Banner Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Banner is a Washington-based bank holding company operating Banner Bank and Islanders Bank across the Pacific Northwest and other western states. Comparisons are with 2015 unless stated otherwise. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $93.7 million | $52.2 million | $277.9 million | $150.2 million |
| Total revenue | $117.2 million | $66.3 million | $341.9 million | $194.1 million |
| Net income | $23.9 million | $12.9 million | $62.6 million | $38.3 million |
| Diluted earnings per share | $0.70 | $0.62 | $1.83 | $1.87 |
| Net interest margin | 4.15% | 4.14% | 4.16% | 4.14% |
| Non-interest expense | $79.1 million | $46.7 million | $243.0 million | $136.3 million |
Q3 return on average assets was 0.96%; nine-month return was 0.85%. The nine-month adjusted efficiency ratio, a non-GAAP measure, was 65.23% versus 64.85%. Management reported Q3 non-GAAP core earnings of $25.1 million, or $0.74 per diluted share; these exclude specified acquisition costs, securities gains or losses, and fair-value changes.
Financial position, liquidity and capital
- At September 30, 2016, total assets were $9.84 billion, loans receivable $7.40 billion, deposits $8.11 billion, and shareholders’ equity $1.33 billion. Net loans were $7.31 billion.
- Cash and cash equivalents were $245.9 million. Deposits increased $56.9 million from year-end 2015; non-interest-bearing deposits were $3.19 billion, or about 39% of deposits. Core deposits represented 86% of deposits.
- FHLB advances were $62.3 million, other borrowings $108.9 million, and junior subordinated debentures $94.4 million. FHLB advances declined $71.0 million from year-end.
- For the first nine months, operating cash flow was $14.6 million, investing cash flow was positive $14.2 million, and financing cash flow was negative $44.8 million; cash declined $16.0 million to $245.9 million.
- Tangible common equity to tangible assets, a non-GAAP measure, was 11.03%, up from 10.67% at year-end. Banner Corporation and both banks exceeded applicable well-capitalized regulatory thresholds; consolidated total risk-based capital was 13.35%.
Material changes and management commentary
- Results reflect the October 2015 acquisition of AmericanWest Bank, which substantially increased Banner’s scale. Q3 revenue rose 77% year over year and net income rose 84%, while nine-month net income increased 63%; nine-month diluted EPS declined from $1.87 to $1.83.
- Management attributed much of the higher revenue and expenses to the acquired operations, alongside organic growth. Q3 mortgage banking revenue increased 84% and deposit fees and service charges increased 33% year over year.
- Acquisition-related costs were $1.7 million in Q3 and $10.9 million year to date; management estimated after-tax diluted EPS impacts of $0.03 and $0.21, respectively. Nine-month results also included $1.4 million accrued for customer product benefits that had not been properly credited in prior periods; the underlying systems processes were rectified.
- Management said it was managing assets to remain below $10 billion through December 31, 2016, to delay certain enhanced regulatory requirements and the Durbin Amendment interchange-revenue cap. Securities were reduced and FHLB advances repaid; Banner also repurchased 484,350 shares for $21.1 million during the first nine months.
- Credit quality remained a focus: the Q3 loan-loss provision was $2.0 million, primarily attributed to organic loan growth and renewals of acquired discounted loans. Non-performing loans were $27.3 million versus $15.2 million at year-end 2015; non-performing assets were $32.2 million, or 0.33% of assets. The allowance was $84.2 million, 309% of non-performing loans. REO fell to $4.7 million.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management described ongoing growth and a moderate-risk profile, while noting that interim results are not necessarily indicative of full-year results.
- Interest-rate exposure is material. Management warned that a prolonged low-rate environment could further compress margins. Its September simulation estimated net interest income increases of 6.9% over 12 months and 10.44% over 24 months for an immediate, sustained 400-basis-point rise; estimated economic value of equity declined 8.3% in that scenario. Management cautioned that model assumptions and a new system affected comparability with prior periods.
- Credit, real-estate, regional economic, deposit-retention, regulatory, technology, litigation, and acquisition-integration risks are discussed. The loan portfolio includes substantial commercial real estate exposure: about 44% of loans were commercial real estate, with construction and land loans about 11%.
- Outstanding commitments to extend credit were $2.21 billion; standby letters of credit and financial guarantees were $21.7 million. Management stated that commitments are part of normal operations and many may expire undrawn. It reported no pending legal proceeding believed likely to have a material adverse effect.
- Management said disclosure controls were effective as of September 30, 2016, and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much earnings growth is sustainable after AmericanWest integration costs, purchase-accounting accretion, and other acquisition effects; compare GAAP results with management’s non-GAAP core measures.
- Whether non-performing loans, classified loans, and the allowance remain manageable, particularly given the increase in non-performing loans and the commercial real estate and construction exposure.
- Whether Banner achieved its stated year-end asset target below $10 billion and how crossing that threshold would affect regulatory requirements and interchange revenue.
- Whether core-deposit growth and low funding costs persist, and whether the $834.9 million of certificates of deposit scheduled to mature within a year are retained or repriced.
- How interest-rate changes affect net interest margin and economic value, recognizing that the sensitivity estimates depend on management’s assumptions and updated modeling methods.