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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ to ______________
Commission File Number 000-26584
BANNER CORPORATION
(Exact name of registrant as specified in its charter)
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Washington | 91-1691604 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
10 South First Avenue, Walla Walla, Washington 99362
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (509) 527-3636
Securities registered pursuant to Section 12(b) of the Act
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $.01 per share | BANR | The NASDAQ Stock Market LLC |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | |
| | | | | | | | Yes | ☒ | | No | ☐ | |
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | |
| | | | | | | | | | | | | | | | | | | Yes | ☒ | | No | ☐ | |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | |
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Large accelerated filer | ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company | ☐ | |
Emerging growth company | ☐ | | | | | | | | | | | | | | | | | | | |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | ☐ | | No | ☒ | |
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APPLICABLE ONLY TO CORPORATE ISSUERS | |
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. | |
| |
Title of class: | | As of October 31, 2023 | |
Common Stock, $.01 par value per share | | | | | | | | | 34,348,094 shares | |
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BANNER CORPORATION AND SUBSIDIARIES
Table of Contents
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PART I – FINANCIAL INFORMATION | |
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Item 1 – Financial Statements. The Unaudited Condensed Consolidated Financial Statements of Banner Corporation and Subsidiaries filed as a part of the report are as follows: | |
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Consolidated Statements of Financial Condition as of September 30, 2023 and December 31, 2022 | |
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Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022 | |
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Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2023 and 2022 | |
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Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2023 and the Year Ended December 31, 2022 | |
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Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 | |
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Selected Notes to the Consolidated Financial Statements | |
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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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Executive Overview | |
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Comparison of Financial Condition at September 30, 2023 and December 31, 2022 | |
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Comparison of Results of Operations for the Three Months Ended September 30, 2023 and June 30, 2023 and the Nine Months Ended September 30, 2023 and 2022 | |
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Asset Quality | |
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Liquidity and Capital Resources | |
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Capital Requirements | |
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Item 3 – Quantitative and Qualitative Disclosures About Market Risk | |
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Market Risk and Asset/Liability Management | |
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Sensitivity Analysis | |
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Item 4 – Controls and Procedures | |
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PART II – OTHER INFORMATION | |
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Item 1 – Legal Proceedings | |
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Item 1A – Risk Factors | |
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Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds | |
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Item 3 – Defaults upon Senior Securities | |
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Item 4 – Mine Safety Disclosures | |
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Item 5 – Other Information | |
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Item 6 – Exhibits | |
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SIGNATURES | |
All references to “Banner” refer to Banner Corporation and those to the “Bank” refer to its wholly-owned subsidiary, Banner Bank. As used throughout this report, the terms “we,” “our,” “us,” or the “Company” refer to Banner Corporation and its consolidated subsidiaries, unless the context otherwise requires.
Special Note Regarding Forward-Looking Statements
Certain matters in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance and projections of financial items, including statements about our financial condition, liquidity and results of operations. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions, or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as increasing supply chain disruptions; changes in the interest rate environment, including the recent increases in the Board of Governors of the Federal Reserve System (the Federal Reserve) benchmark rate and duration at which such increased interest rate levels are maintained, which could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity; the impact of continuing high inflation and the current and future monetary policies of the Federal Reserve in response thereto; the effects of any federal government shutdown; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses and provisions for credit losses; the ability to manage loan delinquency rates; competitive pressures among financial services companies; changes in consumer spending or borrowing and spending habits; interest rate movements generally and the relative differences between short and long-term interest rates, loan and deposit interest rates, net interest margin and funding sources; the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; the transition away from the London Interbank Offered Rate (LIBOR) toward new interest rate benchmarks; the impact of repricing and competitors’ pricing initiatives on loan and deposit products; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values; the ability to adapt successfully to technological changes to meet clients’ needs and developments in the marketplace; the ability to access cost-effective funding; the ability to control operating costs and expenses, including the costs associated with our “Banner Forward” initiative; the use of estimates in determining fair value of certain assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuation; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect employees, and potential associated charges; disruptions, security breaches or other adverse events, failures or interruptions in, or attacks on, information technology systems or on the third-party vendors who perform critical processing functions; changes in financial markets; changes in economic conditions in general and in Washington, Idaho, Oregon and California in particular; secondary market conditions for loans and the ability to sell loans in the secondary market; the costs, effects and outcomes of litigation; legislation or regulatory changes, including but not limited to changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, results of safety and soundness and compliance examinations by the Federal Reserve, the Federal Deposit Insurance Corporation (the FDIC), the Washington State Department of Financial Institutions, Division of Banks (the Washington DFI), or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require restitution or institute an informal or formal enforcement action which could require an increase in reserves for loan losses, write-downs of assets or changes in regulatory capital position, or affect the ability to borrow funds, or maintain or increase deposits, or impose additional requirements and restrictions, any of which could adversely affect liquidity and earnings; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; the quality and composition of our securities portfolio and the impact of adverse changes in the securities markets; the inability of key third-party providers to perform their obligations; changes in accounting principles, policies or guidelines, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business; other economic, competitive, governmental, regulatory and technological factors affecting operations, pricing, products and services; future acquisitions by the Company of other depository institutions or lines of business; and future goodwill impairment due to changes in the Company’s business, changes in market conditions; and other risks detailed in our Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”) and in our reports filed with or furnished to the U.S. Securities and Exchange Commission (SEC), including this report on Form 10-Q.
Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We do not undertake and specifically disclaim any obligation to update any forward-looking statements included in this report or the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) (In thousands, except shares and per share amounts)
September 30, 2023 and December 31, 2022
| | | | | | | | | | | |
ASSETS | September 30, 2023 | | December 31, 2022 |
Cash and due from banks | $ | 207,171 | | | $ | 198,154 | |
Interest bearing deposits | 44,535 | | | 44,908 | |
Total cash and cash equivalents | 251,706 | | | 243,062 | |
Securities—trading | 25,268 | | | 28,694 | |
Securities—available-for-sale, net of allowance for credit losses of $750 and none, respectively; amortized cost $2,774,972 and $3,218,777, respectively | 2,287,993 | | | 2,789,031 | |
Securities—held-to-maturity, net of allowance for credit losses of $349 and $379, respectively | 1,082,156 | | | 1,117,588 | |
Total securities | 3,395,417 | | | 3,935,313 | |
| | | |
Federal Home Loan Bank (FHLB) stock | 15,600 | | | 12,000 | |
Securities purchased under agreements to resell | — | | | 300,000 | |
Loans held for sale (includes $51,697 and $51,779, at fair value, respectively) | 54,158 | | | 56,857 | |
Loans receivable | 10,611,417 | | | 10,146,724 | |
Allowance for credit losses – loans | (146,960) | | | (141,465) | |
Net loans receivable | 10,464,457 | | | 10,005,259 | |
Accrued interest receivable | 61,040 | | | 57,284 | |
Property and equipment, net | 136,504 | | | 138,754 | |
Goodwill | 373,121 | | | 373,121 | |
Other intangibles, net | 6,542 | | | 9,440 | |
Bank-owned life insurance (BOLI) | 303,347 | | | 297,565 | |
Deferred tax assets, net | 186,775 | | | 178,131 | |
Operating lease right-of-use assets | 43,447 | | | 49,283 | |
Other assets | 215,766 | | | 177,362 | |
Total assets | $ | 15,507,880 | | | $ | 15,833,431 | |
LIABILITIES | | | |
Deposits: | | | |
Non-interest-bearing | $ | 5,197,854 | | | $ | 6,176,998 | |
Interest-bearing transaction and savings accounts | 6,518,385 | | | 6,719,531 | |
Interest-bearing certificates | 1,458,313 | | | 723,530 | |
Total deposits | 13,174,552 | | | 13,620,059 | |
Advances from FHLB | 140,000 | | | 50,000 | |
Other borrowings | 188,440 | | | 232,799 | |
Subordinated notes, net | 92,748 | | | 98,947 | |
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities) | 66,284 | | | 74,857 | |
Operating lease liabilities | 48,642 | | | 55,205 | |
Accrued expenses and other liabilities | 231,478 | | | 200,839 | |
Deferred compensation | 45,129 | | | 44,293 | |
Total liabilities | 13,987,273 | | | 14,376,999 | |
COMMITMENTS AND CONTINGENCIES (Note 11) | | | |
SHAREHOLDERS’ EQUITY | | | |
Preferred stock - $0.01 par value per share, 500,000 shares authorized; no shares outstanding at September 30, 2023 and December 31, 2022 | — | | | — | |
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 34,345,949 shares issued and outstanding at September 30, 2023; 34,194,018 shares issued and outstanding at December 31, 2022 | 1,297,307 | | | 1,293,959 | |
Common stock (non-voting) and paid in capital - $0.01 par value per share, 5,000,000 shares authorized; no shares issued and outstanding at September 30, 2023; no shares issued and outstanding at December 31, 2022 | — | | | — | |
Retained earnings | 616,215 | | | 525,242 | |
Carrying value of shares held in trust for stock-based compensation plans | (6,546) | | | (6,905) | |
Liability for common stock issued to stock related compensation plans | 6,546 | | | 6,905 | |
Accumulated other comprehensive loss | (392,915) | | | (362,769) | |
| | | |
Total shareholders’ equity | 1,520,607 | | | 1,456,432 | |
Total liabilities and shareholders’ equity | $ | 15,507,880 | | | $ | 15,833,431 | |
See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands, except shares and per share amounts)
For the Three and Nine Months Ended September 30, 2023 and 2022
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
