Banner Corporation (NASDAQ: BANR) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Banner Corporation is a Washington-based bank holding company whose subsidiary, Banner Bank, operates across Washington, Oregon, California, Idaho and Utah. Financial statement amounts below are in U.S. dollars; amounts described as billions or millions are rounded.
Financial performance and position
| Metric | Q3 2023 / September 30, 2023 | Comparable period / change |
|---|---|---|
| Revenue (net interest income plus non-interest income) | $154.4 million | Up 2% from Q2 2023; down from $162.0 million in Q3 2022 |
| Net interest income | $141.8 million | Down 1% from Q2; down from $146.4 million in Q3 2022 |
| Net interest margin, tax-equivalent | 3.93% | 4.00% in Q2; 4.07% for the first nine months of 2023 versus 3.49% in 2022 |
| Net income / diluted EPS | $45.9 million / $1.33 | Q2: $39.6 million / $1.15; Q3 2022: $49.1 million / $1.43 |
| Nine-month net income / diluted EPS | $141.0 million / $4.09 | Nearly unchanged from the first nine months of 2022 |
| Net interest income after credit-loss provision | $139.7 million | $135.8 million in Q2 and $140.4 million in Q3 2022 |
| Non-interest expense / efficiency ratio | $95.9 million / 62.10% | Q2: $95.4 million / 63.21%; adjusted efficiency ratio was 59.00% versus 58.58% in Q2 |
| Loans / allowance for loan credit losses | $10.61 billion / $147.0 million; allowance was 1.38% of loans | Loans up 4.6% from year-end 2022; allowance was $141.5 million at year-end |
| Deposits | $13.17 billion | Down 3.3% from year-end 2022; core deposits were $11.72 billion, 89% of total deposits |
| Cash and cash equivalents | $251.7 million | $243.1 million at year-end 2022 |
| Total assets / shareholders’ equity | $15.51 billion / $1.52 billion | Assets down from $15.83 billion; equity up from $1.46 billion at year-end 2022 |
| Capital | Tangible common equity to tangible assets: 7.54%; common equity per share: $44.27; tangible common equity per share: $33.22 | Tangible common equity ratio was 6.95% at year-end 2022; non-GAAP measures |
Cash flow, nine months: Operating activities provided $189.6 million and investing activities provided $272.7 million; financing activities used $453.6 million. Cash and cash equivalents increased $8.6 million to $251.7 million. Deposit outflows and loan growth were key funding uses; investment securities sales, maturities and repayments exceeded purchases.
Debt and liquidity: At September 30, Banner reported $140.0 million of FHLB advances, $188.4 million of other borrowings, $92.7 million of subordinated notes and $66.3 million of junior subordinated debentures. Available borrowing capacity was $4.62 billion, and on-balance-sheet liquidity was $2.86 billion. The loan-to-deposit ratio was 81%. Estimated uninsured deposits were 31% of total deposits, or 28% excluding collateralized public deposits and cash held at the holding company.
Material changes and drivers
- Quarterly net income increased from Q2, primarily due to a lower credit-loss provision and higher non-interest income, partly offset by lower net interest income. Compared with Q3 2022, net income and diluted EPS declined.
- Funding costs pressured the quarter: deposit interest expense rose to $31.0 million from $20.5 million in Q2. The average cost of interest-bearing deposits increased to 1.57% from 1.10%; the tax-equivalent net interest margin declined seven basis points.
- For the first nine months, net interest income increased 11% year over year, as higher asset yields more than offset higher funding costs. Non-interest income fell 51%, partly reflecting a $14.4 million net securities-sale loss in 2023 and a $7.8 million branch-sale gain recorded in 2022. Nine-month net income remained approximately flat.
- Deposits declined $445.5 million from year-end: core deposits fell $1.18 billion while certificates of deposit rose $734.8 million. Non-interest-bearing deposits fell 15.9%; certificates more than doubled, and included $162.9 million of brokered deposits.
- Loans grew $464.7 million from year-end, with notable increases in one- to four-family residential, multifamily real estate and multifamily construction loans. Multifamily construction loans rose 39%; one- to four-family construction loans declined 17%.
- Total securities declined $539.9 million from year-end. Available-for-sale securities had $486.4 million of gross unrealized losses at September 30; accumulated other comprehensive loss was $392.9 million, versus $362.8 million at year-end. Management attributed the broad securities fair-value decline primarily to interest rates and market spreads.
Outlook, risks and unusual items
- The filing gives no numerical earnings, revenue or margin guidance. Management said it expects to continue its quarterly dividend practice, subject to board discretion; the current rate was $0.48 per share.
- Management cited continued deposit competition, migration of rate-sensitive balances into higher-yielding accounts or investments, rising funding costs, interest-rate exposure and economic uncertainty. It said liquidity resources were adequate for foreseeable needs and reported that capital ratios exceeded “well-capitalized” regulatory thresholds.
- Credit quality indicators were mixed. Non-performing assets were $26.8 million, or 0.17% of assets, down from $28.7 million at Q2-end but up from $23.4 million at year-end 2022. Non-performing loans were $26.3 million; the allowance covered 560% of those loans. The nine-month credit-loss provision was $8.3 million versus $3.7 million in 2022, reflecting loan growth, forecast deterioration and rating downgrades on bank subordinated debt investments.
- Interest-rate sensitivity modeling estimated that a sustained +300-basis-point shock would reduce next-12-month net interest income by 3.5% and economic value of equity by 13.7%; a -100-basis-point shock was estimated to reduce next-12-month net interest income by 3.8%. These are model estimates dependent on assumptions.
- Banner recorded $14.8 million for outstanding legal proceedings. In the Bolding wage-and-hour class action, the court granted preliminary approval of a settlement; a fairness hearing was scheduled for February 22, 2024. The final outcome remained pending.
- Q3 included a $2.7 million net loss on securities sales, described as strategic sales to reduce the impact of rising rates; $996,000 of Banner Forward expenses; and a $456,000 downward valuation adjustment on multifamily loans held for sale. The bank discontinued originating multifamily loans for sale into the secondary market in 2023.
Important facts for investors to verify
- Whether deposit pricing, core-deposit retention and certificate maturities—including $1.37 billion of certificates scheduled to mature within one year—affect funding costs and margins.
- How securities portfolio unrealized losses, duration (6.8 years) and any further sales or market-rate changes affect capital and earnings.
- Whether non-performing loans, criticized loan grades, charge-offs and the allowance remain consistent with the bank’s credit-risk outlook, particularly across real estate and construction lending.
- Whether reported borrowing capacity remains available under collateral and eligibility requirements, and how uninsured deposit levels evolve.
- The final terms and approval of the Bolding settlement, and whether legal contingencies or Banner Forward costs change.
- The filing’s adjusted earnings and efficiency measures are non-GAAP; compare them with GAAP results and review the company’s reconciliations.