Banner(US:BANR)2020-11-05 20:58PART I – FINANCIAL INFORMATION Item 1 – Financial Statements This section presents Banner Corporation's unaudited condensed consolidated financial statements as of September 30, 2020, and for the three and nine months then ended, detailing financial condition, operations, and cash flows, alongside notes on accounting policies and financial instruments Consolidated Statements of Financial Condition As of September 30, 2020, total assets increased to $14.64 billion from $12.60 billion at year-end 2019, driven by growth in loans and deposits, with shareholders' equity rising to $1.65 billion Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $14,642,075 | $12,604,031 | | Total Loans, Net | $9,995,952 | $9,204,798 | | Total Deposits | $12,215,341 | $10,048,641 | | Total Liabilities | $12,995,546 | $11,009,997 | | Total Shareholders' Equity | $1,646,529 | $1,594,034 | Consolidated Statements of Operations Net income for Q3 2020 decreased to $36.5 million from $39.6 million in Q3 2019, primarily due to a significantly higher provision for credit losses, while nine-month net income also declined to $77.0 million Key Operating Results (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $121,026 | $116,621 | $359,864 | $349,420 | | Provision for Credit Losses | $13,641 | $2,000 | $64,917 | $6,000 | | Non-interest Income | $28,222 | $20,866 | $75,107 | $61,667 | | Non-interest Expense | $91,567 | $87,308 | $276,389 | $264,038 | | Net Income | $36,548 | $39,577 | $76,971 | $112,623 | | Diluted EPS | $1.03 | $1.15 | $2.17 | $3.23 | Consolidated Statements of Cash Flows For the nine months ended September 30, 2020, operating activities generated $138.2 million in cash, while investing activities used $1.65 billion, largely offset by $1.91 billion from financing activities, resulting in a $397.8 million net increase in cash Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $138,162 | $68,492 | | Net Cash used in Investing Activities | ($1,650,717) | ($27,292) | | Net Cash from Financing Activities | $1,910,358 | $11,060 | | Net Change in Cash | $397,803 | $52,260 | Selected Notes to the Consolidated Financial Statements The notes detail significant accounting policies, including the adoption of the CECL standard which reduced shareholders' equity by $11.2 million after-tax, and provide extensive information on the AltaPacific acquisition, financial instrument portfolios, and regulatory capital - The company adopted the new credit loss standard, ASU 2016-13 (Topic 326 or CECL), on January 1, 2020, replacing the incurred loss methodology with an expected loss model56 Pre-Tax Impact of Adopting CECL (in thousands) | Account | Impact of Topic 326 Adoption | | :--- | :--- | | Allowance for credit losses on loans | $7,812 | | Allowance for credit losses on unfunded loan commitments | $7,022 | | Allowance for credit losses on held-to-maturity debt securities | $63 | | Total Pre-Tax Impact | $14,897 | - On November 1, 2019, the Company completed the acquisition of AltaPacific Bancorp, which added $425.7 million in assets, $332.4 million in loans, and $313.4 million in deposits, resulting in $34.0 million of goodwill5859 Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the COVID-19 pandemic's impact on operations, including loan deferrals and PPP, noting strengthened financial condition with $14.64 billion in assets, a decline in Q3 2020 net income to $36.5 million due to higher credit loss provisions, and maintained strong asset quality, liquidity, and capital Executive Overview Banner Corporation reported Q3 2020 net income of $36.5 million, a decrease from Q3 2019 primarily due to a $13.6 million provision for credit losses, while actively managing COVID-19 impacts through loan deferrals and $1.15 billion in PPP loans - The company is actively responding to the COVID-19 pandemic by offering payment relief programs, deferring payments on 3,370 loans totaling $1.09 billion year-to-date, with $239.6 million remaining on deferral as of September 30, 2020224 - Banner participated in the Paycheck Protection Program (PPP), funding 9,103 applications totaling $1.15 billion in loans as of September 30, 2020225 Adjusted Earnings (Non-GAAP, in thousands) | Metric | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income (GAAP) | $36,548 | $39,577 | $76,971 | $112,623 | | Adjusted earnings (non-GAAP) | $36,626 | $40,275 | $81,692 | $115,281 | Comparison of Financial Condition Total assets grew by $2.04 billion to $14.64 billion at September 30, 2020, driven by an $858.6 million increase in loans, including $1.15 billion in PPP loans, and a $2.17 billion increase in deposits, with shareholders' equity rising to $1.65 billion Loan Portfolio Composition (in thousands) | Loan Type | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Commercial real estate | $3,639,106 | $3,618,493 | | Construction & land | $1,270,278 | $1,234,116 | | Commercial business (incl. PPP) | $3,107,443 | $2,137,307 | | One- to four-family residential | $771,431 | $925,531 | | Consumer | $622,831 | $664,251 | | Total loans receivable | $10,163,917 | $9,305,357 | Deposit Composition (in thousands) | Deposit Type | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Non-interest-bearing | $5,412,570 | $3,945,000 | | Interest-bearing transaction & savings | $5,887,419 | $4,983,238 | | Interest-bearing certificates | $915,352 | $1,120,403 | | Total deposits | $12,215,341 | $10,048,641 | Comparison of Results of Operations Q3 2020 net interest income rose 4% to $121.0 million despite margin compression to 3.72%, while the provision for credit losses significantly increased to $13.6 million, non-interest income grew 35% to $28.2 million, and non-interest expense rose 5% to $91.6 million - Net interest margin on a tax equivalent basis decreased to 3.72% for Q3 2020 from 4.29% in Q3 2019, primarily due to lower yields on interest-earning assets, including low-yield PPP loans and excess liquidity283 - Mortgage banking operations revenue increased by 150% to $16.6 million in Q3 2020 from $6.6 million in Q3 2019, driven by higher loan sale volumes and wider gain-on-sale margins amid lower interest rates303305 - Non-interest expense increased to $91.6 million in Q3 2020 from $87.3 million in Q3 2019, partly due to a $3.2 million year-over-year swing in deposit insurance expense, as Q3 2019 included a large FDIC credit281306 Asset Quality Asset quality remained manageable with non-performing assets decreasing to $36.7 million (0.25% of total assets), while the allowance for credit losses on loans significantly increased to $168.0 million, representing 482% of non-performing loans, reflecting CECL adoption and COVID-19 provisions Non-Performing Assets (in thousands) | Category | Sep 30, 2020 | Dec 31, 2019 | Sep 30, 2019 | | :--- | :--- | :--- | :--- | | Nonaccrual Loans | $31,568 | $37,501 | $15,769 | | Loans 90+ Days Past Due & Accruing | $3,255 | $2,097 | $2,487 | | Total Non-Performing Loans | $34,823 | $39,598 | $18,256 | | REO, net & Other Repossessed Assets | $1,832 | $936 | $343 | | Total Non-Performing Assets | $36,655 | $40,534 | $18,599 | - The allowance for credit losses on loans to non-performing loans ratio increased significantly to 482% at Q3 2020, compared to 254% at year-end 2019, indicating a strengthened reserve position311 Liquidity and Capital Resources The company maintains strong liquidity and capital, with deposits growing by $2.17 billion, FHLB advances reduced, and $100.0 million in subordinated notes issued, ensuring all regulatory capital ratios remain significantly above 'Well-Capitalized' thresholds - At September 30, 2020, Banner Bank had $2.36 billion of available credit capacity with the FHLB and $990 million with the Federal Reserve Bank, providing substantial liquidity325 Banner Corporation Regulatory Capital Ratios | Ratio | Sep 30, 2020 Actual | 'Well-Capitalized' Minimum | | :--- | :--- | :--- | | Total capital to risk-weighted assets | 14.65% | 10.00% | | Tier 1 capital to risk-weighted assets | 12.47% | N/A | | Tier 1 leverage capital to average assets | 9.56% | N/A | | Common equity tier 1 capital | 11.13% | N/A | Item 3 – Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed via simulation modeling, with the balance sheet positioned to benefit from rising rates, as a 100 basis point increase is estimated to increase net interest income by 4.3% over 12 months Interest Rate Sensitivity Analysis (as of Sep 30, 2020) | Change in Interest Rates (Basis Points) | Estimated % Change in Net Interest Income (Next 12 Months) | Estimated % Change in Economic Value of Equity | | :--- | :--- | :--- | | +200 | +7.5% | +8.0% | | +100 | +4.3% | +6.9% | | -25 | (0.8)% | (2.3)% | Item 4 – Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2020, with CECL implementation being the only significant internal control change - The CEO and CFO concluded that as of September 30, 2020, the company's disclosure controls and procedures were effective349 PART II – OTHER INFORMATION Item 1 – Legal Proceedings The company is involved in various legal proceedings, none of which are expected to have a material adverse effect on its financial condition or operations - Management does not believe any pending legal proceedings would have a material adverse effect on the company's financial condition or operations352 Item 1A – Risk Factors This section supplements previous disclosures by focusing on COVID-19 related risks, including adverse effects on operations, loan demand, borrower repayment, PPP loan administration, goodwill impairment, and subsidiary dividend capacity - The COVID-19 pandemic has adversely affected business operations, loan demand (excluding PPP), and borrowers' ability to make payments, which could lead to increased delinquencies and charge-offs353356 - The company faces risks related to its $1.15 billion PPP loan portfolio, including administrative complexities and the loan forgiveness process357 - Adverse economic conditions and a decrease in the company's stock price due to the pandemic could trigger goodwill impairment charges358 Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase shares in Q3 2020, as its authorization expired in March 2020 and will not be renewed due to the pandemic, though 479 shares were surrendered for tax obligations - The company's share repurchase authorization expired in March 2020 and has not been renewed due to the pandemic and market conditions362 Item 6 – Exhibits This section provides an index of exhibits filed with the Form 10-Q, including corporate governance documents, material contracts, and required CEO and CFO certifications