Banner(US:BANR)2022-11-02 16:00PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents Banner Corporation's unaudited consolidated financial statements, including condition, operations, comprehensive income, equity changes, and cash flows, for the periods ended September 30, 2022 Consolidated Statements of Financial Condition Total assets decreased to $16.36 billion, while net loans grew to $9.69 billion, and shareholders' equity declined to $1.41 billion due to comprehensive loss Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $16,360,809 | $16,804,872 | ($444,063) | | Total cash and cash equivalents | $821,921 | $2,134,300 | ($1,312,379) | | Net loans receivable | $9,691,178 | $8,952,664 | $738,514 | | Total securities | $4,157,408 | $4,186,896 | ($29,488) | | Total Liabilities | $14,952,150 | $15,114,545 | ($162,395) | | Total deposits | $14,234,266 | $14,326,933 | ($92,667) | | Total Shareholders' Equity | $1,408,659 | $1,690,327 | ($281,668) | | Accumulated other comprehensive (loss) income | ($369,190) | $184 | ($369,374) | Consolidated Statements of Operations Q3 2022 net income was $49.1 million, with year-to-date net income at $141.0 million, impacted by credit loss provisions and lower mortgage banking income Key Performance Metrics (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $146,443 | $130,146 | $394,108 | $375,361 | | Provision (Recapture) for Credit Losses | $6,087 | ($8,638) | $3,660 | ($28,145) | | Total Non-interest Income | $15,585 | $25,334 | $62,185 | $71,942 | | Total Non-interest Expense | $95,034 | $102,145 | $278,282 | $288,296 | | Net Income | $49,070 | $49,884 | $140,998 | $151,121 | | Diluted EPS | $1.43 | $1.44 | $4.09 | $4.32 | - Mortgage banking operations income dropped significantly to $105 thousand in Q3 2022 from $9.6 million in Q3 2021, and to $8.5 million for the first nine months of 2022 from $28.3 million in the same period of 202110 Consolidated Statements of Comprehensive (Loss) Income The company reported a $228.4 million comprehensive loss for the nine months, driven by a $369.4 million other comprehensive loss from unrealized securities losses Comprehensive Income (Loss) Summary (in thousands) | Component | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net Income | $140,998 | $151,121 | | Other Comprehensive Loss | ($369,374) | ($54,130) | | Unrealized holding loss on securities (pre-tax) | ($422,728) | ($62,711) | | Comprehensive (Loss) Income | ($228,376) | $96,991 | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity declined to $1.41 billion, primarily due to a $369.4 million other comprehensive loss and $45.7 million in dividends Shareholders' Equity Reconciliation - 9 Months Ended Sep 30, 2022 (in thousands) | Description | Amount | | :--- | :--- | | Balance, January 1, 2022 | $1,690,327 | | Net income | $140,998 | | Other comprehensive loss, net of tax | ($369,374) | | Accrual of dividends on common stock | ($45,652) | | Repurchase of common stock | ($10,960) | | Stock-based compensation & other | $2,666 | | Balance, September 30, 2022 | $1,408,659 | Consolidated Statements of Cash Flows Cash and cash equivalents decreased by $1.31 billion, with $157.4 million from operations, $1.37 billion used in investing, and $104.2 million used in financing Cash Flow Summary - 9 Months Ended Sep 30 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided from operating activities | $157,367 | $329,723 | | Net cash used by investing activities | ($1,365,547) | ($819,963) | | Net cash (used by) provided from financing activities | ($104,199) | $1,456,639 | | Net Change in Cash and Cash Equivalents | ($1,312,379) | $966,399 | | Cash and cash equivalents, beginning of period | $2,134,300 | $1,234,183 | | Cash and cash equivalents, end of period | $821,921 | $2,200,582 | Selected Notes to the Consolidated Financial Statements This section details disclosures on securities, loans, credit losses, goodwill, deposits, fair value, commitments, and legal proceedings, supporting financial statements Note 3: Securities Total securities portfolio was $4.16 billion, with AFS securities showing $438.0 million in unrealized losses due to rising interest rates Securities Portfolio Summary (in thousands) | Category | Amortized Cost | Fair Value | Gross Unrealized Losses | | :--- | :--- | :--- | :--- | | Trading | $27,203 | $28,383 | N/A | | Available-for-Sale | $3,433,541 | $2,996,173 | ($437,953) | | Held-to-Maturity | $1,133,246 | $947,416 | ($185,885) | - At September 30, 2022, there were 313 available-for-sale