Banner Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Banner Corporation is a regional bank holding company operating Banner Bank and Islanders Bank. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial results and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $105.1 | $99.7 | $204.4 | $194.6 |
| Total non-interest income | $21.2 | $20.4 | $42.6 | $39.4 |
| Total revenue | $126.3 | $120.1 | $247.0 | $234.0 |
| Net income | $32.4 | $25.5 | $61.2 | $49.2 |
| Diluted EPS | $1.00 | $0.77 | $1.89 | $1.49 |
| Net interest margin | 4.39% | 4.33% | 4.37% | 4.29% |
- Q2 net income increased about 27% year over year. Management attributed stronger earnings principally to growth in interest-earning assets, improved yields and net interest margin, a lower federal tax rate, and $2.1 million of miscellaneous gains from selling Poulsbo branch deposits and two former business locations.
- Q2 non-interest expense rose 3.5% to $82.6 million; salary and benefits increased with compliance and risk-management staffing and normal wage increases. Mortgage banking income declined 31% to $4.6 million. The Q2 effective tax rate was 22.1%, versus 33.4% a year earlier.
- GAAP efficiency ratio improved to 65.44% from 66.49% in Q2; adjusted efficiency ratio was 64.09% versus 64.83%. Return on average assets was 1.25% for Q2 and 1.21% for the six-month period.
- At June 30, assets were $10.38 billion, up $616.0 million from year-end 2017. Loans were $7.68 billion, deposits $8.53 billion, and shareholders’ equity $1.25 billion. Available-for-sale securities increased to $1.40 billion from $919.5 million at year-end.
- Deposits increased $344.2 million during the first half, including $162.6 million in core deposits. FHLB advances were $239.2 million, versus $0.2 million at year-end; other borrowings were $112.5 million and junior subordinated debentures were $112.8 million. Tangible common equity to tangible assets was 9.79%, down from 10.61% at year-end.
- Six-month operating cash flow was $34.2 million, compared with $242.6 million in 2017; investing activities used $630.2 million and financing activities provided $584.3 million. Cash and equivalents ended at $249.4 million, down $11.8 million from year-end. Management reported available FHLB and Federal Reserve borrowing capacity and considered liquidity adequate.
Changes, asset quality, and significant items
- Net non-performing assets fell to $16.5 million, or 0.16% of assets, from $27.5 million at year-end 2017. Non-performing loans were $15.3 million; the allowance for loan losses was $93.9 million, or 1.22% of loans and 613% of non-performing loans. The six-month provision was $4.0 million, unchanged year over year; net recoveries were $0.8 million.
- Banner resumed balance-sheet growth after its prior strategy of remaining below $10 billion in assets through year-end 2017. Management said growth in securities and other earning assets was funded primarily by deposits and borrowings. It expects the Durbin Amendment interchange-fee cap to reduce annualized pre-tax revenue by about $13 million beginning July 2019.
- Available-for-sale securities recorded $23.1 million of after-tax-related unrealized losses in other comprehensive income during the first half, largely attributed to higher market interest rates. Total comprehensive income was $25.9 million in Q2 versus $27.3 million in Q2 2017, and $32.9 million for the first half versus $52.7 million.
- Following quarter-end, Banner agreed to acquire Skagit Bancorp in an all-stock transaction announced July 25, 2018. The stated implied aggregate consideration was approximately $191 million; Skagit had $922 million in assets, $599 million in loans and $811 million in deposits at June 30. Closing was expected late in Q4 2018, subject to shareholder, regulatory and other approvals.
- Accounting presentation changed under revenue standard ASC 606: merchant-services expenses are netted against fee income rather than shown as expense. The filing says this changed presentation, not the amount or timing of recognized revenue. The company also adopted financial-instrument guidance that moved instrument-specific credit changes on junior subordinated debentures to other comprehensive income.
Outlook, risks, and contingencies
- The filing gives no specific earnings or revenue guidance. Management described its priorities as sustainable profitability, a moderate risk profile, client acquisition, and continued core-deposit growth.
- Management cautioned that rising rates could increase deposit costs faster than asset yields and compress net interest margin. Modeling showed a 5.2% reduction in next-12-month net interest income under a 100-basis-point rate decline; a +400-basis-point scenario showed a small 0.1% decline in that horizon, while economic value of equity was estimated to decline 10.8%. These are model estimates based on assumptions, not forecasts.
- Key disclosed risks include credit deterioration and collateral values, competition and funding costs, economic conditions in the company’s markets, fair-value estimation, regulatory or legislative changes, cyber and third-party service disruptions, and the Skagit merger’s approval, integration, cost and retention risks. The company also noted $79.2 million of classified loans not on nonaccrual, which could become non-performing.
- Commitments to extend credit totaled $2.41 billion; standby letters of credit and financial guarantees totaled $15.7 million. Management said no pending legal proceedings were believed likely to have a material adverse effect. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether deposit and loan growth sustains net interest income as deposit and borrowing costs rise; review changes in net interest margin and brokered deposits, which were $280.1 million at quarter-end.
- Monitor credit quality, especially classified loans, past-due loans, construction and commercial exposures, and the adequacy of the allowance as the loan portfolio grows.
- Separate recurring operating performance from the $2.1 million branch/property-sale gains, fair-value changes, and the lower tax rate; note that six-month core diluted EPS was $1.80 versus GAAP diluted EPS of $1.89.
- Verify Skagit merger approvals, final consideration, expected closing, integration costs, and realization of projected benefits; the filing does not provide quantified synergy or cost targets.
- Assess the expected Durbin Amendment revenue impact from July 2019 and the effect of the new lease and expected-credit-loss accounting standards; Banner had not quantified the full balance-sheet or allowance impacts for those standards.