Banner Corporation (BANR) — Q2 2019 Form 10-Q
Business context and reporting period. Banner Corporation is a regional bank holding company operating Banner Bank and Islanders Bank in the Pacific Northwest and California. This unaudited filing covers the quarter and six months ended June 30, 2019; balance-sheet comparisons are with December 31, 2018 unless otherwise noted. Results include Skagit Bancorp, acquired November 1, 2018, so comparisons with 2018 reflect a larger company.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue (net interest income plus non-interest income) | $139.4 million | $126.3 million | $273.6 million | $247.0 million |
| Net income | $39.7 million | $32.4 million | $73.0 million | $61.2 million |
| Diluted EPS | $1.14 | $1.00 | $2.09 | $1.89 |
| Net interest income | $116.7 million | $105.1 million | $232.8 million | $204.4 million |
| Net interest margin | 4.38% | 4.39% | 4.38% | 4.37% |
| Non-interest expense | $86.7 million | $82.6 million | $176.7 million | $164.3 million |
Q2 return on average assets was 1.36% and return on average equity was 10.47%. The GAAP efficiency ratio was 62.22% for Q2 (65.44% prior year); the company-reported adjusted, non-GAAP ratio was 59.56% (64.09% prior year). The six-month effective tax rate was 21.3%, versus 22.2%.
Financial condition, cash flow and credit
- Assets and lending: Total assets were $11.85 billion, down $23.9 million from year-end. Loans were $8.75 billion, up $62.0 million since year-end and 13.8% above June 2018. Commercial real estate represented about 41% of loans; construction and land loans about 12%.
- Deposits and liquidity: Deposits totaled $9.29 billion, down $188.1 million from year-end, primarily as brokered deposits declined. Core deposits were $8.22 billion, or 88% of deposits. Cash and cash equivalents were $246.8 million. The company reported $606.0 million of FHLB advances and access to FHLB and Federal Reserve borrowing facilities; management said resources were adequate for foreseeable liquidity needs.
- Debt and capital: FHLB advances were $606.0 million, other borrowings $118.4 million, and junior subordinated debentures $113.6 million. Shareholders’ equity was $1.52 billion. Tangible common equity to tangible assets, a non-GAAP measure, was 10.05%. Banner and both banks exceeded applicable well-capitalized regulatory thresholds.
- Cash flow: For the first six months, operating activities provided $88.0 million and investing activities provided $71.3 million; financing activities used $184.7 million. Cash and cash equivalents decreased $25.4 million to $246.8 million.
- Asset quality: The allowance for loan losses was $98.3 million, or 1.12% of loans, compared with $96.5 million and 1.11% at year-end. Non-performing loans rose to $18.4 million from $15.7 million at year-end; non-performing assets were $21.0 million, or 0.18% of assets. Q2 provision was $2.0 million; six-month net charge-offs were $2.2 million. Management considered reserves adequate but noted estimates could prove inaccurate.
Material changes and management commentary
- Q2 net income increased 22% year over year. Management attributed stronger earnings mainly to loan and interest-earning asset growth, the Skagit acquisition, and higher yields; higher funding costs and operating expenses partly offset those gains.
- Q2 interest income rose 16% year over year, while interest expense rose to $14.1 million from $7.4 million. The cost of interest-bearing deposits increased to 0.64% from 0.33%, reflecting higher rates and funding mix. Net interest margin was broadly stable.
- Non-interest income increased to $22.7 million for Q2, aided by deposit fees and mortgage banking. Six-month non-interest income declined to $40.8 million from $42.6 million, partly because the prior-year period included fair-value gains and $2.1 million of branch/property sale gains.
- Non-interest expense rose 4.9% in Q2 and 7.5% year to date. The filing cites Skagit-related operating costs, added staffing and $0.3 million of Q2 acquisition expense ($2.4 million year to date); professional and legal costs declined.
- Deposits fell from year-end as certificates, particularly brokered deposits, ran off; Banner used FHLB advances as an alternative funding source. Securities declined $106.4 million during the first half, with repayments, maturities and sales exceeding purchases.
Outlook, risks and unusual items
- Durbin Amendment: Because the company and Banner Bank exceeded $10 billion in assets, the interchange fee limitation took effect July 1, 2019. Management estimated a $15 million annualized negative pre-tax revenue impact beginning then.
- AltaPacific transaction: After quarter-end, Banner announced an all-stock agreement to acquire AltaPacific Bancorp. The filing estimated consideration of approximately $87.4 million based on Banner’s July 23 share price; AltaPacific reported $436 million in assets, $339 million in loans and $307 million in deposits. Closing was expected late in Q4 2019, subject to shareholder, regulatory and other conditions. Integration, approval, retention and realization-of-benefits risks apply.
- Credit-loss accounting: The company was preparing to adopt the expected-credit-loss standard (CECL), effective for it in 2020. It expected changes to estimation methods and said adoption could increase the allowance, but the amount was not yet determined.
- Interest-rate risk: Modeling estimated a 4.8% decline in next-12-month net interest income under an instantaneous 100-basis-point rate decrease, versus a 2.9% increase under a 100-basis-point increase. These are model estimates and depend on assumptions. Management described its risk as within internal guidelines.
- Other cited risks include borrower defaults and collateral values, deposit competition and funding costs, economic conditions in its markets, regulatory actions, fair-value estimates, technology and third-party disruptions, and litigation. The filing reported no material change in previously disclosed risk factors and no legal proceedings expected by management to have a material adverse effect.
Important facts for investors to verify
- Track whether loan growth and core deposit retention continue, and whether deposit pricing further pressures net interest margin.
- Monitor non-performing loans, criticized/classified credits, charge-offs and allowance adequacy, including the effects of CECL adoption.
- Assess the realized impact of the Durbin Amendment against management’s $15 million annualized pre-tax estimate.
- Confirm AltaPacific approvals, closing timing, integration costs and expected benefits; the transaction was announced after the reporting date.
- Review liquidity and funding mix as brokered deposits decline and FHLB borrowing rises, alongside the company’s substantial loan commitments.
- Interpret non-GAAP core earnings and adjusted efficiency measures alongside GAAP results; these measures may not be comparable with similarly named measures at other companies.