167,604 102,881 % 62.9%
Goodwill 244,583 244,583 247,738 21,148 % nm
Other intangibles, net 31,934 33,724 37,472 5,457 (5.3)% nm
Bank-owned life insurance 158,831 158,001 156,865 71,842 0.5% 121.1%
Other assets 197,415 194,085 192,810 61,454 1.7% 221.2%
Total assets $9,841,028 $9,916,205 $9,796,298 $5,312,310 (0.8)% 85.2%
LIABILITIES
Deposits:
Non-interest-bearing $3,190,293 $3,023,986 $2,619,618 $1,561,516 5.5% 104.3%
Interest-bearing transaction and savings accounts 3,798,668 3,687,118 4,081,580 2,095,476 3.0% 81.3%
Interest-bearing certificates 1,123,011 1,208,671 1,353,870 730,661 (7.1)% 53.7%
Total deposits 8,111,972 7,919,775 8,055,068 4,387,653 2.4% 84.9%
Advances from Federal Home Loan Bank at fair value 62,342 325,383 133,381 16,435 (80.8)% nm
Customer repurchase agreements and other borrowings 108,911 112,308 98,325 88,083 (3.0)% 23.6%
Junior subordinated debentures at fair value 94,364 93,298 92,480 85,183 1.1% 10.8%
Accrued expenses and other liabilities 92,783 87,441 76,511 42,844 6.1% 116.6%
Deferred compensation 39,385 39,483 40,474 20,910 (0.2)% 88.4%
Total liabilities 8,509,757 8,577,688 8,496,239 4,641,108 (0.8)% 83.4%
SHAREHOLDERS' EQUITY
Common stock 1,243,205 1,263,085 1,261,174 628,958 (1.6)% 97.7%
Retained earnings 80,053 63,967 39,615 41,269 25.1% 94.0%
Other components of shareholders' equity 8,013 11,465 (730) 975 (30.1)% nm
Total shareholders' equity 1,331,271 1,338,517 1,300,059 671,202 (0.5)% 98.3%
Total liabilities and shareholders' equity $9,841,028 $9,916,205 $9,796,298 $5,312,310 (0.8)% 85.2%
Common Shares Issued:
Shares outstanding at end of period 33,867,311 34,350,560 34,242,255 20,962,300
Common shareholders' equity per share (1) $39.31 $38.97 $37.97 $32.02
Common shareholders' tangible equity per share (1) (2) $31.14 $30.86 $29.64 $30.75
Common shareholders' tangible equity to tangible assets (2) 11.03% 11.00% 10.67% 12.20%
Consolidated Tier 1 leverage capital ratio 11.68% 11.85% 11.06% 13.85%


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


ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
Percentage Change
LOANS Sep 30,
2016
Jun 30,
2016
Dec 31,
2015
Sep 30,
2015
Prior
Qtr
Prior
Yr Qtr
Commercial real estate:
Owner occupied $1,340,577 $1,351,015 $1,327,807 $635,146 (0.8)% 111.1%
Investment properties 1,918,639 1,849,123 1,765,353 1,062,418 3.8% 80.6%
Multifamily real estate 266,883 287,783 472,976 198,874 (7.3)% 34.2%
Commercial construction 135,487 105,594 72,103 47,490 28.3% 185.3%
Multifamily construction 105,669 97,697 63,846 72,987 8.2% 44.8%
One- to four-family construction 363,586 330,474 278,469 246,715 10.0% 47.4%
Land and land development:
Residential 162,029 156,964 126,773 111,091 3.2% 45.9%
Commercial 30,556 22,578 33,179 15,517 35.3% 96.9%
Commercial business 1,187,848 1,231,182 1,207,944 812,070 (3.5)% 46.3%
Agricultural business including secured by farmland 383,275 370,515 376,531 242,556 3.4% 58.0%
One- to four-family real estate 846,899 878,986 952,633 533,189 (3.7)% 58.8%
Consumer:
Consumer secured by one- to four-family real estate 497,643 485,545 478,420 250,029 2.5% 99.0%
Consumer-other 159,546 158,469 158,470 141,376 0.7% 12.9%
Total loans outstanding $7,398,637 $7,325,925 $7,314,504 $4,369,458 1.0% 69.3%
Restructured loans performing under their restructured terms $17,649 $18,835 $21,777 $23,981
Loans 30 - 89 days past due and on accrual (1) $12,668 $14,447 $18,834 $4,152
Total delinquent loans (including loans on non-accrual), net (2) $39,543 $38,038 $30,994 $27,682
Total delinquent loans / Total loans outstanding 0.53% 0.52% 0.42% 0.63%

