Banner Corporation (NASDAQ: BANR) — FY 2022 Form 10-K
Reporting period: Year ended December 31, 2022; comparisons are primarily with FY 2021. This is an annual report, not a standalone fourth-quarter results filing.
Business context
Banner is a Washington-based bank holding company whose principal subsidiary, Banner Bank, operated 137 branches and 18 loan production offices across Washington, Oregon, California, Idaho and Utah. Its community and commercial banking business includes lending, deposit gathering and mortgage banking.
Financial and operating performance
| Metric | FY 2022 / Dec. 31, 2022 | FY 2021 / Dec. 31, 2021 |
|---|---|---|
| Total revenue | $628.4 million | $593.3 million |
| Net interest income | $553.2 million | $496.9 million |
| Tax-equivalent net interest margin | 3.68% | 3.39% |
| Net income | $195.4 million | $201.0 million |
| Diluted earnings per share | $5.67 | $5.76 |
| Non-interest income | $75.3 million | $96.4 million |
| Non-interest expense | $377.3 million | $380.1 million |
| Return on average assets / efficiency ratio | 1.18% / 60.04% | 1.24% / 64.06% |
| Net loans / deposits | $10.01 billion / $13.62 billion | $8.95 billion / $14.33 billion |
| Total assets / shareholders’ equity | $15.83 billion / $1.46 billion | $16.80 billion / $1.69 billion |
Net interest income after provision for credit losses was $542.8 million. The provision was $10.4 million, compared with a $33.4 million recapture in 2021. The allowance for loan losses was $141.5 million, or 1.39% of loans, versus $132.1 million, or 1.45%. Net recoveries were $1.2 million, compared with $2.1 million in net charge-offs in 2021.
Operating cash flow was $238.1 million; investing cash flow was negative $1.445 billion and financing cash flow was negative $684.7 million. Cash and cash equivalents decreased $1.891 billion to $243.1 million. Core deposits were $12.90 billion, 95% of total deposits. The company reported $456.6 million of borrowings, including $50.0 million of FHLB advances, $232.8 million of other borrowings, $98.9 million of subordinated notes and $74.9 million of junior subordinated debentures at fair value.
Regulatory capital ratios remained above well-capitalized requirements: Banner reported 14.04% total capital, 12.13% Tier 1 risk-based capital, 9.45% Tier 1 leverage and 11.44% CET1. Book value per share was $42.59; tangible book value per share, a non-GAAP measure, was $31.41. The quarterly dividend increased 9% to $0.48 per share; FY dividends paid were $1.76 per share.
Material changes versus FY 2021
- Revenue rose 6%, mainly as higher asset yields and average earning-asset balances lifted net interest income. The tax-equivalent margin increased 29 basis points.
- Net income declined 3% as a $23.1 million fall in mortgage banking revenue and the swing from a credit-loss recapture to a provision offset higher net interest income. Mortgage banking revenue fell 68% to $10.8 million.
- Loans grew 12%; total deposits declined 5%, reflecting the sale of four branches, including $178.2 million of deposits, and reduced market liquidity. Core deposits’ share of deposits increased from 94% to 95%.
- Cash and securities declined, while loan growth increased the loans-to-deposits ratio to 74.92% from 64.08%. Total assets decreased 6%.
- Shareholders’ equity fell $233.9 million, largely because of a $363.0 million decline in accumulated other comprehensive income, primarily reflecting unrealized securities losses after interest rates rose. Tangible common equity to tangible assets declined to 6.95% from 7.93%.
- The bank sold four branches in June 2022, recording a $7.8 million gain. It also redeemed $50.5 million of junior subordinated debentures, recording a $0.8 million extinguishment loss.
Outlook, risks and contingencies
Management provided no formal earnings or financial guidance. It said Banner Forward revenue initiatives benefited the second half of 2022 and were expected to continue in 2023; efficiency-related initiatives were largely complete. Management expects to continue its quarterly $0.48 dividend, subject to board discretion and regulatory and capital constraints.
- Interest rates and securities: The filing identifies rate changes, deposit repricing, yield-curve shifts and mortgage activity as material uncertainties. About 64% of loans were adjustable or floating rate, but many had rate floors. Modeling estimated that a 300-basis-point increase would raise next-12-month net interest income 2.6% while reducing economic value of equity 11.6%; a 200-basis-point decrease would reduce modeled net interest income 9.2%. These are model estimates, not forecasts. Available-for-sale securities had $431.2 million of gross unrealized losses at year-end; management attributed the declines principally to market rates and spreads, not credit losses.
- Credit and concentration: Commercial and multifamily real estate loans were about 42% of total loans; construction, land and development loans were 15%. The loan portfolio is concentrated in the company’s regional markets, particularly Washington. Recession, inflation, falling property values, higher borrowing costs and weaker business or agricultural conditions could increase losses. Management estimated that a protracted-slump forecast would increase the loan allowance by approximately 28%.
- Liquidity and funding: Deposits declined and the company used cash to support loan growth and investment activity. Available borrowing capacity at year-end included $2.99 billion from the FHLB, approximately $1.19 billion from the Federal Reserve, and $125 million in uncommitted federal funds lines; availability depends on collateral and other conditions. Management stated it believed resources were adequate for foreseeable needs.
- Commitments and litigation: Loan commitments totaled $4.17 billion in the MD&A; the notes detail $4.03 billion of commitments to extend credit, plus other commitments. The company accrued $14.8 million for legal proceedings. In the Bolding wage-and-hour class action, settlement discussions were ongoing; management said an adverse trial outcome could exceed the accrued reserve.
- Other exposures: Risks include cyber incidents and third-party service providers, regulatory and compliance changes, LIBOR transition, climate and severe-weather impacts, and execution of strategic initiatives. Management found goodwill was not impaired at year-end. Independent auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether deposit trends, funding costs and loan growth develop as interest rates and market liquidity change.
- How the securities portfolio’s unrealized losses, AOCI and tangible capital respond to interest rates, and whether any securities need to be sold.
- Credit performance in commercial real estate, construction and land, and commercial business portfolios; adequacy of the allowance under changing economic forecasts.
- Actual realization of Banner Forward revenue and cost benefits, especially as mortgage banking activity remains weaker.
- Outcome of the Bolding litigation relative to the $14.8 million legal accrual, and availability of collateral-backed borrowing capacity and regulatory capital headroom.