Banner(BANR) - 2022 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis for the period ended June 30, 2022 Consolidated Statements of Financial Condition Total assets decreased by $419.7 million to $16.39 billion, driven by reduced cash and deposits, while shareholders' equity declined due to unrealized losses on available-for-sale securities | Metric (in millions) | June 30, 2022 | December 31, 2021 | Change (in millions) | | :-------------------- | :------------ | :---------------- | :------------------- | | Total assets | $16,385.2 | $16,804.9 | $(419.7) | | Total liabilities | $14,899.4 | $15,114.5 | $(215.1) | | Total shareholders' equity | $1,485.8 | $1,690.3 | $(204.5) | | Cash and cash equivalents | $1,170.8 | $2,134.3 | $(963.5) | | Total securities | $4,274.1 | $4,186.9 | $87.2 | | Loans receivable | $9,456.8 | $9,084.8 | $372.0 | | Total deposits | $14,212.6 | $14,326.9 | $(114.3) | Consolidated Statements of Operations Net income for Q2 2022 decreased to $48.0 million from $54.4 million year-over-year, primarily due to a provision for credit losses and lower mortgage banking income | Metric (in millions) | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2021 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total interest income | $133.0 | $133.6 | $255.9 | $258.1 | | Total interest expense| $4.0 | $6.0 | $8.2 | $12.9 | | Net interest income | $129.0 | $127.6 | $247.7 | $245.2 | | Provision (recapture) for credit losses | $4.5 | $(10.3) | $(2.4) | $(19.5) | | Total non-interest income | $27.2 | $22.3 | $46.6 | $46.6 | | Total non-interest expense| $92.1 | $92.6 | $183.2 | $186.2 | | NET INCOME | $48.0 | $54.4 | $91.9 | $101.2 | | Basic EPS | $1.40 | $1.57 | $2.68 | $2.90 | | Diluted EPS | $1.39 | $1.56 | $2.66 | $2.88 | Consolidated Statements of Comprehensive Income Comprehensive income for Q2 2022 resulted in a significant loss of $(53.9) million, primarily driven by substantial unrealized losses on available-for-sale securities | Metric (in millions) | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2021 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | NET INCOME | $48.0 | $54.4 | $91.9 | $101.2 | | Other comprehensive (loss) income | $(101.8) | $25.3 | $(256.1) | $(30.8) | | COMPREHENSIVE (LOSS) INCOME | $(53.9) | $79.7 | $(164.2) | $70.4 | - Unrealized holding losses on available-for-sale securities were a major contributor to the comprehensive loss, with a $(129.4) million loss for the three months and $(282.4) million loss for the six months ended June 30, 2022[11] Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity decreased by $204.5 million, mainly due to accumulated other comprehensive loss, cash dividends, and stock repurchases, partially offset by net income | Metric (in millions) | Dec 31, 2021 | Jun 30, 2022 | Change (in millions) | | :-------------------- | :----------- | :----------- | :------------------- | | Total Shareholders' Equity | $1,690.3 | $1,485.8 | $(204.5) | | Retained earnings | $390.8 | $452.2 | $61.4 | | Accumulated other comprehensive (loss) income | $0.2 | $(255.9) | $(256.1) | - The company repurchased 200,000 shares of common stock at a cost of $10.96 million during the six months ended June 30, 2022[21] - Cash dividends declared per common share increased to $0.44 for the quarter ended June 30, 2022, from $0.41 in the prior year[9] Consolidated Statements of Cash Flows Operating cash flow significantly decreased to $115.4 million, while financing activities shifted to a net outflow of $110.2 million, primarily due to reduced deposit growth | Cash Flow Activity (in millions) | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided from operating activities | $115.4 | $319.7 | | Net cash used by investing activities | $(968.6) | $(1,085.9) | | Net cash (used by) provided from financing activities | $(110.2) | $999.9 | | Net change in cash and cash equivalents | $(963.5) | $233.7 | - The decrease in cash from operating activities was partly due to a gain on sale of branches of $(7.8) million in 2022, which is a non-cash adjustment[23] - Financing activities shifted from a large inflow to an outflow, driven by a significant decrease in net deposit increases ($63.8 million in 2022 vs. $1.07 billion in 2021) and repayment of $50.5 million in