(1) Includes $486,000 of purchased credit-impaired loans at September 30, 2016 compared to $1.4 million at June 30, 2016, $4.3 million at December 31, 2015, and none at September 30, 2015.
(2) Delinquent loans include $3.6 million of delinquent purchased credit-impaired loans at September 30, 2016 compared to $4.4 million at June 30, 2016, $6.3 million at December 31, 2015 and $913,000 at September 30, 2015.


LOANS BY GEOGRAPHIC LOCATION Sep 30, 2016 Jun 30, 2016 Dec 31, 2015 Sep 30, 2015
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
Washington $3,415,413 46.2% $3,401,656 46.4% $3,343,112 45.7% $2,449,120 56.1%
Oregon 1,466,845 19.8% 1,461,906 20.0% 1,446,531 19.8% 1,148,887 26.3%
California 1,204,273 16.3% 1,184,392 16.2% 1,234,016 16.9% 90,808 2.1%
Idaho 517,607 7.0% 505,594 6.9% 496,870 6.8% 364,495 8.3%
Utah 292,088 3.9% 294,102 4.0% 325,011 4.4% 13,470 0.3%
Other 502,411 6.8% 478,275 6.5% 468,964 6.4% 302,678 6.9%
Total loans $7,398,637 100.0% $7,325,925 100.0% $7,314,504 100.0% $4,369,458 100.0%


ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
Quarters Ended Nine months ended
CHANGE IN THE Sep 30, 2016 Jun 30, 2016 Sep 30, 2015 Sep 30, 2016 Sep 30, 2015
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of period $81,318 $78,197 $77,329 $78,008 $75,907
Provision for loan losses 2,000 2,000 4,000
Recoveries of loans previously charged off:
Commercial real estate 34 26 375 98 587
Multifamily real estate 113
Construction and land 673 124 282 1,268 1,234
One- to four-family real estate 482 558 42 1,052 141
Commercial business 433 622 128 1,775 803
Agricultural business, including secured by farmland (138) 160 146 39 1,666
Consumer 73 249 91 529 369
1,557 1,739 1,064 4,761 4,913
Loans charged off:
Commercial real estate (180) (64)
Construction and land (352) (352)
One- to four-family real estate (92) (34) (12) (126) (127)
Commercial business (333) (171) (312) (643) (745)
Agricultural business, including secured by farmland (567) (1,064)
Consumer (230) (413) (397) (1,033) (1,148)
(655) (618) (1,073) (2,549) (3,500)
Net recoveries (charge-offs) 902 1,121 (9) 2,212 1,413
Balance, end of period $84,220 $81,318 $77,320 $84,220 $77,320
Net recoveries / Average loans outstanding 0.012% 0.015% % 0.030% 0.034%


ALLOCATION OF
ALLOWANCE FOR LOAN LOSSES Sep 30, 2016 Jun 30, 2016 Dec 31, 2015 Sep 30, 2015
Specific or allocated loss allowance:
Commercial real estate $19,846 $20,149 $20,716 $19,640
Multifamily real estate 1,436 1,515 4,195 4,363
Construction and land 33,803 31,861 27,131 27,274
One- to four-family real estate 2,190 2,204 4,732 7,937
Commercial business 16,507 17,758 13,856 12,765
Agricultural business, including secured by farmland 2,833 2,891 3,645 2,533
Consumer 3,934 3,743 902 804
Total allocated 80,549 80,121 75,177 75,316
Unallocated 3,671 1,197 2,831 2,004
Total allowance for loan losses $84,220 $81,318 $78,008 $77,320
Allowance for loan losses / Total loans outstanding 1.14% 1.11% 1.07% 1.77%
Allowance for loan losses / Non-performing loans 309% 321% 512% 329%


ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
Sep 30, 2016 Jun 30, 2016 Dec 31, 2015 Sep 30, 2015
NON-PERFORMING ASSETS
Loans on non-accrual status:
Secured by real estate:
Commercial$12,776 $11,753 $3,751 $3,899
Multifamily30 31
Construction and land1,747 1,738 2,260 2,793
One- to four-family3,414 3,512 4,700 4,934
Commercial business2,765 1,426 2,159 980
Agricultural business, including secured by farmland3,755 4,459 697 228
Consumer1,385 1,165 703 789
25,872 24,084 14,270 13,623
Loans more than 90 days delinquent, still on accrual:
Secured by real estate:
Commercial 1,808
Multifamily147 556
Construction and land 5,792
One- to four-family852 896 899 1,285
Commercial business 8 5
Consumer425 337 45 461
1,424 1,233 952 9,907
Total non-performing loans27,296 25,317 15,222 23,530
Real estate owned (REO)4,717 6,147 11,627 6,363
Other repossessed assets164 256 268
Total non-performing assets$32,177 $31,720 $27,117 $29,893
Total non-performing assets to total assets0.33% 0.32% 0.28% 0.56%
Purchased credit-impaired loans, net$38,674 $45,376 $58,600 $5,409


Quarters Ended Nine months ended
REAL ESTATE OWNEDSep 30, 2016 Jun 30, 2016 Sep 30, 2015 Sep 30, 2016 Sep 30, 2015
Balance, beginning of period$6,147 $7,207 $6,105 $11,627 $3,352
Additions from loan foreclosures156 376 1,085 534 3,226
Additions from acquisitions 400 2,525
Additions from capitalized costs 298
Proceeds from dispositions of REO(1,699) (1,656) (906) (8,021) (3,155)
Gain on sale of REO281 651 113 981 333
Valuation adjustments in the period(168) (431) (34) (804) (216)
Balance, end of period$4,717 $6,147 $6,363 $4,717 $6,363


ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
DEPOSIT COMPOSITION Percentage Change
Sep 30, 2016 Jun 30, 2016 Dec 31, 2015 Sep 30, 2015 Prior Qtr Prior Yr
Qtr
Non-interest-bearing $3,190,293 $3,023,986 $2,619,618 $1,561,516 5.5% 104.3%
Interest-bearing checking 853,594 830,625 1,159,846 482,530 2.8% 76.9%
Regular savings accounts 1,387,123 1,321,518 1,284,642 1,030,177 5.0% 34.6%
Money market accounts 1,557,951 1,534,975 1,637,092 582,769 1.5% 167.3%
Total interest-bearing transaction and savings accounts 3,798,668 3,687,118 4,081,580 2,095,476 3.0% 81.3%
Interest-bearing certificates 1,123,011 1,208,671 1,353,870 730,661 (7.1)% 53.7%
Total deposits $8,111,972 $7,919,775 $8,055,068 $4,387,653 2.4% 84.9%


GEOGRAPHIC CONCENTRATION OF DEPOSITS Sep 30, 2016 Jun 30, 2016 Dec 31, 2015 Sep 30, 2015
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
Washington $4,283,522 52.8% $4,158,639 52.5% $4,219,304 52.4% $2,911,674 66.4%
Oregon 1,737,754 21.4% 1,686,160 21.3% 1,648,421 20.4% 1,224,132 27.9%
California 1,491,903 18.4% 1,485,795 18.8% 1,592,365 19.8% %
Idaho 435,090 5.4% 421,427 5.3% 435,099 5.4% 251,847 5.7%
Utah 163,703 2.0% 167,754 2.1% 159,879 2.0% %
Total deposits $8,111,972 100.0% $7,919,775 100.0% $8,055,068 100.0% $4,387,653 100.0%


INCLUDED IN TOTAL DEPOSITS Sep 30, 2016 Jun 30, 2016 Dec 31, 2015 Sep 30, 2015
Public non-interest-bearing accounts $86,207 $102,486 $85,489 $48,814
Public interest-bearing transaction & savings accounts 115,458 127,045 123,941 74,446
Public interest-bearing certificates 26,734 26,574 31,281 27,791
Total public deposits $228,399 $256,105 $240,711 $151,051
Total brokered deposits $60,290 $92,982 $162,936 $10,095


