Banner Corporation (BANR) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Banner Corporation is a regional bank holding company operating Banner Bank, with 150 branches and 18 loan production offices in Washington, Oregon, California and Idaho, and lending activity also in Utah.
Financial performance and position
Unless otherwise stated, amounts are in millions of dollars. Income-statement comparisons are year over year; balance-sheet comparisons are versus December 31, 2020.
| Metric | Q3 2021 | Nine months 2021 |
|---|---|---|
| Net interest income | $130.1; +8% | $375.4; +4% |
| Total revenue | $155.5; +4% | $447.3; +3% |
| Net income | $49.9 vs. $36.5 | $151.1 vs. $77.0 |
| Diluted earnings per share | $1.44 vs. $1.03 | $4.32 vs. $2.17 |
| Net interest margin, tax-equivalent | 3.47% vs. 3.72% | 3.48% vs. 3.93% |
| GAAP efficiency ratio | 65.70% vs. 60.32% | 64.45% vs. 63.00% |
| Adjusted efficiency ratio, non-GAAP | 59.65% vs. 58.02% | 60.39% vs. 59.59% |
- Revenue and earnings drivers: Lower funding costs, higher average interest-earning assets and accelerated recognition of deferred fees on forgiven SBA Paycheck Protection Program (PPP) loans supported net interest income. Mortgage banking income declined, while deposit fees rose. The Q3 credit-loss provision was an $8.6 million recapture, versus a $15.2 million provision in Q3 2020.
- Expenses and margins: Q3 non-interest expense increased 13.5% to $102.1 million; nine-month expense increased 5.2% to $288.3 million. The margin decline reflected lower yields and more funds invested in low-yield short-term assets, partly offset by lower deposit costs.
- Balance sheet: Total assets were $16.64 billion; loans $9.22 billion, down 6.6%; deposits $14.16 billion, up 12.7%; shareholders’ equity $1.67 billion. Core deposits were 94% of deposits. Cash and cash equivalents were $2.20 billion, up from $1.23 billion at year-end.
- Credit quality: Non-performing assets were $29.7 million, or 0.18% of assets, down from $36.5 million and 0.24% at year-end. The loan-loss allowance was $139.9 million, 1.52% of loans, and 485% of non-performing loans. Classified loans totaled $261.8 million, including $225.8 million substandard.
- Capital and funding: Tangible common equity to tangible assets was 7.86%, versus 8.69% at year-end. The company and bank exceeded regulatory well-capitalized thresholds; the bank’s total risk-based capital ratio was 13.72% and CET1 ratio 12.57%. FHLB advances were $50.0 million, down from $150.0 million; other borrowings were $247.4 million. Subordinated notes were $98.5 million and junior subordinated debentures $124.9 million.
- Cash flow and shareholder returns: Nine-month operating cash flow was $329.7 million; investing cash flow was negative $820.0 million; financing cash flow was positive $1.46 billion. Cash increased $966.4 million. Banner repurchased 1.05 million shares for $56.5 million and declared $1.23 per share in dividends through September.
Material changes and management commentary
- Loans decreased mainly as PPP loans were forgiven: PPP balances fell from about $1.04 billion at year-end to $310.2 million. Excluding PPP, loans increased $81.7 million. Deposits grew substantially amid PPP proceeds, fiscal stimulus and elevated client liquidity; Banner reported no brokered deposits.
- Mortgage banking income fell 41% in Q3 and 30% for the nine-month period, principally due to reduced one-to-four-family refinance volume and lower sale margins. Deposit fees and service charges increased 20% in Q3.
- Banner Forward began in Q3, targeting commercial growth, stronger retail relationships, digital-channel investment and streamlined processes, with full implementation expected by 2023. The company reported $7.6 million of Q3 and $10.4 million of nine-month related expenses; management also identified possible further branch rationalization. Adjusted earnings and adjusted ratios are non-GAAP measures.
- Liquidity was supported by $2.24 billion of available FHLB capacity and approximately $813 million of Federal Reserve borrowing capacity, based on pledged collateral. Management expects the loan-to-deposit ratio to remain below its historical 90%–95% range for the foreseeable future; it was 66% at quarter-end.
Outlook, risks, contingencies and unusual items
- No formal earnings or financial guidance was provided. Management cited the low-rate environment, elevated liquidity and lingering COVID-19 impacts. At quarter-end, 41 mortgage loans totaling $12.4 million were under COVID-related forbearance; these were not classified as troubled debt restructurings.
- Interest-rate risk is material. Modeling estimated that an instantaneous +100-basis-point rate move would increase next-12-month net interest income 6.6%, while estimated economic value of equity increased 0.2%; at +400 basis points, modeled NII rose 18.7% but economic value of equity fell 10.7%. Results depend on assumptions, including deposit behavior and repricing.
- Banner accrued $12.1 million for legal proceedings. A wage-and-hour class action, Bolding et al. v. Banner Bank, had a liability trial phase scheduled for September 2022; management said the outcome was unknown and damages could exceed the reserve if the defense were unsuccessful. Management stated it did not believe pending proceedings would otherwise materially adversely affect the company.
- Other risks include loan-credit deterioration, regional economic conditions, interest-rate and funding changes, securities valuations, competition, technology and cybersecurity, regulatory actions, LIBOR transition and COVID-19 effects. Available-for-sale securities had $42.3 million of gross unrealized losses at quarter-end, which management attributed generally to interest rates and market spreads rather than credit losses.
Important facts for investors to verify
- Whether the credit-loss recaptures and lower non-performing assets persist, and how economic forecasts affect future allowance levels.
- PPP forgiveness pace, underlying loan growth excluding PPP, deposit retention and the sustainability of unusually high liquidity.
- Whether Banner Forward achieves cost savings and growth targets by 2023, including the effect of its expenses and potential branch changes.
- Progress and potential exposure in the Bolding litigation, and whether the $12.1 million legal accrual proves adequate.
- Exposure to rising rates and securities valuation changes, including sensitivity to deposit repricing and assumptions used in interest-rate simulations.
- Capital trends, particularly the decline in tangible equity to tangible assets, and the effects of dividends and share repurchases.