junior subordinated debentures[26] Selected Notes to the Consolidated Financial Statements This section provides detailed disclosures on accounting policies, recent standards, and specific financial instrument notes, including securities, loans, deposits, and fair value measurements Note 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The unaudited condensed consolidated financial statements are prepared under GAAP for interim reporting, with no significant changes in accounting policies during H1 2022 - Financial statements are prepared in accordance with GAAP for interim financial information and SEC regulations, with all necessary adjustments included[32] - Management's critical accounting policies, including those for interest income, credit losses, fair value, intangible assets, and deferred taxes, involve significant judgment and estimation, with no significant changes in application during H1 2022[33] Note 2: ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED The company adopted ASU 2020-04, 2021-01, and 2022-02, related to reference rate reform and TDRs, with no material impact expected on financial statements - The company adopted ASU 2020-04 and 2021-01 for Reference Rate Reform, electing certain expedients for hedge relationships, with no material impact on financial statements[36][39] - ASU 2022-02, eliminating TDR recognition guidance and introducing vintage disclosures, is effective for fiscal years beginning after December 15, 2022, and is not expected to have a material impact[39][42] - ASU 2022-03, clarifying fair value measurement of equity securities subject to contractual sale restrictions, is effective for fiscal years beginning after December 15, 2023, and is not expected to have a material impact[43][44] Note 3: SECURITIES Total securities increased to $4.27 billion, but available-for-sale securities incurred significant unrealized losses of $(298.7) million due to rising interest rates | Securities (in millions) | June 30, 2022 Fair Value | December 31, 2021 Fair Value | Change (in millions) | | :------------------------ | :----------------------- | :--------------------------- | :------------------- | | Trading | $27.9 | $27.0 | $0.9 | | Available-for-sale | $3,094.4 | $3,639.0 | $(544.6) | | Held-to-maturity | $1,036.3 | $541.9 | $494.4 | | Total securities | $4,274.1 | $4,186.9 | $87.2 | - Gross unrealized losses on available-for-sale securities increased significantly to $(298.7) million at June 30, 2022, from $(51.1) million at December 31, 2021, primarily due to changes in interest rates[47][50] - $458.6 million of securities were transferred from available-for-sale to held-to-maturity during Q1 2022 to mitigate the impact of future interest rate changes on Accumulated Other Comprehensive Income (AOCI)[63] Note 4: LOANS RECEIVABLE AND THE ALLOWANCE FOR CREDIT LOSSES - LOANS Total loans receivable grew by $372.1 million to $9.46 billion, while the allowance for credit losses decreased due to improved economic forecasts and reduced adversely classified loans | Loan Category (in millions) | June 30, 2022 Amount | December 31, 2021 Amount | Change (in millions) | | :--------------------------- | :------------------- | :----------------------- | :------------------- | | Commercial real estate | $3,245.2 | $3,287.5 | $(42.3) | | Multifamily real estate | $575.2 | $530.9 | $44.3 | | Construction, land & development | $1,396.5 | $1,309.3 | $87.2 | | Commercial business | $1,206.9 | $1,170.8 | $36.1 | | Small business scored | $865.8 | $792.3 | $73.5 | | Agricultural business | $283.4 | $280.6 | $2.8 | | One- to four-family residential | $868.2 | $657.5 | $210.7 | | Consumer | $595.6 | $555.9 | $39.7 | | Total loans receivable | $9,456.8 | $9,084.8 | $372.0 | | Metric (in millions) | June 30, 2022 | December 31, 2021 | | :-------------------- | :------------ | :---------------- | | Allowance for credit losses – loans | $128.7 | $132.1 | | TDRs | $4.4 | $5.5 | - The allowance for credit losses - loans decreased by $3.4 million from December 31, 2021, to June 30, 2022, primarily due to a recapture of provision for credit losses reflecting improved economic forecasts and a decrease in adversely classified loans[128][288][289] - SBA Paycheck Protection Program (PPP) loans decreased