Banner Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Banner Corporation is a Washington-based bank holding company whose subsidiary, Banner Bank, operates in Washington, Oregon, California and Idaho.
Financial performance and condition
| Metric | Q3 2022 / September 30, 2022 | Comparison |
|---|---|---|
| Net interest income | $146.4 million | Up 14% from Q2 2022; $394.1 million for nine months, up 5% year over year |
| Net interest margin, tax-equivalent | 3.85% | 3.44% in Q2; 3.49% for nine months versus 3.48% a year earlier |
| Total revenue | $162.0 million | Up 4% from Q2; nine-month revenue was $456.3 million versus $447.3 million |
| Net income / diluted EPS | $49.1 million / $1.43 | Q2: $48.0 million / $1.39. Nine-month net income was $141.0 million / $4.09 diluted EPS, versus $151.1 million / $4.32 |
| Non-interest income | $15.6 million | Down from $27.2 million in Q2, which included a $7.8 million branch-sale gain; mortgage banking income also fell |
| Non-interest expense | $95.0 million | Up 3% from Q2; nine-month expense of $278.3 million was down 3.5% year over year |
| Credit provision | $6.1 million in Q3 | $4.5 million in Q2; nine-month provision was $3.7 million versus a $28.1 million recapture in 2021 |
| Loans / deposits | $9.83 billion / $14.23 billion | Loans rose 8.2% from year-end 2021; deposits declined 0.6% |
| Cash and cash equivalents | $821.9 million | Down from $2.13 billion at year-end 2021 |
| Shareholders’ equity | $1.41 billion | Down from $1.69 billion, primarily reflecting a $369.4 million decline in accumulated other comprehensive income |
- Profitability and margins: Higher asset yields from rising rates and loan growth lifted Q3 net interest income. The GAAP efficiency ratio was 58.65% in Q3; management’s non-GAAP adjusted ratio was 57.04%.
- Cash flow: For the first nine months, operating cash flow was $157.4 million, investing cash outflow was $1.37 billion and financing cash outflow was $104.2 million. Cash declined $1.31 billion, chiefly as liquidity funded loan growth and investment activity.
- Debt and funding: No FHLB advances were outstanding at quarter-end, compared with $50 million at year-end 2021. Other borrowings were $234.0 million; subordinated notes were $98.8 million and junior subordinated debentures were $73.8 million after a $50.5 million redemption.
- Liquidity and capital: Management reported $2.50 billion of collateral-based FHLB capacity, about $1.10 billion available through the Federal Reserve’s Borrower-in-Custody program and $125 million in uncommitted federal funds lines; none were drawn at quarter-end. Bank capital ratios included 13.26% total capital, 12.18% Tier 1 and 12.18% CET1, above applicable well-capitalized thresholds. Tangible common equity to tangible assets was 6.41%, down from 7.93% at year-end.
Material changes and management commentary
- Loan balances grew $742.3 million from year-end, with notable growth in one-to-four-family residential, commercial business, construction and consumer loans. Non-interest-bearing deposits were $6.51 billion; core deposits were 95% of total deposits. The loan-to-deposit ratio was 70%.
- Four branches were sold during the first nine months, transferring $178.2 million in deposits. The sale generated a $7.8 million gain in Q2.
- Available-for-sale securities had $438.0 million of gross unrealized losses at September 30, compared with $51.1 million at year-end. The company attributed declines mainly to higher interest rates and market spreads, not credit losses. A $458.6 million securities transfer from available-for-sale to held-to-maturity was made during Q1. Securities-related and other valuation changes contributed to the substantial AOCI decline.
- Mortgage banking operations weakened as higher rates reduced refinance and sale volumes and lowered multifamily loan valuations. The company recorded $2.2 million of Q3 and $3.3 million of nine-month lower-of-cost-or-market adjustments on multifamily loans held for sale.
- Banner Forward, an initiative to grow revenue and streamline costs, incurred $411,000 of Q3 expenses. Management said revenue initiatives were beginning to benefit earnings; remaining efficiency measures were expected to be implemented in Q4, with full implementation anticipated by the end of 2023.
Outlook, risks and contingencies
- No formal earnings or financial guidance was provided. Management said the balance sheet was structured to benefit near term if rates continued to rise, while noting that results depend on rates, funding costs, asset repricing and economic conditions.
- Key disclosed risks include inflation, recession or slower growth, labor and supply constraints, geopolitical events, changing interest rates and yield curves, deposit competition and access to cost-effective funding, credit deterioration, real-estate values, regulatory changes, technology and cybersecurity incidents, and third-party service disruptions.
- Non-performing assets were $15.6 million, or 0.10% of assets, versus $23.7 million at year-end 2021. Non-performing loans were $15.2 million; the loan allowance was $135.9 million, or 1.38% of loans. Management cited loan growth and a deterioration in forecast economic indicators as reasons for the Q3 provision. It also identified $119.8 million of classified loans not on nonaccrual that could become problem loans.
- Commitments to extend credit totaled $3.94 billion; standby letters and financial guarantees totaled $28.5 million. These amounts are contractual and do not necessarily represent expected cash outflows. Management stated it believed liquidity resources were adequate for foreseeable needs.
- The company had accrued $11.3 million for legal proceedings. In the Bolding wage-and-hour class action, mediation was rescheduled for December 2022; the filing says a trial could result in damages exceeding the accrued reserve if the company is unsuccessful. Management did not identify pending proceedings it believed would materially adversely affect the company, apart from the described case and related uncertainty.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How higher rates affect net interest margin, deposit pricing and funding costs, and whether the stated rate sensitivity assumptions prove reliable.
- Whether unrealized securities losses and the AOCI-driven decline in equity affect capital, liquidity or strategic flexibility; review the held-to-maturity portfolio’s fair value disclosures.
- Whether loan growth is matched by stable credit performance, particularly in construction, residential, commercial real estate and classified loans.
- Whether mortgage banking weakness, multifamily held-for-sale valuation adjustments and Banner Forward execution affect future earnings.
- The outcome and potential exposure from the Bolding litigation, in light of the $11.3 million total legal accrual and the filing’s statement that case damages could exceed the case reserve.
- Reconcile management’s non-GAAP adjusted earnings and efficiency measures with GAAP results, and assess the assumptions underlying liquidity and interest-rate sensitivity disclosures.