Banner Corporation 2020 Form 10-K Summary
Business context and reporting period
Banner Corporation is a Washington-based bank holding company operating Banner Bank and, at December 31, 2020, Islanders Bank. It serves consumers, businesses and public-sector clients across Washington, Oregon, California and Idaho, with additional loan production offices in Utah. Islanders Bank merged into Banner Bank on February 5, 2021. This filing covers the fiscal year ended December 31, 2020; quarterly figures below identify the fourth quarter.
Financial results and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Net income | $115.9 million | $146.3 million |
| Diluted earnings per share | $3.26 | $4.18 |
| Total revenue (net interest income before provision plus non-interest income) | $579.9 million | $550.9 million |
| Net interest income before provision | $481.3 million | $468.9 million |
| Provision for credit losses on loans | $64.3 million | $10.0 million |
| Non-interest income | $98.6 million | $81.9 million |
| Non-interest expense | $373.1 million | $357.7 million |
| Net interest margin, reported | 3.79% | 4.30% |
| Net cash provided by operating activities | $125.4 million | $148.9 million |
Fourth-quarter 2020 net income was $39.0 million, or $1.10 diluted EPS, compared with $33.7 million, or $0.95, in fourth-quarter 2019. Fourth-quarter provision for credit losses was a $0.6 million recapture.
At year-end, assets were $15.03 billion, net loans $9.70 billion, deposits $12.57 billion, and shareholders’ equity $1.67 billion. Cash and cash equivalents were $1.23 billion; securities totaled $2.77 billion. Core deposits were 93% of deposits, up from 89% in 2019. Total deposits exceeded net loans by approximately $2.87 billion.
Loans grew 5% year over year, while deposits rose 25%, largely reflecting PPP proceeds, fiscal stimulus and increased client liquidity. The allowance for credit losses on loans was $167.3 million, or 1.69% of loans, compared with $100.6 million, or 1.08%, in 2019. Non-performing loans declined to $35.6 million from $39.6 million; net charge-offs were $5.4 million.
Year-end borrowings included $150.0 million of FHLB advances, $184.8 million of repurchase agreements, $98.2 million of subordinated notes, and $117.0 million fair value of junior subordinated debentures. Banner and both banks met regulatory “well-capitalized” requirements. Banner’s consolidated total capital ratio was 14.73%, and its Tier 1 leverage ratio was 9.50%.
Material changes versus the prior comparable period
- Net income declined 21%, while revenue increased 5%. The larger credit-loss provision and lower asset yields outweighed revenue growth.
- Net interest income before provision rose 3%, but reported net interest margin fell 51 basis points to 3.79% (tax-equivalent margin was 3.85%, down 50 basis points).
- Mortgage banking income increased to $51.6 million from $22.2 million, primarily on higher refinance activity and stronger one- to four-family loan sale spreads. Deposit fees and service charges fell 26% to $34.4 million, reflecting pandemic-related waivers and lower activity, as well as Durbin Amendment effects.
- Assets rose 19%; securities increased to $2.77 billion from $1.81 billion. Cash and securities together reached $4.00 billion, versus $2.12 billion a year earlier.
- Banner adopted CECL on January 1, 2020, recording a $14.9 million pre-tax increase in credit-loss allowances and an $11.2 million after-tax reduction to opening equity.
- Cash dividends declared were $1.23 per share in 2020 versus $2.64 in 2019. Banner issued $100 million of subordinated notes in June 2020 and repurchased 624,780 shares for approximately $31.8 million.
Outlook, management commentary, risks and unusual items
Management described the COVID-19 pandemic’s ultimate effects as uncertain and said it expected pandemic-related expenses to continue while the pandemic persisted. It did not provide specific earnings or financial guidance. Management noted that the low-rate environment and low-yield PPP loans pressured asset yields and margins, and that economic conditions and future loan performance would affect credit costs.
At December 31, 2020, 158 loans totaling $75.4 million remained on COVID-related deferral, including 26 loans totaling $33.9 million that had received a second deferral. Banner had funded 9,103 PPP applications totaling $1.15 billion; $1.04 billion remained outstanding after $112.3 million was forgiven. The company began processing applications under the renewed PPP in January 2021.
Key risks include further borrower stress and losses as pandemic relief ends; uncertainty in CECL estimates and economic forecasts; concentrations in commercial real estate and construction lending; regional economic exposure; interest-rate and margin sensitivity; PPP forgiveness and SBA guarantee compliance; liquidity and deposit behavior; cybersecurity and third-party provider risks; and the transition away from LIBOR. Commercial and multifamily real estate represented about 41% of loans, while construction, land and land development loans totaled $1.29 billion.
Unusual items included $3.5 million of COVID-19 expenses, $2.1 million of merger-related costs and a $3.6 million provision for unfunded credit commitments. A $2.5 million litigation accrual contributed to higher professional and legal expense. Banner reported no goodwill impairment after a COVID-related quantitative assessment. Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion and identified the loan-loss allowance estimates as critical audit matters.
Important facts for investors to verify
- How deferrals, downgraded loans and the $305.2 million of other classified loans develop, and whether the $167.3 million loan allowance proves adequate.
- PPP forgiveness progress, remaining balances and whether SBA guarantees remain enforceable if origination, servicing or forgiveness requirements are challenged.
- Whether deposit growth and excess liquidity persist as pandemic-related balances normalize, and how that affects loan growth and funding costs.
- How interest rates, asset repricing and deposit costs affect the net interest margin, including the company’s LIBOR transition.
- Credit performance in commercial real estate, construction and pandemic-sensitive borrower segments, particularly in the company’s regional markets.
- Capital, dividend capacity and the effect of the February 2021 Islanders Bank merger and ongoing branch consolidations.