significantly to $31.0 million at June 30, 2022, from $133.9 million at December 31, 2021, due to loan forgiveness[65][250][254] Note 5: REAL ESTATE OWNED, NET Real Estate Owned (REO) decreased to $340 thousand at June 30, 2022, from $852 thousand at December 31, 2021, primarily due to dispositions exceeding additions | REO Activity (in thousands) | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :-------------------------- | :-------------------------- | :-------------------------- | | Balance, beginning of period| $852 | $816 | | Additions from loan foreclosures | — | $423 | | Proceeds from dispositions | $(864) | $(783) | | Gain on sale of REO | $352 | $307 | | Balance, end of period | $340 | $763 | - The company had no foreclosed one- to four-family residential real estate properties held as REO at June 30, 2022[134] Note 6: GOODWILL, OTHER INTANGIBLE ASSETS AND MORTGAGE SERVICING RIGHTS Goodwill remained stable, while Core Deposit Intangibles decreased to $11.9 million due to amortization and branch sales, and mortgage servicing rights increased | Intangible Asset (in millions) | Dec 31, 2021 | Jun 30, 2022 | Change (in millions) | | :------------------------------ | :----------- | :----------- | :------------------- | | Goodwill | $373.1 | $373.1 | $0 | | Core Deposit Intangibles (CDI) | $14.9 | $11.9 | $(3.0) | | Total Intangibles | $388.0 | $385.0 | $(3.0) | - CDI amortization expense was $2.8 million for the six months ended June 30, 2022[137] - Mortgage servicing rights increased to $17.6 million at June 30, 2022, from $17.2 million at January 1, 2022, with no impairment charges recorded during the period[142] Note 7: DEPOSITS Total deposits decreased by $114.4 million to $14.21 billion, primarily due to a decline in certificates of deposit and core deposits, partly from branch sales | Deposit Type (in millions) | June 30, 2022 | December 31, 2021 | Change (in millions) | | :-------------------------- | :------------ | :---------------- | :------------------- | | Non-interest-bearing | $6,388.8 | $6,385.2 | $3.6 | | Interest-bearing transaction and savings | $7,067.4 | $7,103.1 | $(35.7) | | Certificates of deposit | $756.3 | $838.6 | $(82.3) | | Total deposits | $14,212.6 | $14,326.9 | $(114.3) | - The decrease in total deposits was primarily due to the sale of four branches, which included the transfer of $178.2 million of related deposits[263][310] - Core deposits (non-interest-bearing and interest-bearing transaction and savings accounts) represented 95% of total deposits at June 30, 2022[265] Note 8: FAIR VALUE OF FINANCIAL INSTRUMENTS The company uses a three-level hierarchy for fair value measurements, with significant unobservable inputs for certain securities, loans, and debentures, whose values are sensitive to discount rate changes | Financial Instrument (in millions) | Fair Value Level | June 30, 2022 Fair Value | December 31, 2021 Fair Value | | :---------------------------------- | :--------------- | :----------------------- | :--------------------------- | | Securities—trading | 3 | $27.9 | $27.0 | | Securities—available-for-sale | 2 | $3,094.4 | $3,639.0 | | Securities—held-to-maturity | 2, 3 | $1,036.3 | $541.9 | | Loans receivable | 3 | $9,322.4 | $9,100.5 | | Junior subordinated debentures | 3 | $72.2 | $119.8 | - A 25 basis-point increase/decrease in the discount rate for TPS securities would result in a $758 thousand decrease/increase in fair value[243] - A 25 basis-point increase/decrease in the discount rate for junior subordinated debentures would result in a $1.9 million decrease/increase in fair value[244] | Level 3 Financial Instruments (in millions) | June 30, 2022 Fair Value | December 31, 2021 Fair Value | | :------------------------------------------- | :----------------------- | :--------------------------- | | Corporate bonds (TPS securities) | $27.9 | $27.0 | | Junior subordinated debentures | $72.2 | $119.8 | | SBA servicing rights | $1.0 | $1.2 | | Investments in limited partnerships | $11.9 | $10.3 | Note 9: INCOME TAXES AND DEFERRED TAXES Income tax expense for Q2 2022 was $11.6 million with an effective tax rate of 19.5%, and the company holds tax credit investments with unfunded commitments | Metric (in millions) | 3 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income