INTEREST INCOME: | | | | | | | |
Loans receivable | $ | 149,254 | | | $ | 116,610 | | | $ | 423,359 | | | $ | 321,466 | |
Mortgage-backed securities | 17,691 | | | 17,558 | | | 54,954 | | | 48,486 | |
Securities and cash equivalents | 12,119 | | | 16,951 | | | 39,521 | | | 37,059 | |
Total interest income | 179,064 | | | 151,119 | | | 517,834 | | | 407,011 | |
INTEREST EXPENSE: | | | | | | | |
Deposits | 31,001 | | | 2,407 | | | 60,784 | | | 6,501 | |
FHLB advances | 2,233 | | | — | | | 8,654 | | | 291 | |
Other borrowings | 1,099 | | | 81 | | | 2,251 | | | 245 | |
Subordinated debt | 2,965 | | | 2,188 | | | 8,549 | | | 5,866 | |
Total interest expense | 37,298 | | | 4,676 | | | 80,238 | | | 12,903 | |
Net interest income | 141,766 | | | 146,443 | | | 437,596 | | | 394,108 | |
PROVISION FOR CREDIT LOSSES | 2,027 | | | 6,087 | | | 8,267 | | | 3,660 | |
Net interest income after provision for credit losses | 139,739 | | | 140,356 | | | 429,329 | | | 390,448 | |
NON-INTEREST INCOME: | | | | | | | |
Deposit fees and other service charges | 10,916 | | | 11,449 | | | 32,078 | | | 33,638 | |
Mortgage banking operations | 2,049 | | | 105 | | | 6,426 | | | 8,523 | |
BOLI | 2,062 | | | 1,804 | | | 6,636 | | | 5,674 | |
Miscellaneous | 942 | | | 1,689 | | | 4,010 | | | 5,423 | |
| 15,969 | | | 15,047 | | | 49,150 | | | 53,258 | |
Net (loss) gain on sale of securities | (2,657) | | | 6 | | | (14,436) | | | 473 | |
| | | | | | | |
Net change in valuation of financial instruments carried at fair value | (654) | | | 532 | | | (4,357) | | | 650 | |
| | | | | | | |
Gain on sale of branches, including related deposits | — | | | — | | | — | | | 7,804 | |
Total non-interest income | 12,658 | | | 15,585 | | | 30,357 | | | 62,185 | |
NON-INTEREST EXPENSE: | | | | | | | |
Salary and employee benefits | 61,091 | | | 61,639 | | | 184,452 | | | 181,957 | |
Less capitalized loan origination costs | (4,498) | | | (5,984) | | | (12,386) | | | (19,436) | |
Occupancy and equipment | 11,722 | | | 12,008 | | | 35,686 | | | 38,512 | |
Information and computer data services | 7,118 | | | 6,803 | | | 21,347 | | | 19,451 | |
Payment and card processing services | 5,172 | | | 5,508 | | | 14,459 | | | 16,086 | |
Professional and legal expenses | 3,042 | | | 2,619 | | | 7,563 | | | 7,677 | |
Advertising and marketing | 1,362 | | | 1,326 | | | 3,108 | | | 2,609 | |
Deposit insurance | 2,874 | | | 1,946 | | | 7,603 | | | 4,910 | |
State and municipal business and use taxes | 1,359 | | | 1,223 | | | 3,888 | | | 3,389 | |
Real estate operations, net | (383) | | | 68 | | | (585) | | | (132) | |
Amortization of core deposit intangibles | 857 | | | 1,215 | | | 2,898 | | | 4,064 | |
Loss on extinguishment of debt | — | | | — | | | — | | | 793 | |
Miscellaneous | 6,175 | | | 6,663 | | | 17,884 | | | 18,402 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total non-interest expense | 95,891 | | | 95,034 | | | 285,917 | | | 278,282 | |
Income before provision for income taxes | 56,506 | | | 60,907 | | | 173,769 | | | 174,351 | |
PROVISION FOR INCOME TAXES | 10,652 | | | 11,837 | | | 32,769 | | | 33,353 | |
NET INCOME | $ | 45,854 | | | $ | 49,070 | | | $ | 141,000 | | | $ | 140,998 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Earnings per common share: | | | | | | | |
Basic | $ | 1.33 | | | $ | 1.43 | | | $ | 4.11 | | | $ | 4.11 | |
Diluted | $ | 1.33 | | | $ | 1.43 | | | $ | 4.09 | | | $ | 4.09 | |
Cumulative dividends declared per common share | $ | 0.48 | | | $ | 0.44 | | | $ | 1.44 | | | $ | 1.32 | |
Weighted average number of common shares outstanding: | | | | | | | |
Basic | 34,379,865 | | | 34,224,640 | | | 34,331,458 | | | 34,277,182 | |
Diluted | 34,429,726 | | | 34,416,017 | | | 34,439,214 | | | 34,499,246 | |
See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited) (In thousands)
For the Three and Nine Months Ended September 30, 2023 and 2022
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