securities with unrealized losses, a significant increase from 97 at year-end 2021, which management attributes to changes in interest rates rather than credit deterioration57 Note 4: Loans Receivable and the Allowance for Credit Losses - Loans Total loans grew to $9.83 billion, with an allowance for credit losses of $135.9 million, and nonaccrual loans at $13.5 million Loan Portfolio Composition (in thousands) | Loan Category | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Commercial real estate | $3,656,024 | $3,787,513 | | Construction, land and land development | $1,442,326 | $1,309,321 | | Commercial business | $2,448,943 | $2,245,022 | | One- to four-family residential | $1,025,143 | $657,474 | | Consumer | $662,172 | $555,902 | | Total loans | $9,827,096 | $9,084,763 | Allowance for Credit Losses - Loans Activity (in thousands) | Description | Nine Months Ended Sep 30, 2022 | | :--- | :--- | | Beginning balance | $132,099 | | Provision for credit losses | $2,115 | | Recoveries | $2,955 | | Charge-offs | ($1,251) | | Ending balance | $135,918 | - Total nonaccrual loans decreased to $13.5 million at September 30, 2022, from $22.3 million at year-end 2021126128 Note 6: Goodwill, Other Intangible Assets and Mortgage Servicing Rights Goodwill remained at $373.1 million, CDI decreased to $10.7 million, and mortgage servicing rights covered $2.80 billion in loans - Goodwill of $373.1 million was assessed for impairment as of December 31, 2021, with management concluding that no impairment was indicated139 - The unpaid principal balance of loans for which mortgage and SBA servicing rights are recognized totaled $2.80 billion at September 30, 2022144 Note 7: Deposits Total deposits were $14.23 billion, with core deposits representing 95% and certificates of deposit decreasing to $721.9 million Deposit Composition (in thousands) | Deposit Type | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Non-interest-bearing accounts | $6,507,523 | $6,385,177 | | Interest-bearing transaction and saving accounts | $7,004,799 | $7,103,125 | | Certificates of deposit | $721,944 | $838,631 | | Total deposits | $14,234,266 | $14,326,933 | Note 12: Commitments and Contingencies Off-balance-sheet commitments totaled $3.94 billion, and the company accrued $11.3 million for legal proceedings, including a class action lawsuit - Commitments to extend credit increased to $3.94 billion at September 30, 2022, from $3.53 billion at year-end 2021189 - The company is defending a class action lawsuit, Bolding et al. v. Banner Bank, related to wage claims by mortgage loan officers. The company has accrued $11.3 million for legal proceedings as of September 30, 2022348349 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operations, asset quality, liquidity, and capital, providing an executive overview and detailed comparisons Executive Overview Q3 2022 net income was $49.1 million, driven by higher interest income despite lower mortgage banking income, with the 'Banner Forward' initiative ongoing Q3 2022 Performance Summary | Metric | Q3 2022 | Q2 2022 | | :--- | :--- | :--- | | Net Income | $49.1 million | $48.0 million | | Diluted EPS | $1.43 | $1.39 | | Adjusted Earnings (Non-GAAP) | $49.0 million | $43.2 million | | Adjusted Diluted EPS (Non-GAAP) | $1.42 | $1.25 | - The 'Banner Forward' initiative, focused on enhancing revenue and reducing operating expenses, is ongoing. Revenue enhancements are beginning to positively impact earnings, with full implementation expected by the end of 2023227 Comparison of Financial Condition Total assets decreased to $16.36 billion, loans grew to $9.83 billion, deposits fell by $92.7 million, and shareholders' equity declined to $1.41 billion - Total loans receivable increased by 8.2% to $9.83 billion at Sep 30, 2022 from $9.08 billion at Dec 31, 2021, with notable growth in one- to four-family residential loans, which increased 55.9%253254 - Total deposits decreased by 0.6% to $14.23 billion, impacted by a branch sale that transferred $178.2 million of deposits. Core deposits now represent 95% of total deposits, up from 94% at year-end 2021268 - Tangible common shareholders' equity to tangible assets (a non-GAAP measure) decreased to 6.41% from 7.93% at year-end 2021, mainly due to the decrease in Accumulated Other Comprehensive Income (AOCI)271239 Comparison of Results of Operations Net interest income for Q3 2022 increased to $146.4 million with a 3.85% margin, while non-interest income decreased to $15.6 million, and a $6.1 million credit