Banner Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014 unless otherwise noted. Banner is a regional bank holding company operating primarily in Washington, Oregon, and Idaho. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless specified.
Business context and significant developments
- Banner completed its acquisition of Siuslaw Financial Group on March 6, adding approximately $370 million in assets, $316 million in deposits, and $247 million in loans. Siuslaw’s results are included from March 7.
- The Siuslaw purchase consideration was approximately $63.9 million. Preliminary purchase accounting recorded $21.1 million of goodwill and $3.9 million of core deposit intangibles.
- Banner’s proposed acquisition of AmericanWest Bank remained pending, subject to regulatory approvals and other closing conditions. Management expected closing early in Q3 2015. The announced consideration was 13.23 million Banner shares plus $130 million cash.
Financial performance
| Metric | Q1 2015 | Comparable period |
|---|---|---|
| Net interest income before loan-loss provision | $46.5 million | $42.3 million in Q1 2014 |
| Total other operating income | $13.7 million | $9.0 million in Q1 2014 |
| Operating expenses | $41.9 million | $35.6 million in Q1 2014 |
| Net income | $12.1 million | $10.5 million in Q1 2014 |
| Diluted earnings per share | $0.61 | $0.54 in Q1 2014 |
| Net interest margin / interest rate spread | 4.09% / 4.07% | 4.07% / 4.04% in Q1 2014 |
| Return on average assets / equity | 1.02% / 8.09% | 0.97% / 7.83% in Q1 2014 |
- Net interest income rose 10%, reflecting growth in average earning assets and slightly improved margin, despite continued low rates and a modest decline in asset yields.
- Core operating revenue, a non-GAAP measure excluding securities gains or losses and fair-value changes, was $59.7 million, up 16% from $51.6 million. Core other operating income was $13.2 million, up 42%.
- Other operating income included a $1.1 million net fair-value gain and a $510,000 securities-sale loss. Acquisition-related costs rose to $1.6 million from $45,000; management estimated these costs reduced diluted EPS by about $0.07.
- No loan-loss provision was recorded, the ninth consecutive quarter without one. Income tax expense was $6.2 million, at a 33.8% effective rate. Dividends declared were $0.18 per share.
Financial position, liquidity, and capital
- Total assets were $5.21 billion, up 10%; net loans were $4.04 billion, up 7%; and deposits were $4.32 billion, up 11%. Much of the growth reflected the Siuslaw acquisition.
- Core deposits represented 82% of deposits, compared with 75% a year earlier. Non-interest-bearing deposits were $1.50 billion. Certificates of deposit totaled $778 million, with $570 million due to mature within one year.
- Cash and due from banks ended the quarter at $298.5 million, versus $126.1 million at year-end. Cash flow from operations was $5.3 million, investing activities provided $78.7 million, and financing activities provided $88.4 million. Investing cash flow included $78.6 million of net cash received in the Siuslaw acquisition.
- FHLB advances fell to $250,000 from $32.3 million; other borrowings were $97.0 million and junior subordinated debentures were $84.3 million. Management reported no FRBSF borrowings and cited available secured facilities, including approximately $657 million under its borrower-in-custody line.
- Stockholders’ equity was $651.3 million. Tangible common equity to tangible assets, a non-GAAP measure, was 12.04%, down from 12.29% at year-end. Banner and both bank subsidiaries exceeded applicable “well-capitalized” regulatory thresholds; consolidated common equity tier 1 was 13.54%.
Asset quality, risks, and outlook
- Non-performing assets increased to $29.7 million, or 0.57% of assets, from $20.2 million at year-end. Non-performing loans were $24.7 million, including $9.2 million acquired from Siuslaw. Management said the acquired loans were recorded at fair value but included in non-performing metrics for a fuller view of asset quality.
- The $75.4 million allowance equaled 1.83% of loans and 305% of non-performing loans, down from 454% coverage at year-end. Net charge-offs were $542,000. Management considered reserves adequate but cautioned that estimates may prove incorrect and regulators may require additional reserves.
- Management identified $88 million of other classified loans not on nonaccrual, which could become problem loans. Commercial real estate, construction and land lending, regional economic conditions, and the integration and approval of acquisitions are material areas to monitor.
- Management warned that persistently low rates could compress margins as funding costs have limited room to decline. Its model estimated net interest income would rise 0.2% over 12 months with a 100-basis-point rate increase and fall 0.3% with a 50-basis-point decline; results depend on assumptions about deposit behavior and repricing.
- The filing provided no specific earnings or financial guidance. Management described operating performance as solid and emphasized loan growth, core deposits, client acquisition, and continued problem-asset management. It stated that no pending legal proceeding was expected to materially affect financial condition or operations; no material risk-factor changes were reported.
Important facts for investors to verify
- Regulatory approval, closing timing, consideration, and integration costs for the proposed AmericanWest transaction.
- How much loan, deposit, and earnings growth is organic versus acquired, including the full-quarter contribution and integration costs of Siuslaw.
- Trends in non-performing and classified loans, charge-offs, reserve coverage, and the adequacy of the allowance as acquired loans season.
- Deposit retention and pricing, certificate maturities, liquidity capacity, and the effect of rate changes on margins and net interest income.
- Reconciliation of management’s $8.1 million mortgage-banking revenue commentary with the $4.1 million mortgage-banking line reported in the income statement; the filing text does not make the difference clear.