NET INCOME | $ | 45,854 | | | $ | 49,070 | | | $ | 141,000 | | | $ | 140,998 | |
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF INCOME TAXES: | | | | | | | |
Unrealized holding loss on securities—available-for-sale arising during the period | (76,417) | | | (140,312) | | | (71,669) | | | (422,728) | |
Income tax benefit related to securities—available-for-sale unrealized holding losses | 18,341 | | | 33,675 | | | 17,201 | | | 101,455 | |
Reclassification for net loss (gain) on securities—available-for-sale realized in earnings | 2,657 | | | (6) | | | 14,436 | | | (473) | |
Income tax (benefit) expense related to securities—available-for-sale realized in earnings | (638) | | | 2 | | | (3,465) | | | 114 | |
Reclassification of (recapture) provision for credit losses on securities—available-for-sale realized in earnings | (1,250) | | | — | | | 750 | | | — | |
Income tax benefit (expense) related to the reclassification of (recapture) provision for credit losses on securities—available-for-sale realized in earnings | 300 | | | — | | | (180) | | | — | |
Unrealized loss on securities transferred from available-for-sale to held-to-maturity | — | | | — | | | — | | | (34,596) | |
Income tax benefit related to securities transferred from available-for-sale to held-to-maturity | — | | | — | | | — | | | 8,303 | |
Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity | 617 | | | 754 | | | 1,773 | | | 1,982 | |
Income tax expense related to amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity | (150) | | | (181) | | | (426) | | | (476) | |
Net unrealized gain (loss) on interest rate swaps used in cash flow hedges | 3,090 | | | (7,871) | | | 6,472 | | | (26,425) | |
Income tax (expense) benefit related to interest rate swaps used in cash flow hedges | (741) | | | 1,889 | | | (1,553) | | | 6,342 | |
Changes in fair value of junior subordinated debentures related to instrument specific credit risk | 953 | | | (1,612) | | | 8,573 | | | (4,544) | |
Income tax (expense) benefit related to junior subordinated debentures | (229) | | | 387 | | | (2,058) | | | 1,091 | |
Reclassification of fair value of junior subordinated debentures redeemed | — | | | — | | | — | | | 765 | |
Income tax expense related to junior subordinated debentures redeemed | — | | | — | | | — | | | (184) | |
Other comprehensive loss | (53,467) | | | (113,275) | | | (30,146) | | | (369,374) | |
COMPREHENSIVE (LOSS) INCOME | $ | (7,613) | | | $ | (64,205) | | | $ | 110,854 | | | $ | (228,376) | |
See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited) (In thousands, except shares and per share amounts)
For the Nine Months Ended September 30, 2023 and the Year Ended December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock and Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders’ Equity |
| | Shares | | Amount | | | |
Balance, January 1, 2022 | | 34,252,632 | | | $ | 1,299,381 | | | $ | 390,762 | | | $ | 184 | | | $ | 1,690,327 | |
| | | | | | | | | | |
Net income | | | | | | 43,963 | | | | | 43,963 | |
Other comprehensive loss, net of income tax | | | | | | | | (154,275) | | | (154,275) | |
Accrual of dividends on common stock ($0.44/share) | | | | | | (15,066) | | | | | (15,066) | |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered | | 120,152 | | | (1,169) | | | | | | | (1,169) | |
| | | | | | | | | | |
Balance, March 31, 2022 | | 34,372,784 | | | $ | 1,298,212 | | | $ | 419,659 | | | $ | (154,091) | | | $ | 1,563,780 | |
Net income | | | | | | 47,965 | | | | | 47,965 | |
Other comprehensive loss, net of income tax | | | | | | | | (101,824) | | | (101,824) | |
Accrual of dividends on common stock ($0.44/share) | | | | | | (15,378) | | | | | (15,378) | |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered | | 18,546 | | | 2,247 | | | | | | | 2,247 | |
Repurchase of common stock | | (200,000) | | | (10,960) | | | | | | | (10,960) | |
Balance, June 30, 2022 | | 34,191,330 | | | $ | 1,289,499 | | | $ | 452,246 | | | $ | (255,915) | | | $ | 1,485,830 | |
