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Banner Corporation Earns $85.4 Million, or $2.52 per Diluted Share in 2016; Net Income Totaled $22.8 Million, or $0.69 per Diluted Share, in the Fourth Quarter of 2016; Highlighted by Continued Revenue Growth and an Expanded Net Interest Margin

WALLA WALLA, Wash., Jan. 25, 2017 (GLOBE NEWSWIRE) -- Banner Corporation (NASDAQ GSM:BANR), the parent company of Banner Bank and Islanders Bank, today reported continued strong revenue generation contributed to solid fourth quarter and full year 2016 operating results. Net income in the fourth quarter of 2016 was $22.8 million, or $0.69 per diluted share, compared to $23.9 million, or $0.70 per diluted share, in the preceding quarter and $6.9 million, or $0.20 per diluted share, in the fourth quarter a year ago. The current quarter results were impacted by $788,000 of acquisition-related expenses which, net of tax benefit, reduced net income by $0.02 per diluted share. The results for the preceding quarter included $1.7 million of acquisition-related expenses which, net of tax benefit, reduced net income by $0.03 per diluted share, while operating results in the fourth quarter a year ago included $18.4 million of acquisition-related expenses which, net of tax benefit, reduced net income by $0.37 per diluted share.

For the year ended December 31, 2016, net income increased to $85.4 million, or $2.52 per diluted share, compared to $45.2 million, or $1.89 per diluted share, for the year ended December 31, 2015. Acquisition-related expenses were $11.7 million (or $0.22, net of tax, per diluted share) for 2016, compared to $26.1 million (or $0.76, net of tax, per diluted share) for 2015.

“Our 2016 operating performance continued to reflect the success of our proven client acquisition, balance sheet management and product pricing strategies, which produced solid core revenue and additional core deposit growth,” stated Mark J. Grescovich, President and Chief Executive Officer. “We also benefited from the successful completion of the integration of the AmericanWest Bank acquisition, which made a dramatic impact on our scale and reach and is providing enhanced opportunity for future client and revenue growth. During the fourth quarter, we made additional progress in generating operating synergies as a result of the consolidation of overlapping locations and integration of operational activities earlier in the year. However, during the quarter we also incurred increased expenses related to enhanced infrastructure and regulatory compliance costs as we prepared to cross the threshold of $10 billion in total assets. While increasing regulatory costs are a significant headwind as we enter 2017, through the hard work of our employees across the franchise, we expect to continue successfully executing on our strategies and priorities to deliver sustainable profitability and revenue growth to our shareholders while maintaining our moderate risk profile.”

At December 31, 2016, Banner Corporation had $9.79 billion in assets, $7.37 billion in net loans and $8.12 billion in deposits. The Company operates 190 branch offices located in nine of the top 20 largest western Metropolitan Statistical Areas by population.

Fourth Quarter 2016 Highlights

  • Net income was $22.8 million, compared to $23.9 million in the preceding quarter and increased substantially compared to $6.9 million in the fourth quarter of 2015.
  • Return on average assets was 0.92% in the current quarter, 0.96% in the preceding quarter and 0.28% in the same quarter a year ago.
  • Acquisition-related expenses were $788,000 which, net of tax benefit, reduced net income by $0.02 per diluted share for the fourth quarter of 2016.
  • Revenues from core operations* were $117.5 million, the same as in the preceding quarter and increased 5% compared to $112.0 million in the fourth quarter a year ago.
  • Net interest margin was 4.32% for the current quarter, compared to 4.15% in the preceding quarter and 4.05% in the fourth quarter a year ago.
  • Excluding the impact of acquisition accounting adjustments, the net interest margin was 4.13%*, compared to 4.01%* in the third quarter and was 3.89%* in the fourth quarter a year ago.
  • Deposit fees and other service charges were $12.2 million, compared to $12.9 million in the preceding quarter and $13.2 million in the same quarter a year ago.
  • Revenues from mortgage banking operations were $5.1 million compared to $8.1 million in the preceding quarter and $4.5 million in the fourth quarter a year ago.
  • Provision for loan losses was $2.0 million, increasing the allowance for loan losses to $86.0 million or 1.15% of total loans.
  • Core deposits increased 1% during the current quarter and represented 87% of total deposits at December 31, 2016.
  • Quarterly dividends to shareholders were $0.23 per share, providing a current yield of 1.6% based on our December 31, 2016 closing price.
  • Repurchased 1,145,250 shares of common stock at an average price of $44.29 per share during the year 2016, including 660,900 shares at an average price per share of $44.86 during the fourth quarter.
  • Common shareholders' tangible equity per share* was $31.06 at December 31, 2016, compared to $31.14 at the preceding quarter end and $29.64 a year ago.
  • The ratio of tangible common shareholders' equity to tangible assets* remained strong at 10.83% at December 31, 2016, compared to 11.03% at the preceding quarter end and 10.67% 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 was subject to adjustment within a post-closing measurement period of one year from the acquisition date. During the fourth quarter of 2016, there were no post-closing adjustments to goodwill as the measurement period has lapsed; however, post-closing adjustments reduced goodwill by $3.2 million during the year ended December 31, 2016.

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 an 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 fourth quarter net interest income, before the provision for loan losses, increased 4% to $97.2 million, compared to $93.7 million in the preceding quarter. Fourth quarter 2016 net interest income, before the provision for loan losses, increased 6% compared to $92.1 million in the fourth quarter a year ago. For the year, Banner’s net interest income, before the provision for loan losses, increased 55% to $375.1 million compared to $242.3 million in 2015 largely reflecting the acquisition of AmericanWest Bank and continued client acquisition.

“Our net interest margin increased 17 basis points compared to the preceding quarter and increased 27 basis points compared to the fourth quarter a year ago, as a result of higher average loan yields and increased accretion from acquisition accounting loan discounts, as well as modest changes in our asset mix and slightly reduced funding costs,” said Grescovich. "Excluding the impact of acquisition accounting, the net interest margin increased 12 basis points compared to the preceding quarter, and increased by 24 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 4.32% for the fourth quarter of 2016, which included 16 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 4.15% in the preceding quarter and 4.05% in the fourth quarter a year ago. Excluding the effects of acquisition accounting, the net interest margin was 4.13%* in the fourth quarter, 4.01% in the preceding quarter and 3.89%* in the fourth quarter a year ago.

