Banner Corporation (NASDAQ: BANR) — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results. Banner Corporation is a bank holding company operating Banner Bank, a regional commercial bank with branches and lending offices in the western United States.
Financial performance
| Metric | Q2 2022 | Comparison |
|---|---|---|
| Net interest income | $129.0 million | Up 9% from Q1 2022; $127.6 million in Q2 2021 |
| Net interest margin, tax-equivalent | 3.44% | 3.18% in Q1; 3.31% for H1 2022 versus 3.48% in H1 2021 |
| Total revenue | $156.2 million | Up 13% from Q1, including a $7.8 million branch-sale gain |
| Net income / diluted EPS | $48.0 million / $1.39 | $44.0 million / $1.27 in Q1; $54.4 million / $1.56 in Q2 2021 |
| Adjusted net income / diluted EPS (non-GAAP) | $43.2 million / $1.25 | $46.1 million / $1.33 in Q1 |
| Non-interest expense | $92.1 million | Up 0.9% from Q1; down from $92.6 million in Q2 2021 |
| Efficiency ratio / adjusted ratio (non-GAAP) | 58.94% / 59.46% | 66.04% / 62.09% in Q1 |
For the first six months, net income was $91.9 million and diluted EPS was $2.66, versus $101.2 million and $2.88 in H1 2021. H1 revenue was $294.3 million, nearly unchanged year over year; mortgage banking income fell 55% to $8.4 million. H1 adjusted earnings were $89.2 million, or $2.58 per diluted share, versus $103.6 million, or $2.95, in the prior-year period.
Financial position, cash flow and capital
- At June 30, 2022, assets were $16.39 billion, loans $9.46 billion, deposits $14.21 billion, and shareholders’ equity $1.49 billion. Loans rose $372 million from year-end; deposits declined $114 million, primarily reflecting the transfer of $178 million of deposits in the sale of four branches.
- Cash and cash equivalents were $1.17 billion, down from $2.13 billion at year-end. H1 operating cash flow was $115 million; investing cash outflow was $969 million and financing cash outflow was $110 million. Net cash declined $963 million.
- There were no FHLB advances outstanding. Other borrowings were $235 million. Junior subordinated debentures fell to $72 million after $50.5 million was redeemed; subordinated notes were $99 million.
- Core deposits were 95% of total deposits; Banner reported no brokered deposits. Management reported $2.41 billion of FHLB capacity and approximately $877 million of Federal Reserve borrowing capacity available against pledged collateral, with no balances drawn.
- Regulatory capital ratios exceeded “well-capitalized” thresholds. Banner Corporation’s total risk-based capital ratio was 13.80%; Banner Bank’s was 13.27%. Tangible common equity to tangible assets (non-GAAP) was 6.88%, down from 7.93% at year-end; tangible book value per share was $32.20, versus $38.02.
- H1 cash dividends were $0.88 per share. The current quarterly dividend was $0.44 per share, subject to board discretion; the company repurchased 200,000 shares for $11.0 million during Q2.
Material changes and asset quality
- Q2 results benefited from higher asset yields and the $7.8 million gain on the sale of four branches, but were partly offset by lower mortgage banking income and a $4.5 million provision for credit losses. Adjusted earnings declined from Q1 despite higher GAAP earnings.
- Rising rates drove substantial securities valuation losses: available-for-sale securities had $298.7 million of gross unrealized losses at quarter-end, compared with $51.1 million at December 31, 2021. H1 after-tax other comprehensive loss was $256.1 million, largely reducing accumulated other comprehensive income and equity. Banner transferred approximately $458.6 million of securities from available-for-sale to held-to-maturity in Q1.
- Non-performing assets were $19.1 million, or 0.12% of assets, down from $23.7 million at year-end and $31.5 million a year earlier. Non-performing loans were $18.7 million. The loan allowance was $128.7 million, 1.36% of loans and 688% of non-performing loans. The allowance for unfunded commitments was $14.2 million.
- Management recorded a Q2 provision principally for loan growth and, to a lesser extent, weaker forecast economic conditions. It reported $134.5 million in other classified loans not on nonaccrual status, which could become non-performing.
Outlook, risks and contingencies
- No specific quantified earnings or full-year financial guidance is provided. Management said the balance sheet is positioned to benefit in the near term if rates continue to rise, citing variable-rate asset repricing; its sensitivity model estimates a 10.0% increase in next-12-month net interest income under an instantaneous +400-basis-point rate shock. These are model estimates, not forecasts.
- Management expected the loan-to-deposit ratio to remain below its historical 90%–95% range for the foreseeable future. Banner Forward, aimed at commercial growth, deeper retail relationships, technology and process efficiencies, was expected to be fully implemented by the end of 2023; Q2 costs were $1.6 million.
- Key exposures include interest-rate and securities valuation risk, credit losses and economic deterioration, inflation or recession, funding competition, mortgage-market slowdown, operational and technology risks, and regulatory or legal matters. Management identifies allowance and fair-value estimates as judgment-sensitive.
- Legal proceedings included an employment class action. The company had accrued $11.8 million for legal proceedings; it said the ultimate outcome may be higher or lower than the accrual and the class-action outcome remained uncertain. Management stated it knew of no other pending proceeding expected to have a material adverse effect.
Most important facts for investors to verify
- Whether higher rates translate into sustained net interest margin and earnings improvement as deposit costs reprice and loan demand changes.
- Credit trends, especially the $134.5 million of classified loans, commercial real estate exposures, and allowance adequacy under changing economic forecasts.
- The effect of unrealized securities losses and the AOCI reduction on reported equity, capital flexibility and future securities decisions.
- Deposit retention and liquidity following branch divestitures, including maturities of $611 million of certificates of deposit within one year and available borrowing capacity.
- Actual costs, timing and realized savings or revenue gains from Banner Forward, and the outcome and potential exposure of the employment class action.