Net income | | | | | | 49,070 | | | | | 49,070 | |
Other comprehensive loss, net of income tax | | | | | | | | (113,275) | | | (113,275) | |
Accrual of dividends on common stock ($0.44/share) | | | | | | (15,208) | | | | | (15,208) | |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered | | 429 | | | 2,242 | | | | | | | 2,242 | |
| | | | | | | | | | |
Balance, September 30, 2022 | | 34,191,759 | | | $ | 1,291,741 | | | $ | 486,108 | | | $ | (369,190) | | | $ | 1,408,659 | |
Net income | | | | | | 54,380 | | | | | 54,380 | |
Other comprehensive income, net of income tax | | | | | | | | 6,421 | | | 6,421 | |
Accrual of dividends on common stock ($0.44/share) | | | | | | (15,246) | | | | | (15,246) | |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered | | 2,259 | | | 2,218 | | | | | | | 2,218 | |
| | | | | | | | | | |
| | | | | | | | | | |
Balance, December 31, 2022 | | 34,194,018 | | | $ | 1,293,959 | | | $ | 525,242 | | | $ | (362,769) | | | $ | 1,456,432 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | | | | | |
Balance, January 1, 2023 | | 34,194,018 | | | $ | 1,293,959 | | | $ | 525,242 | | | $ | (362,769) | | | $ | 1,456,432 | |
| | | | | | | | | | |
| | | | | | | | | | |
Net income | | | | | | 55,555 | | | | | 55,555 | |
Other comprehensive income, net of income tax | | | | | | | | 37,133 | | | 37,133 | |
Accrual of dividends on common stock ($0.48/share) | | | | | | (16,691) | | | | | (16,691) | |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered | | 114,522 | | | (734) | | | | | | | (734) | |
| | | | | | | | | | |
| | | | | | | | | | |
Balance, March 31, 2023 | | 34,308,540 | | | 1,293,225 | | | 564,106 | | | (325,636) | | | 1,531,695 | |
Net income | | | | | | 39,591 | | | | | 39,591 | |
Other comprehensive loss, net of income tax | | | | | | | | (13,812) | | | (13,812) | |
Accrual of dividends on common stock ($0.48/share) | | | | | | (16,670) | | | | | (16,670) | |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered | | 36,087 | | | 1,709 | | | | | | | 1,709 | |
| | | | | | | | | | |
Balance, June 30, 2023 | | 34,344,627 | | | $ | 1,294,934 | | | $ | 587,027 | | | $ | (339,448) | | | $ | 1,542,513 | |
Net income | | | | | | 45,854 | | | | | 45,854 | |
Other comprehensive loss, net of income tax | | | | | | | | (53,467) | | | (53,467) | |
Accrual of dividends on common stock ($0.48/share) | | | | | | (16,666) | | | | | (16,666) | |
Amortization of stock-based compensation related to restricted stock grants, net of shares surrendered | | 1,322 | | | 2,373 | | | | | | | 2,373 | |
| | | | | | | | | | |
Balance, September 30, 2023 | | 34,345,949 | | | $ | 1,297,307 | | | $ | 616,215 | | | $ | (392,915) | | | $ | 1,520,607 | |
See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
For the Nine Months Ended September 30, 2023 and 2022
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
OPERATING ACTIVITIES: | | | |
Net income | $ | 141,000 | | | $ | 140,998 | |
Adjustments to reconcile net income to net cash provided from operating activities: | | | |
Depreciation | 13,314 | | | 12,594 | |
Deferred income and expense, net of amortization | (2,490) | | | (3,743) | |
Capitalized loan servicing rights, net of amortization | 1,520 | | | 479 | |
Amortization of core deposit intangibles | 2,898 | | | 4,064 | |
Loss (gain) on sale of securities, net | 14,436 | | | (473) | |
| | | |
Net change in valuation of financial instruments carried at fair value | 4,357 | | | (650) | |
| | | |
| | | |
| | | |
| | | |
Gain on sale of branches, including related deposits | — | | | (7,804) | |
Decrease in deferred taxes | 877 | | | 9,233 | |
(Decrease) increase in current taxes receivable, net | (3,370) | | | 9,706 | |
Stock-based compensation | 6,785 | | | 6,592 | |
Net change in cash surrender value of BOLI | (6,357) | | | (4,980) | |
Gain on sale of loans, excluding capitalized servicing rights | (2,277) | | | (3,246) | |
