BANNER CORPORATION TheSEC's Final Rule 33-10890, Management's Discussion and Analysis, Selected Financial Data and Supplementary Financial Information, amends certain disclosure requirements of Regulation S-K and must be applied in a registrant's first fiscal year ending on or afterAugust 9, 2021 . The amendments to Item 303 of Regulation S-K allow registrants to compare the results of the most recently completed quarter to the results of either the immediately preceding quarter or the corresponding quarter of the preceding year. Since we are a financial institution, we believe we are not as highly subject to seasonal fluctuations as other businesses and industries. Therefore, we have elected to adopt this rule change, as management believes that comparing current quarter results to those of the immediately preceding quarter is more useful in identifying current business trends and provides a more meaningful analysis to our investors. Accordingly, we have compared the results of operations for the three months endedJune 30, 2022 andMarch 31, 2022 , and, as required, we continue to compare our year-to-date results to the corresponding year-to-date results of the preceding year. 53 --------------------------------------------------------------------------------
Executive Overview
We are a bank holding company incorporated in theState of Washington which owns one subsidiary bank,Banner Bank .Banner Bank is aWashington -chartered commercial bank that conducts business from its main office inWalla Walla, Washington and, as ofJune 30, 2022 , it had 137 full service branch offices and 18 loan production offices located inWashington ,Oregon ,California ,Idaho andUtah .Banner Corporation is subject to regulation by theFederal Reserve .Banner Bank is subject to regulation by the Washington DFI and theFDIC . As ofJune 30, 2022 , we had total consolidated assets of$16.39 billion , total loans of$9.46 billion , total deposits of$14.21 billion and total shareholders' equity of$1.49 billion .Banner Bank is a regional bank which offers a wide variety of commercial banking services and financial products to individuals, businesses and public sector entities in its primary market areas. The Bank's primary business is that of traditional banking institutions, accepting deposits and originating loans in locations surrounding their offices inWashington ,Oregon ,California andIdaho .Banner Bank is also an active participant in secondary loan markets, engaging in mortgage banking operations largely through the origination and sale of one- to four-family and multifamily residential loans. Lending activities include commercial business and commercial real estate loans, agriculture business loans, construction and land development loans, one- to four-family and multifamily residential loans, SBA loans and consumer loans.Banner Corporation's successful execution of its super community bank model and strategic initiatives have delivered solid core operating results and profitability over the last several years. Banner's longer term strategic initiatives continue to focus on originating high quality assets and client acquisition, which we believe will continue to generate strong revenue while maintaining the Company's moderate risk profile. For the quarter endedJune 30, 2022 , our net income was$48.0 million , or$1.39 per diluted share, compared to$44.0 million , or$1.27 per diluted share, for the preceding quarter. The current quarter was positively impacted by the gain recognized on the branch sale completed during the quarter and increased interest income due to increased average yields on total interest-earning assets, partially offset by decreased mortgage banking income and the provision for credit losses. Our adjusted earnings (a non-GAAP financial measure), which excludes net gain or loss on sales of securities, changes in the valuation of financial instruments carried at fair value, merger and acquisition-related expenses, COVID-19 expenses, Banner Forward expenses, loss on extinguishment of debt, the gain on sale of branches and related tax expenses or benefits, were$43.2 million , or$1.25 per diluted share, for the quarter endedJune 30, 2022 , compared to$46.1 million , or$1.33 per diluted share, for the preceding quarter. During the third quarter of 2021 we began implementing Banner Forward, a bank-wide initiative to drive revenue growth and reduce operating expense. Banner Forward is focused on accelerating growth in commercial banking, deepening relationships with retail clients, and advancing technology strategies to enhance our digital service channels, while streamlining underwriting and back office processes. The remaining efficiency-related initiatives associated with Banner Forward are anticipated to be implemented sequentially over the third quarter with implementation of the revenue initiatives ramping up in the second half of the year and into 2023. We expect full implementation by the end of next year. During the second quarter of 2022, we incurred expenses of$1.6 million related to Banner Forward. Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of client deposits, FHLB advances, other borrowings, subordinated notes, and junior subordinated debentures. Net interest income is primarily a function of our interest rate spread, which is the difference between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, as well as a function of the average balances of interest-earning assets, interest-bearing liabilities and non-interest-bearing funding sources including non-interest-bearing deposits. Our net interest income increased$10.4 million , or 9% to$129.0 million , compared to$118.7 million in the preceding quarter. The increased net interest income during the quarter compared to the preceding quarter was primarily due to the increase in market interest rates resulting in an increase in yields on interest-earning assets, as well as loan balances making up a higher percentage of interest-earning assets and decreases in the cost of funding liabilities, partially offset by the decline in the recognition of deferred loan fee income due to loan repayments from SBA PPP loan forgiveness and a decrease in average interest-earning assets. Our net income is also affected by the level of our non-interest income, including deposit fees and other service charges, results of mortgage banking operations, which includes gains and losses on the sale of loans and servicing fees, gains and losses on the sale of securities, as well as our non-interest expenses and provisions for credit losses and income taxes. In addition, our net income is affected by the net change in the value of certain financial instruments carried at fair value. Our total revenues (net interest income plus total non-interest income) for the second quarter of 2022 increased 13% to$156.2 million , compared to$138.1 million in the preceding quarter, primarily due to the increase in net interest income and the gain recognized on the branch sale, partially offset by lower income from mortgage banking operations. Our total non-interest income, which is a component of total revenue and includes the net gain on sale of securities and changes in the value of financial instruments carried at fair value, was$27.2 million for the quarter endedJune 30, 2022 , compared to$19.4 million in the preceding quarter, primarily due to the$7.8 million gain recognized on the branch sale completed during the quarter. Non-interest expense was$92.1 million in the second quarter of 2022, compared to$91.2 million in the preceding quarter. Our non-interest expense increased in the second quarter of 2022, compared to the preceding quarter, largely as a result of increased salary and employee benefits, primarily due to normal salary and wage adjustments, payment and card processing services expenses and professional and legal 54 --------------------------------------------------------------------------------
expenses, partially offset by increased capitalized loan origination costs, primarily due to increased loan production, and decreases in loss on extinguishment of debt and information/computer data services expense.