Average interest-earning asset yields increased 15 basis points to 4.49% compared to 4.34% for the preceding quarter and increased 25 basis points compared to 4.24% in the fourth quarter a year ago. Loan yields increased 15 basis points compared to the preceding quarter and increased 21 basis points from the fourth quarter a year ago. Loan yields were positively impacted by increased market interest rates late in the fourth quarter due primarily to the impact of the December 2016 increase in the federal funds rate and related increases in Prime and LIBOR rates. Loan yields in the current quarter were also aided by $1.1 million in prepayment fees related to a single credit relationship. The accretion of discounts and related balance sheet impact on the loans acquired through the acquisitions added 21 basis points to reported loan yields for the quarter. Deposit costs decreased one basis point compared to the preceding quarter and decreased two basis points compared to the fourth 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 fourth quarter of 2016. The total cost of funds decreased one basis point to 0.18% during the fourth quarter compared to the preceding quarter and declined two basis points compared to 0.20% for the fourth quarter a year ago, reflecting the decreased deposit costs and a reduction in Federal Home Loan Bank (FHLB) advances as part of a strategy to remain below $10 billion in total assets at December 31, 2016.

“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 fourth quarter, the same as in the preceding quarter,” added Grescovich. In the fourth quarter a year ago, Banner did not record a provision.

Mortgage banking revenues, including gains on one- to four-family and multifamily loan sales and loan servicing fees, decreased significantly to $5.1 million in the fourth quarter compared to $8.1 million in the preceding quarter but increased 15% compared to $4.5 million in the fourth quarter of 2015. For the full year, mortgage banking revenues increased 45% to $25.6 million compared to $17.7 million in 2015. The decrease in mortgage banking revenues compared to the third quarter reflected an expected seasonal pattern for one- to four-family loans, but also reflected meaningfully narrower spreads on sales compared to exceptionally wide spread levels in the preceding quarter. In addition, sales of multifamily loans were significantly less in the current quarter resulting in gains of only $254,000, while sales of multifamily loans resulted in $1.4 million of gains in the third quarter. Home purchase activity accounted for 58% of fourth quarter one- to four-family mortgage banking loan originations.

Also reflecting seasonal factors, Banner’s deposit fees and other service charges decreased 6% to $12.2 million in the fourth quarter compared to $12.9 million in the preceding quarter and, principally as a result of changes in certain fee structures for accounts acquired in the AmericanWest Bank merger, decreased 7% compared to $13.2 million in the fourth quarter a year ago. Nonetheless, reflecting the significant increase in core deposits compared to a year earlier, deposit fees and other service charges increased 21% to $49.2 million for the year, compared to $40.6 million in 2015.

Total revenues were $116.6 million for the fourth quarter of 2016, compared to $117.2 million in the preceding quarter and $110.5 million in the fourth 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) was $117.5 million in the fourth quarter of 2016, the same as the preceding quarter. Revenues from core operations* increased 5% compared to $112.0 million in the fourth quarter of 2015. Total revenues for 2016 were $458.5 million compared to $304.6 million in 2015, with the significant increase largely attributable to the acquisition of AmericanWest Bank. For the year ended December 31, 2016, revenues from core operations* increased 50% to $460.3 million compared to $305.9 million in 2015.

Fourth 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 a $311,000 net gain on the sale of securities. In the preceding quarter, results included a $1.1 million net loss for fair value adjustments that was partly offset by a $891,000 net gain on the sale of securities. In the fourth quarter a year ago, results included a $1.5 million net loss for fair value adjustments and a $3,000 net loss on the sale of securities. In 2016 results included a $2.6 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 $843,000 net gain on the sale of securities. A year ago, results included an $813,000 net loss for fair value adjustments and a $540,000 net loss on the sale of securities.

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 $19.5 million in the fourth quarter of 2016, compared to $23.5 million in the third quarter of 2016 and $18.4 million in the fourth 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 $20.3 million in the fourth quarter of 2016, compared to $23.7 million for the third quarter of 2016 and $19.9 million in the fourth quarter a year ago. For the year ended December 31, 2016, Banner’s total non-interest income was $83.5 million compared to $62.3 million a year ago and non-interest income from core operations* was $85.2 million compared to $63.6 million for the same periods, respectively.

Banner’s total non-interest expenses were $79.9 million in the fourth quarter of 2016, compared to $79.1 million in the preceding quarter and $100.3 million in the fourth quarter of 2015. For the year, total non-interest expenses were $322.9 million compared to $236.6 million in 2015. The year’s 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 increased advertising and marketing expenses, elevated costs for professional services largely as result of seasonal factors relating to accounting, audit and examination processes, and costs incurred in anticipation of enhanced regulatory compliance requirements. There was $788,000 in acquisition-related expenses in the current quarter compared to $1.7 million in the preceding quarter and $18.4 million in the fourth quarter a year ago.

For the fourth quarter of 2016, Banner recorded $11.9 million in state and federal income tax expense for an effective tax rate of 34.4%, which reflects normal statutory tax rates reduced by the effect of tax-exempt income and certain tax credits.

Balance Sheet Review

As part of Banner’s previously announced strategy to maintain total assets below $10.0 billion through the year 2016, total assets decreased to $9.79 billion at December 31, 2016, from $9.84 billion at September 30, 2016 and $9.80 billion a year ago. The total of securities and interest-bearing deposits held at other banks was $1.16 billion at December 31, 2016, compared to $1.39 billion at September 30, 2016 and $1.54 billion a year ago. The decrease in the securities portfolio during the current quarter reflects the temporary deleveraging strategy. The average effective duration of Banner's securities portfolio was approximately 3.8 years at December 31, 2016 compared to 3.3 years at December 31, 2015.

“Total loans increased again during the quarter, with good production in targeted loan types, including increases in commercial real estate and construction and development loans. The regional economy remains solid and we continue to see significant potential for growth in our loan origination pipelines,” said Grescovich.

Net loans receivable increased 1% to $7.37 billion at December 31, 2016, compared to $7.31 billion at September 30, 2016 and increased 2% compared to $7.24 billion a year ago. Commercial real estate and multifamily real estate loans increased 2% to $3.59 billion at December 31, 2016, compared to $3.53 billion at September 30, 2016, but increased modestly compared to $3.57 billion a year ago, reflecting significant sales earlier in the year of multifamily loans acquired in the AmericanWest Bank merger, which had been held for investment. Commercial business loans increased 2% to $1.21 billion at December 31, 2016, compared to $1.19 billion three months earlier but were unchanged compared to a year ago. Agricultural business loans, which are seasonal by nature, decreased to $369.2 million at December 31, 2016, compared to $383.3 million three months earlier and $376.5 million a year ago. Total construction, land and land development loans increased 3% to $823.1 million at December 31, 2016, compared to $797.3 million at September 30, 2016, and increased 43% compared to $574.4 million a year earlier. One- to four-family loans continued to decline as a result of repayments, with nearly all newly originated mortgage loans being sold in the secondary market.

