Banner Corporation (BANR) — Q1 2024 Form 10-Q
Business context and reporting period
Banner Corporation is the bank holding company for Banner Bank, a regional commercial bank operating in Washington, Oregon, California, Idaho and Utah. This unaudited filing covers the three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023 unless noted.
Financial performance and condition
- Revenue and earnings: GAAP total revenue was $144.6 million, down from $152.5 million in the prior quarter and $162.6 million in Q1 2023. Net income was $37.6 million, or $1.09 diluted EPS, versus $42.6 million/$1.24 in Q4 2023 and $55.6 million/$1.61 in Q1 2023. Adjusted revenue, a non-GAAP measure, was $150.4 million; adjusted diluted EPS was $1.22.
- Net interest and margins: Net interest income was $133.0 million, down 4% sequentially and 13% year over year. Tax-equivalent net interest margin was 3.74%, compared with 3.83% in Q4 2023 and 4.30% in Q1 2023. Management attributed margin pressure chiefly to higher deposit and other funding costs, partly offset by higher loan yields.
- Expenses and returns: Non-interest expense was $97.6 million, up 3.2% year over year. The GAAP efficiency ratio was 67.55% (58.20% in Q1 2023); adjusted efficiency ratio was 63.70% (54.23%). Return on average assets was 0.97%, versus 1.44% a year earlier.
- Cash flow: Net cash from operating activities was $51.5 million, compared with $74.7 million in Q1 2023. Investing activities provided $62.2 million, versus $308.8 million, including substantial securities and repurchase-agreement cash flows in the prior-year period. Financing activities used $158.9 million, versus $383.6 million; deposits increased $129.3 million and net FHLB advances were repaid by $271.0 million. Cash and equivalents ended the quarter at $209.3 million.
- Balance sheet and lending: Total assets were $15.52 billion, down $152.1 million during the quarter. Gross loans were $10.87 billion, up $58.6 million; net loans were $10.72 billion. Deposits totaled $13.16 billion, up $129.3 million. The loan-to-deposit ratio was 83%.
- Credit quality: Nonperforming assets were $29.9 million, or 0.19% of assets, broadly stable from year-end. The allowance for loan losses was $151.1 million, or 1.39% of loans, versus $149.6 million/1.38%. The quarter included $1.4 million of provision for loan losses and $0.9 million recapture on unfunded commitments. Net recoveries on loans were $73,000.
- Liquidity and funding: Management reported on-balance-sheet liquidity of $2.77 billion and available borrowing capacity of $5.05 billion. Estimated uninsured deposits were 31% of deposits, or 28% excluding collateralized public deposits and cash held at the holding company. Core deposits were 89% of deposits. Certificates of deposit totaled $1.49 billion, with $1.39 billion due within one year.
- Debt and capital: FHLB advances fell to $52.0 million from $323.0 million. Other borrowings were $183.3 million; subordinated notes, net, were $89.5 million; junior subordinated debentures were $66.6 million. Shareholders’ equity was $1.66 billion. Tangible common equity to tangible assets, a non-GAAP measure, was 8.50%. Banner and the Bank exceeded applicable well-capitalized regulatory thresholds; the Bank’s CET1 ratio was 12.57%.
- Dividends: The quarterly dividend was $0.48 per share. Management said it currently expects to continue quarterly dividends at that rate, subject to board discretion.
Material changes and unusual items
- Net interest income fell year over year as funding costs rose sharply; interest expense was $51.7 million versus $13.6 million in Q1 2023. The average cost of interest-bearing deposits increased to 2.15% from 0.51%.
- The Company recorded a $4.9 million net loss on securities sales, compared with a $7.3 million loss in Q1 2023. Management said the sales were strategic and intended to reduce the impact of rising rates on the securities portfolio. Available-for-sale securities had $374.1 million of gross unrealized losses at quarter-end; management attributed these primarily to interest rates and market spreads, not credit losses. The quarter’s securities-related fair-value decline contributed to a $10.3 million other comprehensive loss.
- Mortgage banking revenue decreased sequentially to $2.3 million from $5.4 million. The prior quarter included a $3.5 million fair-value gain associated with multifamily loans; there was no similar transaction in Q1.
- Loan growth was concentrated in one-to-four-family residential and multifamily construction lending. Multifamily construction loans rose 13.7% during the quarter to $573.0 million; commercial real estate loans declined 0.7% to $3.61 billion.
- A court-approved settlement in the Bolding wage-and-hour class action provides for a settlement fund of up to $15.0 million. Banner had accrued $14.8 million for legal proceedings and stated that no additional accruals for this settlement were anticipated; the ultimate payment may be below the fund limit.
Outlook, commentary and risks
The filing provides no specific earnings or revenue guidance. Management described its strategy as emphasizing high-quality asset origination and client acquisition while maintaining a moderate risk profile, and said it believes available resources are sufficient for foreseeable liquidity needs. It identifies interest rates, deposit competition and funding costs, economic conditions, credit quality, real-estate values, liquidity access, and operational, regulatory and legal matters as risks. Interest-rate simulations show sensitivity to rate changes: a +300-basis-point shock was estimated to reduce next-12-month net interest income by 2.0% and economic value of equity by 12.2%; a -300-basis-point shock was estimated to reduce next-12-month net interest income by 10.3%. These are model estimates dependent on assumptions.
Important facts for investors to verify
- Whether deposit pricing and mix continue to pressure net interest margin and earnings.
- Trends in uninsured deposits, near-term certificate maturities, and actual availability of borrowing capacity.
- Credit performance in commercial real estate, construction and residential lending, including delinquencies, nonaccrual loans and allowance adequacy.
- How securities losses, future securities sales and interest-rate changes affect capital and reported results.
- The final amount paid under the Bolding settlement and whether legal accruals change.
- Non-GAAP adjusted measures are supplemental; compare them with GAAP results and the Company’s stated reconciliations.