We recorded a$4.5 million provision for credit losses in the quarter endedJune 30, 2022 , compared to a$7.0 million recapture of provision for credit losses in the prior quarter. The provision for credit losses for the current quarter primarily reflects loan growth and, to a lesser extent, a deterioration in forecasted economic conditions. The allowance for credit losses - loans atJune 30, 2022 was$128.7 million , representing 688% of non-performing loans, compared to$132.1 million , or 578% of non-performing loans atDecember 31, 2021 . In addition to the allowance for credit losses - loans, Banner maintains an allowance for credit losses - unfunded loan commitments which was$14.2 million atJune 30, 2022 , compared to$12.4 million atDecember 31, 2021 . Non-performing loans were$18.7 million atJune 30, 2022 , compared to$22.8 million atDecember 31, 2021 and$30.8 million a year earlier. (See Note 4, Loans Receivable and the Allowance for Credit Losses, as well as "Asset Quality" below in this Form 10-Q.) *Non-GAAP financial measures: Net income, revenues and other earnings and expense information excluding fair value adjustments, net gains or losses on the sale of securities, gain on sale of branches, merger and acquisition-related expenses, loss on extinguishment of debt, COVID-19 expenses, Banner Forward expenses, amortization of CDI, REO operations, state/municipal tax expense and the related tax benefit, are non-GAAP financial measures. Management has presented these and other non-GAAP financial measures in this discussion and analysis because it believes that they provide useful and comparative information to assess trends in our core operations and to facilitate the comparison of our performance with the performance of our peers. However, these non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP. Where applicable, we have also presented comparable earnings information using GAAP financial measures. For a reconciliation of these non-GAAP financial measures, see the tables below. Because not all companies use the same calculations, our presentation may not be comparable to other similarly titled measures as calculated by other companies. See "Comparison of Results of Operations for the Three Months EndedJune 30, 2022 andMarch 31, 2022 and the Six Months EndedJune 30, 2022 and 2021" for more detailed information about our financial performance.
The following tables set forth reconciliations of non-GAAP financial measures discussed in this report (dollars in thousands except per share data):
For the Six Months
Ended
Quarters Ended June 30,
Jun 30, 2022 Mar 31, 2022 2022 2021
ADJUSTED REVENUE
Net interest income (GAAP) $ 129,011 $ 118,654 $ 247,665 $ 245,215
Non-interest income (GAAP) 27,173 19,427 46,600 46,608
Total revenue (GAAP) 156,184 138,081 294,265 291,823
Exclude net gain on sale of securities (32) (435) (467) (562)
Exclude change in valuation of financial
instruments carried at fair value (69) (49) (118) (117)
Exclude gain on sale of branches (7,804) - (7,804) -
Adjusted Revenue (non-GAAP) $ 148,279 $ 137,597 $ 285,876 $ 291,144
55--------------------------------------------------------------------------------
For the Six Months
Ended
Quarters Ended June 30,
Jun 30, 2022 Mar 31, 2022 2022 2021
ADJUSTED EARNINGS
Net income (GAAP) $ 47,965 $ 43,963 $ 91,928 $ 101,237
Exclude net gain on sale of securities (32) (435) (467) (562)
Exclude net change in valuation of financial
instruments carried at fair value (69) (49) (118) (117)
Exclude merger and acquisition-related expenses - - - 650
Exclude COVID-19 expenses - - - 265
Exclude gain on sale of branches (7,804) - (7,804) -
Exclude Banner Forward expenses 1,579 2,465 4,044 2,855
Exclude loss on extinguishment of debt - 793 793 -
Exclude related net tax expense (benefit) 1,518 (666) 852 (742)
Total adjusted earnings (non-GAAP) $ 43,157 $ 46,071 $ 89,228 $ 103,586
Diluted earnings per share (GAAP) $ 1.39 $ 1.27 $ 2.66 $ 2.88 Diluted adjusted earnings per share (non-GAAP)
$ 1.33 $ 2.58 $ 2.95 For the Six Months Ended Quarters Ended June 30, Jun 30, 2022 Mar 31, 2022 2022 2021 ADJUSTED EFFICIENCY RATIO Non-interest expense (GAAP)$ 92,053 $ 91,195 $ 183,248 $ 186,151 Exclude merger and acquisition-related expenses - - - (650) Exclude COVID-19 expenses - - - (265) Exclude Banner Forward expenses (1,579) (2,465) (4,044) (2,855) Exclude CDI amortization (1,425) (1,424) (2,849) (3,422) Exclude state/municipal tax expense (1,004) (1,162) (2,166) (2,148) Exclude REO operations 121 79 200 124 Exclude loss on extinguishment of debt - (793) (793) - Adjusted non-interest expense (non-GAAP)$ 88,166 $ 85,430 $ 173,596 $ 176,935 Net interest income (GAAP)$ 129,011 $ 118,654 $ 247,665 $ 245,215 Non-interest income (GAAP) 27,173 19,427 46,600 46,608 Total revenue (GAAP) 156,184 138,081 294,265 291,823 Exclude net gain on sale of securities (32) (435) (467) (562) Exclude net change in valuation of financial instruments carried at fair value (69) (49) (118) (117) Exclude gain on sale of branches (7,804) - (7,804) - Adjusted revenue (non-GAAP)$ 148,279 $ 137,597 $ 285,876 $ 291,144 Efficiency ratio (GAAP) 58.94 % 66.04 % 62.27 % 63.79 % Adjusted efficiency ratio (non-GAAP) 59.46 % 62.09 % 60.72 % 60.77 % 56
-------------------------------------------------------------------------------- The ratio of tangible common shareholders' equity to tangible assets is also a non-GAAP financial measure. We calculate tangible common equity by excluding goodwill and other intangible assets from shareholders' equity. We calculate tangible assets by excluding the balance of goodwill and other intangible assets from total assets. We believe that this is consistent with the treatment by our bank regulatory agencies, which exclude goodwill and other intangible assets from the calculation of risk-based capital ratios. Management believes that this non-GAAP financial measure provides information to investors that is useful in understanding the basis of our capital position (dollars in thousands except per share data). TANGIBLE COMMON SHAREHOLDERS' EQUITY TO TANGIBLE ASSETS June 30, 2022 December 31, 2021 June 30, 2021 Shareholders' equity (GAAP)$ 1,485,830 $
1,690,327
Exclude goodwill and other intangible assets, net 384,991 387,976 391,125
Tangible common shareholders' equity (non-GAAP)
1,302,351 $ 1,278,086
Total assets (GAAP) $ 16,385,197 $
16,804,872
Exclude goodwill and other intangible assets, net 384,991 387,976 391,125 Total tangible assets (non-GAAP)$ 16,000,206 $ 16,416,896 $ 15,790,732 Common shareholders' equity to total assets (GAAP) 9.07 % 10.06 % 10.32 % Tangible common shareholders' equity to tangible assets (non-GAAP) 6.88 % 7.93 % 8.09 % TANGIBLE COMMON SHAREHOLDERS' EQUITY PER SHARE Tangible common shareholders' equity (non-GAAP)$ 1,100,839 $ 1,302,351 $ 1,278,086 Common shares outstanding at end of period 34,191,330 34,252,632 34,550,888 Common shareholders' equity (book value) per share (GAAP)$ 43.46 $ 49.35$ 48.31 Tangible common shareholders' equity (tangible book value) per share (non-GAAP)$ 32.20 $
38.02
Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Selected Notes to the Consolidated Financial Statements contained in Item 1 of this Form 10-Q.
