Banner Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Banner is a regional bank holding company operating Banner Bank and Islanders Bank, serving customers primarily in Washington, Oregon and Idaho. Its business includes commercial, agricultural, real estate and consumer lending, deposit services, and residential mortgage origination and sales.
Banner completed its acquisition of Siuslaw Financial Group on March 6, 2015. Siuslaw contributed approximately $370 million of assets, $247 million of loans and $316 million of deposits. Banner’s results include Siuslaw from March 7, 2015; the filing says isolating Siuslaw’s contributed revenue and net income is impracticable due to integration.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $51.5 | $43.8 | $98.0 | $86.1 |
| Total GAAP revenue | $67.6 | $64.1 | $127.8 | $115.5 |
| Net income | $13.2 | $17.0 | $25.4 | $27.5 |
| Diluted EPS | $0.64 | $0.88 | $1.25 | $1.42 |
| Net interest margin | 4.19% | 4.06% | 4.14% | 4.06% |
- Quarterly core revenue, a company-defined non-GAAP measure excluding securities gains/losses, fair-value changes and the 2014 bargain-purchase gain, was $66.8 million versus $54.6 million. Six-month core revenue was $126.5 million versus $106.2 million.
- Q2 other operating expenses were $47.7 million, up from $38.4 million; they included $3.9 million in acquisition-related costs. The six-month expense totals were $89.6 million and $74.0 million.
- No loan-loss provision was recorded in Q2 or the first half of 2015, continuing a tenth consecutive quarter without a provision. Q2 net recoveries were $2.0 million; first-half net recoveries were $1.4 million.
- Q2 return on average assets was 1.02%, versus 1.50% a year earlier; the six-month figures were 1.02% and 1.24%. Q2 efficiency ratio was 70.61%, versus 59.94%.
- Operating cash flow was $36.8 million for the first half, compared with $40.7 million in 2014. Cash and cash equivalents ended June at $184.0 million, up from $126.1 million at year-end.
Financial condition, liquidity and capital
- Total assets were $5.19 billion at June 30, up 10% from $4.72 billion at December 31, 2014. Net loans were $4.17 billion, up 11%; deposits were $4.30 billion, up 10%.
- Deposits included $1.48 billion non-interest-bearing and $2.05 billion interest-bearing transaction and savings accounts. Core deposits were 82% of deposits. Certificates of deposit totaled $766 million, of which $575 million mature or reprice within one year.
- Period-end borrowings included $0.2 million of FHLB advances, $94.5 million of other borrowings (primarily retail repurchase agreements), and $84.7 million of junior subordinated debentures at fair value.
- Stockholders’ equity was $660.7 million. Tangible common equity to tangible assets, a non-GAAP measure, was 12.26%. Banner Corporation’s regulatory capital ratios included 16.21% total capital to risk-weighted assets, 14.96% Tier 1 risk-based capital, and 13.28% common equity Tier 1; the company and both banks exceeded applicable “well-capitalized” minimums.
- Management reported $1.454 billion of outstanding loan commitments, including $1.386 billion of undisbursed loans and unused credit lines. Available facilities included up to $1.7 billion of FHLB credit for Banner Bank, subject to collateral and other terms, and approximately $687 million under the Federal Reserve Borrower-In-Custody program; no Federal Reserve borrowing was outstanding.
Material changes and unusual items
- Net income declined from the prior-year periods despite higher net interest income and core operating revenue. Q2 and first-half 2014 results included a $9.1 million bargain-purchase gain from the 2014 Oregon branch acquisition, which added approximately $0.23 to diluted EPS after related costs.
- Loan growth included organic growth and Siuslaw. Share issuance for the Siuslaw acquisition increased common shares outstanding; goodwill and other intangibles rose to $26.9 million, including $21.1 million of goodwill.
- Banner’s proposed AmericanWest Bank acquisition remained pending. The agreement contemplated 13.23 million Banner shares and $130 million cash; those shares would represent approximately 38.8% of pro forma Banner ownership. Closing was expected late in Q3 or in Q4 2015, subject to regulatory approval and customary conditions.
- Q2 included a $0.8 million net fair-value gain and a $28,000 net securities loss. The first half included a $1.8 million fair-value gain and a $537,000 securities-sale loss; the gains included recoveries associated with liquidation of trust-preferred securities. Fair-value estimates for certain securities and debt use significant unobservable inputs.
Management outlook, risks and contingencies
Management described loan demand, housing markets and mortgage activity as solid, and cited growth in deposits, fee income and mortgage banking. It also noted that persistently low rates pressure asset yields; very low rates could further compress margins as deposit costs have limited room to decline. The filing provides no specific earnings or revenue guidance.
- Asset quality weakened on some measures: non-performing loans were $23.3 million, versus $16.7 million at year-end, and non-performing assets were $29.4 million, versus $20.2 million. Management attributed much of the increase to Siuslaw-acquired assets. The allowance was $77.3 million, or 1.82% of loans and 332% of non-performing loans. Management considered it adequate but cautioned that estimates may prove incorrect and regulators may require additional reserves.
- In addition to non-performing loans, $80 million of classified loans were not on nonaccrual status and could become non-performing. Non-performing assets were concentrated in Oregon (62%); credit exposure and real estate values remain risks.
- Other stated risks include integration costs and execution for Siuslaw and the proposed AmericanWest transaction, obtaining regulatory approval, competition for deposits, interest-rate and funding changes, economic conditions in Banner’s markets, operational and cybersecurity disruptions, litigation, and regulatory or capital-rule changes.
- Management reported no pending legal proceeding it believed would materially adversely affect the company. The filing reported no material change in previously disclosed risk factors and concluded disclosure controls were effective at June 30, 2015.
Important facts for investors to verify
- Whether the AmericanWest transaction received required approvals, closed on schedule, and delivered expected integration costs, synergies and dilution.
- Whether organic loan and core-deposit growth can continue, and how the $575 million of certificates maturing within a year affect funding costs and liquidity.
- Trends in non-performing loans, classified credits, charge-offs and recoveries, particularly acquired Siuslaw exposures and Oregon real estate concentrations; assess allowance adequacy.
- Whether net interest margin can be sustained as rates and asset yields change, including the sensitivity assumptions and deposit behavior used in management’s interest-rate analysis.
- The quality and repeatability of earnings excluding acquisition costs, fair-value movements and other unusual items, as well as the effect of rising operating expenses.