ADDITIONAL FINANCIAL INFORMATION
(in thousands)
BUSINESS COMBINATIONS
ACQUISITION OF STARBUCK BANCSHARES, INC. October 1, 2015
Cash paid $130,000
Fair value of common shares issued 630,674
Total consideration 760,674
Fair value of assets acquired:
Cash and cash equivalents $95,821
Securities 1,037,238
Loans receivable 2,999,130
Real estate owned held for sale 6,105
Property and equipment 66,728
Core deposit intangible 33,500
Deferred tax asset 108,454
Other assets 113,009
Total assets acquired 4,459,985
Fair value of liabilities assumed:
Deposits 3,638,596
FHLB advances 221,442
Junior subordinated debentures 5,806
Other liabilities 56,359
Total liabilities assumed 3,922,203
Net assets acquired 537,782
Goodwill $222,892


MERGER AND ACQUISITION EXPENSEQuarters Ended Nine months ended
Sep 30, 2016 Jun 30, 2016 Sep 30, 2015 Sep 30, 2016 Sep 30, 2015
By expense category:
Personnel severance/retention fees$16 $(24) $227 $1,304 $443
Professional services687 599 1,185 2,138 5,411
Branch consolidation and other occupancy expenses94 924 5 2,517 55
Client communications527 126 151 904 221
Information/computer data services459 532 301 2,409 807
Miscellaneous(63) 255 338 1,673 804
Total merger and acquisition expense$1,720 $2,412 $2,207 $10,945 $7,741
By acquisition:
Siuslaw Financial Group1 94 340 95 1,867
Starbuck Bancshares, Inc. (AmericanWest)1,719 2,318 1,867 10,850 5,874
Total merger and acquisition expense$1,720 $2,412 $2,207 $10,945 $7,741


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 SEPTEMBER 30, 2016 Amount Ratio Amount Ratio Amount Ratio
Banner Corporation-consolidated:
Total capital to risk-weighted assets $1,176,129 13.39% $702,514 8.00% $878,142 10.00%
Tier 1 capital to risk-weighted assets 1,088,260 12.39% 526,885 6.00% 526,885 6.00%
Tier 1 leverage capital to average assets 1,088,260 11.40% 381,961 4.00% N/A N/A
Common equity tier 1 capital to risk-weighted assets 1,025,683 11.68% 395,164 4.50% N/A N/A
Banner Bank:
Total capital to risk-weighted assets 1,075,145 12.53% 686,511 8.00% 858,139 10.00%
Tier 1 capital to risk-weighted assets 989,527 11.53% 514,883 6.00% 686,511 8.00%
Tier 1 leverage capital to average assets 989,527 10.69% 370,197 4.00% 462,747 5.00%
Common equity tier 1 capital to risk-weighted assets 989,527 11.53% 386,162 4.50% 557,790 6.50%
Islanders Bank:
Total capital to risk-weighted assets 39,888 20.39% 15,646 8.00% 19,558 10.00%
Tier 1 capital to risk-weighted assets 37,637 19.24% 11,735 6.00% 15,646 8.00%
Tier 1 leverage capital to average assets 37,637 12.97% 11,604 4.00% 14,505 5.00%
Common equity tier 1 capital to risk-weighted assets 37,637 19.24% 8,801 4.50% 12,713 6.50%


ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
(rates / ratios annualized)
ANALYSIS OF NET INTEREST SPREADQuarter Ended
September 30, 2016 June 30, 2016 September 30, 2015
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:
Mortgage loans$5,843,381 $70,223 4.78% $5,715,740 $68,914 4.85% $3,200,184 $39,504 4.90%
Commercial/agricultural loans1,495,611 17,373 4.62% 1,504,969 17,816 4.76% 984,159 10,273 4.14%
Consumer and other loans142,977 2,209 6.15% 140,355 2,205 6.32% 129,496 1,972 6.04%
Total loans(1)7,481,969 89,805 4.78% 7,361,064 88,935 4.86% 4,313,839 51,749 4.76%
Mortgage-backed securities920,560 4,803 2.08% 1,004,044 5,274 2.11% 314,941 1,307 1.65%
Other securities472,159 3,050 2.57% 450,528 2,931 2.62% 261,580 1,638 2.48%
Interest-bearing deposits with banks86,868 98 0.45% 95,668 101 0.42% 109,445 97 0.35%
FHLB stock16,413 93 2.25% 18,911 80 1.70% 6,180 2 0.13%
Total investment securities1,496,000 8,044 2.14% 1,569,151 8,386 2.15% 692,146 3,044 1.74%
Total interest-earning assets8,977,969 97,849 4.34% 8,930,215 97,321 4.38% 5,005,985 54,793 4.34%
Non-interest-earning assets913,991 903,706 276,761
Total assets$9,891,960 $9,833,921 $5,282,746
Deposits:
Interest-bearing checking accounts$837,930 188 0.09% $789,626 185 0.09% $477,105 95 0.08%
Savings accounts1,371,911 449 0.13% 1,329,104 431 0.13% 1,019,059 381 0.15%
Money market accounts1,564,906 749 0.19% 1,577,320 811 0.21% 574,968 229 0.16%
Certificates of deposit1,173,630 1,398 0.47% 1,244,796 1,344 0.43% 749,702 1,033 0.55%
Total interest-bearing deposits4,948,377 2,784 0.22% 4,940,846 2,771 0.23% 2,820,834 1,738 0.24%
Non-interest-bearing deposits3,120,279 % 3,029,890 % 1,559,053 %
Total deposits8,068,656 2,784 0.14% 7,970,736 2,771 0.14% 4,379,887 1,738 0.16%
Other interest-bearing liabilities:
FHLB advances152,198 256 0.67% 214,290 339 0.64% 1,660 4 0.96%
Other borrowings111,016 82 0.29% 111,987 78 0.28% 92,550 47 0.20%
Junior subordinated debentures140,212 1,019 2.89% 140,212 985 2.83% 131,964 816 2.45%
Total borrowings403,426 1,357 1.34% 466,489 1,402 1.21% 226,174 867 1.52%
Total funding liabilities8,472,082 4,141 0.19% 8,437,225 4,173 0.20% 4,606,061 2,605 0.22%
Other non-interest-bearing liabilities(2)68,566 62,858 6,731
Total liabilities8,540,648 8,500,083 4,612,792
Shareholders' equity1,351,312 1,333,838 669,954
Total liabilities and shareholders' equity$9,891,960 $9,833,921 $5,282,746
Net interest income/rate spread $93,708 4.15% $93,148 4.18% $52,188 4.12%
Net interest margin 4.15% 4.20% 4.14%
Additional Key Financial Ratios:
Return on average assets 0.96% 0.86% 0.97%
Return on average equity 7.02% 6.32% 7.67%
Average equity/average assets 13.66% 13.56% 12.68%
Average interest-earning assets/average interest-bearing liabilities 167.76% 165.15% 164.29%
Average interest-earning assets/average funding liabilities 105.97% 105.84% 108.68%
Non-interest income/average assets 0.95% 0.84% 1.06%
Non-interest expense/average assets 3.18% 3.27% 3.51%
Efficiency ratio(4) 67.47% 70.27% 70.45%
Adjusted efficiency ratio(5) 63.61% 65.33% 64.88%
(1) Average balances include loans accounted for on a nonaccrual basis and loans 90 days or more past due. Amortization of net deferred loan fees/costs is included with interest on loans.
(2) Average other non-interest-bearing liabilities include fair value adjustments related to FHLB advances and junior subordinated debentures.
(3) Yields and costs have not been adjusted for the effect of tax-exempt interest.
(4) Non-interest expense divided by the total of net interest income (before provision for loan losses) and non-interest income.
(5) Adjusted non-interest expense divided by adjusted revenue. Adjusted revenue excludes net gain (loss) on sale of securities and fair value adjustments. Adjusted non-interest expense excludes acquisition related costs, amortization of CDI, real estate operations expense, and state/municipal business and use taxes. These represent non-GAAP financial measures. See also Non-GAAP Financial Measures reconciliation tables on the last three pages of the press release tables.


ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
(rates / ratios annualized)
ANALYSIS OF NET INTEREST SPREADNine months ended
September 30, 2016 September 30, 2015
Average
Balance
Interest and
Dividends
Yield/Cost(3) Average
Balance
Interest and
Dividends
Yield/Cost(3)
Interest-earning assets:
Mortgage loans$5,755,988 $207,881 4.82% $3,069,745 $113,707 4.95%
Commercial/agricultural loans1,490,757 51,213 4.59% 943,999 29,750 4.21%
Consumer and other loans141,570 6,603 6.23% 126,245 5,735 6.07%
Total loans(1)7,388,315 265,697 4.80% 4,139,989 149,192 4.82%
Mortgage-backed securities976,267 15,467 2.12% 309,503 3,609 1.56%
Other securities450,142 8,752 2.60% 262,560 4,859 2.47%
Interest-bearing deposits with banks95,406 300 0.42% 120,013 259 0.29%
FHLB stock17,614 254 1.93% 16,599 20 0.16%
Total investment securities1,539,429 24,773 2.15% 708,675 8,747 1.65%
Total interest-earning assets8,927,744 290,470 4.35% 4,848,664 157,939 4.36%
Non-interest-earning assets903,957 259,641
Total assets$9,831,701 $5,108,305
Deposits:
Interest-bearing checking accounts$853,818 570 0.09% $468,211 284 0.08%
Savings accounts1,336,259 1,303 0.13% 979,627 1,091 0.15%
Money market accounts1,587,500 2,421 0.20% 556,831 657 0.16%
Certificates of deposit1,248,781 4,207 0.45% 763,339 3,208 0.56%
Total interest-bearing deposits5,026,358 8,501 0.23% 2,768,008 5,240 0.25%
Non-interest-bearing deposits2,980,027 % 1,460,859 %
Total deposits8,006,385 8,501 0.14% 4,228,867 5,240 0.17%
Other interest-bearing liabilities:
FHLB advances178,468 874 0.65% 6,473 24 0.50%
Other borrowings108,632 234 0.29% 92,377 137 0.20%
Junior subordinated debentures140,212 2,962 2.82% 130,030 2,357 2.42%
Total borrowings427,312 4,070 1.27% 228,880 2,518 1.47%
Total funding liabilities8,433,697 12,571 0.20% 4,457,747 7,758 0.23%
Other non-interest-bearing liabilities(2)64,825 4,275
Total liabilities8,498,522 4,462,022
Shareholders' equity1,333,179 646,283
Total liabilities and shareholders' equity$9,831,701 $5,108,305
Net interest income/rate spread $277,899 4.15% $150,181 4.13%
Net interest margin 4.16% 4.14%
Additional Key Financial Ratios:
Return on average assets 0.85% 1.00%
Return on average equity 6.27% 7.93%
Average equity/average assets 13.56% 12.65%
Average interest-earning assets/average interest-bearing liabilities 163.70% 161.79%
Average interest-earning assets/average funding liabilities 105.86% 108.77%
Non-interest income/average assets 0.87% 1.15%
Non-interest expense/average assets 3.30% 3.57%
Efficiency ratio(4) 71.08% 70.24%
Adjusted efficiency ratio(5) 65.23% 64.85%
(1) Average balances include loans accounted for on a nonaccrual basis and loans 90 days or more past due. Amortization of net deferred loan fees/costs is included with interest on loans.
(2) Average other non-interest-bearing liabilities include fair value adjustments related to FHLB advances and junior subordinated debentures.
(3) Yields and costs have not been adjusted for the effect of tax-exempt interest.
(4) Non-interest expense divided by the total of net interest income (before provision for loan losses) and non-interest income.
(5) Adjusted non-interest expense divided by adjusted revenue. Adjusted revenue excludes net gain (loss) on sale of securities and fair value adjustments. Adjusted non-interest expense excludes acquisition related costs, amortization of CDI, real estate operations expense, and state/municipal business and use taxes. These represent non-GAAP financial measures. See also Non-GAAP Financial Measures reconciliation tables on the last three pages of the press release tables.


ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
* Non-GAAP Financial Measures (unaudited)
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. Where applicable, comparable earnings information using GAAP financial measures is also presented.
REVENUE FROM CORE OPERATIONSQuarters Ended Nine months ended
Sep 30, 2016 Jun 30, 2016 Sep 30, 2015 Sep 30, 2016 Sep 30, 2015
Net interest income before provision for loan losses$93,708 $93,148 $52,188 $277,899 $150,181
Total non-interest income23,512 20,537 14,098 64,007 43,935
Total GAAP revenue117,220 113,685 66,286 341,906 194,116
Exclude net (gain) loss on sale of securities(891) 380 (531) 537
Exclude change in valuation of financial instruments carried at fair value1,124 377 1,113 1,472 (735)
Revenue from core operations (non-GAAP)$117,453 $114,442 $67,399 $342,847 $193,918