Gain on disposal of real estate held for sale and property and equipment, net | (442) | | | 239 | |
Provision for credit losses | 8,267 | | | 3,660 | |
| | | |
Loss on extinguishment of debt | — | | | 765 | |
Origination of loans held for sale | (187,077) | | | (376,654) | |
Proceeds from sales of loans held for sale | 200,525 | | | 375,656 | |
Net change in: | | | |
Other assets | (21,602) | | | (55,631) | |
Other liabilities | 19,188 | | | 46,562 | |
Net cash provided from operating activities | 189,552 | | | 157,367 | |
INVESTING ACTIVITIES: | | | |
Purchases of securities—available-for-sale | (54,192) | | | (606,622) | |
Principal repayments and maturities of securities—available-for-sale | 138,402 | | | 296,272 | |
Proceeds from sales of securities—available-for-sale | 334,937 | | | 25,030 | |
Purchases of securities—held-to-maturity | — | | | (190,645) | |
Principal repayments and maturities of securities—held-to-maturity | 35,329 | | | 40,810 | |
| | | |
| | | |
Loan originations, net of repayments | (479,482) | | | (621,444) | |
Purchases of loans and participating interest in loans | — | | | (103,268) | |
Proceeds from sales of other loans | 11,519 | | | 13,269 | |
| | | |
Net cash paid related to branch divestiture | — | | | (168,137) | |
Purchases of property and equipment | (11,626) | | | (12,244) | |
Proceeds from sale of real estate held for sale and sale of other property | 1,019 | | | 5,940 | |
Proceeds from FHLB stock repurchase program | 119,840 | | | 2,000 | |
Purchase of FHLB stock | (123,440) | | | — | |
| | | |
Proceeds from maturity of securities purchased under agreements to resell | 300,000 | | | — | |
Investment in bank-owned life insurance | (66) | | | (50,052) | |
Other | 419 | | | 3,544 | |
Net cash provided from (used by) investing activities | 272,659 | | | (1,365,547) | |
Continued on next page
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited) (In thousands)
For the Nine Months Ended September 30, 2023 and 2022
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
FINANCING ACTIVITIES: | | | |
(Decrease) increase in deposits, net | $ | (445,507) | | | $ | 85,535 | |
| | | |
Repayment of long term FHLB advances | — | | | (50,000) | |
Advances of overnight and short term FHLB advances, net | 90,000 | | | — | |
Decrease in other borrowings, net | (44,360) | | | (30,483) | |
| | | |
Repayment of junior subordinated debentures | — | | | (50,518) | |
Proceeds from redemption of trust preferred securities related to junior subordinated debentures | — | | | 1,518 | |
Cash dividends paid | (50,263) | | | (46,019) | |
Cash paid for repurchase of common stock | — | | | (10,960) | |
Taxes paid related to net share settlement of equity awards | (3,437) | | | (3,272) | |
Net cash used by financing activities | (453,567) | | | (104,199) | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | 8,644 | | | (1,312,379) | |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 243,062 | | | 2,134,300 | |
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 251,706 | | | $ | 821,921 | |
| | | |
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | |
Interest paid in cash | $ | 66,461 | | | $ | 11,332 | |
Tax paid | 29,931 | | | 10,670 | |
NON-CASH INVESTING AND FINANCING TRANSACTIONS: | | | |
Transfer of loans to real estate owned and other repossessed assets | 205 | | | — | |
Dividends accrued but not paid until after period end | 921 | | | 972 | |
Loans, held-for-sale, transferred (from) to portfolio | (8,472) | | | 13,420 | |
Securities, available-for-sale, transferred to held-to-maturity | — | | | 462,159 | |
DISPOSITIONS: | | | |
Assets divested | — | | | (1,539) | |
Liabilities divested | — | | | (178,209) | |
See Selected Notes to the Consolidated Financial Statements
BANNER CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements include the accounts of Banner Corporation (the Company or Banner), a bank holding company incorporated in the State of Washington and its wholly-owned subsidiary, Banner Bank (the Bank).