tax expense | $11.6 | $21.5 | $23.9 | | Effective tax rate | 19.5% | 19.0% | 19.1% | | Tax Credit Investments (in millions) | June 30, 2022 | December 31, 2021 | | :------------------------------------ | :------------ | :---------------- | | Tax credit investments | $56.0 | $56.6 | | Unfunded commitments | $28.0 | $31.2 | Note 10: CALCULATION OF WEIGHTED AVERAGE SHARES OUTSTANDING FOR EARNINGS PER SHARE (EPS) Diluted weighted average shares outstanding for EPS were 34.45 million for Q2 2022, reflecting the dilutive effect of unvested restricted stock | Metric (in thousands, except shares) | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2021 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic weighted average shares outstanding | 34,307,001 | 34,736,639 | 34,303,889 | 34,854,357 | | Diluted weighted shares outstanding | 34,451,740 | 34,933,714 | 34,532,935 | 35,149,986 | Note 11: STOCK-BASED COMPENSATION PLANS Stock-based compensation expense was $2.3 million for Q2 2022, with $15.3 million in unrecognized expense to be amortized over the next 33 months - Stock-based compensation expense for restricted stock grants was $2.3 million for Q2 2022 (down from $2.5 million YoY) and $4.3 million for the six months ended June 30, 2022 (down from $4.7 million YoY)[187] - Unrecognized compensation expense for these awards totaled $15.3 million as of June 30, 2022, to be amortized over the next 33 months[187] Note 12: COMMITMENTS AND CONTINGENCIES The company has significant off-balance-sheet commitments, including $3.98 billion in credit extensions and $242.7 million in loan originations, with an allowance for unfunded commitments of $14.2 million | Commitment Type (in millions) | June 30, 2022 | December 31, 2021 | | :----------------------------- | :------------ | :---------------- | | Commitments to extend credit | $3,978.3 | $3,527.1 | | Standby letters of credit | $35.6 | $21.8 | | Commitments to originate loans | $242.7 | $106.6 | | Risk participation agreements | $53.2 | $40.1 | - The allowance for credit losses - unfunded loan commitments was $14.2 million at June 30, 2022, an increase from $12.4 million at December 31, 2021[190] NOTE 13: DERIVATIVES AND HEDGING The company uses derivatives, primarily interest rate swaps, for asset/liability management and client financing, with cash flow hedges resulting in net unrealized losses of $15.1 million in AOCI - Derivatives designated as cash flow hedges resulted in net unrealized losses of $15.1 million (net of taxes) recorded in AOCI at June 30, 2022, compared to $958 thousand at December 31, 2021[202] | Derivative Type (in millions) | June 30, 2022 Notional/Contract Amount | December 31, 2021 Notional/Contract Amount | | :----------------------------- | :------------------------------------- | :----------------------------------------- | | Interest Rate Swaps (designated) | $400.0 | $400.0 | | Interest rate swaps (non-designated) | $462.0 | $551.6 | | Mortgage loan commitments | $33.6 | $88.0 | | Forward sales contracts | $12.8 | $56.1 | - The company generally posts collateral against derivative liabilities, totaling $26.0 million at June 30, 2022[209] NOTE 14: REVENUE FROM CONTRACTS WITH CLIENTS Deposit fees and other service charges increased by $3.5 million (18.7%) for the six months ended June 30, 2022, driven by higher deposit transaction account activity | Revenue Category (in millions) | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2021 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Deposit service charges | $5.9 | $4.5 | $11.4 | $8.6 | | Debit and credit card interchange fees | $6.1 | $5.9 | $11.8 | $11.2 | | Merchant services income | $4.1 | $3.8 | $7.6 | $6.9 | | Other service charges | $1.2 | $1.2 | $3.2 | $2.6 | | Total deposit fees and other service charges | $11.0 | $9.8 | $22.2 | $18.7 | - Deposit fees and other service charges increased by $3.5 million (18.7%) for the six months ended June 30, 2022, compared to the same period a year earlier, driven by increased deposit transaction account activity[294] Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial performance, condition, asset quality, liquidity, and capital resources, highlighting key trends and significant changes Executive Overview Banner Corporation