Banner Corporation (NASDAQ: BANR) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Banner Corporation is a bank holding company whose wholly owned subsidiary, Banner Bank, operates in Washington, Oregon, California, Idaho and Utah. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial results and key metrics
| Metric | Q2 2023 | Comparison |
|---|---|---|
| GAAP revenue | $150.9 million | Down 7% from Q1 2023 ($162.6 million); $156.2 million in Q2 2022 |
| Net interest income | $142.5 million | Down 7% sequentially from $153.3 million; up from $129.0 million in Q2 2022 |
| Tax-equivalent net interest margin | 4.00% | Down 30 basis points sequentially; 3.31% for H1 2023 versus 3.31% for H1 2022 |
| Net income / diluted EPS | $39.6 million / $1.15 | $55.6 million / $1.61 in Q1 2023; $48.0 million / $1.39 in Q2 2022 |
| Credit-loss provision | $6.8 million | Q1 included a $0.5 million recapture; H1 provision was $6.2 million versus a $2.4 million recapture in H1 2022 |
| Non-interest income / expense | $8.4 million / $95.4 million | Non-interest income was affected by securities-sale losses and fair-value changes; expenses rose 0.8% sequentially |
For the six months ended June 30, net income was $95.1 million, or $2.76 diluted EPS, versus $91.9 million, or $2.66, in H1 2022. GAAP results included $11.8 million of net securities-sale losses and $3.7 million of losses from fair-value changes in financial instruments during H1 2023. Q2 adjusted diluted EPS, a non-GAAP measure, was $1.32; the company’s reconciliation excludes specified securities, fair-value and other items.
Balance sheet, cash flow, liquidity and capital
- At June 30, total assets were $15.58 billion, gross loans $10.47 billion, deposits $13.10 billion and shareholders’ equity $1.54 billion. Net loans increased 3% from the prior quarter; the loan-to-deposit ratio was 80%.
- H1 operating cash flow was $118.0 million, investing cash flow was positive $298.3 million and financing cash flow was negative $378.0 million. Cash and cash equivalents ended the period at $281.3 million.
- Deposits fell $521.0 million from year-end 2022. Core deposits were $11.74 billion (90% of deposits); certificates of deposit rose to $1.36 billion, including $203.6 million of brokered CDs. About $1.26 billion of CDs mature within one year. Uninsured deposits were 31% of deposits; management reported 28% excluding collateralized public deposits and holding-company cash.
- FHLB advances were $270.0 million, compared with $50.0 million at year-end; other borrowings were $193.0 million, subordinated notes $92.6 million and junior subordinated debentures $67.2 million.
- Management reported $3.07 billion of on-balance-sheet liquidity and $4.02 billion of available borrowing capacity. Capacity included FHLB and Federal Reserve facilities subject to collateral and other requirements; no Federal Reserve borrowings were outstanding at quarter-end.
- Regulatory capital ratios exceeded well-capitalized thresholds: Banner Bank’s total capital ratio was 13.39%, Tier 1 leverage ratio 10.20% and common equity Tier 1 ratio 12.23%. Tangible common equity to tangible assets, a non-GAAP measure, was 7.64%.
- The quarterly dividend was $0.48 per share. Management said it currently expects to continue quarterly dividends at that rate, subject to board discretion and regulatory constraints.
Material changes versus comparable periods
- Sequential earnings and margin weakened: Q2 net income declined to $39.6 million from $55.6 million in Q1, as deposit and other funding costs rose faster than asset yields. Funding-liability costs increased 46 basis points sequentially, while interest-earning-asset yields rose 12 basis points.
- Year over year, H1 net interest income rose 19% to $295.8 million and tax-equivalent NIM rose to 4.15%, but non-interest income fell to $17.7 million from $46.6 million. Comparisons reflect the prior-year $7.8 million branch-sale gain and current-period securities-sale and fair-value losses.
- Loan balances grew $325.7 million from year-end 2022. Notable movements included growth in one- to four-family residential, multifamily real estate and multifamily construction loans; one- to four-family construction loans declined.
- Total securities declined $345.1 million from year-end, partly due to sales and ordinary cash flows. A $300 million reverse repurchase agreement matured. Available-for-sale securities had $411.8 million of gross unrealized losses at quarter-end, largely attributed by management to interest rates and market spreads; the portfolio also included a $2.0 million credit-loss allowance on one security.
- Shareholders’ equity rose $86.1 million from year-end, including a $23.3 million improvement in accumulated other comprehensive loss. No common shares were repurchased during H1 2023.
Credit quality, outlook and risks
- Non-performing assets were $28.7 million, or 0.18% of assets, versus $23.4 million, or 0.15%, at year-end 2022. Nonaccrual loans were $28.1 million; loans 30–89 days past due and accruing totaled $6.3 million.
- The loan allowance was $144.7 million, or 1.38% of loans, and equaled 513% of non-performing loans. Management cited loan growth, a deterioration in forecasted economic conditions and downgrades on bank subordinated-debt investments as drivers of the Q2 credit provision. Substandard loans increased, primarily reflecting commercial real estate downgrades.
- Management provided no quantified full-year earnings or margin guidance. It described its strategy as focusing on high-quality asset origination, client acquisition and a moderate risk profile, and stated it believes available resources can meet foreseeable liquidity needs.
- Interest-rate and funding risks are significant: deposit outflows and migration to higher-cost CDs continued, while the filing notes heightened industry sensitivity to rapid deposit movements following 2023 bank failures. In management’s model, an instantaneous, sustained 300-basis-point rate increase reduced estimated next-12-month net interest income by 3.5%; a 100-basis-point decline reduced it by 3.6%. Results depend on modeling assumptions.
- Other disclosed risks include regional economic weakness, inflation and recession, credit deterioration, competition for deposits, securities valuation and interest-rate exposure, regulatory actions, cyber and third-party disruptions, and litigation. The company had accrued $14.8 million for legal proceedings. In the Bolding wage-and-hour class action, the parties had reached agreement in principle on fundamental settlement terms, subject to a written agreement and court approval.
Most important facts for investors to verify
- Whether deposit outflows stabilize and whether CD repricing, brokered deposits and near-term maturities raise funding costs or pressure margins.
- How the securities portfolio’s unrealized losses, duration and potential sale needs affect liquidity, capital and earnings under changing rates.
- Whether CRE, construction and other criticized loans produce further downgrades, delinquencies, charge-offs or allowance increases.
- Whether management’s reported borrowing capacity remains available under actual collateral and facility conditions, and how uninsured-deposit levels evolve.
- The final terms and court approval of the Bolding settlement, and whether legal exposure differs materially from the $14.8 million accrued.