Loans held for sale increased significantly to $246.4 million at December 31, 2016, compared to $123.1 million at September 30, 2016 and $44.7 million at December 31, 2015, principally as a result of multifamily loan originations that outpaced loan sales. Loans held for sale at December 31, 2016, included $216.3 million of multifamily loans and $30.1 million of one- to four-family loans.

Total deposits were $8.12 billion at December 31, 2016, a modest increase compared to $8.11 billion at September 30, 2016, and $8.06 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 product changes as well as organic growth, non-interest-bearing account balances increased 20% to $3.14 billion at December 31, 2016, compared to $2.62 billion a year ago. Interest-bearing transaction and savings accounts decreased 4% to $3.94 billion compared to $4.08 billion a year ago as the product change more than offset organic growth. Certificates of deposit decreased 23% to $1.05 billion at December 31, 2016, compared to $1.35 billion a year earlier. Brokered deposits totaled $34.1 million at December 31, 2016, compared to $60.3 million at September 30, 2016 and $162.9 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 1% during the current quarter. Core deposits represented 87% of total deposits at December 31, 2016, compared to 86% of total deposits at September 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 0.13% for the quarter ended December 31, 2016, a one basis point decline compared to the preceding quarter, and a two basis points decline compared to the quarter ended December 31, 2015.

At December 31, 2016, total common shareholders' equity was $1.31 billion, or $39.34 per share, compared to $1.33 billion at September 30, 2016 and $1.30 billion a year ago. The decrease in shareholders’ equity compared to the prior quarter primarily reflects the repurchase of 660,900 shares of common stock at an average price of $44.86 per share as well as the $0.23 per share quarterly dividend, which was partially offset by net income for the quarter. The decrease in shareholders’ equity for the quarter also reflects an adverse change of $11.5 million in other comprehensive income for the quarter principally related to changes in the value securities available for sale as a result of increased market interest rates. At December 31, 2016, tangible common shareholders' equity*, which excludes goodwill and other intangible assets, was $1.03 billion, or 10.83% of tangible assets*, compared to $1.05 billion, or 11.03% of tangible assets, at September 30, 2016, and $1.01 billion, or 10.67% of tangible assets, a year ago. Banner's tangible book value per share* increased to $31.06 at December 31, 2016, compared to $29.64 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 December 31, 2016, Banner Corporation's common equity Tier 1 capital ratio was 11.13%, its Tier 1 leverage capital to average assets ratio was 11.83%, and its total capital to risk-weighted assets ratio was 13.32%.

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 $86.0 million at December 31, 2016, or 1.15% of total loans outstanding and 381% of non-performing loans compared to $78.0 million at December 31, 2015, or 1.07% of total loans outstanding and 512% of non-performing loans. Banner had net charge-offs of $253,000 in the fourth quarter compared to net recoveries of $902,000 in the third quarter of 2016 and net recoveries of $688,000 in the fourth 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 fourth quarter of 2015. If the allowance for loan losses included the remaining loan discount*, the adjusted allowance for loan losses to adjusted loans would have been 1.57% as of December 31, 2016 as compared to 1.65% a year ago. Non-performing loans were $22.6 million at December 31, 2016, compared to $27.3 million at September 30, 2016 and $15.2 million a year ago. Real estate owned and other repossessed assets were $11.2 million at December 31, 2016, compared to $4.9 million at September 30, 2016, and $11.9 million a year ago.

Banner's non-performing assets were $33.8 million, or 0.35% of total assets, at December 31, 2016, compared to $32.2 million, or 0.33% of total assets, at September 30, 2016 and $27.1 million, or 0.28% of total assets, a year ago. In addition to non-performing assets, purchased credit-impaired loans decreased to $32.3 million at December 31, 2016, compared to $38.7 million at September 30, 2016, and $58.6 million a year ago.

Conference Call

Banner will host a conference call on Thursday, January 26, 2017, at 8:00 a.m. PST, to discuss its fourth quarter results. To listen to the call on-line, go to www.bannerbank.com. Investment professionals are invited to dial (866) 235-9915 to participate in the call. A replay will be available for one week at (877) 344-7529 using access code 10098018, 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 Twelve months ended
(in thousands except shares and per share data) Dec 31, 2016 Sep 30, 2016 Dec 31, 2015 Dec 31, 2016 Dec 31, 2015
INTEREST INCOME:
Loans receivable $93,915 $89,805 $88,100 $359,612 $237,292
Mortgage-backed securities 3,861 4,803 5,440 19,328 9,049
Securities and cash equivalents 3,231 3,241 2,955 12,537 8,092
101,007 97,849 96,495 391,477 254,433
INTEREST EXPENSE:
Deposits 2,604 2,784 3,146 11,105 8,385
Federal Home Loan Bank advances 79 256 287 953 311
Other borrowings 76 82 73 310 211
Junior subordinated debentures 1,077 1,019 890 4,040 3,247
3,836 4,141 4,396 16,408 12,154
Net interest income before provision for loan losses 97,171 93,708 92,099 375,069 242,279
PROVISION FOR LOAN LOSSES 2,030 2,000 6,030
Net interest income 95,141 91,708 92,099 369,039 242,279
NON-INTEREST INCOME:
Deposit fees and other service charges 12,199 12,927 13,172 49,156 40,607
Mortgage banking operations 5,143 8,141 4,482 25,552 17,720
Bank owned life insurance 893 1,333 1,056 4,538 2,497
Miscellaneous 2,065 1,344 1,196 6,001 2,821
20,300 23,745 19,906 85,247 63,645
Net gain (loss) on sale of securities 311 891 (3) 843 (540)
Net change in valuation of financial instruments carried at fair value (1,148) (1,124) (1,547) (2,620) (813)
Total non-interest income 19,463 23,512 18,356 83,470 62,292
NON-INTEREST EXPENSE:
Salary and employee benefits 44,387 44,758 49,225 180,883 127,282
Less capitalized loan origination costs (4,785) (4,953) (4,007) (18,895) (14,379)
Occupancy and equipment 12,581 10,979 11,533 45,000 30,366
Information / computer data services 4,674 4,836 5,365 19,281 12,110
Payment and card processing services 5,440 5,878 5,504 21,604 16,430
Professional services 2,384 2,258 2,341 8,120 4,828
Advertising and marketing 3,220 2,282 1,882 9,709 7,649
Deposit insurance 1,012 890 1,284 4,551 3,189
State/municipal business and use taxes 952 956 505 3,516 1,889
Real estate operations (338) (21) 207 175 397
Amortization of core deposit intangibles 1,722 1,724 1,896 7,061 3,164
Miscellaneous 7,820 7,785 6,150 30,131 17,565
79,069 77,372 81,885 311,136 210,490
Acquisition related expenses 788 1,720 18,369 11,733 26,110
Total non-interest expense 79,857 79,092 100,254 322,869 236,600
Income before provision for income taxes 34,747 36,128 10,201 129,640 67,971
PROVISION FOR INCOME TAXES 11,943 12,277 3,308 44,255 22,749
NET INCOME $22,804 $23,851 $6,893 $85,385 $45,222
Earnings per share available to common shareholders:
Basic $0.69 $0.70 $0.20 $2.52 $1.90
Diluted $0.69 $0.70 $0.20 $2.52 $1.89
Cumulative dividends declared per common share $0.23 $0.23 $0.18 $0.88 $0.72
Weighted average common shares outstanding:
Basic 33,134,222 34,045,225 33,842,350 33,820,148 23,801,373
Diluted 33,201,333 34,124,611 33,934,426 33,853,511 23,866,621
(Decrease) increase in common shares outstanding (673,924) (483,249) 13,279,955 (1,048,868) 14,670,707