Summary of Critical Accounting Policies and Estimates
Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified certain accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements. Management believes the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the factual circumstances at the time. However, given the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. Further, subsequent changes in economic or market conditions could have a material impact on these estimates and our financial condition and operating results in future periods. There have been no significant changes in our application of accounting policies sinceDecember 31, 2021 . For additional information concerning critical accounting policies, see the Selected Notes to the Consolidated Financial Statements and the following: Provision and Allowance for Credit Losses - Loans: (Note 4) The methodology for determining the allowance for credit losses - loans is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for credit losses. Among the material estimates required to establish the allowance for credit losses - loans are: a reasonable and supportable forecast; a reasonable and supportable forecast period and the reversion period; value of collateral; strength of guarantors; the amount and timing of future cash flows for loans individually evaluated; and determination of the qualitative loss factors. All of these estimates are susceptible to significant change. The allowance for credit losses - loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The Bank has elected to exclude accrued interest receivable from the amortized cost basis in their estimate of the allowance for credit losses. The provision for credit losses reflects the amount required to maintain the allowance for credit losses at an appropriate level based upon management's evaluation of the adequacy of collective and individual loss reserves. The Company has established systematic methodologies for the determination of the adequacy of the Company's allowance for credit losses. The methodologies are set forth in a formal policy and take into consideration the need for a valuation allowance for loans evaluated on a collective (pool) basis which have similar risk characteristics as well as allowances that are tied to individual loans that do not share risk characteristics. The Company increases its allowance for credit losses by charging provisions for credit losses on its Consolidated Statement of Operations. Losses related to specific assets are applied as a reduction of the carrying value of the assets and 57 -------------------------------------------------------------------------------- charged against the allowance for credit loss reserve when management believes the uncollectibility of a loan balance is confirmed. Recoveries on previously charged off loans are credited to the allowance for credit losses. Management estimates the allowance for credit losses - loans using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses - loans is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. These factors include, among others, changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions. The allowance for credit losses - loans is measured on a collective (pool) basis when similar risk characteristics exist. In estimating the component of the allowance for credit losses for loans that share common risk characteristics, loans are pooled based on loan type and areas of risk concentration. For loans evaluated collectively, the allowance for credit losses - loans is calculated using life of loan historical losses adjusted for economic forecasts and current conditions. For commercial real estate, multifamily real estate, construction and land, commercial business and agricultural loans with risk rating segmentation, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and risk rating. For one- to four- family residential loans, consumer loans, home equity lines of credit, small business loans, and small balance commercial real estate loans, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and delinquency status. These models calculate an expected life-of-loan loss percentage for each loan category by calculating the probability of default, based on the migration of loans from performing to loss by risk rating or delinquency categories using historical life-of-loan analysis and the severity of loss, based on the aggregate net lifetime losses incurred for each loan pool. For credit cards, historical credit loss assumptions are estimated using a model that calculates an expected life-of-loan loss percentage for each loan category by considering the historical cumulative losses based on the aggregate net lifetime losses incurred for each loan pool. The model captures historical loss data commencing with the first quarter of 2008. For loans evaluated collectively, management uses economic indicators to adjust the historical loss rates so that they better reflect management's expectations of future conditions over the remaining lives of the loans in the portfolio based on reasonable and supportable forecasts. These economic indicators are selected based on correlation to the Company's historical credit loss experience and are evaluated for each loan category. The economic indicators evaluated include the unemployment rate, gross domestic product, real estate price indices and growth, industrial employment, corporate profits, the household consumer debt service ratio, the household mortgage debt service ratio, and single family median home price growth. Management considers various economic scenarios and forecasts when evaluating the economic indicators and probability weights the various scenarios to arrive at the forecast that most reflects management's expectations of future conditions. The selection of a more optimistic or pessimistic economic forecast would result in a lower or higher allowance for credit losses. The use of a protracted slump economic forecast would have increased the allowance for credit losses - loans by approximately 8% as ofJune 30, 2022 , where the use of a stronger near-term growth economic forecast would result in a negligible decrease in the allowance for credit losses - loans as ofJune 30, 2022 . The allowance for credit losses - loans is then adjusted for the period in which those forecasts are considered to be reasonable and supportable. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can be made, the adjustments discontinue to be applied so that the model reverts back to the historical loss rates using a straight line reversion method. Management selected a reasonable and supportable forecast period of 12 months with a reversion period of 12 months. Both the reasonable and supportable forecast period and the reversion period are periodically reviewed by management. Further, for loans evaluated collectively, management also considers qualitative and environmental (QE) factors for each loan category to adjust for differences between the historical periods used to calculate historical loss rates and expected conditions over the remaining lives of the loans in the portfolio. In determining the aggregate adjustment needed management considers the financial condition of the borrowers, the nature and volume of the loans, the remaining terms and the extent of prepayments on the loans, the volume and severity of past due and classified loans as well as the value of the underlying collateral on loans in which the collateral dependent practical expedient has not been used. Management also considers the Company's lending policies, the quality of the Company's credit review system, the quality of the Company's management and lending staff, and the regulatory and economic environments in the areas in which the Company's lending activities are concentrated. Management uses a scale to assign QE factor adjustments based on the level of estimated impact which requires a significant amount of judgment. Generally, adjustments to QE factors are made in five basis-point increments. Some QE factors impact all loan segments equally while others may impact some loan segments more or less than others. If management's judgment were different for a QE factor that impacts all loan segments equally, a five basis-point change in this QE factor would increase or decrease the allowance for credit losses by 3.6% as ofJune 30, 2022 . Fair Value Accounting and Measurement: (Note 8) We use fair value measurements to record fair value adjustments to certain financial assets and liabilities. A hierarchical disclosure framework associated with the level of pricing observability is utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Determining the fair value of financial instruments with unobservable inputs requires a significant amount of judgment. This includes the discount rate used to fair value our trust preferred securities and junior subordinated debentures. A 25 basis-point increase or decrease in the discount rate used to calculate the fair value of our trust preferred securities would result in a$758,000 decrease or increase in the reported fair value as ofJune 30, 2022 , with an offsetting adjustment to our non-interest income. A 25 basis-point increase or decrease in the discount rate used to calculate the fair value of our junior subordinated debentures would 58 --------------------------------------------------------------------------------
