Banner Corporation (NASDAQ: BANR) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Banner is a regional bank holding company operating Banner Bank and Islanders Bank across Washington, Oregon, California, Idaho and Utah. Figures below are in U.S. dollars; “million” and “billion” are used for readability.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $116.6 million | $109.1 million | $349.4 million | $313.5 million |
| Total revenue | $137.5 million | $129.5 million | $411.1 million | $376.5 million |
| Net income | $39.6 million | $37.8 million | $112.6 million | $99.0 million |
| Diluted earnings per share | $1.15 | $1.17 | $3.23 | $3.05 |
| Net interest margin | 4.25% | 4.48% | 4.33% | 4.41% |
| Return on average assets | 1.31% | 1.43% | 1.27% | 1.28% |
- Q3 net income rose 5% year over year, while diluted EPS declined as average diluted shares increased. Nine-month net income and diluted EPS increased 14% and 6%, respectively.
- Q3 net interest income grew 7%, supported by higher average earning assets, including growth and the Skagit acquisition. Margin compressed as funding costs rose and asset yields eased. The nine-month margin also declined.
- Non-interest income was $20.9 million in Q3, up from $20.4 million; nine-month non-interest income was $61.7 million, down from $63.0 million. Q3 deposit fees and service charges declined 16%, while mortgage banking income increased 14%.
- Non-interest expense increased 7% to $87.3 million in Q3 and 7% to $264.0 million for the nine months, mainly reflecting Skagit-related staffing and operating costs. GAAP efficiency ratio was 63.50% for Q3 and 64.23% year to date; adjusted non-GAAP ratios were 60.71% and 61.17%.
Financial position, funding and credit
- At September 30, total assets were $12.10 billion, up $226.5 million from year-end 2018. Loans receivable were $8.84 billion, up 1.7% from year-end; loans held for sale were $244.9 million. Total deposits were $9.73 billion, up 2.7%; core deposits were $8.51 billion, or 87% of deposits.
- Cash and cash equivalents were $324.5 million. Nine-month cash flow was $68.5 million provided by operations, $27.3 million used in investing and $11.1 million provided by financing; cash increased $52.3 million.
- FHLB advances were $382.0 million, down from $540.2 million at year-end; other borrowings were $120.0 million and junior subordinated debentures were $113.4 million. The filing reports no single total-debt figure; these categories are reported separately. Management cited FHLB and Federal Reserve borrowing capacity and considered liquidity resources adequate for foreseeable needs.
- The allowance for loan losses was $97.8 million, 1.11% of loans, versus $96.5 million and 1.11% at year-end. Q3 provision was $2.0 million; nine-month net charge-offs were $4.7 million, compared with net recoveries of $0.2 million a year earlier.
- Non-performing loans were $18.3 million, or 0.21% of loans, versus $15.7 million at year-end; non-performing assets were $18.6 million, or 0.15% of assets. Management described asset quality as manageable and the allowance as adequate, while noting $86.3 million of additional classified loans not on nonaccrual.
- Shareholders’ equity was $1.53 billion. Regulatory capital ratios exceeded “well-capitalized” thresholds; tangible common equity to tangible assets was 9.93%, up from 9.62% at year-end. The company repurchased $53.9 million of stock during the first nine months and accrued $43.0 million of dividends.
Material changes and notable items
- Banner completed its acquisition of AltaPacific on November 1, 2019, after the reporting date. AltaPacific had $420 million of assets, $334 million of loans and $297 million of deposits at September 30; the combined company was expected to have approximately $12.5 billion in assets. Purchase accounting was not yet complete, and preliminary fair values and consideration were not provided in this filing.
- Results include Skagit, acquired November 1, 2018. Management attributed higher interest income and expenses, staffing and other operating costs in part to the larger post-acquisition company.
- Banner became subject to the Durbin Amendment interchange fee cap on July 1, 2019. Management estimated an annualized $15 million negative pre-tax revenue impact, based on current debit-card volumes.
- Q3 expenses included a $1.6 million charge from lowering the discount rate on the deferred compensation liability. A $2.7 million credit for previously paid FDIC premiums produced a net Q3 deposit-insurance benefit of $1.6 million.
- Banner adopted lease accounting Topic 842 on January 1, 2019. At September 30 it reported operating lease right-of-use assets of $59.0 million and liabilities of $62.8 million.
- Expected credit loss standard CECL was scheduled for adoption in 2020. Banner was developing its models and forecast inputs; management said the standard could increase the allowance, but the magnitude was not yet determined.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management emphasized loan and core-deposit growth, mortgage production and a moderate-risk profile, while identifying rising funding costs, lower market rates and the Durbin Amendment as factors affecting results. Interest-rate sensitivity modeling estimated net interest income would increase 5.9% over 12 months in a +400-basis-point scenario and decline 5.7% in a -100-basis-point scenario; these are model estimates dependent on assumptions, not forecasts.
Key disclosed risks include credit deterioration and collateral values, interest-rate and deposit-pricing movements, competition, access to cost-effective funding, economic conditions in the company’s markets, technology and third-party service disruptions, regulatory changes, and integration and retention risks related to acquisitions. Management reported no pending legal proceeding expected to have a material adverse effect and no material change to previously disclosed risk factors. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether AltaPacific integration, retention and purchase accounting produce the expected benefits and costs.
- Actual revenue impact from the Durbin Amendment and the trajectory of deposit costs and net interest margin.
- Trends in non-performing and classified loans, net charge-offs, acquired-loan discounts and allowance adequacy.
- The eventual CECL allowance adjustment and its effect on capital and earnings.
- Liquidity and capital resilience under changing interest rates, including the assumptions behind sensitivity estimates.
- Future share repurchases and dividends relative to acquisition funding, regulatory limits and capital needs.