Banner Corporation — Q3 2018 Form 10-Q
Business context and reporting period. Banner Corporation is a Washington-based bank holding company operating Banner Bank and Islanders Bank. This unaudited filing covers the quarter and nine months ended September 30, 2018; balance-sheet comparisons are with December 31, 2017 unless stated otherwise. The business is primarily traditional commercial and consumer banking, with mortgage lending and loan sales.
Key financial results
| Metric | Q3 2018 | Comparable period | Nine months 2018 | Comparable period |
|---|---|---|---|---|
| Net interest income | $109.1 million | $100.2 million; +9% | $313.5 million | $294.8 million; +6% |
| Net interest margin | 4.48% | 4.22% | 4.41% | 4.27% |
| Net income | $37.8 million | $25.1 million | $99.0 million | $74.3 million |
| Diluted EPS | $1.17 | $0.76 | $3.05 | $2.25 |
| Net interest income plus non-interest income | $129.5 million | $118.3 million | $376.5 million | $352.3 million |
| Non-interest expense | $81.6 million | $80.3 million | $246.0 million | $236.5 million |
Q3 return on average assets was 1.43% (0.97% a year earlier); nine-month ROA was 1.28% (0.98%). The adjusted efficiency ratio, a non-GAAP measure, was 60.21% for Q3 and 63.79% year to date, compared with 65.62% and 65.25%, respectively.
Financial position, credit and liquidity
- Total assets were $10.51 billion, up $751.1 million since year-end; loans were $7.82 billion, up $223.6 million, and securities were $1.70 billion, up $494.7 million.
- Deposits were $8.69 billion, up $502.4 million. Core deposits were $7.51 billion (86% of deposits); brokered deposits rose to $325.2 million from $57.2 million at year-end. Certificates of deposit totaled $1.18 billion, including $880.0 million maturing within one year.
- FHLB advances were $221.2 million, compared with $0.2 million at year-end; other borrowings were $99.0 million and junior subordinated debentures carried at fair value were $113.1 million.
- Cash and cash equivalents were $248.7 million. Nine-month cash from operations was $86.2 million, versus $277.4 million a year earlier; investing used $782.2 million and financing provided $683.4 million. Cash declined $12.5 million over the period.
- The allowance for loan losses was $95.3 million, or 1.22% of loans, versus $89.0 million and 1.17% at year-end. Non-performing loans were $15.8 million, down from $27.0 million at year-end; non-performing assets were $16.7 million, or 0.16% of assets. Management stated the allowance was adequate.
- Shareholders’ equity was $1.27 billion. Tangible common equity to tangible assets, a non-GAAP measure, was 9.86%, down from 10.61% at year-end. Banner and both subsidiary banks exceeded applicable regulatory capital requirements; Banner Corporation’s total capital ratio was 13.76% and Banner Bank’s was 13.03%.
Material changes and notable items
- Higher average earning-asset balances and yields lifted net interest income and margin. Interest expense also rose: Q3 deposit expense increased 73% year over year, while the average cost of interest-bearing deposits rose to 0.42% from 0.24%.
- Q3 non-interest expense included $1.0 million of Skagit merger costs. Nine-month earnings also benefited from a $3.6 million net gain on changes in fair value of financial instruments; fair-value changes on junior subordinated debentures were recorded in other comprehensive income under newly adopted accounting guidance.
- Available-for-sale securities had a $33.1 million nine-month unrealized fair-value decline, largely attributed to higher market interest rates. Accumulated other comprehensive loss increased to $13.0 million from $5.0 million at year-end.
- Banner completed the Skagit Bancorp acquisition on November 1, 2018, after quarter-end. Skagit had $919 million in assets, $604 million in loans and $819 million in deposits at September 30; it added 11 branches. Banner reported preliminary purchase accounting was incomplete and expected to disclose estimates in its 2018 Form 10-K.
- The company adopted revenue-recognition guidance that changed presentation, not revenue timing or amount: merchant-services costs were netted against fee income, reducing both reported non-interest income and expense by $5.9 million for the first nine months of 2018 (and $6.1 million for the comparable 2017 period).
Outlook, risks and contingencies
No specific earnings or margin guidance is provided. Management estimated the Durbin Amendment interchange-fee cap would reduce pre-tax revenue by approximately $13 million annualized beginning July 2019, based on current debit-card volumes. Management also cautioned that rising rates could increase deposit costs faster than asset yields and compress margins. Interest-rate, credit, real-estate valuation, funding, competition, regulatory, technology and merger-integration risks are discussed in the filing.
At September 30, outstanding commitments to extend credit were $2.65 billion, with additional standby letters of credit and loan-origination commitments. The company reported available FHLB credit facilities and approximately $1.17 billion of Federal Reserve Borrower-in-Custody capacity, subject to collateral requirements. Management said it believed resources were adequate for foreseeable liquidity needs. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Skagit acquisition accounting, integration costs, acquired credit marks, goodwill and realized synergies once reported in the 2018 Form 10-K.
- Whether deposit pricing, brokered-deposit usage and borrowing costs pressure net interest margin as rates and competition change.
- Credit trends, including the $60.9 million of additional classified loans not on nonaccrual, allowance adequacy and potential adoption effects of the expected-credit-loss standard.
- Performance and liquidity implications of large unfunded credit commitments, near-term certificate maturities and the planned Durbin Amendment impact.
- Future securities valuation changes and effects on accumulated other comprehensive loss and tangible capital.