FINANCIAL CONDITION Percentage Change
(in thousands except shares and per share data) Dec 31, 2016 Sep 30, 2016 Dec 31, 2015 Prior Qtr Prior Yr Qtr
ASSETS
Cash and due from banks $177,083 $161,710 $117,657 9.5% 50.5%
Interest-bearing deposits 70,636 84,207 144,260 (16.1)% (51.0)%
Total cash and cash equivalents 247,719 245,917 261,917 0.7% (5.4)%
Securities - trading 24,568 30,889 34,134 (20.5)% (28.0)%
Securities - available for sale 800,917 1,006,414 1,138,573 (20.4)% (29.7)%
Securities - held to maturity 267,873 271,975 220,666 (1.5)% 21.4%
Federal Home Loan Bank stock 12,506 12,826 16,057 (2.5)% (22.1)%
Loans held for sale 246,353 123,144 44,712 100.1% 451.0%
Loans receivable 7,451,148 7,398,637 7,314,504 0.7% 1.9%
Allowance for loan losses (85,997) (84,220) (78,008) 2.1% 10.2%
Net loans 7,365,151 7,314,417 7,236,496 0.7% 1.8%
Accrued interest receivable 30,178 30,345 29,627 (0.6)% 1.9%
Real estate owned held for sale, net 11,081 4,717 11,627 134.9% (4.7)%
Property and equipment, net 166,481 167,621 167,604 (0.7)% (0.7)%
Goodwill 244,583 244,583 247,738 % (1.3)%
Other intangibles, net 30,162 31,934 37,472 (5.5)% (19.5)%
Bank-owned life insurance 158,936 158,831 156,865 0.1% 1.3%
Other assets 187,160 197,415 192,810 (5.2)% (2.9)%
Total assets $9,793,668 $9,841,028 $9,796,298 (0.5)% %
LIABILITIES
Deposits:
Non-interest-bearing $3,140,451 $3,190,293 $2,619,618 (1.6)% 19.9%
Interest-bearing transaction and savings accounts 3,935,630 3,798,668 4,081,580 3.6% (3.6)%
Interest-bearing certificates 1,045,333 1,123,011 1,353,870 (6.9)% (22.8)%
Total deposits 8,121,414 8,111,972 8,055,068 0.1% 0.8%
Advances from Federal Home Loan Bank at fair value 54,216 62,342 133,381 (13.0)% (59.4)%
Customer repurchase agreements and other borrowings 105,685 108,911 98,325 (3.0)% 7.5%
Junior subordinated debentures at fair value 95,200 94,364 92,480 0.9% 2.9%
Accrued expenses and other liabilities 71,369 92,783 76,511 (23.1)% (6.7)%
Deferred compensation 40,074 39,385 40,474 1.7% (1.0)%
Total liabilities 8,487,958 8,509,757 8,496,239 (0.3)% (0.1)%
SHAREHOLDERS' EQUITY
Common stock 1,213,837 1,243,205 1,261,174 (2.4)% (3.8)%
Retained earnings 95,328 80,053 39,615 19.1% 140.6%
Other components of shareholders' equity (3,455) 8,013 (730) (143.1)% 373.3%
Total shareholders' equity 1,305,710 1,331,271 1,300,059 (1.9)% 0.4%
Total liabilities and shareholders' equity $9,793,668 $9,841,028 $9,796,298 (0.5)% %
Common Shares Issued:
Shares outstanding at end of period 33,193,387 33,867,311 34,242,255
Common shareholders' equity per share (1) $39.34 $39.31 $37.97
Common shareholders' tangible equity per share (1) (2) $31.06 $31.14 $29.64
Common shareholders' tangible equity to tangible assets (2) 10.83% 11.03% 10.67%
Consolidated Tier 1 leverage capital ratio 11.83% 11.68% 11.06%


(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 Dec 31, 2016 Sep 30, 2016 Dec 31, 2015 Prior Qtr Prior Yr Qtr
Commercial real estate:
Owner occupied $1,352,999 $1,340,577 $1,327,807 0.9% 1.9%
Investment properties 1,986,336 1,918,639 1,765,353 3.5% 12.5%
Multifamily real estate 248,150 266,883 472,976 (7.0)% (47.5)%
Commercial construction 124,068 135,487 72,103 (8.4)% 72.1%
Multifamily construction 124,126 105,669 63,846 17.5% 94.4%
One- to four-family construction 375,704 363,586 278,469 3.3% 34.9%
Land and land development:
Residential 170,004 162,029 126,773 4.9% 34.1%
Commercial 29,184 30,556 33,179 (4.5)% (12.0)%
Commercial business 1,207,879 1,187,848 1,207,944 1.7% %
Agricultural business including secured by farmland 369,156 383,275 376,531 (3.7)% (2.0)%
One- to four-family real estate 813,077 846,899 952,633 (4.0)% (14.6)%
Consumer:
Consumer secured by one- to four-family real estate 493,211 497,643 478,420 (0.9)% 3.1%
Consumer-other 157,254 159,546 158,470 (1.4)% (0.8)%
Total loans outstanding $7,451,148 $7,398,637 $7,314,504 0.7% 1.9%
Restructured loans performing under their restructured terms $18,907 $17,649 $21,777
Loans 30 - 89 days past due and on accrual (1) $11,571 $12,668 $18,834
Total delinquent loans (including loans on non-accrual), net (2) $30,553 $39,543 $30,994
Total delinquent loans / Total loans outstanding 0.41% 0.53% 0.42%


(1) Includes $470,000 of purchased credit-impaired loans at December 31, 2016 compared to $486,000 at September 30, 2016 and $4.3 million at December 31, 2015.
(2) Delinquent loans include $1.7 million of delinquent purchased credit-impaired loans at December 31, 2016 compared to $3.6 million at September 30, 2016 and $6.3 million at December 31, 2015.