reported Q2 2022 net income of $48.0 million, benefiting from a branch sale gain and increased interest income, despite a provision for credit losses - Net income for Q2 2022 was $48.0 million ($1.39 diluted EPS), up from $44.0 million ($1.27 diluted EPS) in Q1 2022[223] - Q2 2022 results were positively impacted by a $7.8 million gain on a branch sale and increased interest income, partially offset by decreased mortgage banking income and a $4.5 million provision for credit losses[223][228][231] - The "Banner Forward" initiative, focused on revenue growth and expense reduction, incurred $1.6 million in expenses during Q2 2022, with full implementation expected by the end of 2023[225] | Metric (in millions, except EPS) | Q2 2022 (GAAP) | Q1 2022 (GAAP) | Q2 2022 (Non-GAAP Adjusted) | Q1 2022 (Non-GAAP Adjusted) | | :-------------------- | :------------- | :------------- | :-------------------------- | :-------------------------- | | Net income | $48.0 | $44.0 | $43.2 | $46.1 | | Diluted EPS | $1.39 | $1.27 | $1.25 | $1.33 | | Total revenue | $156.2 | $138.1 | $148.3 | $137.6 | | Non-interest expense | $92.1 | $91.2 | $88.2 | $85.4 | | Efficiency ratio | 58.94% | 66.04% | 59.46% | 62.09% | Comparison of Financial Condition at June 30, 2022 and December 31, 2021 Total assets decreased to $16.39 billion, while loans grew to $9.46 billion, and shareholders' equity declined by $204.5 million due to unrealized losses on available-for-sale securities - Total assets decreased by $419.7 million to $16.39 billion at June 30, 2022, from $16.80 billion at December 31, 2021, mainly due to a decrease in cash and interest-bearing deposits[249] - Total loans receivable increased by $372.1 million (4.1%) to $9.46 billion at June 30, 2022, from $9.08 billion at December 31, 2021, with significant growth in one-to-four family residential loans (32.0% increase)[249][250] - Total deposits decreased by $114.4 million (0.8%) to $14.21 billion at June 30, 2022, from $14.33 billion at December 31, 2021, partly due to the sale of four branches and related deposit transfers[263][266] - Shareholders' equity decreased by $204.5 million to $1.49 billion, primarily due to a $256.1 million decrease in Accumulated Other Comprehensive Income (AOCI) from unrealized losses on available-for-sale securities[267] | Loan Category (in millions) | Jun 30, 2022 | Dec 31, 2021 | % Change | | :--------------------------- | :----------- | :----------- | :------- | | Owner-occupied CRE | $845.2 | $831.6 | 1.6% | | Investment properties | $1,628.1 | $1,674.0 | (2.7)% | | Small balance CRE | $1,191.9 | $1,281.9 | (7.0)% | | Multifamily real estate | $575.2 | $530.9 | 8.3% | | Commercial construction | $194.0 | $168.0 | 15.5% | | One- to four-family construction | $625.5 | $568.8 | 10.0% | | Land and land development | $320.0 | $313.5 | 2.1% | | Commercial business (excl. PPP) | $1,176.3 | $1,038.2 | 13.3% | | SBA PPP loans | $31.0 | $133.9 | (76.9)% | | One- to four-family residential | $868.2 | $657.5 | 32.0% | | Consumer (incl. HELOC) | $595.6 | $555.9 | 7.1% | | Total loans receivable | $9,456.8 | $9,084.8 | 4.1% | Comparison of Results of Operations for the Three Months Ended June 30, 2022 and March 31, 2022 and the Six Months Ended June 30, 2022 and 2021 Q2 2022 net income increased to $48.0 million due to higher net interest income and a branch sale gain, while six-month net income decreased year-over-year due to lower mortgage banking income - Net interest income increased by $10.4 million (9%) to $129.0 million in Q2 2022 compared to Q1 2022, primarily due to higher yields on loans and investment securities from rising interest rates[226][273] - Net interest margin (tax equivalent) increased to 3.44% in Q2 2022 from 3.18% in Q1 2022, reflecting the impact of Federal Reserve rate hikes[274] - Non-interest income increased by $7.7 million to $27.2 million in Q2 2022 compared to Q1 2022, mainly due to a $7.8 million gain on branch sales[228][293] - Mortgage banking operations revenue decreased by $462 thousand in Q2 2022 compared to Q1 2022, and by $10.3 million for the six months ended June 30, 2022 YoY, due to reduced loan sales volume and lower gain on sale margins from increased interest rates[294] - A $4.5 million provision for credit losses was recorded