Banner Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited. Banner is a regional bank holding company operating Banner Bank and Islanders Bank, with commercial, consumer, agricultural, real estate and mortgage banking activities across the Pacific Northwest and other western states.
Financial performance and condition
- Q2 earnings: Net income was $25.5 million, or $0.77 per diluted share, versus $21.0 million, or $0.61, in Q2 2016. First-half net income was $49.2 million, or $1.49 per diluted share, versus $38.7 million, or $1.14.
- Revenue and margins: Q2 total revenue (net interest income plus non-interest income) rose 7% to $122.2 million; first-half revenue rose 6% to $237.9 million. Net interest income increased 7% to $99.7 million in Q2 and 5.6% to $194.6 million in the first half. Net interest margin was 4.33% in Q2 (4.20% prior year) and 4.29% for the first half (4.16%). Q2 GAAP efficiency ratio was 67.06%; adjusted ratio was 65.42%.
- Non-interest items: Q2 non-interest income was $22.5 million, up 9.4%; first-half non-interest income was $43.3 million, up 7.0%. First-half results included a one-time $2.5 million gain on sale of a previously acquired loan. Q2 non-interest expense rose 2.6% to $81.9 million; first-half expense fell 2.4% to $160.0 million, largely because 2016 included acquisition costs.
- Balance sheet at June 30: Total assets were $10.20 billion, up $406.2 million from year-end 2016; loans were $7.55 billion and deposits $8.48 billion. Shareholders’ equity was $1.31 billion. Tangible common equity was 10.46% of tangible assets, compared with 10.83% at year-end.
- Credit quality: The $88.6 million allowance for loan losses was 1.17% of loans and 405% of non-performing loans. Non-performing assets fell to $24.5 million, or 0.24% of assets, from $33.8 million at year-end. Separately, $93.4 million of other classified loans were not on nonaccrual, but management noted possible repayment concerns.
- Cash flow and liquidity: First-half operating cash flow was $241.4 million, compared with use of $12.7 million a year earlier; investing cash flow was negative $568.7 million and financing cash flow positive $353.1 million. Cash and cash equivalents ended at $273.5 million. Deposits grew $362.3 million in the half; brokered deposits rose to $250.0 million from $34.1 million at year-end. Available borrowing capacity included a reported $530.5 million FRBSF line, subject to collateral requirements.
- Borrowings and capital: FHLB advances were $50.2 million, other borrowings $116.5 million and junior subordinated debentures $96.9 million. The company and both banks exceeded regulatory capital requirements; Banner Bank’s total capital ratio was 12.31% and common equity tier 1 ratio 11.29%.
Material changes versus comparable periods
- Q2 diluted EPS rose to $0.77 from $0.61; first-half diluted EPS rose to $1.49 from $1.14. Prior-year comparisons include acquisition-related costs of $2.4 million in Q2 and $9.2 million in the first half of 2016.
- Management attributed stronger net interest income to earning-asset growth, higher loan and securities yields, and a favorable asset mix. The Q2 margin included 15 basis points from acquisition-accounting adjustments, versus 19 basis points a year earlier.
- Assets increased following Banner’s decision to resume balance-sheet growth after keeping assets below $10 billion through 2016. Securities increased $489.8 million from year-end, mainly from purchases of government-sponsored mortgage-backed securities.
- Non-performing assets and REO declined, but first-half net charge-offs were $1.4 million versus net recoveries of $1.3 million in the prior-year period.
- Non-interest expense reflects higher compliance, risk-management, staffing and professional-services costs associated with crossing the $10 billion asset threshold.
Outlook, risks and unusual items
- Management described continued growth and profitability as strategic priorities, with a moderate-risk profile and focus on core deposits and lending. The filing provides no specific forward earnings or revenue guidance.
- After quarter-end, Banner Bank agreed to sell its seven Utah branches and related assets and liabilities. The transaction covers approximately $260 million of loans and $180 million of deposits, with an estimated $15.3 million deposit premium; completion was expected in Q4 2017, subject to regulatory approval and customary conditions.
- Interest-rate risk is material. Company modeling estimated that a 100-basis-point rate increase would raise next-12-month net interest income by 1.9%, while a 50-basis-point decrease would reduce it by 2.8%. The model also estimated an 18.4% decline in economic value of equity under a 400-basis-point increase; outcomes depend on assumptions and actual repricing behavior.
- Other risks include borrower credit deterioration, real estate and regional economic conditions, deposit competition and retention, regulatory requirements, cyber and third-party risks, and valuation estimates. Management said the allowance was adequate, while acknowledging estimates may prove incorrect and regulators may require additional reserves.
- Off-balance-sheet commitments included $2.25 billion to extend credit, $15.7 million in standby letters and guarantees, and $87.1 million to originate loans. Many commitments may not be drawn. Management reported no pending legal proceeding expected to have a material adverse effect.
- Future accounting changes could affect results: the company was evaluating expected-credit-loss accounting, which may increase the allowance, and lease accounting, which it expected to increase reported assets and liabilities for its 124 leased buildings and offices.
Most important facts for investors to verify
- Whether loan and deposit growth sustains net interest income as funding costs and market rates change.
- Credit trends in the $93.4 million of classified loans, charge-offs, and the adequacy of the $88.6 million allowance.
- Deposit mix and funding costs, particularly the increase in brokered deposits and certificates maturing within one year.
- Execution, regulatory approval, closing timing and final economics of the Utah branch sale.
- Actual costs of enhanced regulatory compliance, and the eventual impact of expected-credit-loss and lease accounting standards.