Banner Corporation (BANR) — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020 unless otherwise stated. Banner Corporation is a bank holding company operating Banner Bank, a regional bank serving Washington, Oregon, California, Idaho and Utah.
Financial performance and condition
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior date |
|---|---|---|
| Total revenue (net interest income plus non-interest income) | $141.9 million | $138.4 million, Q1 2020 |
| Net interest income | $117.7 million | $119.3 million, Q1 2020 |
| Net interest margin, tax-equivalent | 3.44% | 4.25%, Q1 2020 |
| Net income / diluted EPS | $46.9 million / $1.33 | $16.9 million / $0.47, Q1 2020 |
| Non-interest expense | $93.5 million | $93.5 million, Q1 2020 |
| Operating cash flow | $322.5 million | $52.6 million, Q1 2020 |
| Total assets | $16.12 billion | $15.03 billion, December 31, 2020 |
| Total loans / deposits | $9.95 billion / $13.55 billion | $9.87 billion / $12.57 billion, December 31, 2020 |
| Cash and cash equivalents | $1.65 billion | $1.23 billion, December 31, 2020 |
| Shareholders’ equity | $1.62 billion | $1.67 billion, December 31, 2020 |
- Profitability improved sharply year over year, principally reflecting a $9.3 million net recapture of credit-loss provisions versus a $23.5 million provision in Q1 2020, higher mortgage banking income, lower funding costs, and a favorable year-over-year fair-value comparison.
- Net interest margin compressed to 3.44% from 4.25%, as yields on earning assets declined and a greater share of assets was in lower-yielding short-term investments. Lower funding costs partly offset the effect; interest expense fell to $6.9 million from $12.4 million.
- Non-interest income was $24.3 million, up from $19.2 million, including mortgage banking income of $11.4 million and a $0.5 million securities-sale gain. The prior-year quarter included a $4.6 million fair-value loss.
- Q1 cash flow was $322.5 million from operations, $(829.5) million from investing and $922.7 million from financing. The resulting net increase in cash was $415.7 million. Investing outflows chiefly reflected securities purchases; financing inflows chiefly reflected deposit growth.
- Deposits rose $981.6 million during the quarter, largely in core deposits. Core deposits were 93% of total deposits, and Banner reported no brokered deposits. Loans increased $76.7 million overall, but declined $195.4 million excluding PPP loans; the loan-to-deposit ratio was 74%.
- Loans held for sale declined to $135.3 million from $243.8 million at year-end. The company sold $300.3 million of one- to four-family residential loans in Q1, versus $204.0 million a year earlier.
- Credit quality: non-performing assets were $37.0 million, or 0.23% of assets, compared with $36.5 million at year-end and $46.1 million a year earlier. The loan-loss allowance was $156.1 million, 1.57% of loans and 426% of non-performing loans. Net charge-offs were $3.2 million.
- Borrowings included $100.0 million of FHLB advances, $216.3 million of other borrowings, $98.3 million of subordinated notes and $117.2 million of junior subordinated debentures. FHLB advances declined $50.0 million during the quarter.
- Capital remained above regulatory minimums: Banner Corporation’s total capital ratio was 14.74% and Banner Bank’s was 13.63%. Tangible common equity to tangible assets was 7.80%, down from 8.69% at year-end. The company declared $0.41 per common share and repurchased 500,000 shares for $25.3 million.
Material changes and unusual items
- Q1’s $9.3 million credit-loss recapture reflected improved forecast economic indicators and lower loan balances excluding PPP loans. The allowance for loan losses fell from $167.3 million at year-end; PPP loans, totaling approximately $1.32 billion, carried no loan allowance because they are fully SBA-guaranteed.
- Available-for-sale securities increased substantially as Banner deployed excess liquidity. Their fair value fell $73.1 million during the quarter, primarily with rising market yields and spreads; the after-tax effect contributed to a $56.1 million decline in accumulated other comprehensive income. This reduced reported equity despite positive net income.
- Salary and benefits expense included $1.3 million of severance tied to a staffing reduction and a $1.2 million increase in the deferred-compensation liability. Higher capitalized PPP loan-origination costs partly offset expense growth.
- At quarter-end, 91 loans totaling $33.9 million remained on COVID-related deferral, including 79 mortgage loans totaling $25.7 million under forbearance. Management said deferrals had declined significantly from earlier in the pandemic.
Outlook, commentary and risks
- Management emphasized continued focus on high-quality lending and client acquisition but provided no specific numerical earnings or revenue guidance in the supplied filing text. It noted that low rates, elevated liquidity and COVID-related impacts affected results.
- Management expects COVID-related expenses to continue in future quarters depending on the pandemic’s duration. It described current non-performing loans and assets as manageable.
- Key risks include pandemic-related economic effects, borrower credit deterioration, regional economic conditions, interest-rate and margin movements, deposit competition and liquidity, real-estate values, operational and cybersecurity events, regulatory changes, and fair-value and allowance-estimation uncertainty.
- Interest-rate modeling estimated that an instantaneous +100-basis-point rate change would increase net interest income by 4.2% over 12 months while reducing economic value of equity by 0.9%. These estimates depend on modeling assumptions; management considered its interest-rate risk within internal policy guidelines.
- Banner reported $3.36 billion of commitments to extend credit and $21.5 million of standby letters of credit and financial guarantees. It had $2.28 billion of available FHLB credit capacity and approximately $1.01 billion of Federal Reserve credit lines based on pledged collateral. Management said no pending legal proceeding was expected to have a material adverse effect; it reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether deposit and short-term liquidity growth is sustained, and how quickly excess cash and securities are converted into earning loans.
- How net interest margin and asset yields respond to rates, deposit repricing and the large low-yielding PPP portfolio.
- Whether credit-loss recaptures remain appropriate as forecasts change; monitor non-performing loans, classified loans, charge-offs and the $275.6 million of other classified loans not on nonaccrual.
- The duration and credit effects of remaining COVID-related deferrals, along with PPP forgiveness, repayment and fee recognition.
- Further changes in securities’ fair values, accumulated other comprehensive income and tangible capital, and the effects of continued repurchases and dividends.
- Liquidity and funding needs associated with $3.36 billion of credit commitments and the maturity of $705.0 million of certificates of deposit within one year.