Business context and reporting period
Banner Corporation, a bank holding company operating Banner Bank and Islanders Bank, filed this unaudited Form 10-Q for the quarter ended March 31, 2017. It provides commercial banking, lending and mortgage banking services primarily in Washington, Oregon, California, Idaho and Utah. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2017 | Comparable period / change |
|---|---|---|
| Net interest income | $94.9 | $91.0; up 4% |
| Net interest margin | 4.25% | 4.13%; 4.15% vs. 4.01% excluding acquisition-accounting effects |
| Total revenue | $115.7 | $111.0; up 4% |
| Net income / diluted EPS | $23.8 / $0.72 | $17.8 / $0.52 |
| Provision for loan losses | $2.0 | None in Q1 2016 |
| Non-interest expense | $78.1 | $84.0; down 7% |
| Operating cash flow | $185.4 | $22.0 |
Q1 2017 core earnings, a non-GAAP measure excluding specified fair-value, securities-sale and acquisition items, were $24.2 million, or $0.73 diluted EPS, versus $22.1 million, or $0.65, in Q1 2016. Return on average assets was 0.97% and return on average equity was 7.30%. The GAAP efficiency ratio was 67.48%; the adjusted ratio was 65.84%.
At March 31, 2017, total assets were $10.07 billion, up $274.7 million from year-end. Loans receivable were $7.42 billion and net loans $7.33 billion; deposits were $8.42 billion. Cash and cash equivalents were $300.7 million. Shareholders’ equity was $1.32 billion; tangible common equity to tangible assets was 10.72% (non-GAAP). Regulatory capital ratios exceeded applicable well-capitalized thresholds.
Total deposits increased $300.5 million during the quarter. Core deposits were 86% of deposits; brokered deposits rose to $171.5 million from $34.1 million at year-end, partly to fund securities purchases. FHLB advances fell to $0.2 million from $54.2 million; other borrowings were $120.2 million and junior subordinated debentures were $96.0 million. Investing cash flow was a use of $385.1 million, principally reflecting $458.0 million in available-for-sale securities purchases; financing cash flow provided $252.7 million. Cash and cash equivalents increased $53.0 million.
Material changes versus comparable periods
- Net income increased 34% year over year. Q1 2016 included $6.8 million of acquisition-related costs, with a stated $0.13 per diluted share after-tax impact; there were no such costs in Q1 2017.
- Net interest income growth reflected higher average earning assets and margin. Average loans rose 5% year over year, while average investment securities and related balances declined; deposit costs remained low.
- Non-interest income rose to $20.8 million from $20.0 million. Core non-interest income increased 8%, though mortgage banking revenue declined 18% to $4.6 million.
- Loans declined $29.9 million from year-end, while securities increased $421.6 million as Banner resumed balance-sheet growth after its 2016 strategy to remain below $10 billion in assets.
- Non-performing assets fell to $21.3 million from $33.8 million at year-end; non-performing loans declined to $18.1 million from $22.6 million. Net charge-offs were $1.5 million versus net recoveries of $0.2 million in Q1 2016.
Outlook, commentary, risks and unusual items
Management cited continued client and core-deposit growth, solid asset quality and strong core revenue, and said it had renewed its balance-sheet leveraging strategy in 2017. The filing provides no specific forward earnings or revenue guidance.
The $2.0 million loan-loss provision was attributed primarily to new originations and renewals of acquired loans moving out of discounted portfolios. The allowance was $86.5 million, or 1.17% of loans and 479% of non-performing loans. Management considered it adequate but cautioned that estimates may prove inaccurate and regulators could require additional reserves. A further $100.9 million of classified loans were not on nonaccrual status and could become problem loans.
Unusual items included a $2.5 million one-time gain on the sale of a previously acquired loan; a $1.2 million gain on sale of REO; $865,000 of accruals for certain prior-year deposit-fee refunds; and release of a $1.2 million reserve for a terminated unfunded commitment. Higher market rates adversely affected mortgage banking gains, including multifamily loan sales.
Key risks include credit deterioration and real-estate values; interest-rate, margin and funding pressures; deposit competition and retention; regulatory and capital requirements; fair-value and allowance-estimation uncertainty; operational, technology and cybersecurity risks; and execution of business strategies. In modeled scenarios, an immediate 400-basis-point rate increase raised projected next-12-month net interest income 4.7% but reduced estimated economic value of equity 15.1%; results depend on modeling assumptions. Management stated liquidity was adequate, citing available secured borrowing capacity, and the company and banks exceeded regulatory capital requirements. No material change to previously disclosed risk factors was reported; management identified no legal proceeding expected to have a material adverse effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether loan growth, borrower performance and the $100.9 million classified-loan exposure affect future credit costs and allowance adequacy.
- Whether deposit growth, the increase in brokered deposits and deposit pricing can sustain funding and net interest margin as rates and competition change.
- How recurring earnings trend after separating the one-time loan and REO gains, prior-year acquisition costs, and fair-value effects.
- Whether the securities portfolio expansion and interest-rate sensitivity produce the expected returns without materially weakening liquidity or economic value.
- The future effect and implementation timing of new accounting standards, particularly expected-credit-loss guidance; management had not quantified the potential allowance increase.