Banner Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Banner is a regional bank holding company operating Banner Bank and Islanders Bank across western states. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior date |
|---|---|---|
| Total revenue (net interest income plus non-interest income) | $138.4 million | $134.2 million in Q1 2019, up 3% |
| Net interest income | $119.3 million | $116.1 million in Q1 2019, up 3% |
| Net interest margin | 4.19% | 4.37% in Q1 2019 |
| Net income / diluted EPS | $16.9 million / $0.47 | $33.3 million / $0.95 in Q1 2019 |
| Provision for credit losses—loans | $21.7 million | $2.0 million in Q1 2019 |
| Non-interest income / expense | $19.2 million / $95.2 million | $18.1 million / $90.0 million in Q1 2019 |
| Operating cash flow | $52.6 million | $164.8 million in Q1 2019 |
| Cash and cash equivalents | $295.0 million | $307.7 million at December 31, 2019 |
| Total assets / loans / deposits | $12.78 billion / $9.29 billion / $10.45 billion | Assets $12.60 billion, loans $9.31 billion and deposits $10.05 billion at December 31, 2019 |
| Allowance for credit losses—loans | $130.5 million, or 1.41% of loans | $100.6 million at December 31, 2019 |
| FHLB advances / other borrowings / junior subordinated debentures | $247.0 million / $128.8 million / $99.8 million | $450.0 million / $118.5 million / $119.3 million at December 31, 2019 |
| Tangible common equity to tangible assets | 9.70% | 9.77% at December 31, 2019 |
Material changes and key drivers
- Net income fell about 49% year over year, chiefly reflecting the sharp increase in credit-loss provisions associated with COVID-19 and the economic outlook as of quarter-end.
- Net interest income grew 3%, supported by higher average earning assets, including the AltaPacific acquisition completed in November 2019, and lower funding costs. Net interest margin declined 18 basis points as asset yields fell faster than funding costs adjusted.
- Mortgage banking operations revenue rose to $10.2 million from $3.4 million, reflecting stronger residential mortgage production and sale gains. Deposit fees and service charges declined 22% to $9.8 million, partly due to the Durbin Amendment’s effect on interchange fees.
- Non-interest expense increased 6% to $95.2 million, including higher staffing and operating costs following AltaPacific, a $1.7 million provision for unfunded commitments, and $239,000 of COVID-19-related expense.
- Deposits grew $400.9 million during the quarter, including $355.0 million in core deposits. FHLB advances fell $203.0 million as deposit growth funded securities purchases and borrowing reduction.
- Loans declined modestly from year-end, while total securities increased $253.8 million to $2.07 billion. Available-for-sale securities unrealized gains increased accumulated other comprehensive income; total Q1 comprehensive income was $63.7 million.
- Cash from operations declined year over year; investing activities used $190.9 million, chiefly reflecting securities purchases, while financing activities provided $125.6 million. Cash and equivalents decreased by $12.7 million during the quarter.
Outlook, risks and unusual items
- Management said the Q1 credit-loss provision reflected expected lifetime losses under the economic conditions and forecast available at March 31. It warned that further deterioration, including higher unemployment or lower GDP, could require an additional provision in Q2 and materially adversely affect earnings.
- Management expects COVID-19 expenses to increase in following quarters depending on the pandemic’s duration. It also expects near-term net interest income and margin pressure from the pandemic and low interest rates.
- As of April 30, Banner reported 2,582 COVID-related loan modifications totaling $837.0 million, and SBA approval for approximately 7,000 Paycheck Protection Program applications totaling more than $1.1 billion. PPP forgiveness procedures and servicing requirements were described as uncertain.
- To preserve capital, Banner suspended further share repurchases until further notice. It repurchased 624,780 shares for $31.8 million during Q1, with the purchases completed before the pandemic outbreak. The quarterly dividend declared was $0.41 per share.
- Banner and both banks exceeded applicable regulatory capital requirements and were described as well-capitalized. The company reported $3.30 billion of outstanding loan commitments and substantial contingent credit facilities, subject to collateral and other requirements.
- Management identified possible credit deterioration, liquidity and deposit pressures, operational and cybersecurity risks from remote work and vendor dependence, and potential goodwill impairment if adverse economic conditions or share-price weakness prove sustained. No pending legal proceeding was believed likely to have a material adverse effect.
- Banner adopted CECL on January 1, 2020. The adoption increased credit-loss allowances by $14.9 million before tax and reduced opening shareholders’ equity by $11.2 million net of tax; management expects greater quarterly provision variability under the model.
Important facts for investors to verify
- How COVID-related borrower modifications perform after deferrals expire, and whether delinquencies, criticized loans, nonaccruals or charge-offs rise.
- Whether the $130.5 million loan allowance and $11.5 million unfunded-commitment allowance remain adequate under updated CECL forecasts.
- PPP loan funding, servicing, forgiveness outcomes and any associated fee income, costs or operational issues.
- Trends in net interest margin and deposit costs following the Federal Reserve’s rate cuts, and the effect of the rate environment on earnings.
- Liquidity, deposit mix and concentrations, including certificate maturities and the availability of borrowing facilities under their collateral conditions.
- Capital actions, including the paused repurchase program and dividend sustainability if bank capital or liquidity weakens.