Banner Corporation (NASDAQ: BANR) — Q1 2023 Form 10-Q
Business context and reporting period. Banner is a regional bank holding company operating Banner Bank, with 137 branches and 18 loan production offices in Washington, Oregon, California, Idaho and Utah. The unaudited quarter ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Unless noted, dollar amounts below are in millions.
Financial results and position
| Metric | Q1 2023 / March 31, 2023 | Comparison |
|---|---|---|
| Total revenue (GAAP) | $162.6 | Down 6% from Q4 2022; up from $138.1 in Q1 2022 |
| Net interest income | $153.3 | Down 4% from Q4 2022; up from $118.7 in Q1 2022 |
| Net income / diluted EPS | $55.6 / $1.61 | Q4 2022: $54.4 / $1.58; Q1 2022: $44.0 / $1.27 |
| Net interest margin | 4.30% tax-equivalent; 4.22% reported | Tax-equivalent margin was 4.23% in Q4 2022 |
| Return on average assets / equity | 1.44% / 15.00% | Q4 2022: 1.34% / 15.14% |
| Net cash from operating activities | $74.7 | Q1 2022: $50.7 |
| Cash and cash equivalents | $243.0 | Nearly unchanged from year-end |
| Total assets / loans / deposits | $15,533.6 / $10,160.7 / $13,154.2 | Assets down $299.8; loans up $14.0; deposits down $465.9 since year-end |
| Total shareholders’ equity | $1,531.7 | Up $75.3 since year-end |
- Q1 net income rose 2% quarter over quarter and 26% year over year. Net interest income was higher year over year, while interest expense increased to $13.6 from $4.2 in Q1 2022 as deposit and borrowing costs rose.
- Non-interest income was $9.3, including a $7.3 net loss on securities sales. Non-interest expense was $94.6, down from $99.0 in Q4 2022. The GAAP efficiency ratio was 58.20%; the company-reported adjusted ratio was 54.23% (non-GAAP).
- Net cash decreased $0.1 in the quarter: operating cash flow was $74.7, investing cash flow was $308.8 and financing cash flow was negative $383.6.
- Net loans were $10.02 billion. The loan-to-deposit ratio was 78%. The allowance for loan credit losses was $141.5, or 1.39% of loans, unchanged from year-end.
- Non-performing assets increased to $27.1, or 0.17% of assets, from $23.4, or 0.15%, at year-end. Non-performing loans were $26.8; management also reported $121.7 of classified loans not on nonaccrual status.
- Core deposits fell $692.3 to $12.20 billion; certificates of deposit rose $226.4 to $949.9. Core deposits were 93% of deposits. Uninsured deposits were 33% of total deposits, or 31% excluding collateralized public deposits and holding-company cash. The bank reported no brokered deposits.
- On-balance-sheet liquidity was $3.40 billion and available borrowing capacity was $4.25 billion. FHLB advances were $170.0, up from $50.0 at year-end. Subordinated notes were $99.0 and junior subordinated debentures were $74.7.
- Reported regulatory ratios exceeded well-capitalized thresholds: Banner’s total capital ratio was 14.45% and Banner Bank’s was 13.71%. Tangible common equity to tangible assets was 7.59% (non-GAAP), up from 6.95%.
Material changes and management commentary
- Management attributed the improved tax-equivalent net interest margin to asset yields rising faster than funding costs during the quarter. It also noted that higher deposit competition, a shift toward higher-cost CDs and lagged repricing increased funding costs. Net interest income nevertheless declined from Q4 as funding costs increased.
- Deposit outflows reflected reduced market liquidity and rate-sensitive clients moving some non-operating funds to higher-yielding investments. Management said relationship banking remained its strategy and believed available resources were adequate for foreseeable liquidity needs.
- Loans were essentially flat quarter over quarter. Residential and multifamily lending increased, while commercial real estate, construction and several business-loan categories declined. Commercial real estate loans were 35% of the portfolio; construction, land and development loans were 14%.
- Q1 included a $524,000 total recapture of provision for credit losses, mainly reflecting lower unfunded construction commitments; provision on funded loans was $774,000. Net loan charge-offs were $782,000. Management cited commercial real estate downgrades as a driver of higher substandard loans.
- Available-for-sale securities had $388.8 of gross unrealized losses at quarter-end, largely attributed by management to interest rates and market spreads rather than credit losses. A $36.1 improvement in their fair value, net of tax effects, contributed to other comprehensive income.
- The company declared dividends of $0.48 per share for the quarter. Management said it expects to continue quarterly dividends at the current rate, subject to board discretion; this is not a guarantee.
Outlook, risks and contingencies
- The filing provides no quantitative earnings or revenue guidance. Management’s forward-looking statements are subject to risks including economic conditions, inflation, interest-rate changes, deposit competition and access to funding, credit quality, real estate values, regulation, technology and operational disruptions.
- The filing added banking-industry risk discussion following the failures of Silicon Valley Bank, Signature Bank and First Republic Bank, noting potential effects on depositor confidence, deposits, liquidity, results and the company’s share price.
- Interest-rate simulation showed estimated next-12-month net interest income sensitivity ranging from a 1.1% increase under a +100 basis-point shock to a 3.8% decrease under a -100 basis-point shock; a +300 basis-point shock modeled a 1.6% decrease. These are model estimates dependent on assumptions, not forecasts.
- Banner accrued $14.9 for legal proceedings. In the Bolding wage-and-hour class and collective action, the parties had agreed in principle on fundamental settlement terms and were preparing a written agreement for court review. The final outcome may differ from the accrual.
- Off-balance-sheet commitments included $3.95 billion to extend credit and $39.3 million of standby letters of credit and financial guarantees. Not all commitments are expected to be drawn. The allowance for unfunded commitments was $13.4.
Important facts for investors to verify
- Whether deposit balances, deposit mix and funding costs stabilize, particularly given uninsured deposits of 33% of total deposits and the increase in CDs.
- Subsequent trends in non-performing and classified loans, commercial real estate exposures, charge-offs and allowance adequacy.
- Realized and unrealized securities losses, securities-portfolio duration and the effect of interest-rate changes on tangible capital and earnings.
- Actual liquidity and borrowing availability, including the terms and eligible collateral for contingent borrowing facilities.
- The final settlement terms and possible cost of the Bolding litigation, compared with the $14.9 million legal accrual.
- How actual operating results compare with modeled interest-rate sensitivity; management cautions that model outcomes depend on assumptions and actual experience may differ.