result in a
Goodwill : (Note 6)Goodwill represents the excess of the purchase consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed in a business combination and is not amortized but is reviewed annually, or more frequently as current circumstances and conditions warrant, for impairment. An assessment of qualitative factors is completed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The qualitative assessment involves judgment by management on determining whether there have been any triggering events that have occurred which would indicate potential impairment. Such trigger events considered by management could include: a) macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, or other developments in equity and credit markets; b) industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (consider in both absolute terms and relative to peers), a change in the market for an entity's products or services, or a regulatory or political development; c) cost factors such as increases in labor, or other costs that have a negative effect on earnings and cash flows; d) overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods; e) other relevant entity-specific events such as changes in management, key personnel, strategy, or clients; or litigation; f) events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing of all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit; g) if applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers). If the qualitative analysis concludes that further analysis is required, then a quantitative impairment test would be completed. The quantitative goodwill impairment test is used to identify the existence of impairment and the amount of impairment loss and compares the reporting unit's estimated fair values, including goodwill, to its carrying amount. If a quantitative goodwill impairment test is required, management would engage a third-party valuation firm to estimate the fair value of the reporting unit. Various valuation methodologies are considered when estimating the reporting unit's fair value. These methodologies could include a comparable transaction approach, a control premium approach and a discounted cash flow approach, as well as others. The specific factors used in these various valuation methodologies that require judgment include the selection of comparable market transactions, discount rates, earnings capitalization rates and the future projected earnings of the reporting unit. Changes in these assumptions could result in changes to the estimated fair value of the reporting unit. If the fair value exceeds the carry amount, then goodwill is not considered impaired. If the carrying amount exceeds its fair value, an impairment loss would be recognized equal to the amount of excess, limited to the amount of total goodwill allocated to the reporting unit. The impairment loss would be recognized as a charge to earnings. The Company completed an assessment of qualitative factors and the potential triggering events noted above as ofJune 30, 2022 and concluded that no further analysis was required as it is more likely than not that the fair value ofBanner Bank , the reporting unit, exceeds the carrying value. Income Taxes and Deferred Taxes: (Note 9) The Company and its wholly-owned subsidiaries file consolidatedU.S. federal income tax returns, as well as state income tax returns inOregon ,California ,Utah ,Idaho andMontana . Income taxes are accounted for using the asset and liability method. Under this method a deferred tax asset or liability is determined based on the enacted tax rates which are expected to be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company's income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A 1% change in tax rates would result in a$5.2 million increase or decrease in our net deferred tax asset as ofJune 30, 2022 . We assess the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other pertinent information and maintain tax accruals consistent with our evaluation. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations by the tax authorities and newly enacted statutory, judicial and regulatory guidance that could impact the relative merits of tax positions. These changes, when they occur, impact accrued taxes and can materially affect our operating results. A valuation allowance is required to be recognized if it is more likely than not that all or a portion of our deferred tax assets will not be realized. The evaluation pertaining to the tax expense and related deferred tax asset and liability balances involves a high degree of judgment and subjectivity around the measurement and resolution of these matters. This includes an evaluation of our ability to use our net operating loss carryforwards. The ultimate realization of the deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible. Legal Contingencies: In the normal course of our business, we have various legal proceedings and other contingent matters pending. We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis of potential results, assuming a combination of litigation and settlement strategies. The estimated losses often involve a level of subjectivity and usually are a range of reasonable losses and not an exact number, in those situations we accrue the best estimate within the range or the low end of the range if no estimate within the range is better than another. 59 --------------------------------------------------------------------------------
Comparison of Financial Condition at
General: Total assets decreased$419.7 million , to$16.39 billion atJune 30, 2022 , from$16.80 billion atDecember 31, 2021 . The decrease was largely the result of a decrease in cash held and interest-bearing deposits, partially offset by loan growth. Loans and lending: Loans are our most significant and generally highest yielding earning assets. We attempt to maintain a portfolio of loans to total deposits ratio at a level designed to enhance our revenues, while adhering to sound underwriting practices and appropriate diversification guidelines in order to maintain a moderate risk profile. Our loan to deposit ratio typically ranges from 90% to 95%. Our loan to deposit ratio atJune 30, 2022 was 67%, which reflects the unprecedented level of market liquidity and decrease in business activity due to the impacts of the COVID-19 pandemic. We expect our loan to deposit ratio to remain below historical levels for the foreseeable future. We offer a wide range of loan products to meet the demands of our clients. Our lending activities are primarily directed toward the origination of real estate and commercial loans. Total loans receivable increased$372.1 million during the six months endedJune 30, 2022 , primarily reflecting increased one-to-four family residential, commercial business, multifamily real estate, commercial construction, one- to four-family construction, land and land development, agricultural business, and consumer loan balances, partially offset by decreased commercial real estate and multifamily construction loan balances. Excluding SBA PPP loans, total loans receivable increased$475.0 million during the six months endedJune 30, 2022 . AtJune 30, 2022 , our loans receivable totaled$9.46 billion compared to$9.08 billion atDecember 31, 2021 and$9.65 billion atJune 30, 2021 . During the first quarter of 2022, the Company changed the segmentation of its Small Balance CRE loan category based on the common risk characteristics used to measure the allowance for credit losses. The presentation of loans receivable atDecember 31, 2021 andJune 30, 2021 has been revised to match the segmentation used in the current period presentation. The following table sets forth the composition of the Company's loans receivable by type of loan as of the dates indicated (dollars in thousands): Percentage Change Jun 30, 2022 Dec 31, 2021 Jun 30, 2021 Prior Year End Prior Year Commercial real estate: Owner-occupied$ 845,184 $ 831,623 $ 780,558 1.6 % 8.3 % Investment properties 1,628,105
1,674,027 1,633,481 (2.7) (0.3) Small balance CRE 1,191,903 1,281,863 1,294,879 (7.0) (8.0) Multifamily real estate 575,183 530,885 468,970 8.3
22.6
Construction, land and land development: Commercial construction 193,984 167,998 181,316 15.5 7.0 Multifamily construction 256,952 259,116 295,661 (0.8) (13.1) One- to four-family construction 625,488 568,753 603,895 10.0 3.6 Land and land development 320,041 313,454 290,404 2.1 10.2 Commercial business: Commercial business 1,176,287 1,038,206 1,123,026 13.3 4.7 SBA PPP 30,651 132,574 807,172 (76.9) (96.2) Small business scored 865,828 792,310 743,975 9.3 16.4 Agricultural business, including secured by farmland: Agricultural business, including secured by farmland 283,059 279,224 240,933 1.4 17.5 SBA PPP 356 1,354 17,962 (73.7) (98.0) One- to four-family residential 868,175 657,474 611,227 32.0
