Banner Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; filed August 5, 2016. Banner is a regional bank holding company operating Banner Bank and Islanders Bank across the Pacific Northwest and other western states. Results include AmericanWest Bank since its October 2015 acquisition, so year-over-year comparisons reflect a substantially larger company.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income before loan-loss provision | $93.1 million | $51.5 million | $184.2 million | $98.0 million |
| Net interest margin | 4.20% | 4.19% | 4.16% | 4.14% |
| Provision for loan losses | $2.0 million | None | $2.0 million | None |
| Net income | $21.0 million | $13.2 million | $38.7 million | $25.4 million |
| Diluted earnings per share | $0.61 | $0.64 | $1.14 | $1.25 |
| Total non-interest expense | $79.9 million | $47.7 million | $163.9 million | $89.6 million |
- Q2 total revenue, defined as net interest income before provision plus non-interest income, was $113.7 million, up 68%. Deposit fees and service charges and mortgage banking revenue rose 28% and 41%, respectively, year over year.
- Reported net interest margin included acquisition-accounting benefits. Excluding acquisition discount accretion and related effects, management’s non-GAAP margin was 4.01% for both Q2 and the first half, versus 4.15% and 4.11%, respectively, in 2015.
- At June 30, total assets were $9.92 billion; loans were $7.33 billion gross ($7.24 billion net); deposits were $7.92 billion; and shareholders’ equity was $1.34 billion. Cash and cash equivalents totaled $234.7 million.
- First-half cash flows were negative $14.7 million from operations and negative $70.3 million from investing, offset by $57.7 million from financing. Cash and cash equivalents declined $27.3 million to $234.7 million.
- Deposits declined $135.3 million from year-end, while FHLB advances increased to $325.4 million from $133.4 million. Other borrowings were $112.3 million and junior subordinated debentures were $93.3 million.
- Core deposits were 85% of total deposits. Non-interest-bearing deposits were $3.02 billion, up 15% from year-end; total deposits were down 1.7% from year-end.
- Tangible common equity to tangible assets, a non-GAAP measure, was 11.00%, versus 10.67% at year-end. Banner Corporation and both banks exceeded applicable well-capitalized regulatory thresholds.
Changes, management commentary and notable items
- Net income rose substantially, but diluted EPS fell year over year, reflecting the much larger share count following acquisitions. AmericanWest added scale, assets, deposits and operating costs; the filing cautions that the comparison is not like-for-like.
- Acquisition-related costs were $2.4 million in Q2 and $9.2 million in the first half. After tax, management estimates these reduced diluted EPS by $0.05 and $0.17, respectively. Management also reported a $1.4 million accrual for customer product benefits that had not been properly credited in prior periods, primarily due to bonus-interest system processes over six years; the processes have since been corrected.
- Non-performing loans increased to $25.3 million from $15.2 million at year-end; non-performing assets were $31.7 million, or 0.32% of assets. The $81.3 million allowance equaled 321% of non-performing loans and 1.11% of gross loans. Management attributed the $2.0 million provision primarily to organic loan growth and acquired loans migrating out of discounted portfolios as they renewed.
- Management described asset quality as solid and the allowance as adequate, while noting that estimates may prove incorrect and regulators may require additional reserves. REO fell to $6.1 million from $11.6 million at year-end.
- Liquidity sources include deposits, loan and securities cash flows, FHLB borrowing facilities, and a Federal Reserve lending program. Management reported no Federal Reserve borrowings and stated it believed available resources were adequate. Loan commitments totaled $2.32 billion; commitments may not all be drawn.
- Interest-rate sensitivity modeling estimated that an instantaneous +100-basis-point move would reduce next-12-month net interest income by 0.6%, while a +400-basis-point move would reduce it by 2.4%. Management warned that prolonged low rates could further compress margins; results depend on modeling assumptions and deposit behavior.
- No specific earnings or financial guidance is provided. Forward-looking risks include acquisition integration and realization of synergies, credit deterioration, regional economic and real-estate conditions, interest-rate and funding changes, deposit competition, regulatory actions, cybersecurity and third-party service-provider risks.
- Management reported effective disclosure controls as of June 30 and no material change in internal control over financial reporting during the quarter. It stated that pending legal matters were not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much future earnings growth depends on AmericanWest integration, loan discount accretion and acquisition-related cost reductions.
- Whether margin performance excluding acquisition-accounting effects can stabilize, given lower yields on acquired loans and the larger securities mix.
- Trends in non-performing loans, classified credits, delinquencies, allowance coverage and acquired-loan discounts; reported non-performing loans exclude purchased credit-impaired loans.
- Deposit retention and funding costs as certificates mature, deposits shift between account types, and FHLB advances remain above year-end levels.
- The recurring effect of the $1.4 million customer-benefit correction and whether further remediation or customer obligations arise.
- Regulatory capital, liquidity and interest-rate model assumptions, including the effect of deposit repricing behavior and loan prepayments.