Banner Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Banner is a regional bank holding company operating Banner Bank and Islanders Bank in Washington, Oregon, California, Idaho and Utah. Results include AmericanWest, acquired in October 2015, and Siuslaw, acquired in March 2015, so year-over-year comparisons reflect a substantially larger company and are not fully like-for-like.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue (net interest income before provision plus non-interest income) | $111.0 million | $60.2 million |
| Net interest income | $91.0 million | $46.5 million |
| Net interest margin | 4.13% | 4.09% |
| Non-interest income | $20.0 million | $13.7 million |
| Non-interest expense | $84.0 million | $41.9 million |
| Net income | $17.8 million | $12.1 million |
| Diluted EPS | $0.52 | $0.61 |
| Provision for loan losses | None | None |
- Revenue increased 84%, primarily reflecting acquisition-related growth in average earning assets, deposit fees and mortgage banking. Net interest income rose 96%; average earning assets rose 92% to $8.87 billion.
- Net income increased, but diluted EPS declined as the weighted-average share count increased substantially following the acquisitions. Acquisition-related expense was $6.8 million; after related tax effects it reduced diluted EPS by approximately $0.13.
- Management’s non-GAAP core earnings were $22.1 million, or $0.65 per diluted share, versus $13.1 million, or $0.66, a year earlier. Core results exclude acquisition costs, securities gains or losses, fair-value changes and related tax effects.
- Net interest margin included acquisition accounting benefits. Excluding the disclosed effects of acquired loan discounts, deposit premiums and related average-asset adjustments, non-GAAP margin was 4.01%, versus 4.07% a year earlier.
- Annualized return on average assets was 0.73% (1.02% in Q1 2015); the efficiency ratio was 75.70% (69.59%).
Financial position, liquidity and capital
- At March 31, 2016, total assets were $9.75 billion, down 1% from year-end; loans were $7.19 billion, deposits $8.03 billion and shareholders’ equity $1.32 billion.
- Loans declined $128.5 million from December 31, 2015, primarily due to a $139.1 million sale of acquired multifamily loans, mortgage prepayments and seasonal agricultural-loan reductions. Commercial real estate was about 45% of loans.
- Cash and cash equivalents were $260.6 million. Q1 cash provided by operating activities was $21.4 million and investing activities provided $58.4 million; financing activities used $81.2 million, including net FHLB repayments and dividends. Cash declined $1.3 million during the quarter.
- Deposits decreased $25.2 million from year-end. Non-interest-bearing deposits rose to $3.04 billion, including a $421.8 million product conversion of former AmericanWest interest-bearing accounts; core deposits were 84% of total deposits. Certificates of deposit totaled $1.29 billion, with $955.9 million maturing or repricing within one year.
- FHLB advances were $75.4 million, other borrowings $106.1 million and junior subordinated debentures $92.9 million. Banner reported $66.1 million of standalone holding-company liquid assets and available, collateral-dependent borrowing capacity through FHLB and Federal Reserve programs; management said resources were adequate for foreseeable needs.
- Regulatory capital exceeded “well-capitalized” thresholds. Banner Corporation’s total risk-based capital ratio was 13.61%, common equity tier 1 ratio 11.95% and leverage ratio 11.28%. Tangible common equity to tangible assets, a non-GAAP measure, was 10.98%.
Asset quality and material changes
- Non-performing assets were $23.0 million, or 0.24% of assets, down from $27.1 million at year-end and $29.7 million a year earlier. Non-performing loans were $15.6 million. The allowance was $78.2 million, equal to 501% of non-performing loans and 1.09% of loans.
- Q1 net recoveries were $189,000. Management cited improved credit metrics and recoveries as the reasons no loan-loss provision was recorded, while stating that the allowance remained appropriate. Acquired-loan discounts, not included in the allowance, were $42.3 million; management’s adjusted allowance-to-adjusted-loans ratio was 1.67%.
- Real estate owned declined to $7.2 million after $4.7 million of property sales; the quarter included $205,000 of REO valuation charges. Performing troubled debt restructurings were $19.5 million.
- Shareholders’ equity increased $20.1 million, supported by earnings and an $8.6 million after-tax increase in accumulated other comprehensive income, largely from unrealized gains on available-for-sale securities.
Outlook, risks and unusual items
- The filing gives no specific earnings, growth or margin guidance. Management described core revenue as strong and integration as progressing; AmericanWest systems conversion and branch consolidations occurred in mid-February 2016. Acquisition-related costs included severance, branch consolidation, systems and professional costs. Management anticipates further cost savings and synergies, but provides no quantified target here.
- Management warned that prolonged low rates could further compress margins as asset yields reset downward while deposit costs have limited room to fall. Interest-rate simulations estimate a 1.5% decline in next-12-month net interest income under a 50-basis-point rate decrease; under a 400-basis-point increase, the modeled 12-month decline is 1.3%. These are model estimates subject to assumptions, not forecasts.
- Key stated risks include credit deterioration and adequacy of loan-loss reserves; economic and real-estate conditions in the company’s markets; deposit competition and funding costs; acquisition integration and realization of synergies; regulatory actions; interest-rate changes; fair-value and goodwill estimates; litigation; and technology or third-party-provider disruptions. The filing reports no material change to previously disclosed risk factors.
- Legal proceedings arise in the ordinary course; management did not believe any pending matter would have a material adverse effect. Disclosure controls were assessed as effective, with no materially affecting change in internal control reported for the quarter.
Investor verification priorities
- Track whether integration costs decline and expected AmericanWest and Siuslaw operating savings are realized.
- Assess credit trends, criticized and non-performing loans, acquired-loan discount accretion, and the adequacy of the allowance.
- Verify deposit retention and mix, especially the $955.9 million of certificates maturing or repricing within one year, and monitor funding costs.
- Review net interest margin and interest-rate sensitivity alongside the assumptions used for deposit repricing, prepayments and rate floors.
- Monitor goodwill and other acquired-intangible valuations, including the preliminary purchase-accounting adjustments.