42.0
Consumer:
Consumer-home equity revolving lines of credit 506,524 458,533 458,915 10.5 10.4 Consumer-other 89,109 97,369 101,807 (8.5) (12.5) Total loans receivable$ 9,456,829 $ 9,084,763 $ 9,654,181 4.1 % (2.0) % Our commercial real estate loans for owner-occupied, investment properties, and small balance CRE totaled$3.67 billion , or 39% of our loan portfolio atJune 30, 2022 . In addition, multifamily residential real estate loans totaled$575.2 million and comprised 6% of our loan portfolio. Commercial real estate loans decreased by$122.3 million during the first six months of 2022 while multifamily real estate loans increased by$44.3 million . We also originate commercial, multifamily, and one- to four-family construction, land and land development loans, which totaled$1.40 billion , or 15% of our loan portfolio atJune 30, 2022 , compared to$1.31 billion atDecember 31, 2021 and$1.37 billion June 30, 2021 . One- to four-family construction balances increased$56.7 million , or 10%, to$625.5 million atJune 30, 2022 compared to$568.8 million at 60 --------------------------------------------------------------------------------December 31, 2021 and increased$21.6 million , or 4%, compared to$603.9 million atJune 30, 2021 . One- to four-family construction loans represented approximately 7% of our total loan portfolio atJune 30, 2022 , and includes both speculative construction and one- to four-family all-in-one construction loans made to owner occupants that convert to permanent loans upon completion of the homes and subsequently are often sold into the secondary market. Our commercial business lending is directed toward meeting the credit and related deposit needs of various small- to medium-sized business and agribusiness borrowers operating in our primary market areas. Our commercial business lending, to a lesser extent, includes participation in certain syndicated loans, including shared national credits, which totaled$201.8 million atJune 30, 2022 . Our commercial and agricultural business loans increased$112.5 million to$2.36 billion atJune 30, 2022 , compared to$2.24 billion atDecember 31, 2021 , and decreased$576.9 million , or 20%, compared to$2.93 billion atJune 30, 2021 . The decrease from the prior year reflects SBA PPP loan repayments from SBA loan forgiveness. SBA PPP loans decreased 77% to$31.0 million atJune 30, 2022 , compared to$133.9 million atDecember 31, 2021 , and decreased 96% when compared to$825.1 million atJune 30, 2021 . Commercial and agricultural business loans represented approximately 25% of our portfolio atJune 30, 2022 . We are active originators of one- to four-family residential loans in most communities where we have established offices inWashington ,Oregon ,California andIdaho . Most of the one- to four-family residential loans that we originate are typically sold in secondary markets with net gains on sales and loan servicing fees reflected in our revenues from mortgage banking. Our one- to four-family residential loan originations have recently been relatively strong, despite the increases in interest rates during the current year. AtJune 30, 2022 , our outstanding balance of one- to four-family residential loans retained in our portfolio increased$210.7 million , to$868.2 million , compared to$657.5 million atDecember 31, 2021 , and increased$256.9 million , or 42%, compared to$611.2 million atJune 30, 2021 . The increase in one- to four-family loans from the preceding quarter was primarily the result of a jumbo mortgage campaign offered during the second quarter of 2022. One- to four-family residential loans represented 9% of our loan portfolio atJune 30, 2022 . Our consumer loan activity is primarily directed at meeting demand from our existing deposit clients. AtJune 30, 2022 , consumer loans, including home equity revolving lines of credit, increased$39.7 million to$595.6 million , compared to$555.9 million atDecember 31, 2021 , and increased$34.9 million compared to$560.7 million atJune 30, 2021 . The following table shows the commitment amount for loan origination (excluding loans held for sale) activity for the three and six months endedJune 30, 2022 andJune 30, 2021 (in thousands): Three Months Ended Six Months Ended Jun 30, 2022 Jun 30, 2021 Jun 30, 2022 Jun 30, 2021 Commercial real estate$ 121,365 $ 103,415 $ 208,786 $ 194,632 Multifamily real estate 2,959 45,674 24,128 58,552 Construction and land 643,832 509,828 1,189,307 957,197 Commercial business: Commercial business 245,997 181,996 518,510 297,907 SBA PPP - 55,990 - 484,170 Agricultural business 26,786 12,546 55,462 39,713 One-to four- family residential 126,963 47,086 182,784 104,817 Consumer 193,853 131,424 315,812 218,746 Total commitment amount for loan originations (excluding loans held for sale)$ 1,361,755 $ 1,087,959 $ 2,494,789 $ 2,355,734 Loans held for sale decreased to$69.2 million atJune 30, 2022 , compared to$96.5 million atDecember 31, 2021 , as sales exceeded originations of held-for-sale loans during the six months endedJune 30, 2022 . Loans held for sale were$71.7 million atJune 30, 2021 . Originations of loans held for sale decreased to$299.1 million for the six months endedJune 30, 2022 , compared to$504.3 million for the same period last year, primarily due to decreased refinance activity for one- to four-family residential mortgage loans due to the increase in interest rates during the current year. The volume of one- to four-family residential mortgage loans sold was$299.0 million during the six months endedJune 30, 2022 , compared to$566.9 million in the same period a year ago. During the six months endedJune 30, 2022 , we sold$15.8 million of multifamily loans, compared to$191.6 million for the same period a year ago. Loans held for sale included$57.9 million and$18.9 million of multifamily loans and$11.3 million and$52.8 million of one- to four-family residential mortgage loans atJune 30, 2022 and 2021, respectively. 61 --------------------------------------------------------------------------------
The following table presents loans by geographic concentration at
Jun 30, 2022 Dec 31, 2021 Jun 30, 2021 Percentage Change
Amount Percentage Amount Amount Prior Year End Prior Year Qtr
Washington $ 4,436,092 46.9 % $ 4,264,590 $ 4,541,792 4.0 % (2.3) %
California 2,227,532 23.6 2,138,340 2,246,580 4.2 (0.8)
Oregon 1,699,238 18.0 1,652,364 1,753,285 2.8 (3.1)
Idaho 562,464 5.9 525,141 525,610 7.1 7.0
Utah 94,508 1.0 74,913 92,103 26.2 2.6
Other 436,995 4.6 429,415 494,811 1.8 (11.7)
Total loans receivable $ 9,456,829 100.0 % $ 9,084,763 $ 9,654,181 4.1 % (2.0) %
Investment Securities : Our total investment securities increased $87.2 million
to $4.27 billion at June 30, 2022 from December 31, 2021 . Securities purchased
exceeded sales, paydowns and maturities during the six-month period ended
June 30, 2022 . During the first quarter of 2022, $458.6 million of securities
were transferred from available for sale to securities held to maturity to limit
the impact that potential future interest rates changes would have on our AOCI.
Purchases during the six months ended June 30, 2022 were primarily in
mortgage-backed securities. The average effective duration of Banner's
securities portfolio was approximately 6.5 years at June 30, 2022 , compared to
4.6 years at December 31, 2021 . Net fair value adjustments to the portfolio of
securities held for trading, which were included in net income, increased
$905,000 in the six months ended June 30, 2022 . In addition, fair value
adjustments for securities designated as available-for-sale decreased $282.4
million for the six months ended June 30, 2022 , which was included net of the
associated tax benefit of $67.8 million as a component of other comprehensive
income, and largely occurred as a result of increases in market interest rates
during the six months ended June 30, 2022 . (See Note 3 of the Selected Notes to
the Consolidated Financial Statements in this Form 10-Q.) The Company held
$300.0 million of securities purchased under resell agreements at both June 30,
2022 and December 31, 2021 .
Deposits: Deposits, client retail repurchase agreements and loan repayments are
the major sources of our funds for lending and other investment purposes. We
compete with other financial institutions and financial intermediaries in
attracting deposits and we generally attract deposits within our primary market
areas. Increasing core deposits (non-interest-bearing and interest-bearing
transaction and savings accounts) is a fundamental element of our business
strategy. Much of the focus of our branch strategy and current marketing efforts
have been directed toward attracting additional deposit client relationships and
balances. This effort has been particularly directed towards emphasizing core
deposit activity in non-interest-bearing and other transaction and savings
accounts. The long-term success of our deposit gathering activities is reflected
not only in the growth of core deposit balances, but also in the level of
deposit fees, service charges and other payment processing revenues compared to
prior periods.
