Banner Corporation : 01/23/13 - BANR Reports Net Income of $14.7 Million in Fourth Quarter 2012

Banner Corporation Reports Net Income of $14.7 Million, or $0.69 Per Diluted Share, in Fourth Quarter; Net Income Highlighted by Record Revenue Generation and Further Improved Credit Quality

Walla Walla, WA - January 23, 2013 - Banner Corporation (NASDAQ GSM: BANR), the parent company of Banner Bank and Islanders Bank, today reported net income of $14.7 million in the fourth quarter of 2012, compared to $15.6 million in the preceding quarter and $5.1 million in the fourth quarter a year ago. For the full year ended December 31, 2012, Banner reported net income of $64.9 million, compared to $5.5 million in 2011.

"Banner's 2012 performance proves that our super community bank strategy is working. Our continued improvement in asset quality, record revenues from core operations, significant customer account growth and strong mortgage banking results clearly demonstrate that our strategic plan and initiatives are effective," said Mark J. Grescovich, President and Chief Executive Officer. "Similar to the third quarter, Banner's fourth quarter and full year 2012 revenues from core operations* (net interest income before the provision for loan losses plus total other operating income excluding fair value and other-than-temporary impairment (OTTI) adjustments) increased 8% when compared to the same periods a year ago. However, while this marks the thirteenth consecutive quarter that we have realized a year-over-year increase in revenues from core operations*, the current headwinds associated with the prolonged very low interest rate environment and the sluggish economy will make revenue growth challenging going forward. Nonetheless, our strong balance sheet and improved operations have positioned us well to meet this difficult environment."

"An additional highlight of 2012 was the redemption of our senior preferred shares," Grescovich continued. "We believe this redemption was a further indication of Banner's continued operating improvement, financial strength and appropriate capital management. We are pleased with the work we have done to strengthen our asset quality metrics, operating results and profitability trends so that we were well positioned from a financial perspective to redeem these preferred shares."

In the fourth quarter, Banner repurchased 43,375 shares of its senior preferred stock in private transactions at an average price of $991 per share and on December 24, 2012 redeemed the remaining 30,041 shares at a liquidation value of $1,000 per share. As a result, Banner realized gains of $401,000 on the repurchases, which partially offset accelerated accretion of the remaining portion of the initial discount recognized when the preferred shares were issued. In addition, the accrual for the quarterly dividend was reduced by the retirement of the repurchased shares. Including the preferred stock dividend, related accretion and gains on repurchases, net income available to common shareholders was $0.69 per diluted share for the fourth quarter of 2012, compared to $0.79 per diluted share in the third quarter of 2012 and $0.18 per diluted share in the fourth quarter a year ago. For the year ended December 31, 2012, net income available to common shareholders was $3.16 per diluted share compared to a net loss of $0.15 per diluted share in 2011.

Fourth Quarter 2012 Highlights (compared to fourth quarter 2011 except as noted)

• Net income was $14.7 million, compared to $5.1 million in the fourth quarter a year ago.
• Revenues from core operations* increased 8% to $54.5 million.
• Net interest margin was 4.09%, compared to 4.22% in the preceding quarter and 4.07% in the fourth quarter a year ago.
• Deposit fees and other service charges increased 9%.
• Revenues from mortgage banking increased 136%.
• Non-performing assets decreased to $50.2 million, or 1.18% of total assets, at December 31, 2012, a 15% decrease compared to three months earlier and a 58% decrease compared to a year earlier.
• Non-performing loans decreased to $34.4 million at December 31, 2012, an 11% decrease compared to three months earlier and a 54% decrease compared to a year earlier.
• The ratio of tangible common equity to tangible assets increased to 11.80% at December 31, 2012.*
• Banner retired the remaining shares of its senior preferred stock.

*Earnings information excluding fair value and other-than-temporary impairment (OTTI) adjustments (alternately referred to as other operating income from core operations or revenues from core operations) and the ratio of tangible common equity (which excludes other intangible assets and preferred stock) to tangible assets represent non-GAAP (Generally Accepted Accounting Principles) financial measures. Management has presented these non-GAAP financial measures in this earnings release because it believes that they provide useful and comparative information to assess trends in Banner's core operations reflected in the current quarter's results and facilitate the comparison of our performance with the performance of our peers. Where applicable, comparable earnings information using GAAP financial measures is also presented.