LOANS BY GEOGRAPHIC LOCATION Dec 31, 2016 Sep 30, 2016 Dec 31, 2015
Amount Percentage Amount Percentage Amount Percentage
Washington $3,433,617 46.1% $3,415,413 46.2% $3,343,112 45.7%
Oregon 1,505,369 20.2% 1,466,845 19.8% 1,446,531 19.8%
California 1,239,989 16.6% 1,204,273 16.3% 1,234,016 16.9%
Idaho 495,992 6.7% 517,607 7.0% 496,870 6.8%
Utah 283,890 3.8% 292,088 3.9% 325,011 4.4%
Other 492,291 6.6% 502,411 6.8% 468,964 6.4%
Total loans $7,451,148 100.0% $7,398,637 100.0% $7,314,504 100.0%



ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
Quarters Ended Twelve months ended
CHANGE IN THE Dec 31, 2016 Sep 30, 2016 Dec 31, 2015 Dec 31, 2016 Dec 31, 2015
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of period $84,220 $81,318 $77,320 $78,008 $75,907
Provision for loan losses 2,030 2,000 6,030
Recoveries of loans previously charged off:
Commercial real estate 484 34 233 582 819
Multifamily real estate 113
Construction and land 903 673 578 2,171 1,811
One- to four-family real estate 231 482 631 1,283 772
Commercial business 218 433 143 1,993 948
Agricultural business, including secured by farmland 20 (138) 261 59 1,927
Consumer 81 73 197 610 570
1,937 1,557 2,043 6,698 6,960
Loans charged off:
Commercial real estate (566) (537) (746) (64)
Construction and land (616) (616) (891)
One- to four-family real estate (249) (92) (292) (375) (419)
Commercial business (305) (333) (948) (746)
Agricultural business, including secured by farmland (161) (567) (1,225)
Consumer (454) (230) (365) (1,487) (1,514)
(2,190) (655) (1,355) (4,739) (4,859)
Net recoveries (charge-offs) (253) 902 688 1,959 2,101
Balance, end of period $85,997 $84,220 $78,008 $85,997 $78,008
Net recoveries (charge-offs) / Average loans outstanding % 0.01% 0.01% 0.03% 0.04%


ALLOCATION OF
ALLOWANCE FOR LOAN LOSSES Dec 31, 2016 Sep 30, 2016 Dec 31, 2015
Specific or allocated loss allowance:
Commercial real estate $20,993 $19,846 $20,716
Multifamily real estate 1,360 1,436 4,195
Construction and land 34,252 33,803 27,131
One- to four-family real estate 2,238 2,190 4,732
Commercial business 16,533 16,507 13,856
Agricultural business, including secured by farmland 2,967 2,833 3,645
Consumer 4,104 3,934 902
Total allocated 82,447 80,549 75,177
Unallocated 3,550 3,671 2,831
Total allowance for loan losses $85,997 $84,220 $78,008
Allowance for loan losses / Total loans outstanding 1.15% 1.14% 1.07%
Allowance for loan losses / Non-performing loans 381% 309% 512%




ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
Dec 31, 2016 Sep 30, 2016 Dec 31, 2015
NON-PERFORMING ASSETS
Loans on non-accrual status:
Secured by real estate:
Commercial$8,237 $12,776 $3,751
Multifamily 30
Construction and land1,748 1,747 2,260
One- to four-family2,263 3,414 4,700
Commercial business3,074 2,765 2,159
Agricultural business, including secured by farmland3,229 3,755 697
Consumer1,875 1,385 703
20,426 25,872 14,270
Loans more than 90 days delinquent, still on accrual:
Secured by real estate:
Commercial701
Multifamily147 147
Construction and land
One- to four-family1,233 852 899
Commercial business 8
Consumer72 425 45
2,153 1,424 952
Total non-performing loans22,579 27,296 15,222
Real estate owned (REO)11,081 4,717 11,627
Other repossessed assets166 164 268
Total non-performing assets$33,826 $32,177 $27,117
Total non-performing assets to total assets0.35% 0.33% 0.28%
Purchased credit-impaired loans, net$32,322 $38,674 $58,600


Quarters Ended Twelve months ended
REAL ESTATE OWNEDDec 31, 2016 Sep 30, 2016 Dec 31, 2015 Dec 31, 2016 Dec 31, 2015
Balance, beginning of period$4,717 $6,147 $6,363 $11,627 $3,352
Additions from loan foreclosures8,375 156 1,125 8,909 4,351
Additions from acquisitions 5,706 400 8,231
Additions from capitalized costs 298
Proceeds from dispositions of REO(2,791) (1,699) (1,585) (10,812) (4,740)
Gain on sale of REO852 281 18 1,833 351
Valuation adjustments in the period(72) (168) (876) (216)
Balance, end of period$11,081 $4,717 $11,627 $11,081 $11,627



ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
DEPOSIT COMPOSITION Percentage Change
Dec 31, 2016 Sep 30, 2016 Dec 31, 2015 Prior Qtr Prior Yr
Non-interest-bearing $3,140,451 $3,190,293 $2,619,618 (1.6)% 19.9%
Interest-bearing checking 914,484 853,594 1,159,846 7.1% (21.2)%
Regular savings accounts 1,523,391 1,387,123 1,284,642 9.8% 18.6%
Money market accounts 1,497,755 1,557,951 1,637,092 (3.9)% (8.5)%
Total interest-bearing transaction and savings accounts 3,935,630 3,798,668 4,081,580 3.6% (3.6)%
Interest-bearing certificates 1,045,333 1,123,011 1,353,870 (6.9)% (22.8)%
Total deposits $8,121,414 $8,111,972 $8,055,068 0.1% 0.8%


GEOGRAPHIC CONCENTRATION OF DEPOSITS Dec 31, 2016 Sep 30, 2016 Dec 31, 2015
Amount Percentage Amount Percentage Amount Percentage
Washington $4,347,644 53.6% $4,283,522 52.8% $4,219,304 52.4%
Oregon 1,708,973 21.0% 1,737,754 21.4% 1,648,421 20.4%
California 1,469,748 18.1% 1,491,903 18.4% 1,592,365 19.8%
Idaho 447,019 5.5% 435,090 5.4% 435,099 5.4%
Utah 148,030 1.8% 163,703 2.0% 159,879 2.0%
Total deposits $8,121,414 100.0% $8,111,972 100.0% $8,055,068 100.0%