INCOME FROM CORE OPERATIONSQuarters Ended Nine months ended
Sep 30, 2016 Jun 30, 2016 Sep 30, 2015 Sep 30, 2016 Sep 30, 2015
Income before provision for taxes (GAAP)36,128 31,798 19,589 94,893 57,769
Exclude net (gain) loss on sale of securities(891) 380 (531) 537
Exclude change in valuation of financial instruments carried at fair value1,124 377 1,113 1,472 (735)
Exclude acquisition costs1,720 2,412 2,207 10,945 7,741
Income from core operations before provision for taxes (non-GAAP)38,081 34,967 22,909 106,779 65,312


ACQUISITION ACCOUNTING IMPACT ON NET INTEREST MARGINQuarters Ended Nine months ended
Sep 30, 2016 Jun 30, 2016 Sep 30, 2015 Sep 30, 2016 Sep 30, 2015
Net interest income before provision for loan losses (GAAP)$93,708 $93,148 $52,188 $277,899 $150,181
Exclude discount accretion on purchased loans(2,446) (3,214) (359) (7,349) (987)
Exclude premium amortization on acquired certificates of deposit(316) (460) (53) (1,237) (176)
Net interest income before acquisition accounting impact (non-GAAP)$90,946 $89,474 $51,776 $269,313 $149,018
Average interest-earning assets (GAAP)$8,977,969 $8,930,215 $5,005,985 $8,927,744 $4,848,664
Exclude average net loan discount on acquired loans36,958 41,246 4,314 40,504 4,140
Average interest-earning assets before acquired loan discount (non-GAAP)$9,014,927 $8,971,461 $5,010,299 $8,968,248 $4,852,804
Net interest margin (GAAP)4.15% 4.20% 4.14% 4.16% 4.14%
Exclude impact on net interest margin from discount accretion(0.11) (0.14) (0.03) (0.11) (0.03)
Exclude impact on net interest margin from CD premium amortization(0.01) (0.02) (0.02)
Exclude impact of net loan discount on average earning assets(0.02) (0.03) (0.01) (0.02)
Net margin before acquisition accounting impact (non-GAAP)4.01% 4.01% 4.10% 4.01% 4.11%


ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands except shares and per share data)
Quarters Ended Nine months ended
Sep 30, 2016 Jun 30, 2016 Sep 30, 2015 Sep 30, 2016 Sep 30, 2015
NON-INTEREST INCOME/EXPENSE FROM CORE OPERATIONS
Total non-interest income (GAAP) $23,512 $20,537 $14,098 $64,007 $43,935
Exclude net (gain) loss on sale of securities (891) 380 (531) 537
Exclude change in valuation of financial instruments carried at fair value 1,124 377 1,113 1,472 (735)
Non-interest income from core operations (non-GAAP) $23,745 $21,294 $15,211 $64,948 $43,737
Total non-interest expense (GAAP) $79,092 $79,887 $46,697 $243,013 $136,347
Exclude acquisition related costs (1,720) (2,412) (2,207) (10,945) (7,741)
Non-interest expense from core operations (non-GAAP) $77,372 $77,475
$44,490
$232,068
$128,606


Quarters Ended Nine months ended
Sep 30, 2016 Jun 30, 2016 Sep 30, 2015 Sep 30, 2016 Sep 30, 2015
EARNINGS FROM CORE OPERATIONS
Net income (GAAP) $23,851 $20,957 $12,947 $62,581 $38,329
Exclude net (gain) loss on sale of securities (891) 380 (531) 537
Exclude change in valuation of financial instruments carried at fair value 1,124 377 1,113 1,472 (735)
Exclude acquisition-related costs 1,720 2,412 2,207 10,945 7,741
Exclude related tax expense (benefit) (703) (1,141) (1,092) (4,261) (2,165)
Total earnings from core operations (non-GAAP) $25,101 $22,985 $15,175 $70,206 $43,707
Diluted earnings per share (GAAP) $0.70 $0.61 $0.62 $1.83 $1.87
Diluted core earnings per share (non-GAAP) $0.74 $0.67 $0.73 $2.06 $2.14
NET EFFECT OF ACQUISITION-RELATED COSTS ON EARNINGS
Acquisition-related costs $(1,720) $(2,412) $(2,207) $(10,945) $(7,741)
Related tax benefit 619 868 691 3,922 2,237
Total net effect of acquisition-related costs on earnings $(1,101) $(1,544) $(1,516) $(7,023) $(5,504)
Diluted weighted average shares outstanding 34,124,611 34,116,498 20,821,377 34,104,875 20,467,609
Total net effect of acquisition-related costs on diluted weighted average earnings per share $(0.03) $(0.05) $(0.07) $(0.21) $(0.27)


ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
Quarters Ended Nine months ended
Sep 30, 2016 Jun 30, 2016 Sep 30, 2015 Sep 30, 2016 Sep 30, 2015
ADJUSTED EFFICIENCY RATIO
Non-interest expense (GAAP) $79,092 $79,887 $46,697 $243,013 $136,347
Exclude acquisition-related costs (1,720) (2,412) (2,207) (10,945) (7,741)
Exclude CDI amortization (1,724) (1,808) (286) (5,339) (1,268)
Exclude B&O tax expense (956) (770) (475) (2,564) (1,383)
Exclude REO gain (loss) 21 (137) 2 (513) (190)
Adjusted non-interest expense (non-GAAP) $74,713 $74,760 $43,731 $223,652 $125,765
Net interest income before provision for loan losses (GAAP) $93,708 $93,148 $52,188 $277,899 $150,181
Non-interest income (GAAP) 23,512 20,537 14,098 64,007 43,935
Total revenue 117,220 113,685 66,286 341,906 194,116
Exclude net (gain) loss on sale of securities (891) 380 (531) 537
Exclude net change in valuation of financial instruments carried at fair value 1,124 377 1,113 1,472 (735)
Adjusted revenue (non-GAAP) $117,453 $114,442 $67,399 $342,847 $193,918
Efficiency ratio (GAAP) 67.47% 70.27% 70.45% 71.08% 70.24%
Adjusted efficiency ratio (non-GAAP) 63.61% 65.33% 64.88% 65.23% 64.85%


Sep 30, 2016 Jun 30, 2016 Dec 31, 2015 Sep 30, 2015
TANGIBLE COMMON SHAREHOLDERS' EQUITY TO TANGIBLE ASSETS
Shareholders' equity (GAAP) $1,331,271 $1,338,517 $1,300,059 $671,202
Exclude goodwill and other intangible assets, net 276,517 278,307 285,210 26,605
Tangible common shareholders' equity (non-GAAP) $1,054,754 $1,060,210 $1,014,849 $644,597
Total assets (GAAP) $9,841,028 $9,916,205 $9,796,298 $5,312,310
Exclude goodwill and other intangible assets, net 276,517 278,307 285,210 26,605
Total tangible assets (non-GAAP) $9,564,511 $9,637,898 $9,511,088 $5,285,705
Tangible common shareholders' equity to tangible assets (non-GAAP) 11.03% 11.00% 10.67% 12.20%
TANGIBLE COMMON SHAREHOLDERS' EQUITY PER SHARE
Tangible common shareholders' equity $1,054,754 $1,060,210 $1,014,849 $644,597
Common shares outstanding at end of period 33,867,311 34,350,560 34,242,255 20,962,300
Common shareholders' equity (book value) per share (GAAP) $39.31 $38.97 $37.97 $32.02
Tangible common shareholders' equity (tangible book value) per share (non-GAAP) $31.14 $30.86 $29.64 $30.75


ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
Sep 30, 2016 Jun 30, 2016 Dec 31, 2015 Sep 30, 2015
RATIO OF ADJUSTED ALLOWANCE FOR LOAN LOSSES TO ADJUSTED LOANS
Loans receivable (GAAP) $7,398,637 $7,325,925 $7,314,504 4,369,458
Net loan discount on acquired loans 34,867 38,838 43,657 4,258
Adjusted loans (non-GAAP) $7,433,504 $7,364,763 $7,358,161 4,373,716
Allowance for loan losses (GAAP) $84,220 $81,318 $78,008 77,320
Net loan discount on acquired loans 34,867 38,838 43,657 4,258
Adjusted allowance for loan losses (non-GAAP) $119,087 $120,156 $121,665 81,578
Adjusted allowance for loan losses / Adjusted loans (non-GAAP) 1.60% 1.63% 1.65% 1.87%


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

Source:Banner Corporation