Income Statement Review

"The net interest margin expansion compared to a year ago, for both the quarter and full year, reflects important reductions in deposit and other funding costs, as well as a significant reduction in the adverse effect of non-performing assets," said Grescovich. "However, the continuing impact of exceptionally low market interest rates is clearly evident in declining asset yields and the contraction of our net interest margin compared to the immediately preceding quarter." Banner's net interest margin was 4.09% in the fourth quarter of 2012, compared to 4.22% in the preceding quarter and 4.07% in the fourth quarter a year ago. The margin in the third quarter benefited by nine basis points from the collection of previously unrecognized interest on certain nonaccrual loans, while collections on those loans added just three basis points to the margin in the current quarter. For all of 2012, the net interest margin was 4.17% compared to 4.05% in 2011.

Deposit costs decreased by six basis points in the fourth quarter compared to the preceding quarter and 24 basis points compared to the fourth quarter a year ago. Total funding costs for the fourth quarter of 2012 decreased five basis points compared to the preceding quarter and 29 basis points from the fourth quarter a year ago. Asset yields decreased 17 basis points compared to the preceding quarter and decreased 25 basis points from the fourth quarter a year ago. Loan yields decreased by 19 basis points compared to the preceding quarter and decreased 27 basis points from the fourth quarter a year ago. Nonaccrual loans reduced the margin by approximately six basis points in the fourth quarter of 2012 compared to approximately five basis points in the preceding quarter and approximately 14 basis points in the fourth quarter of 2011.

Fourth quarter net interest income, before the provision for loan losses, was $41.5 million, compared to $42.7 million in the preceding quarter and $41.6 million in the fourth quarter a year ago. For the full year of 2012, net interest income, before the provision for loan losses, was $167.6 million compared to $164.6 million in 2011.

"In addition to solid net interest income and deposit fees, our revenues from core operations* continued to benefit from another quarter of very strong mortgage banking results," said Grescovich. Significant homeowner refinance activity contributed to revenues from mortgage banking activities, which increased 33% to $4.4 million in the fourth quarter of 2012, compared to $3.3 million in the immediately preceding quarter and increased 136% from the $1.9 million in the fourth quarter a year ago. For the year ended December 31, 2012, revenues from mortgage banking increased to $12.9 million compared to $5.1 million for all of 2011. Deposit fees and other service charges were $6.4 million in the fourth quarter of 2012, compared to $6.7 million in the preceding quarter and a 9% increase compared to $5.9 million in the fourth quarter a year ago. Deposit fees and other service charges increased to $25.3 million for the year ended December 31, 2012, a 10% increase compared to the full year 2011. Miscellaneous revenues increased compared to prior periods primarily reflecting increased gains from the sale of SBA guaranteed loans, which totaled $558,000 and $876,000 for the quarter and year ended December 31, 2012, respectively, as well as the recognition in the current quarter of a $549,000 death benefit on a bank-owned life insurance policy. Loan servicing fees were reduced in the fourth quarter of 2012 as a result of a $400,000 impairment charge reflecting accelerated loan prepayments. Revenues from core operations* were $54.5 million in the fourth quarter compared to $54.3 million in the third quarter of 2012 and $50.5 million in the fourth quarter a year ago. For the year, revenues from core operations* increased 8% to $211.4 million compared to $196.2 million a year ago.

During the second quarter of 2012, Banner reversed most of its deferred tax asset valuation allowance, reflecting Banner's return to profitability and its expectation of sustainable profitability in future periods. This expectation also led to the significant adjustment of the fair value estimate for the junior subordinated debentures issued by the Company. The substantial changes to both of these significant accounting estimates were directly linked to Banner's improved performance and profitability. In the third and fourth quarters of 2012, Banner reversed the remaining balance of the deferred tax valuation allowance, which substantially reduced the provision for income tax expense for both quarters. For the year ended December 31, 2012, the elimination of the deferred tax asset valuation allowance, combined with the Company's pre-tax income, resulted in a net tax benefit of $24.8 million. By contrast, as a result of the previous valuation allowance, Banner's results for the quarter and year ended December 31, 2011 did not reflect any tax expense or benefit.

Banner's fourth quarter 2012 results included a $386,000 net gain for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value. In the preceding quarter, Banner recorded a net gain of $473,000 for fair value adjustments, which was largely offset by $409,000 of OTTI charges related to certain equity securities issued by government sponsored entities. For the quarter ended December 31, 2011, the Company recorded a net loss of $1.8 million for fair value adjustments.