The following table sets forth the Company's deposits by type of deposit account as of the dates indicated (dollars in thousands):
Percentage Change
Prior Year
Jun 30, 2022 Dec 31, 2021 Jun 30, 2021 Prior Year End Quarter
Non-interest-bearing $ 6,388,815 $ 6,385,177 $ 6,090,063 0.1 % 4.9 %
Interest-bearing checking 1,859,582 1,947,414 1,736,696 (4.5) 7.1
Regular savings accounts 2,801,177 2,784,716 2,646,302 0.6
5.9
Money market accounts 2,406,678 2,370,995 2,290,600 1.5
5.1
Interest-bearing transaction & savings accounts 7,067,437 7,103,125 6,673,598 (0.5) 5.9 Total core deposits 13,456,252 13,488,302 12,763,661 (0.2) 5.4 Interest-bearing certificates 756,312 838,631 873,047 (9.8) (13.4) Total deposits$ 14,212,564 $ 14,326,933 $ 13,636,708 (0.8) % 4.2 % Total deposits were$14.21 billion atJune 30, 2022 , compared to$14.33 billion atDecember 31, 2021 and$13.64 billion a year ago. The$114.4 million decrease in total deposits compared toDecember 31, 2021 reflects a$32.1 million decrease in core deposits and an$82.3 million decrease in certificates of deposit. The decrease in total deposits during the first six months of 2022 was primarily due to the sale of four branches, which included the transfer of$178.2 million of related deposits. Non-interest-bearing account balances were$6.39 billion at bothJune 30, 2022 andDecember 31, 2021 , and increased 5% compared to$6.09 billion a year ago. Interest-bearing transaction and savings accounts decreased 1% to$7.07 billion atJune 30, 2022 , compared to$7.10 billion atDecember 31, 2021 , and increased 6% compared to 62 --------------------------------------------------------------------------------$6.67 billion a year ago. Certificates of deposit decreased 10% to$756.3 million atJune 30, 2022 , compared to$838.6 million atDecember 31, 2021 and decreased 13% compared to$873.0 million a year ago. We had no brokered deposits atJune 30, 2022 orDecember 31, 2021 . Core deposits represented 95% and 94% of total deposits atJune 30, 2022 andDecember 31, 2021 , respectively.
The following table presents deposits by geographic concentration at
Jun 30, 2022 Dec 31, 2021 Jun 30, 2021 Percentage Change
Prior Year
Amount Percentage Amount Amount Prior Year End Quarter
Washington $ 7,820,321 55.0 % $ 7,952,376 $ 7,547,591 (1.7) % 3.6 %
Oregon 3,123,110 22.0 3,067,054 2,939,667 1.8 6.2
California 2,520,493 17.7 2,524,296 2,417,387 (0.2) 4.3
Idaho 748,640 5.3 783,207 732,063 (4.4) 2.3
Total deposits $ 14,212,564 100.0 % $ 14,326,933 $ 13,636,708 (0.8) % 4.2 %
Borrowings: We had no FHLB advances at June 30, 2022 , compared to $50.0 million
at December 31, 2021 as increased core deposits were a sufficient source of
funding. Other borrowings, consisting of retail repurchase agreements primarily
related to client cash management accounts, decreased $29.8 million , or 11%, to
$234.7 million at June 30, 2022 , compared to $264.5 million at December 31,
2021 . Junior subordinated debentures totaled $72.2 million at June 30, 2022
compared to $119.8 million at December 31, 2021 , as Banner redeemed
$50.5 million of junior subordinated debentures during the six months ended
June 30, 2022 . Subordinated notes, net of issuance costs were $98.8 million at
June 30, 2022 compared to $98.6 million at December 31, 2021 .
Shareholders' Equity: Total shareholders' equity decreased $204.5 million to
$1.49 billion at June 30, 2022 . The decrease in shareholders' equity is
primarily due to the $256.1 million decrease in AOCI, primarily representing the
unrealized loss and related decrease in the fair value of securities
available-for-sale, net of tax, the accrual of $30.4 million of cash dividends
to common shareholders and the repurchase of 200,000 shares of common stock at a
total cost of $11.0 million , partially offset by the $91.9 million of
year-to-date net income. During the six months ended June 30, 2022 , no shares of
restricted stock were forfeited and 54,218 shares were surrendered by employees
to satisfy tax withholding obligations upon the vesting of restricted stock
grants. (See Part II, Item 2, "Unregistered Sales of Equity Securities and Use
of Proceeds" in this Form 10-Q.) Tangible common shareholders' equity, which
excludes goodwill and other intangible assets, decreased $201.5 million to $1.10
billion , or 6.88% of tangible assets at June 30, 2022 , compared to $1.30
billion , or 7.93% of tangible assets at December 31, 2021 . The decrease in
tangible common shareholders' equity as a percentage of tangible assets was
primarily due to the decrease in tangible common shareholders' equity primarily
due to the previously mentioned decrease in AOCI.
Comparison of Results of Operations for the Three Months Ended
For the quarter endedJune 30, 2022 , our net income was$48.0 million , or$1.39 per diluted share, compared to$44.0 million , or$1.27 per diluted share, for the preceding quarter. For the six months endedJune 30, 2022 , our net income was$91.9 million , or$2.66 per diluted share, compared to net income of$101.2 million , or$2.88 per diluted share for the same period a year earlier. Our net income for the current quarter included a$7.8 million gain on sale of branches and increased interest income due to increased average yields on total interest-earning assets, partially offset by decreased mortgage banking income and a provision for credit losses of$4.5 million . Our results for both the quarter endedJune 30, 2022 and the preceding quarter included no COVID-19 related expenses or merger and acquisition-related expenses. Our net income for the six months endedJune 30, 2022 included a$10.3 million decrease in mortgage banking income and a decline in the recognition of deferred loan fee income due to reduced loan repayments from SBA PPP loan forgiveness compared to the same period a year ago, partially offset by a recapture of provision for credit losses of$2.4 million and the previously mentioned gain recognized on sale of branches. Our results for the six months endedJune 30, 2022 included no COVID-19 related expenses or merger and acquisition-related expenses as compared to$265,000 of COVID-19 related expenses and$650,000 of merger and acquisition-related expenses in the same prior year period. An increase in the yields on loans and investment securities due to rising interest rates during the quarter, partially offset by a decline in the recognition of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness produced increased net interest income for the quarter compared to the preceding quarter. Growth in the balance of average interest-earning assets and decreased funding costs, partially offset by a decline in the recognition of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness and the decline in the average yield on interest-earning assets, produced increased net interest income for the six months endedJune 30, 2022 compared to the same period a year ago. The increase in net interest income and the gain on sale of branches, partially offset by lower income from mortgage banking operations resulted in increased total revenue for the quarter endedJune 30, 2022 , compared to the preceding quarter. Banner recorded a$4.5 million provision for credit losses for the quarter endedJune 30, 2022 , compared to a$7.0 million recapture of provision for credit losses in the prior quarter. The provision for credit losses for the current quarter primarily reflects loan growth and, to a lesser extent, a deterioration in forecasted economic conditions. The recapture of provision for credit losses for the preceding quarter primarily reflects improvement in the level of adversely classified loans, as well as in the forecasted economic indicators utilized to estimate credit losses. The increase in net interest income and the gain recognized on the branch sale completed during the second quarter of 2022, partially offset by decreased mortgage banking income resulted in revenues increasing for the six months endedJune 30, 2022 , compared to the same period a year earlier. Banner recorded a$2.4 million recapture of provision for credit losses for the six months endedJune 30, 2022 , compared to a$19.5 million recapture of provision for credit losses for the same period a year ago. The recapture of provision for credit 63 --------------------------------------------------------------------------------