loss provision was recorded - Net interest margin on a tax equivalent basis increased by 41 basis points to 3.85% in Q3 2022 compared to 3.44% in Q2 2022, driven by a 43 basis-point increase in the average yield on interest-earning assets280 - A provision for credit losses of $6.1 million was recorded in Q3 2022, compared to a $4.5 million provision in Q2 2022, primarily reflecting loan growth and a deterioration in forecasted economic conditions275 - Mortgage banking operations revenue decreased by $3.9 million quarter-over-quarter, reflecting reduced loan sale volumes and gain-on-sale margins due to rising interest rates298 Asset Quality Asset quality improved, with non-performing assets decreasing to $15.6 million (0.10% of total assets) and the allowance for credit losses at $135.9 million Non-Performing Assets (in thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | Sep 30, 2021 | | :--- | :--- | :--- | :--- | | Total non-performing loans | $15,193 | $22,836 | $28,861 | | REO and other repossessed assets | $357 | $869 | $869 | | Total non-performing assets | $15,550 | $23,705 | $29,730 | | NPA / Total Assets | 0.10% | 0.14% | 0.18% | - Substandard loans decreased to $136.4 million at September 30, 2022, from $198.4 million at year-end 2021, primarily due to risk rating upgrades311 Liquidity and Capital Resources The company maintains strong liquidity with $2.50 billion FHLB and $1.10 billion FRBSF capacity, robust capital ratios, and a $0.44 per share quarterly dividend - The company has substantial available liquidity, with $2.50 billion in credit capacity from the FHLB and $1.10 billion from the FRBSF as of September 30, 2022316 - The current quarterly common stock dividend rate is $0.44 per share, which management believes balances investment in the bank with returning cash to shareholders317 Capital Requirements Banner Corporation and Banner Bank maintained capital levels exceeding regulatory requirements, with CET1 at 11.27% and Total Capital at 13.85% Banner Corporation Regulatory Capital Ratios (Consolidated) | Ratio | Actual (Sep 30, 2022) | Minimum Adequately Capitalized | | :--- | :--- | :--- | | Common equity tier 1 capital | 11.27% | 4.50% | | Tier 1 capital to risk-weighted assets | 11.96% | 6.00% | | Total capital to risk-weighted assets | 13.85% | 8.00% | | Tier 1 leverage capital to average assets | 9.06% | 4.00% | Quantitative and Qualitative Disclosures About Market Risk The company is asset-sensitive to interest rate risk; a +100 bps rate shock increases net interest income by 3.3%, while a -100 bps shock decreases it by 6.3% Interest Rate Sensitivity Analysis (as of Sep 30, 2022) | Rate Shock (Basis Points) | Estimated % Change in Net Interest Income (Next 12 Months) | | :--- | :--- | | +300 | +5.8% | | +200 | +5.3% | | +100 | +3.3% | | -100 | -6.3% | | -200 | -13.4% | - As of September 30, 2022, the company had $4.23 billion in loans with interest rate floors, which helps maintain loan yields in declining rate environments. Of these, $1.09 billion had interest rates at their floors327 Controls and Procedures Management concluded disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting - The CEO and CFO concluded that as of September 30, 2022, the company's disclosure controls and procedures were effective345 - No material changes to internal control over financial reporting occurred during the third quarter of 2022346 PART II – OTHER INFORMATION Legal Proceedings The company faces a class action lawsuit (Bolding et al. v. Banner Bank) for wage claims, with $11.3 million accrued for legal proceedings - The company is defending a class action lawsuit (Bolding et al. v. Banner Bank) regarding wage claims under the Fair Labor Standards Act (FLSA) and state laws for mortgage loan officers349 - As of September 30, 2022, the company had accrued $11.3 million for legal proceedings, though the ultimate outcome is unknown348 Risk Factors No material changes to risk factors were reported for the period, consistent with the prior Annual Report on Form 10-K - No material changes to risk factors were reported for the period350 Unregistered Sales of Equity Securities and Use of Proceeds No common stock was repurchased in Q3 2022, with 1,512,510 shares remaining available under the existing authorization - No shares were repurchased under the publicly announced authorization during the quarter ended September 30, 2022351352 - The company has 1,512,510 shares remaining that may be purchased under its current stock repurchase authorization351352