Banner's full year 2012 results included a net charge of $16.5 million for fair value adjustments compared to a net charge of $624,000 in 2011. The net charge in the current year primarily reflects a change of $23.1 million in the estimated fair value of the junior subordinated debentures, which was partially offset by changes in the estimated value of other financial instruments carried at fair value. For 2012, OTTI charges were $409,000 compared to a recovery of $3.0 million for 2011.

Total other operating income, which includes the changes in the valuation of financial instruments, increased to $13.3 million in the fourth quarter of 2012 compared to $11.7 million in the third quarter of 2012 and $7.2 million in the fourth quarter a year ago. For all of 2012, total other operating income was $26.9 million compared to $34.0 million in 2011. Other operating income from core operations* (total other operating income, excluding fair value and OTTI adjustments) for the fourth quarter of 2012 was $12.9 million, compared to $11.6 million for the preceding quarter and $8.9 million for the fourth quarter a year ago, reflecting strong mortgage banking revenues. Reflecting increased deposit fees and service charges as well as the strong mortgage banking revenues and increased gains on SBA loan sales, for the year ended December 31, 2012, other operating income from core operations* was $43.8 million compared to $31.6 million for the year ended December 31, 2011.

Total other operating expenses (non-interest expenses) were $34.5 million in the fourth quarter of 2012, compared to $33.4 million in the preceding quarter and $38.7 million in the fourth quarter of 2011. "Operating expenses declined in the fourth quarter compared to the fourth quarter a year ago, largely due to lower costs associated with loan collections and the real estate owned portfolio, as well as decreased FDIC deposit insurance expense," said Grescovich. "The increase in operating expenses compared to the preceding quarter was largely a result of realizing significantly more in net gains on the sale of real estate owned in the third quarter of 2012 than in the current quarter."

For the year 2012, total other operating expenses declined 11% to $141.5 million compared to $158.1 million in 2011. The decrease was largely a result of decreased costs related to real estate owned, professional services, and deposit insurance, which more than offset increases in compensation and other expenses.

Credit Quality

"Credit costs continue to decline and were significantly below those of a year ago," said Grescovich. "Our bankers and loan work-out teams have done an outstanding job of enhancing our portfolio management processes and reducing non-performing assets from over $339 million three years ago to just above $50 million at the end of 2012. All of our key credit quality metrics have improved, including further improvement in the most recent quarter, while our reserve levels have remained substantial."

Banner recorded a $1.0 million provision for loan losses in the fourth quarter of 2012, compared to a $3.0 million provision in the preceding quarter and a $5.0 million provision in the fourth quarter a year ago. The allowance for loan losses at December 31, 2012 was $77.5 million, representing 2.39% of total loans outstanding and 225% of non-performing loans. Non-performing loans decreased 11% to $34.4 million at December 31, 2012, compared to $38.7 million three months earlier, and decreased 54% when compared to $75.3 million a year earlier.

Real estate owned and repossessed assets decreased 22% to $15.9 million at December 31, 2012, compared to $20.4 million three months earlier, and decreased 63% when compared to $43.0 million a year ago. Net charge-offs in the fourth quarter of 2012 totaled $2.3 million, or 0.07% of average loans outstanding, compared to $4.4 million, or 0.14% of average loans outstanding in the third quarter of 2012 and $8.2 million, or 0.25% of average loans outstanding in the fourth quarter a year ago.

At December 31, 2012, Banner's non-performing assets were 1.18% of total assets, compared to 1.38% at September 30, 2012 and 2.79% a year ago. Non-performing assets decreased 15% to $50.2 million at December 31, 2012, compared to $59.1 million three months earlier, and decreased 58% when compared to $118.9 million a year ago.

Balance Sheet Review

"Total loans outstanding increased during the quarter," said Grescovich. "However, net loan originations were modest and credit line utilizations remained low, as the weak economy continues to temper loan demand by both businesses and consumers. We expect a continued challenging environment going forward as businesses and consumers maintain a cautious approach to spending and borrowing."

Net loans were $3.16 billion at September 30, 2012, compared to $3.13 billion three months earlier and $3.21 billion a year ago. Commercial and agricultural business loans increased 3% to $848.1 million at December 31, 2012 compared to $822.7 million three months earlier and $819.6 million a year ago. Commercial real estate and multifamily real estate loans were $1.21 billion at December 31, 2012 compared to $1.22 billion at September 30, 2012 and $1.23 billion at December 31, 2011.