INCLUDED IN TOTAL DEPOSITS Dec 31, 2016 Sep 30, 2016 Dec 31, 2015
Public non-interest-bearing accounts $92,789 $86,207 $85,489
Public interest-bearing transaction & savings accounts 128,976 115,458 123,941
Public interest-bearing certificates 25,650 26,734 31,281
Total public deposits $247,415 $228,399 $240,711
Total brokered deposits $34,074 $60,290 $162,936


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 Twelve months ended
Dec 31, 2016 Sep 30, 2016 Dec 31, 2015 Dec 31, 2016 Dec 31, 2015
By expense category:
Personnel severance/retention fees$80 $16 $6,134 $1,384 $6,577
Professional services92 687 5,757 2,230 11,169
Branch consolidation and other occupancy expenses73 94 976 2,590 1,031
Client communications254 527 306 1,158 527
Information/computer data services81 459 2,069 2,490 2,875
Payment and processing13 12 197 28
Miscellaneous195 (63) 3,115 1,684 3,903
Total merger and acquisition expense$788 $1,720 $18,369 $11,733 $26,110
By acquisition:
Siuslaw Financial Group 1 133 95 2,000
Starbuck Bancshares, Inc. (AmericanWest Bank)788 1,719 18,236 11,638 24,110
Total merger and acquisition expense$788 $1,720 $18,369 $11,733 $26,110


ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
Actual Minimum to be
categorized as
"Adequately Capitalized"
Minimum to be
categorized as
"Well Capitalized"
REGULATORY CAPITAL RATIOS AS OF DECEMBER 31, 2016 Amount Ratio Amount Ratio Amount Ratio
Banner Corporation-consolidated:
Total capital to risk-weighted assets $1,214,913 13.32% $729,663 8.00% $912,079 10.00%
Tier 1 capital to risk-weighted assets 1,125,267 12.34% 547,248 6.00% 547,248 6.00%
Tier 1 leverage capital to average assets 1,125,267 11.83% 380,519 4.00% n/a n/a
Common equity tier 1 capital to risk-weighted assets 1,014,994 11.13% 410,436 4.50% n/a n/a
Banner Bank:
Total capital to risk-weighted assets 1,043,837 11.70% 713,984 8.00% 892,480 10.00%
Tier 1 capital to risk-weighted assets 956,298 10.72% 535,488 6.00% 713,984 8.00%
Tier 1 leverage capital to average assets 953,298 10.34% 369,936 4.00% 462,420 5.00%
Common equity tier 1 capital to risk-weighted assets 956,298 10.72% 401,616 4.50% 580,112 6.50%
Islanders Bank:
Total capital to risk-weighted assets 35,207 18.45% 15,266 8.00% 19,082 10.00%
Tier 1 capital to risk-weighted assets 33,099 17.35% 11,449 6.00% 15,266 8.00%
Tier 1 leverage capital to average assets 33,099 12.72% 10,405 4.00% 13,006 5.00%
Common equity tier 1 capital to risk-weighted assets 33,099 17.35% 8,587 4.50% 12,403 6.50%



ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
(rates / ratios annualized)
ANALYSIS OF NET INTEREST SPREADQuarter Ended
December 31, 2016 September 30, 2016 December 31, 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$5,960,506 $74,538 4.97% $5,843,381 $70,223 4.78% $5,785,986 $69,552 4.77%
Commercial/agricultural loans1,469,407 17,192 4.65% 1,495,611 17,373 4.62% 1,469,445 16,303 4.40%
Consumer and other loans141,133 2,185 6.16% 142,977 2,209 6.15% 142,599 2,245 6.25%
Total loans(1)7,571,046 93,915 4.93% 7,481,969 89,805 4.78% 7,398,030 88,100 4.72%
Mortgage-backed securities796,625 3,861 1.93% 920,560 4,803 2.08% 1,025,612 5,440 2.10%
Other securities469,377 3,062 2.60% 472,159 3,050 2.57% 457,521 2,787 2.42%
Interest-bearing deposits with banks91,625 95 0.41% 86,868 98 0.45% 129,797 76 0.23%
FHLB stock11,668 74 2.52% 16,413 93 2.25% 17,268 92 2.11%
Total investment securities1,369,295 7,092 2.06% 1,496,000 8,044 2.14% 1,630,198 8,395 2.04%
Total interest-earning assets8,940,341 101,007 4.49% 8,977,969 97,849 4.34% 9,028,228 96,495 4.24%
Non-interest-earning assets904,846 913,991 870,169
Total assets$9,845,187 $9,891,960 $9,898,397
Deposits:
Interest-bearing checking accounts$876,904 197 0.09% $837,930 188 0.09% $1,127,541 234 0.08%
Savings accounts1,470,548 493 0.13% 1,371,911 449 0.13% 1,595,451 420 0.10%
Money market accounts1,541,258 677 0.17% 1,564,906 749 0.19% 1,311,383 881 0.27%
Certificates of deposit1,089,337 1,237 0.45% 1,173,630 1,398 0.47% 1,418,774 1,611 0.45%
Total interest-bearing deposits4,978,047 2,604 0.21% 4,948,377 2,784 0.22% 5,453,149 3,146 0.23%
Non-interest-bearing deposits3,193,172 % 3,120,279 % 2,665,676 %
Total deposits8,171,219 2,604 0.13% 8,068,656 2,784 0.14% 8,118,825 3,146 0.15%
Other interest-bearing liabilities:
FHLB advances32,932 79 0.95% 152,198 256 0.67% 178,399 287 0.64%
Other borrowings107,819 76 0.28% 111,016 82 0.29% 99,515 73 0.29%
Junior subordinated debentures140,212 1,077 3.06% 140,212 1,019 2.89% 140,212 890 2.52%
Total borrowings280,963 1,232 1.74% 403,426 1,357 1.34% 418,126 1,250 1.19%
Total funding liabilities8,452,182 3,836 0.18% 8,472,082 4,141 0.19% 8,536,951 4,396 0.20%
Other non-interest-bearing liabilities(2)67,536 68,566 54,967
Total liabilities8,519,718 8,540,648 8,591,918
Shareholders' equity1,325,469 1,351,312 1,306,479
Total liabilities and shareholders' equity$9,845,187 $9,891,960 $9,898,397
Net interest income/rate spread $97,171 4.31% $93,708 4.15% $92,099 4.04%
Net interest margin 4.32% 4.15% 4.05%
Additional Key Financial Ratios:
Return on average assets 0.92% 0.96% 0.28%
Return on average equity 6.84% 7.02% 2.09%
Average equity/average assets 13.46% 13.66% 13.20%
Average interest-earning assets/average interest-bearing liabilities 170.00% 167.76% 153.77%
Average interest-earning assets/average funding liabilities 105.78% 105.97% 105.75%
Non-interest income/average assets 0.79% 0.95% 0.74%
Non-interest expense/average assets 3.23% 3.18% 4.02%
Efficiency ratio(4) 68.47% 67.47% 90.76%
Adjusted efficiency ratio(5) 65.32% 63.61% 70.78%
(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 core deposit intangibles (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 four pages of the press release tables.


ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
(rates / ratios annualized)
ANALYSIS OF NET INTEREST SPREADTwelve months ended
December 31, 2016 December 31, 2015
Average
Balance
Interest and
Dividends
Yield/Cost(3) Average
Balance
Interest and
Dividends
Yield/Cost(3)
Interest-earning assets:
Mortgage loans$5,807,397 $282,419 4.86% $3,754,386 $183,260 4.88%
Commercial/agricultural loans1,485,390 68,405 4.61% 1,076,440 46,053 4.28%
Consumer and other loans141,460 8,788 6.21% 130,367 7,979 6.12%
Total loans(1)7,434,247 359,612 4.84% 4,961,193 237,292 4.78%
Mortgage-backed securities931,111 19,328 2.08% 490,002 9,049 1.85%
Other securities454,977 11,814 2.60% 311,701 7,646 2.45%
Interest-bearing deposits with banks94,456 395 0.42% 122,479 334 0.27%
FHLB stock16,119 328 2.03% 16,768 112 0.67%
Total investment securities1,496,663 31,865 2.13% 940,950 17,141 1.82%
Total interest-earning assets8,930,910 391,477 4.38% 5,902,143 254,433 4.31%
Non-interest-earning assets904,181 413,503
Total assets$9,835,091 $6,315,646
Deposits:
Interest-bearing checking accounts$859,621 767 0.09% $634,398 518 0.08%
Savings accounts1,370,014 1,796 0.13% 1,134,849 1,511 0.13%
Money market accounts1,575,877 3,098 0.20% 747,019 1,538 0.21%
Certificates of deposit1,208,702 5,444 0.45% 928,545 4,818 0.52%
Total interest-bearing deposits5,014,214 11,105 0.22% 3,444,811 8,385 0.24%
Non-interest-bearing deposits3,033,604 % 1,764,539 %
Total deposits8,047,818 11,105 0.14% 5,209,350 8,385 0.16%
Other interest-bearing liabilities:
FHLB advances141,885 953 0.67% 49,808 311 0.62%
Other borrowings108,427 310 0.29% 94,176 211 0.22%
Junior subordinated debentures140,212 4,040 2.88% 132,597 3,247 2.45%
Total borrowings390,524 5,303 1.36% 276,581 3,769 1.36%
Total funding liabilities8,438,342 16,408 0.19% 5,485,931 12,154 0.22%
Other non-interest-bearing liabilities(2)65,508 17,051
Total liabilities8,503,850 5,502,982
Shareholders' equity1,331,241 812,664
Total liabilities and shareholders' equity$9,835,091 $6,315,646
Net interest income/rate spread $375,069 4.19% $242,279 4.09%
Net interest margin 4.20% 4.10%
Additional Key Financial Ratios:
Return on average assets 0.87% 0.72%
Return on average equity 6.41% 5.56%
Average equity/average assets 13.54% 12.87%
Average interest-earning assets/average interest-bearing liabilities 165.24% 158.60%
Average interest-earning assets/average funding liabilities 105.84% 107.59%
Non-interest income/average assets 0.85% 0.99%
Non-interest expense/average assets 3.28% 3.75%
Efficiency ratio(4) 70.41% 77.68%
Adjusted efficiency ratio(5) 65.26% 67.02%
(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 four pages of the press release tables.


ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
* Non-GAAP Financial Measures
In addition to results presented in accordance with generally accepted accounting principles in the United States of America (GAAP), this press release contains certain non-GAAP financial measures. Management has presented these non-GAAP financial measures in this earnings release because it believes that they provide useful and comparative information to assess trends in Banner's core operations reflected in the current quarter's results and facilitate the comparison of our performance with the performance of our peers. Where applicable, comparable earnings information using GAAP financial measures is also presented.
REVENUE FROM CORE OPERATIONSQuarters Ended Twelve months ended
Dec 31, 2016 Sep 30, 2016 Dec 31, 2015 Dec 31, 2016 Dec 31, 2015
Net interest income before provision for loan losses$97,171 $93,708 $92,099 $375,069 $242,279
Total non-interest income19,463 23,512 18,356 83,470 62,292
Total GAAP revenue116,634 117,220 110,455 458,539 304,571
Exclude net (gain) loss on sale of securities(311) (891) 3 (843) 540
Exclude change in valuation of financial instruments carried at fair value1,148 1,124 1,547 2,620 813
Revenue from core operations (non-GAAP)$117,471 $117,453 $112,005 $460,316 $305,924


INCOME FROM CORE OPERATIONSQuarters Ended Twelve months ended
Dec 31, 2016 Sep 30, 2016 Dec 31, 2015 Dec 31, 2016 Dec 31, 2015
Income before provision for taxes (GAAP)$34,747 $36,128 $10,201 $129,640 $67,971
Exclude net (gain) loss on sale of securities(311) (891) 3 (843) 540
Exclude change in valuation of financial instruments carried at fair value1,148 1,124 1,547 2,620 813
Exclude acquisition costs788 1,720 18,369 11,733 26,110
Income from core operations before provision for taxes (non-GAAP)$36,372 $38,081 $30,120 $143,150 $95,434


ACQUISITION ACCOUNTING IMPACT ON NET INTEREST MARGINQuarters Ended Twelve months ended
Dec 31, 2016 Sep 30, 2016 Dec 31, 2015 Dec 31, 2016 Dec 31, 2015
Net interest income before provision for loan losses (GAAP)$97,171 $93,708 $92,099 $375,069 $242,279
Exclude discount accretion on purchased loans(3,635) (2,446) (2,579) (10,984) (3,566)
Exclude premium amortization on acquired certificates of deposit(315) (316) (572) (1,552) (748)
Net interest income before acquisition accounting impact (non-GAAP)$93,221 $90,946 $88,948 $362,533 $237,965
Average interest-earning assets (GAAP)$8,940,341 $8,977,969 $9,028,228 $8,930,910 $5,902,143
Exclude average net loan discount on acquired loans32,773 36,958 43,109 38,561 17,615
Average interest-earning assets before acquired loan discount (non-GAAP)$8,973,114 $9,014,927 $9,071,337 $8,969,471 $5,919,758
Net interest margin (GAAP)4.32% 4.15% 4.05% 4.20% 4.10%
Exclude impact on net interest margin from discount accretion(0.16) (0.11) (0.11) (0.12) (0.06)
Exclude impact on net interest margin from CD premium amortization(0.01) (0.01) (0.02) (0.02) (0.01)
Exclude impact of net loan discount on average earning assets(0.02) (0.02) (0.03) (0.02) (0.01)
Net margin before acquisition accounting impact (non-GAAP)4.13% 4.01% 3.89% 4.04% 4.02%


ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands except shares and per share data)
Quarters Ended Twelve months ended
Dec 31, 2016 Sep 30, 2016 Dec 31, 2015 Dec 31, 2016 Dec 31, 2015
NON-INTEREST INCOME/EXPENSE FROM CORE OPERATIONS
Total non-interest income (GAAP) $19,463 $23,512 $18,356 $83,470 $62,292
Exclude net (gain) loss on sale of securities (311) (891) 3 (843) 540
Exclude change in valuation of financial instruments carried at fair value 1,148 1,124 1,547 2,620 813
Non-interest income from core operations (non-GAAP) $20,300 $23,745 $19,906 $85,247 $63,645
Total non-interest expense (GAAP) $79,857 $79,092 $100,254 $322,869 $236,600
Exclude acquisition related costs (788) (1,720) (18,369) (11,733) (26,110)
Non-interest expense from core operations (non-GAAP) $79,069 $77,372 $81,885 $311,136 $210,490


Quarters Ended Twelve months ended
Dec 31, 2016 Sep 30, 2016 Dec 31, 2015 Dec 31, 2016 Dec 31, 2015
EARNINGS FROM CORE OPERATIONS
Net income (GAAP) $22,804 $23,851 $6,893 $85,385 $45,222
Exclude net (gain) loss on sale of securities (311) (891) 3 (843) 540
Exclude change in valuation of financial instruments carried at fair value 1,148 1,124 1,547 2,620 813
Exclude acquisition-related costs 788 1,720 18,369 11,733 26,110
Exclude related tax expense (benefit) (585) (703) (6,425) (4,857) (8,552)
Total earnings from core operations (non-GAAP) $23,844 $25,101 $20,387 $94,038 $64,133
Diluted earnings per share (GAAP) $0.69 $0.70 $0.20 $2.52 $1.89
Diluted core earnings per share (non-GAAP) $0.72 $0.74 $0.60 $2.78 $2.69
NET EFFECT OF ACQUISITION-RELATED COSTS ON EARNINGS
Acquisition-related costs $(788) $(1,720) $(18,369) $(11,733) $(26,110)
Related tax benefit 284 619 5,867 4,217 8,065
Total net effect of acquisition-related costs on earnings $(504) $(1,101) $(12,502) $(7,516) $(18,045)
Diluted weighted average shares outstanding33,201,333 34,124,611 33,934,426 33,853,511 23,866,621
Total net effect of acquisition-related costs on diluted weighted average earnings per share $(0.02) $(0.03) $(0.37) $(0.22) $(0.76)


ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
Quarters Ended Twelve months ended
Dec 31, 2016 Sep 30, 2016 Dec 31, 2015 Dec 31, 2016 Dec 31, 2015
ADJUSTED EFFICIENCY RATIO
Non-interest expense (GAAP) $79,857 $79,092 $100,254 $322,869 $236,600
Exclude acquisition-related costs (788) (1,720) (18,369) (11,733) (26,110)
Exclude CDI amortization (1,722) (1,724) (1,896) (7,061) (3,164)
Exclude state/municipal tax expense (952) (956) (505) (3,516) (1,889)
Exclude REO gain (loss) 338 21 (207) (175) (397)
Adjusted non-interest expense (non-GAAP) $76,733 $74,713 $79,277 $300,384 $205,040
Net interest income before provision for loan losses (GAAP) $97,171 $93,708 $92,099 $375,069 $242,279
Non-interest income (GAAP) 19,463 23,512 18,356 83,470 62,292
Total revenue 116,634 117,220 110,455 458,539 304,571
Exclude net (gain) loss on sale of securities (311) (891) 3 (843) 540
Exclude net change in valuation of financial instruments carried at fair value 1,148 1,124 1,547 2,620 813
Adjusted revenue (non-GAAP) $117,471 $117,453 $112,005 $460,316 $305,924
Efficiency ratio (GAAP) 68.47% 67.47% 90.76% 70.41% 77.68%
Adjusted efficiency ratio (non-GAAP) 65.32% 63.61% 70.78% 65.26% 67.02%


Dec 31, 2016 Sep 30, 2016 Dec 31, 2015
TANGIBLE COMMON SHAREHOLDERS' EQUITY TO TANGIBLE ASSETS
Shareholders' equity (GAAP) $1,305,710 $1,331,271 $1,300,059
Exclude goodwill and other intangible assets, net 274,745 276,517 285,210
Tangible common shareholders' equity (non-GAAP) $1,030,965 $1,054,754 $1,014,849
Total assets (GAAP) $9,793,668 $9,841,028 $9,796,298
Exclude goodwill and other intangible assets, net 274,745 276,517 285,210
Total tangible assets (non-GAAP) $9,518,923 $9,564,511 $9,511,088
Common shareholders' equity to total assets (GAAP) 13.33% 13.53% 13.27%
Tangible common shareholders' equity to tangible assets (non-GAAP) 10.83% 11.03% 10.67%
TANGIBLE COMMON SHAREHOLDERS' EQUITY PER SHARE
Tangible common shareholders' equity $1,030,965 $1,054,754 $1,014,849
Common shares outstanding at end of period 33,193,387 33,867,311 34,242,255
Common shareholders' equity (book value) per share (GAAP) $39.34 $39.31 $37.97
Tangible common shareholders' equity (tangible book value) per share (non-GAAP) $31.06 $31.14 $29.64


ADDITIONAL FINANCIAL INFORMATION
(dollars in thousands)
Dec 31, 2016 Sep 30, 2016 Dec 31, 2015
RATIO OF ADJUSTED ALLOWANCE FOR LOAN LOSSES TO ADJUSTED LOANS
Loans receivable (GAAP) $7,451,148 $7,398,637 $7,314,504
Net loan discount on acquired loans 31,110 34,867 43,657
Adjusted loans (non-GAAP) $7,482,258 $7,433,504 $7,358,161
Allowance for loan losses (GAAP) $85,997 $84,220 $78,008
Net loan discount on acquired loans 31,110 34,867 43,657
Adjusted allowance for loan losses (non-GAAP) $117,107 $119,087 $121,665
Allowance for loan losses / Total loans (GAAP) 1.15% 1.14% 1.07%
Adjusted allowance for loan losses / Adjusted loans (non-GAAP) 1.57% 1.60% 1.65%


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

Source:Banner Corporation