These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the SEC. In preparing these financial statements, the Company has evaluated events and transactions subsequent to September 30, 2023, for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information and note disclosures have been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements. Certain reclassifications have been made to the 2022 Consolidated Financial Statements and/or schedules to conform to the 2023 presentation. These reclassifications may have affected certain ratios for the prior periods. The effect of these reclassifications is considered immaterial. All significant intercompany transactions and balances have been eliminated.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments.
The information included in this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Interim results are not necessarily indicative of results for a full year or any other interim period.
Note 2: ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED
Financial Instruments – Credit Losses (Topic 326)
On January 1, 2023, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminated the troubled debt restructuring (TDR) recognition and measurement guidance and, instead, requires that a creditor evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The ASU also introduced new disclosure requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. In addition, the ASU requires vintage disclosures including current-period gross write-offs by year of origination for financing receivables. The Company applied the ASU prospectively and new disclosures have been added when applicable.
Reference Rate Reform (Topic 848)
In March 2020, the FASB issued guidance within ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, in response to the scheduled discontinuation of LIBOR on December 31, 2021. The amendments in this ASU provide optional guidance designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements (e.g., loans, debt securities, derivatives, borrowings) necessitated by reference rate reform. Since the issuance of this guidance, the publication cessation of U.S. dollar LIBOR was extended to June 30, 2023.
In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of Sunset Date of Topic 848. This ASU defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. This deferral of the sunset date is in response to the extension of the publication cessation date. The amendments in this ASU are effective upon the issuance date of December 2022.
The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance: 1) modifications of contracts within the scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; 2) modifications of contracts within the scope of Topic 842, Leases, should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts; 3) modifications of contracts do not require an entity to reassess its original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic characteristics and risks of the host contract; and 4) the amendments in this ASU also include a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in this ASUs are effective upon the issuance date of March 12, 2020, and applies to contract modifications made and new hedging relationships entered into through December 31, 2022.
The Company used the expedients in the Reference Rate Reform guidance to manage through the transition from LIBOR, specifically as they relate to loans, leases and hedging relationships. The adoption of this accounting guidance did not have a material impact on the Company’s Consolidated Financial Statements.
Fair Value Measurement (Topic 820)
In June 2022, the FASB issued guidance within ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The ASU affects all entities that have investments in equity securities measured at fair value that are subject to a contractual sale restriction. These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.
The ASU is effective for fiscal years, beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The adoption of this ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.
Note 3: SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair value of securities at September 30, 2023 and December 31, 2022 are summarized as follows (in thousands):
| | | | | | | | | | | | | | | |
| September 30, 2023 |
| Amortized Cost | | | | | | Fair Value |
Trading: | | | | | | | |
| | | | | | | |
| | | | | | | |
Corporate bonds | $ | 27,203 | | | | | | | $ | 25,268 | |
| | | | | | | |
| | | | | | | |
| $ | 27,203 | | | | | | | $ | 25,268 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Allowance for Credit Losses | | Fair Value |
Available-for-Sale: | | | | | | | | | |
U.S. Government and agency obligations | $ | 35,342 | | | $ | — | | | $ | (1,015) | | | $ | — | | | $ | 34,327 | |
Municipal bonds | 166,902 | | | — | | | (43,304) | | | — | | | 123,598 | |
Corporate bonds | 106,015 | | | — | | | (14,247) | | | (750) | | | 91,018 | |
Mortgage-backed or related securities | 2,244,179 | | | — | | | (424,727) | | | — | | | |