in Q2 2022, compared to a $7.0 million recapture in Q1 2022, reflecting loan growth and deteriorating economic forecasts[231][269][288] - Non-interest expenses increased by $0.9 million to $92.1 million in Q2 2022 compared to Q1 2022, but decreased by $2.9 million for the six months ended June 30, 2022 YoY, primarily due to reduced staffing and consulting expenses[229][271][296] Asset Quality Non-performing assets decreased to $19.1 million (0.12% of total assets), and the allowance for credit losses provided strong coverage at 688% of non-performing loans | Metric (in millions) | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :-------------------- | :------------ | :---------------- | :------------ | | Non-performing assets | $19.1 | $23.7 | $31.5 | | Non-performing assets to total assets | 0.12% | 0.14% | 0.19% | | Nonaccrual loans | $16.7 | $22.3 | $28.6 | | Loans >90 days delinquent, still accruing | $2.1 | $0.6 | $2.1 | | REO, net | $0.3 | $0.9 | $0.8 | | Allowance for credit losses - loans | $128.7 | $132.1 | $148.0 | | Allowance for credit losses - loans to non-performing loans | 688% | 578% | 481% | - Substandard loans decreased during the six months ended June 30, 2022, primarily due to payoffs and risk rating upgrades[305] - The company had $4.4 million of Troubled Debt Restructuring (TDR) loans performing under their restructured repayment terms at June 30, 2022[302][303] Liquidity and Capital Resources Liquidity is primarily from deposits, loan payments, and securities, with $2.41 billion in FHLB and $876.8 million in FRBSF credit capacity, while shareholders' equity decreased due to AOCI losses - Total deposits decreased by $114.4 million during H1 2022, with certificates of deposit decreasing by $82.3 million and core deposits by $32.1 million, partly due to branch sales[310] - The company had $2.41 billion of available credit capacity from FHLB and $876.8 million from FRBSF at June 30, 2022, with no outstanding advances[314] - Total shareholders' equity decreased by $204.5 million to $1.49 billion at June 30, 2022, primarily due to a $256.1 million decrease in AOCI[316] | Metric (in millions) | June 30, 2022 | December 31, 2021 | | :-------------------- | :------------ | :---------------- | | Tangible common shareholders' equity | $1,100.8 | $1,302.4 | | Tangible common shareholders' equity to tangible assets | 6.88% | 7.93% | Capital Requirements Both Banner Corporation and Banner Bank exceeded all regulatory capital requirements at June 30, 2022, maintaining capital levels significantly above "Well-Capitalized" thresholds - Both Banner Corporation and Banner Bank exceeded all regulatory capital requirements at June 30, 2022[318][320] | Capital Ratio | Banner Corporation (Actual) | Minimum "Well-Capitalized" | Banner Bank (Actual) | Minimum "Well-Capitalized" | | :------------ | :-------------------------- | :------------------------- | :------------------- | :------------------------- | | Total capital to risk-weighted assets | 13.80% | 10.00% | 13.27% | 10.00% | | Tier 1 capital to risk-weighted assets | 11.92% | 6.00% | 12.22% | 8.00% | | Tier 1 leverage capital to average assets | 8.74% | n/a | 8.95% | 5.00% | | Common equity tier 1 capital | 11.21% | n/a | 12.22% | 6.50% | Item 3 – Quantitative and Qualitative Disclosures About Market Risk The company actively manages interest rate risk through asset/liability modeling, with sensitivity analysis indicating a 4.1% increase in net interest income for a 100 basis-point rate hike Market Risk and Asset/Liability Management Interest rate risk, arising from asset/liability repricing mismatches, is the primary market risk, actively managed to optimize earnings within acceptable risk tolerances - Interest rate risk, stemming from mismatches in asset/liability repricing, is the primary market risk[323][324] - The company actively manages interest rate risk through adjustments to the mix of interest-earning assets and funding sources, aiming to maximize earnings within acceptable risk tolerances[324][325] - Loans with interest rate floors totaled $3.90 billion at June 30, 2022, with a weighted average floor rate of 4.10% compared to a current average note rate of 4.77%[324] Sensitivity Analysis Asset/liability simulation modeling shows a 100 