losses for the six months ended
Non-interest expenses increased in the quarter endedJune 30, 2022 compared to the prior quarter and decreased during the six months endedJune 30, 2022 , compared to the to the same period a year ago. The increase in non-interest expense for the current quarter compared to the prior quarter reflects increased salary and employee benefits expenses, primarily due to normal salary and wage adjustments, payment and card processing services expenses and professional services expenses, partially offset by increased capitalized loan origination costs, primarily due to increased loan production, and decreases in loss on extinguishment of debt and information/computer data services expense. During the prior quarter, Banner recorded a$793,000 loss on extinguishment of debt as a result of the redemption of$50.5 million of junior subordinated debentures. The year-over-year decrease in non-interest expense primarily reflects decreases in salary and employee benefits expenses, primarily due to a reduction in staffing, professional and legal expenses, primarily due to a reduction in consultant expense, and advertising and marketing expenses. The year-over-year decreases in non-interest expenses were partially offset by a decrease in capitalized loan origination costs and the previously mentioned loss on extinguishment of debt recognized during the first quarter of 2022. OPERATING DATA: Quarters Ended Six months ended (In thousands) June 30, 2022 March 31, 2022 June 30, 2022 June 30, 2021 Interest income$ 133,001 $ 122,891 $ 255,892 $ 258,086 Interest expense 3,990 4,237 8,227 12,871 Net interest income 129,011 118,654 247,665 245,215 Provision (recapture) for credit losses 4,534 (6,961) (2,427) (19,507) Net interest income after provision (recapture) for credit losses 124,477 125,615 250,092 264,722 Deposit fees and other service charges 11,000 11,189 22,189 18,697 Mortgage banking operations revenue 3,978 4,440 8,418 18,692 Net change in valuation of financial instruments carried at fair value 69 49 118 117 All other non-interest income 12,126 3,749 15,875 9,102 Total non-interest income 27,173 19,427 46,600 46,608 Salary and employee benefits 60,832 59,486 120,318 126,754 All other non-interest expenses 31,221 31,709 62,930 59,397 Total non-interest expense 92,053 91,195 183,248 186,151 Income before provision for income tax expense 59,597 53,847 113,444 125,179 Provision for income tax expense 11,632 9,884 21,516 23,942 Net income$ 47,965 $ 43,963 $ 91,928 $ 101,237 PER COMMON SHARE DATA: Quarters Ended Six months ended March 31, June 30, 2022 2022 June 30, 2022 June 30, 2021 Net income: Basic $ 1.40$ 1.28 $ 2.68 $ 2.90 Diluted 1.39 1.27 2.66 2.88 Net Interest Income. Net interest income increased by$10.4 million , or 9%, to$129.0 million for the quarter endedJune 30, 2022 , compared to$118.7 million for the preceding quarter. The higher net interest income during the quarter compared to the preceding quarter was primarily due to increases in the yields on loans and investment securities, partially offset by a decline in the recognition of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness. The higher yields on interest-earnings assets for the quarter endedJune 30, 2022 compared to preceding quarter reflect the rising interest rate environment during 2022. The net interest margin on a tax equivalent basis of 3.44% for the quarter endedJune 30, 2022 was enhanced by two basis points as a result of acquisition accounting adjustments. This compares to a net interest margin on a tax equivalent basis of 3.18% for the preceding quarter, which included three basis points from acquisition accounting adjustments. The increase in net interest margin compared to the preceding quarter was primarily due to an increase in the average yields on interest-earning assets during the current quarter. InMarch 2022 , in response to inflation, theFederal Open Market Committee ("FOMC") of theFederal Reserve System commenced increasing the target range for the federal funds rate by implementing a 25 basis-point increase. During the second quarter of 2022, theFOMC increased the target range for the federal funds rate by an additional 125 basis points to a range of 1.50% to 1.75%. The increase in average yields on interest-earning assets during the current quarter reflects the lagging benefit of variable rate interest-earnings assets beginning to reprice higher. Our balance sheet is 64 --------------------------------------------------------------------------------
structured to increase the net interest margin in the near term if the
Net interest income increased by$2.5 million , or 1%, to$247.7 million for the six months endedJune 30, 2022 , compared to$245.2 million for the same period one year earlier, primarily due to an increase of$912.2 million in the average balance of interest-earning assets and decreased funding costs, partially offset by a decline in the recognition of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness and the decline in the average yield on interest-earning assets. The lower average yields for the six months endedJune 30, 2022 compared to same period a year ago reflect the growth in the average balance of interest-earning assets primarily being invested in short term investments including interest bearing deposits and securities available for sale. The net interest margin on a tax equivalent basis decreased to 3.31% for the six months endedJune 30, 2022 compared to 3.48% for the same period in the prior year, as a result of lower yields on interest-earning assets. The net interest margin included three basis points from acquisition accounting adjustments for the six months endedJune 30, 2022 and five basis points for same period a year earlier. Interest Income. Interest income for the quarter endedJune 30, 2022 was$133.0 million , compared to$122.9 million for the preceding quarter. The increase in interest income during the current quarter compared to the prior quarter occurred primarily as a result of higher yields on interest-earning assets, partially offset by a decline in the recognition of deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness. The average balance of interest-earning assets was$15.35 billion for the quarter endedJune 30, 2022 , compared to$15.42 billion for the preceding quarter. The average yield on total interest-earning assets was 3.54% for the quarter endedJune 30, 2022 , compared to 3.29% for the preceding quarter. This increase in average yield between the quarters reflects a 46 basis-point increase in the average yield on investment securities, and a four basis-point increase in the average yield on loans, in each case due to rising interest rates, partially offset by a decline in the recognition of deferred loan fee income due to SBA repayment and forgiveness of low yielding SBA PPP loans. Average loans receivable for the quarter endedJune 30, 2022 increased$209.4 million , or 2%, to$9.37 billion , compared to$9.16 billion for the preceding quarter, primarily reflecting the increase in one- to four-family loans. Interest income on loans increased by$4.2 million to$104.5 million for the current quarter from$100.4 million for the preceding quarter, reflecting the increase in the average balance of loans receivable as well as the impact of the previously mentioned increases in interest rates, partially offset by a decline