BANNER CORP annual report, FY2019

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Banner Corporation (BANR) — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Banner is a regional bank holding company operating Banner Bank and Islanders Bank, with 178 branches in Washington, Oregon, California and Idaho.

Financial performance and position

  • Profit and revenue: Net income was $146.3 million, or $4.18 per diluted share, versus $136.5 million, or $4.15, in 2018. Total revenue was $550.9 million, up 7%; net interest income before provision rose 9% to $468.9 million. Total non-interest income declined 2% to $81.9 million.
  • Margins and costs: Net interest margin fell to 4.30% from 4.43%, and interest-rate spread declined to 4.27% from 4.40%, as funding costs rose faster than asset yields. Non-interest expense increased 5% to $357.7 million; acquisition-related costs were $7.5 million versus $5.6 million.
  • Credit quality: Provision for loan losses was $10.0 million, compared with $8.5 million. Non-performing loans rose to $39.6 million from $15.7 million, and net charge-offs increased to $5.9 million from $1.0 million. The allowance was $100.6 million, equal to 1.08% of loans and 254% of non-performing loans. Management attributed much of the increase in non-performing loans to one commercial relationship moving to nonaccrual.
  • Balance sheet: Total assets were $12.60 billion, net loans $9.20 billion, deposits $10.05 billion and shareholders’ equity $1.59 billion. Assets, net loans and deposits increased 6%, 7% and 6%, respectively, from year-end 2018. Core deposits were 89% of deposits, up from 86%.
  • Debt and liquidity: Borrowings totaled $687.8 million, including $450.0 million of FHLB advances, $118.5 million of repurchase agreements and $119.3 million fair value of junior subordinated debentures. Cash and cash equivalents were $307.7 million; the company also reported $1.19 billion of available Federal Reserve borrowing capacity, subject to collateral. Operating cash flow was $148.9 million, investing cash outflow $143.1 million and financing cash inflow $29.8 million; year-end cash was $307.7 million.
  • Capital and shareholder returns: Banner and both banks exceeded applicable well-capitalized requirements. Banner’s total risk-based capital ratio was 12.93%, Tier 1 ratio 11.97%, and CET1 ratio 10.63%. The company repurchased 1.0 million shares for $53.9 million and declared $2.64 per share in dividends, including a $1.00 special dividend in the fourth quarter.

Material changes and notable items

  • Banner acquired AltaPacific on November 1, 2019 for $87.6 million in total consideration, primarily Banner shares. The acquisition added approximately $425.7 million of assets, $332.4 million of loans and $313.4 million of deposits, and added $34.0 million of goodwill. Integration was ongoing at year-end.
  • Loan growth reflected both AltaPacific and organic expansion. Non-interest-bearing deposits increased $287.2 million; certificates of deposit fell $199.9 million, including a reduction in brokered deposits.
  • Durbin Amendment limits took effect for Banner on July 1, 2019. Management estimated an approximately $7 million reduction in debit interchange income in the second half; full-year interchange fee income was $19.2 million versus $23.2 million in 2018.
  • Fourth-quarter 2019 net income was $33.7 million, or $0.95 diluted EPS, versus $37.5 million, or $1.09, in fourth-quarter 2018. Fourth-quarter provision for loan losses rose to $4.0 million from $2.5 million.
  • Cash dividends declared included regular quarterly dividends of $0.41 per share and the $1.00 special dividend in Q4. The filing reports $93.5 million of dividends accrued during 2019; cash dividends paid during the year were $56.1 million.

Outlook, management commentary and risks

  • No quantified earnings or revenue guidance is provided. Management described its strategy as pursuing organic growth, selective acquisitions, core-deposit growth and continued investment in its regional “super community bank” model.
  • Management expected AltaPacific systems integration to be completed in the first quarter of 2020. It cautioned that acquisition benefits, integration costs, customer retention and acquired-asset performance may differ from expectations.
  • CECL became effective for Banner on January 1, 2020. Based on then-current model results, Banner estimated a 10%–20% combined increase in its allowance for credit losses and reserve for unfunded loan commitments, recorded through an opening-equity adjustment; the estimate was still being finalized.
  • Key exposures include concentration in regional economies and real estate lending, including commercial real estate and construction; rising non-performing loans and uncertain allowance estimates; interest-rate and funding-cost changes; and the expected further reduction in interchange income during 2020.
  • Other disclosed risks include LIBOR transition uncertainty, deposit competition and liquidity access, acquisition integration and goodwill impairment, cybersecurity and third-party service disruptions, regulatory and compliance requirements, and potential legal claims. Management said no pending legal proceeding was believed likely to materially adversely affect the company.
  • The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. However, the AltaPacific operations and systems not yet integrated—representing 4% of reported loans and 3% of deposits—were excluded from management’s internal-control assessment and the auditor’s related control audit scope.

Investor facts to verify

  1. Track whether the $39.6 million of non-performing loans, particularly the large commercial relationship, stabilizes or results in further charge-offs and provisions.
  2. Review the finalized CECL adoption impact against the estimated 10%–20% increase, including effects on capital and quarterly credit-loss expense.
  3. Assess AltaPacific integration progress, realized cost savings or revenue benefits, customer and employee retention, and any changes to acquired asset valuations or goodwill.
  4. Monitor net interest margin and deposit pricing, especially whether funding costs continue to rise relative to asset yields as rates and competition change.
  5. Confirm the full-year impact of Durbin limits on interchange income and the company’s ability to offset the reduction through other fee revenue.
  6. Reconcile cash dividends paid with dividends accrued, and assess the sustainability of the special dividend and share repurchases relative to earnings, capital and liquidity needs.