basis-point interest rate increase would boost net interest income by 4.1% over 12 months, while a decrease would reduce it by 7.9% - Asset/liability simulation modeling is the primary tool for assessing interest rate risk, quantifying variations in net interest income under different rate environments[326] | Change in Interest Rates (Basis Points) | Estimated Increase (Decrease) in Net Interest Income Next 12 Months (in millions) | Estimated Increase (Decrease) in Net Interest Income Next 24 Months (in millions) | Estimated Increase (Decrease) in Economic Value of Equity (in millions) | | :-------------------------------------- | :------------------------------------------------------------------ | :------------------------------------------------------------------ | :-------------------------------------------------------- | | +400 | $57.3 (10.0%) | $122.7 (10.5%) | $(623.5) (19.6%) | | +300 | $43.9 (7.6%) | $94.1 (8.0%) | $(494.0) (15.5%) | | +200 | $38.1 (6.6%) | $84.4 (7.2%) | $(345.1) (10.9%) | | +100 | $23.3 (4.1%) | $52.7 (4.5%) | $(187.2) (5.9%) | | -25 | $(10.0) (1.7%) | $(24.0) (2.1%) | $43.6 (1.4%) | | -50 | $(21.7) (3.8%) | $(52.4) (4.5%) | $64.7 (2.0%) | | -100 | $(45.3) (7.9%) | $(110.4) (9.4%) | $72.5 (2.3%) | - At June 30, 2022, the one-year cumulative interest sensitivity gap to total assets was 24.96%, indicating that interest-earning assets repricing within one year exceeded interest-bearing liabilities[335] Item 4 – Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2022[341] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2022[342] PART II – OTHER INFORMATION This part includes disclosures on legal proceedings, risk factors, equity security sales, and other miscellaneous information Item 1 – Legal Proceedings The company is involved in various legal proceedings, including a class action lawsuit, and has accrued $11.8 million related to these matters - The company has accrued $11.8 million related to legal proceedings as of June 30, 2022[344] - A class and collective action lawsuit, Bolding et al. v. Banner Bank, alleges failure to pay required wages to mortgage loan officers, with the court allowing the case to proceed to trial or settlement[345] Item 1A – Risk Factors No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021, were reported - No material changes in risk factors were reported since the 2021 Form 10-K[346] Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 200,000 shares of common stock during Q2 2022 under a renewed authorization, with 1,512,510 shares remaining available | Period | Total Number of Common Shares Purchased | Average Price Paid per Common Share | | :------------------------- | :-------------------------------------- | :---------------------------------- | | April 1, 2022 - April 30, 2022 | 84 | $59.69 | | May 1, 2022 - May 31, 2022 | 201,428 | $54.83 | | June 1, 2022 - June 30, 2022 | — | — | | Total for quarter | 201,512 | $54.83 | - The company repurchased 200,000 shares under its repurchase authorization during Q2 2022, with 1,512,510 shares remaining available for future repurchase[347][348] Item 3 – Defaults upon Senior Securities This item is not applicable to the company - This item is not applicable to the company[348] Item 4 – Mine Safety Disclosures This item is not applicable to the company - This item is not applicable to the company[348] Item 5 – Other Information This item is not applicable to the company - This item is not applicable to the company[348] Item 6 – Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, employment agreements, incentive plans, and certifications - The exhibit list includes restated articles of incorporation, amended bylaws, employment agreements, incentive plans, and certifications (CEO/CFO)[350] - XBRL instance, schema, calculation, definition, and label linkbase documents are included as exhibits[350][351] SIGNATURES This section contains the duly authorized signatures of the company's President, CEO, and CFO, affirming the accuracy of the report SIGNATURES The report was signed by Mark J. Grescovich, President and CEO, and Peter J. Conner, EVP, Treasurer, and CFO, on August 4, 2022 - The report was signed by Mark J. Grescovich (President and CEO) and Peter J. Conner (EVP, Treasurer, and CFO) on August 4, 2022[354]