Business context and reporting period
Banner Corporation is a Washington bank holding company operating Banner Bank, a regional commercial bank with 150 branches and 18 loan production offices. Its markets include Washington, Oregon, California, Idaho and Utah. This Form 10-K covers the fiscal year ended December 31, 2021; it is an annual report, not a standalone fourth-quarter results report.
At year-end, Banner reported $16.80 billion of assets, $8.95 billion of net loans, $14.33 billion of deposits and $1.69 billion of shareholders’ equity.
Financial performance and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Net income | $201.0 million | $115.9 million |
| Diluted earnings per share | $5.76 | $3.26 |
| Total revenue | $593.3 million | $579.9 million |
| Net interest income | $496.9 million | $481.3 million |
| Non-interest income | $96.4 million | $98.6 million |
| Non-interest expense | $380.1 million | $369.6 million |
| Net interest margin, tax-equivalent | 3.39% | 3.85% |
| Return on average assets | 1.24% | 0.83% |
| Return on average common equity | 12.12% | 7.14% |
| Operating cash flow | $301.6 million | $125.4 million |
Net income included a $33.4 million recapture of credit-loss provisions, versus a $67.9 million provision in 2020. Mortgage banking income fell $17.1 million to $33.9 million, while deposit fees and service charges rose $5.1 million to $39.5 million. The GAAP efficiency ratio was 64.06%, compared with 63.73%; the adjusted, non-GAAP ratio was 60.22%, compared with 60.76%.
Cash and cash equivalents were $2.13 billion; securities totaled $4.19 billion. Deposits increased 14% to $14.33 billion, with core deposits representing 94% of the total. Net loans declined 8% to $8.95 billion, largely reflecting SBA Paycheck Protection Program (PPP) forgiveness; excluding PPP loans, total loans receivable increased $124.3 million. The loans-to-deposits ratio fell to 64.08% from 80.48%.
Total borrowings were $434.3 million, down from $451.8 million. Year-end funding included $50.0 million of FHLB advances, $264.5 million of retail repurchase agreements, $98.6 million of subordinated notes and $119.8 million of junior subordinated debentures at fair value. Available FHLB borrowing capacity was $2.38 billion and Federal Reserve borrowing capacity was $782.3 million; neither facility was fully drawn.
Regulatory capital remained above well-capitalized thresholds: Banner Corporation’s total capital ratio was 14.71%, CET1 ratio 11.54%, and Tier 1 leverage ratio 8.76%. Tangible common equity to tangible assets, a non-GAAP measure, was 7.93%, down from 8.69%.
Material changes versus the prior comparable period
- Net income rose 73%, benefiting substantially from the credit-loss provision recapture, higher net interest income and lower funding costs.
- Net interest margin compressed 46 basis points as asset yields fell and excess liquidity was invested in lower-yielding short-term assets, partly offset by lower funding costs.
- Deposits grew $1.76 billion, while loans contracted due mainly to $1.48 billion of PPP loan forgiveness. Securities increased $1.42 billion as Banner deployed excess liquidity.
- Non-performing assets declined to $23.7 million, or 0.14% of assets, from $36.5 million, or 0.24%. Net charge-offs fell to $2.1 million from $5.4 million.
- Available-for-sale securities had an $80.1 million pre-tax unrealized fair-value loss for the year; accumulated other comprehensive income fell $68.9 million, largely reflecting securities valuation changes.
- Banner repurchased 1.05 million shares for $56.5 million and declared $1.64 per share in dividends during 2021. The year-end share-repurchase authorization permits repurchase of up to 1,712,510 shares.
Outlook, management commentary, risks and unusual items
Management said it expected the federal funds rate to begin rising in 2022 and believed higher rates could benefit net interest income. Its year-end interest-rate model estimated a 5.4% increase in next-12-month net interest income under an instantaneous, sustained 100-basis-point increase, but a 14.7% decrease in economic value of equity under a 400-basis-point increase. These are modeled sensitivities, not earnings guidance. The filing does not provide a numerical earnings forecast.
Banner Forward, begun in the third quarter of 2021, aims to accelerate commercial growth, deepen retail relationships, improve digital channels and streamline processes; implementation is expected through 2023. Banner recorded $11.6 million of related expense in 2021. Management cautioned that savings and growth may not materialize and implementation costs may exceed expectations.
COVID-19, inflation, regional economic conditions, interest-rate and securities-market movements, credit quality, commercial real estate and construction exposures, deposit competition, LIBOR transition, cybersecurity and third-party service-provider risks remain material. Commercial and multifamily real estate represented about 47% of loans; construction, land and land development loans were $1.31 billion. Management’s credit-loss estimates depend on forecasts and subjective assumptions, identified as critical audit matters.
At year-end, 21 mortgage loans totaling $6.4 million were under COVID-related forbearance. Banner had originated over $1.61 billion of PPP loans and received forgiveness for $1.48 billion by year-end. Subsequent to year-end, Banner agreed to sell four branches with about $212 million of deposits at a 5% premium on core deposits, subject to approvals. It also redeemed an additional $50.5 million of junior subordinated debentures after year-end.
Banner accrued $12.1 million for legal proceedings. A class and collective action concerning alleged wage and overtime violations remained pending; the liability phase of trial was scheduled to begin in September 2022, and the filing notes potential damages could exceed the accrued reserve. The independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of the 2021 earnings increase is repeatable after the credit-loss recapture and PPP fee acceleration, and how Banner’s margin performs as rates and deposit costs change.
- Loan growth and credit quality after PPP runoff, including performance of commercial real estate, construction and land exposures, and whether the $132.1 million loan-loss allowance remains adequate.
- Realized and unrealized effects of interest-rate moves on the $4.19 billion securities portfolio, equity and liquidity.
- Execution, costs and measurable results of Banner Forward, the branch sale and post-year-end debt redemption.
- Outcome and potential exposure from the wage-and-hour litigation compared with the $12.1 million accrued legal reserve.
- Any subsequent changes in regulatory capital, dividends, share repurchases, deposit balances or the availability of wholesale funding.