The aggregate total of securities and interest-bearing deposits declined to $745.5 million at December 31, 2012 compared to $764.4 million at September 30, 2012, but increased from $691.7 million at December 31, 2011. The change in the mix of interest-bearing deposits and securities holdings compared to a year ago reflects a modest extension of the expected duration of this aggregate position designed to increase the yield relative to interest-bearing deposits. The securities purchased in recent periods were primarily short- to intermediate-term U.S. Government Agency notes and mortgage-backed securities and, to a lesser extent, intermediate-term tax-exempt municipal securities. The average duration of Banner's securities portfolio at December 31, 2012 was 4.6 years.

Total deposits increased 2% to $3.56 billion at December 31, 2012, compared to $3.49 billion three months earlier and $3.48 billion a year ago. Non-interest-bearing account balances increased 7% to $981.2 million at December 31, 2012, compared to $919.0 million at September 30, 2012, and increased 26% compared to $777.6 million a year ago. Interest-bearing transaction and savings accounts totaled $1.55 billion at December 31, 2012, compared to $1.48 billion at September 30, 2012 and $1.45 billion a year ago.

"The continued growth in core deposits and improvement in our deposit mix have been rewarding and reflect a value proposition that is clearly resonating with our client base," said Grescovich. "Our super community bank strategy that involves lowering our funding costs by reducing our reliance on high-priced certificates of deposit, growing new client relationships, and improving our core funding position is consistently producing results and enhancing our deposit franchise." Banner's cost of deposits declined six basis points to 0.35% for the quarter ended December 31, 2012 compared to 0.41% for the quarter ended September 30, 2012, and declined 24 basis points from 0.59% for the quarter ended December 31, 2011.

Total assets were $4.27 billion at December 31, 2012, nearly unchanged from September 30, 2012 and a slight increase from $4.26 billion a year ago. At December 31, 2012, total common stockholders' equity was $506.9 million, or $26.10 per share. Banner had 19.5 million shares of common stock outstanding at year end, compared to 17.6 million shares of common stock outstanding a year ago, primarily as a result of stock issuances through Banner's Dividend Reinvestment and Direct Stock Purchase and Sale Plan. At December 31, 2012, tangible common stockholders' equity, which excludes other intangible assets and preferred stock, was $502.7 million, or 11.80% of tangible assets, compared to $489.1 million, or 11.47% of tangible assets, at September 30, 2012 and $405.4 million, or 9.54% of tangible assets, a year ago. Banner's tangible book value per share increased to $25.88 at December 31, 2012, compared to $23.14 per share a year ago.

Banner Corporation and its subsidiary banks continue to maintain capital levels significantly in excess of the requirements to be categorized as "well-capitalized" under applicable regulatory standards. Banner Corporation's Tier 1 leverage capital to average assets ratio was 12.74% and its total capital to risk-weighted assets ratio was 16.96% at December 31, 2012.

Conference Call

Banner will host a conference call on Thursday, January 24, 2013, at 8:00 a.m. PST, to discuss its fourth quarter results. The conference call can be accessed live by telephone at [phone] to participate in the call. To listen to the call on-line, go to the Company's website at www.bannerbank.com. A replay will be available for one week at [phone], using access code 4583551.

About the Company

Banner Corporation is a $4.27 billion bank holding company operating two commercial banks in Washington, Oregon and Idaho. Banner serves the Pacific Northwest region with a full range of deposit services and business, commercial real estate, construction, residential, agricultural and consumer loans. Visit Banner Bank on the Web at www.bannerbank.com.

This press release contains statements that the Company believes are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to the Company's financial condition, liquidity, results of operations, plans, objectives, future performance or business. You should not place undue reliance on these statements, as they are subject to risks and uncertainties. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Company may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors which could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements include, but are not limited to, the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and non-performing assets and may result in our allowance for loan losses not being adequate to cover actual losses and require us to materially increase our reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates and the relative differences between short and long-term interest rates, loan and deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System and of our bank subsidiaries by the Federal Deposit Insurance Corporation, the Washington State Department of Financial Institutions or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or any of the Banks which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules including changes related to Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuations; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; the failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common stock and interest or principal payments on our junior subordinated debentures; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed in Banner Corporation's reports filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2011. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements whether as a result of new information, future events or otherwise. These risks could cause our actual results for 2013 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect our operating and stock price performance.