Banner Corporation (BANR) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Banner is a regional bank holding company operating through Banner Bank across Washington, Oregon, California, Idaho and Utah. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and condition
- Q2 earnings: Net income was $54.4 million, or $1.56 per diluted share, versus $23.5 million, or $0.67, in Q2 2020. Six-month net income was $101.2 million, or $2.88 per diluted share, versus $40.4 million, or $1.14.
- Revenue and net interest: Q2 total revenue was $149.9 million, up 2% year over year; net interest income rose 7% to $127.6 million. For the first half, total revenue was $291.8 million and net interest income was $245.2 million, up from $285.7 million and $238.8 million, respectively.
- Margins and returns: Tax-equivalent net interest margin was 3.52% in Q2, down from 3.87% a year earlier; first-half margin was 3.48%, versus 4.05%. Q2 return on average assets was 1.36% and return on average equity 13.32%; first-half figures were 1.30% and 12.43%.
- Credit costs: The income statement recorded a $10.3 million net recapture of credit-loss provisions in Q2, compared with a $28.6 million provision in Q2 2020. The loan allowance was $148.0 million, or 1.53% of loans, at June 30, versus $167.3 million, or 1.69%, at year-end. Management attributed the recapture primarily to improved economic forecasts and fewer adversely classified loans.
- Non-interest income and expenses: Q2 non-interest income fell 19% to $22.3 million, mainly because mortgage banking income declined 47% to $7.5 million. Non-interest expense rose 2% to $92.6 million, including higher professional and legal costs and lower capitalized loan-origination costs. The GAAP efficiency ratio was 61.79%, compared with 61.47% a year earlier; the company-reported non-GAAP adjusted ratio was 59.77%, versus 58.58%.
- Assets and lending: Total assets increased to $16.18 billion from $15.03 billion at December 31, 2020, largely as deposit growth funded securities purchases. Loans were $9.65 billion, down 2.2% since year-end; excluding PPP loans, loans increased $2.5 million. The loan-to-deposit ratio was 71%. Securities totaled $3.76 billion, up $987 million since year-end; portfolio effective duration was approximately 4.6 years.
- Deposits and liquidity: Deposits increased 8.5% to $13.64 billion since year-end, with core deposits at 94% of total and no brokered deposits. Cash and cash equivalents were $1.47 billion. Banner reported $2.35 billion of available FHLB credit capacity and approximately $742.8 million of Federal Reserve BIC capacity; neither facility had Federal Reserve borrowings outstanding at period-end.
- Debt and capital: Period-end balances included $100.0 million of FHLB advances, $237.7 million of other borrowings, $98.4 million of subordinated notes and $117.5 million of junior subordinated debentures. Shareholders’ equity was $1.67 billion. Tangible common equity to tangible assets, a non-GAAP measure, was 8.09%, down from 8.69% at year-end. Banner Corporation’s total risk-based capital ratio was 14.62%; Banner Bank’s was 13.60%. Both exceeded well-capitalized thresholds.
- Cash flow: For the first half, operating activities provided $319.7 million, investing activities used $1.09 billion and financing activities provided $999.9 million. Cash and cash equivalents increased $233.7 million to $1.47 billion. These cash flows reflect substantial securities purchases and deposit inflows.
- Asset quality: Non-performing assets were $31.5 million, or 0.19% of assets, down from $36.5 million, or 0.24%, at year-end. Non-performing loans were $30.8 million; loans 30–89 days past due and accruing were $5.7 million. Separately, $242.2 million of classified loans were not on nonaccrual status.
Changes versus comparable periods
- Profit increased substantially year over year, aided by lower funding costs and credit-loss provision recaptures. Q2 net interest income grew despite a lower net interest margin.
- Mortgage banking revenue weakened as one- to four-family loan-sale margins and refinance activity declined; multifamily loan-sale gains partly offset the reduction.
- Deposits and short-term liquidity expanded, while loans declined modestly overall, largely because of PPP forgiveness and repayments. PPP loans outstanding were approximately $825.1 million at June 30; Banner reported SBA forgiveness on 6,707 loans totaling $822.3 million.
- Available-for-sale securities generated a $39.5 million unrealized loss in first-half other comprehensive income, net of tax effects noted by management; accumulated other comprehensive income fell to $38.3 million from $69.1 million at year-end. The company attributed the securities valuation decline primarily to changes in market yields and spreads.
- Banner repurchased 750,000 shares for $39.9 million in the first half and accrued $29.0 million of common dividends. It declared dividends of $0.41 per share in Q2.
Outlook, risks and unusual items
- The filing provides no specific earnings, revenue or margin guidance. Management described its strategy as emphasizing high-quality asset origination, client acquisition and a moderate risk profile.
- Management cited the continuing effects of COVID-19, low interest rates, unusually high market liquidity and reduced business activity in some markets. At June 30, 71 loans totaling $28.5 million remained on payment deferral, including 62 mortgage loans totaling $20.2 million under forbearance arrangements. Management said these were current before the pandemic and were not treated as troubled debt restructurings.
- Management’s interest-rate simulation estimated that an instantaneous +100 basis-point rate change would increase net interest income by 4.8% over 12 months and 6.1% over 24 months; a 25-basis-point decline would reduce those measures by 0.9% and 1.3%, respectively. These are model estimates dependent on assumptions. The filing also cautions that interest-rate changes can affect securities values and economic value of equity.
- Outstanding commitments included $3.34 billion to extend credit, $147.1 million to originate loans and $20.5 million in standby letters of credit and financial guarantees. Commitments are not necessarily expected to be fully drawn. The company also had $26.3 million of unfunded tax-credit investment commitments.
- Banner disclosed ordinary-course legal proceedings but said management did not believe any pending matter would have a material adverse effect. Professional and legal expense included costs associated with settlement of a litigation matter in Q2; the filing does not provide a clear settlement amount.
- Management reported no material change to previously disclosed risk factors and concluded disclosure controls were effective. It noted that actual results may differ from forward-looking statements, particularly due to credit conditions, interest rates, economic conditions, funding access, regulation, litigation, technology and COVID-19-related impacts.
Important facts for investors to verify
- Whether earnings growth and credit-cost recaptures are sustainable, given that improved forecasts and PPP fee acceleration materially influenced results.
- Loan-credit trends, including the $242.2 million of classified loans outside nonaccrual status, remaining pandemic deferrals and management’s allowance assumptions.
- How deposit growth and excess liquidity evolve as PPP balances and stimulus-related deposits run off, and whether the low 71% loan-to-deposit ratio changes.
- Exposure to interest-rate movements, including the securities portfolio’s duration, unrealized losses and potential effects on net interest income, capital and tangible equity.
- Mortgage banking trends, operating expenses and the nature and future impact of the Q2 litigation settlement and higher professional and legal costs.