Banner Corporation (NASDAQ: BANR) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. Banner is a regional bank holding company operating Banner Bank and Islanders Bank across the Pacific Northwest and other western states. Results include Skagit Bancorp, acquired November 1, 2018.
Financial results and position
Unless noted otherwise, dollar amounts are in millions.
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior date |
|---|---|---|
| Total revenue (net interest income plus non-interest income) | $134.2 | $120.7 in Q1 2018 |
| Net interest income | $116.1 | $99.4 in Q1 2018 |
| Net income; diluted EPS | $33.3; $0.95 | $28.8; $0.89 in Q1 2018 |
| Net interest margin | 4.37% | 4.35% in Q1 2018 |
| Non-interest expense | $90.0 | $81.7 in Q1 2018 |
| Operating cash flow | $165.3 provided | $74.8 used in Q1 2018 |
| Total assets | $11,740.3 | $11,871.3 at December 31, 2018 |
| Total loans; allowance for loan losses | $8,692.7; $97.3 | $8,684.6; $96.5 at December 31, 2018 |
| Total deposits | $9,376.2 | $9,477.0 at December 31, 2018 |
| FHLB advances; other borrowings; junior subordinated debentures | $418.0; $121.7; $113.9 | $540.2; $119.0; $114.1 at December 31, 2018 |
| Shareholders’ equity; tangible common equity / tangible assets | $1,511.2; 10.04% | $1,478.6; 9.62% at December 31, 2018 |
Reported diluted EPS was $0.95; management’s non-GAAP core diluted EPS was $0.99, excluding specified items including acquisition costs. The GAAP efficiency ratio was 67.06%; the adjusted non-GAAP ratio was 63.32%. These company-defined non-GAAP measures are not substitutes for GAAP results.
Material changes and operating trends
- Net interest income rose 17% year over year, mainly on a $1.51 billion increase in average interest-earning assets, reflecting organic growth and Skagit, together with higher asset yields. Average earning-asset yield was 4.89%, up from 4.59%.
- Funding costs rose materially: interest expense increased to $13.9 million from $5.4 million, as average funding balances and costs increased. Average interest-bearing deposit cost rose to 0.61% from 0.27%.
- Non-interest income declined to $18.1 million from $21.4 million. The prior-year quarter included a $3.3 million fair-value gain; mortgage banking income also fell, partly offset by higher deposit fees.
- Non-interest expense increased 10% to $90.0 million, including $2.1 million of Skagit acquisition-related costs, higher staffing and occupancy costs, and a $676,000 write-down of a former administration building.
- Loans were broadly stable quarter over quarter but 15% higher year over year, with Skagit contributing to annual growth. Total deposits fell 1% quarter over quarter, while core deposits rose 0.7%; certificates of deposit, particularly brokered deposits, declined. Core deposits were 88% of deposits.
- Cash and cash equivalents were $261.5 million. Operating cash flow benefited from loan-sale proceeds; financing cash use included a net $122 million reduction in FHLB advances and lower deposits. Banner reported $5.21 billion of potential FHLB credit capacity for Banner Bank, subject to collateral and other requirements, plus approximately $1.16 billion of Federal Reserve borrowing availability subject to collateral requirements.
Outlook, risks and contingencies
- No earnings or revenue guidance is provided in the supplied filing text. Management said Skagit integration was complete and described core performance, client acquisition, deposit growth and asset quality as solid.
- Because Banner and Banner Bank exceeded $10 billion in assets, the Durbin Amendment interchange fee limit was scheduled to take effect July 1, 2019. Management anticipated an annualized pretax revenue reduction of approximately $15 million from that date.
- Management identified rising deposit costs as a risk to margins and earnings, potentially increasing faster than yields on earning assets. In the filing’s interest-rate simulation, an instantaneous +400 basis-point shock corresponded to a 0.4% increase in next-12-month net interest income but a 7.2% decline in estimated economic value of equity. Results depend on model assumptions.
- Credit quality remained manageable, but non-performing assets increased to $22.0 million from $18.9 million at year-end; non-performing loans were $19.3 million. The allowance was 1.12% of loans and 504% of non-performing loans. Management cited $47.5 million of additional classified loans not on nonaccrual as potential future credit concerns.
- Banner was evaluating the expected-credit-loss standard (CECL), effective for the company in 2020. It anticipated changes to allowance methods and said the standard may increase the allowance, but the effect had not been determined.
- Off-balance-sheet commitments included $2.84 billion to extend credit and $15.9 million of standby letters of credit and financial guarantees. Commitments do not necessarily become funding requirements; exposure depends on customer drawdowns and performance.
- Management said it was not party to legal proceedings expected to have a material adverse effect, and reported no material changes to previously disclosed risk factors. Regulatory capital ratios exceeded applicable well-capitalized thresholds; disclosure controls were deemed effective.
Important facts for investors to verify
- Track the realized impact of the Durbin Amendment against management’s estimated $15 million annualized pretax revenue reduction.
- Assess whether loan and deposit pricing can sustain net interest margin as funding costs rise; review the assumptions behind the interest-rate sensitivity analysis.
- Monitor non-performing assets, classified loans, charge-offs, acquired-loan discount accretion and the adequacy of the allowance, including the forthcoming CECL impact.
- Separate Skagit’s ongoing contribution and integration-related costs from organic trends, and evaluate the durability of deposit growth and loan-sale activity.
- Review liquidity and funding composition, including brokered and maturing certificates of deposit, borrowing capacity and the large volume of undrawn commitments.