Banner Corporation (NASDAQ: BANR) — Q1 2022 Form 10-Q
Business context and period: Regional bank holding company operating Banner Bank, with 141 full-service branches and 18 loan production offices across Washington, Oregon, California, Idaho and Utah. This unaudited report covers the three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021 unless noted.
Financial performance and position
- Earnings and revenue: Net income was $44.0 million, or $1.27 per diluted share, versus $46.9 million and $1.33 a year earlier. Total revenue (net interest income plus non-interest income) was $138.1 million, down 3% year over year. Adjusted earnings, a non-GAAP measure, were $46.1 million, or $1.33 per diluted share.
- Interest income and margins: Net interest income was $118.7 million, up 1% year over year. Tax-equivalent net interest margin was 3.18%, versus 3.44%; reported net interest margin was 3.12%. Lower funding costs supported results, while PPP fee recognition and lower asset yields weighed on income.
- Fees and expenses: Non-interest income was $19.4 million, down 20% year over year, largely reflecting mortgage banking revenue of $4.4 million, down 61%. Deposit fees rose 25% to $11.2 million. Non-interest expense declined 2.5% to $91.2 million. The GAAP efficiency ratio was 66.04%; adjusted efficiency ratio was 62.09%.
- Credit costs and asset quality: The company recorded a $7.0 million recapture of credit-loss provision, compared with a $9.3 million provision in Q1 2021. The loan allowance was $125.5 million, or 1.37% of loans, versus $156.1 million, or 1.57%, a year earlier. Non-performing assets fell to $19.1 million (0.11% of assets) from $37.0 million a year earlier. Management attributed the recapture chiefly to improved economic forecasts and fewer adversely classified loans.
- Loans, deposits and liquidity: Total assets were $16.78 billion; loans were $9.15 billion, up 0.7% from year-end but down 8.1% year over year, largely reflecting PPP forgiveness. Deposits were $14.52 billion, up 1.4% from year-end and 7.2% year over year; core deposits were 94% of deposits. The loan-to-deposit ratio was 63%. Cash and cash equivalents totaled $1.99 billion. Banner reported $2.37 billion of available FHLB capacity and approximately $969.7 million of Federal Reserve BIC credit capacity, with no borrowings from either at quarter-end.
- Debt and capital: Banner repaid $50.5 million of junior subordinated debentures, leaving $70.5 million outstanding; it had no FHLB advances at quarter-end. Shareholders’ equity declined to $1.56 billion, mainly because of accumulated other comprehensive losses. Tangible common equity to tangible assets was 7.18%, down from 7.93% at year-end. Banner Corporation and Banner Bank remained above regulatory well-capitalized thresholds; their total capital ratios were 14.04% and 13.46%, respectively.
- Cash flow: Operating cash flow was $50.7 million, compared with $322.5 million in Q1 2021; investing activities used $278.2 million and financing activities provided $81.7 million. Cash and cash equivalents decreased $145.9 million during the quarter.
Material changes and unusual items
- Available-for-sale securities recorded $153.1 million of unrealized losses before tax in Q1, largely attributed to rising interest rates. Total accumulated other comprehensive loss moved to $154.1 million from $0.2 million of accumulated other comprehensive income at year-end; this was a major contributor to lower equity.
- Banner transferred $458.6 million of securities from available-for-sale to held-to-maturity, stating the purpose was to limit the effect of potential future rate changes on AOCI. The securities portfolio’s average effective duration was approximately 6.2 years.
- Mortgage banking revenue declined as mortgage rates rose, refinance activity and one- to four-family loan-sale volumes fell, and multifamily loans held for sale incurred a $603,000 valuation adjustment.
- Q1 included a $793,000 loss on extinguishment of debt associated with the debenture redemption and $2.5 million of Banner Forward initiative expenses. No COVID-19 or acquisition-related expenses were reported for the quarter.
Outlook, risks and contingencies
- Outlook: No quantitative earnings or revenue guidance was provided. Management expected Banner Forward efficiency initiatives to be implemented over the next two quarters, revenue initiatives to ramp up in the second half of 2022, and full implementation by 2023. The stated goal was sequential operating improvement over the following five quarters.
- Management said the March 2022 Federal Reserve rate increase had limited effect on Q1 margin because it occurred near quarter-end; further increases were expected by the FOMC. Banner’s modeled sensitivity estimated a 7.1% increase in next-12-month net interest income under an immediate, sustained +100 basis-point rate shock, and a 2.1% decline under a -25 basis-point shock. These are model estimates dependent on assumptions, not forecasts.
- Key stated risks include interest-rate and funding changes, inflation and regional economic conditions, credit deterioration and real estate values, competition, technology and cybersecurity events, regulatory matters, and uncertainty in fair-value and credit-loss estimates. Management noted that a protracted-slump forecast would increase the loan allowance by approximately 6%.
- Outstanding commitments to extend credit were $3.82 billion; standby letters of credit and financial guarantees were $25.9 million. Management said commitments are part of normal operations and many may not be drawn. It reported $12.9 million of allowance for unfunded commitments.
- Banner had accrued $11.4 million for legal proceedings. A wage-and-hour class and collective action against Banner Bank was scheduled for a liability-phase trial beginning in September 2022; the company said the outcome was unknown and damages could exceed the case reserve if it lost.
Important facts for investors to verify
- Whether net interest margin and funding costs respond as expected to further rate increases, given modeled sensitivity assumptions and the securities portfolio’s duration.
- Whether credit quality and the loan-loss allowance remain adequate as forecasts, classified loans, and regional economic conditions change.
- Whether mortgage banking weakness and reduced PPP fee income are offset by core loan growth, deposit fees, and Banner Forward execution.
- The ongoing effect of securities unrealized losses and the AFS-to-HTM transfer on reported equity, liquidity, and financial flexibility.
- The outcome and potential exposure of the wage-and-hour litigation, and whether the $11.4 million accrued legal reserve proves sufficient.