in the recognition of deferred loan fee income due to loan repayments from SBA PPP loan forgiveness. The average yield on total loans increased to 4.54% for the quarter endedJune 30, 2022 , from 4.50% in the preceding quarter, also reflecting the impact of the previously mentioned increases in interest rates, partially offset by a decline in the recognition of deferred loan fee income due to loan repayments from SBA PPP loan forgiveness. The acquisition accounting loan discount accretion and the related balance sheet impact added four basis points to the current quarter's average loan yield, compared to five basis points in the preceding quarter. The combined average balance of mortgage-backed securities, other investment securities, equity securities, interest-bearing deposits and FHLB stock (total investment securities or combined portfolio) decreased to$5.98 billion for the quarter endedJune 30, 2022 (excluding the effect of fair value adjustments), compared to$6.26 billion for the preceding quarter. The interest and dividend income from those investments increased by$6.0 million compared to the preceding quarter. The average yield on the combined portfolio increased to 1.99% for the quarter endedJune 30, 2022 , from 1.53% in the preceding quarter. The increase in the average yield for the current quarter compared to the preceding quarter reflects the rising interest rates as well as a decrease in the average balance of interest-bearing deposits. Interest income for the six months endedJune 30, 2022 was$255.9 million , compared to$258.1 million for the same period in the prior year, a decrease of$2.2 million . The results between the periods primarily reflect a decrease in the average yield on interest-earning assets, mostly due to the investment of excess liquidity in short term investments as well as a decline in the acceleration of the recognition of deferred loan fee income upon SBA repayment and forgiveness of low yielding SBA PPP loans, partially offset by a higher average balance of interest-earning assets. Interest Expense. Interest expense for the quarter endedJune 30, 2022 was$4.0 million , compared to$4.2 million for the preceding quarter. The interest expense decrease between the current quarter and preceding quarter reflects the decrease in total average borrowings and a slight decrease in the average cost of total funding liabilities. Interest expense for the six months endedJune 30, 2022 was$8.2 million , compared to$12.9 million for the same period in the prior year. The decrease in interest expense occurred as a result of an eight basis-point decrease in the average cost of all funding liabilities to 0.11% for the six months endedJune 30, 2022 , compared to 0.19% for the same period in the prior year, partially offset by a$1.03 billion , or 7%, increase in average funding liabilities. The increase in average funding liabilities reflects increases in low costing core deposits, including non-interest-bearing deposits and interest-bearing transaction and savings accounts. Deposit interest expense decreased$78,000 , or 4%, to$2.0 million for the quarter endedJune 30, 2022 , compared to$2.1 million for the preceding quarter, primarily as a result of a decrease in the average balance of interest-bearing deposits. The average rate paid on total deposits was 0.06% in both the second quarter of 2022 and the preceding quarter. The cost of interest-bearing deposits decreased by one basis-point to 0.10% for the quarter endedJune 30, 2022 , compared to 0.11% in the preceding quarter. Average deposit balances increased to$14.44 billion for the quarter endedJune 30, 2022 , from$14.41 billion for the preceding quarter. Deposit interest expense for the six months endedJune 30, 2022 decreased$2.5 million , or 38%, to$4.1 million , compared to$6.6 million for the same period in the prior year. Average deposit balances increased to$14.43 billion for the six months endedJune 30, 2022 , from$13.27 billion for the same period a year earlier, while the average rate paid on deposits decreased to 0.06% for the six months endedJune 30, 2022 from 0.10% for the same period in the prior year. The average cost of interest-bearing deposits decreased by eight basis points to 0.10% for the six months endedJune 30, 2022 , compared to 0.18% in the same period a year earlier. The decrease in the average cost of interest-bearing 65 --------------------------------------------------------------------------------
deposits was primarily the result of an increase in the average balance of core deposits and a 36 basis-point decrease on the cost of certificates of deposit.
Interest expense on total borrowings decreased to$2.0 million for the quarter endedJune 30, 2022 from$2.2 million for the preceding quarter. The decrease was primarily due to decreases in the average balance of the FHLB Advances. The average rate paid on total borrowings for the quarter endedJune 30, 2022 increased to 1.80% from 1.74% for the preceding quarter. Average total borrowings were$441.3 million for the quarter endedJune 30, 2022 , compared to$500.4 million for the preceding quarter. Interest expense on total borrowings decreased to$4.1 million for the six months endedJune 30, 2022 from$6.2 million for the same period a year earlier. Average total borrowings were$470.6 million for the six months endedJune 30, 2022 , compared to$591.7 million for the same period a year earlier. The decrease was primarily due to the decrease in the average balance of the junior subordinated debentures and FHLB advances. The average rate paid on total borrowings for the six months endedJune 30, 2022 decreased to 1.77% from 2.12% for the same period a year earlier. Analysis of Net Interest Spread. The following tables present for the periods indicated our condensed average balance sheet information, together with interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities with additional comparative data on our operating performance (dollars in thousands): 66 -------------------------------------------------------------------------------- ADDITIONAL FINANCIAL INFORMATION (dollars in thousands) (rates / ratios annualized) ANALYSIS OF NET INTEREST SPREAD Quarters Ended Jun 30, 2022 Mar 31, 2022 Interest and Yield / Interest and Yield / Average Balance Dividends Cost(3) Average Balance Dividends Cost(3) Interest-earning assets: Held for sale loans $ 69,338$ 655 3.79 %$ 130,221 $ 1,115 3.47 % Mortgage loans 7,565,894 85,408 4.53 7,347,662 81,032 4.47 Commercial/agricultural loans 1,572,957 17,153 4.37 1,479,216 15,011 4.12 SBA PPP loans 45,739 1,056 9.26 88,720 2,784 12.73 Consumer and other loans 117,162 1,683 5.76 115,881 1,700 5.95 Total loans(1) 9,371,090 105,955 4.54 9,161,700 101,642 4.50 Mortgage-backed securities 3,170,915 16,965 2.15 2,975,263 14,235 1.94 Other securities 1,626,204 10,326 2.55 1,573,834 8,429 2.17 Interest-bearing deposits with banks 1,176,591 2,281 0.78 1,697,545 820 0.20 FHLB stock 10,000 100 4.01 11,756 106 3.66 Total investment securities 5,983,710 29,672 1.99 6,258,398 23,590 1.53 Total interest-earning assets 15,354,800 135,627 3.54 15,420,098 125,232 3.29 Non-interest-earning assets 1,282,649 1,372,182 Total assets$ 16,637,449 $ 16,792,280 Deposits: Interest-bearing checking accounts$ 1,924,896 289 0.06$ 1,958,824 273 0.06 Savings accounts 2,841,286 352 0.05 2,816,774 354 0.05 Money market accounts 2,431,456 531 0.09 2,390,621 506 0.09 Certificates of deposit 783,536 836 0.43 825,028 953 0.47 Total interest-bearing deposits 7,981,174 2,008 0.10 7,991,247 2,086 0.11 Non-interest-bearing deposits 6,456,432 - - 6,421,143 - - Total deposits 14,437,606 2,008 0.06 14,412,390 2,086 0.06 Other interest-bearing liabilities: FHLB advances - - - 42,222 291 2.80 Other borrowings 252,085 80 0.13 266,148 84 0.13 Junior subordinated debentures and subordinated notes 189,178 1,902 4.03 191,985 1,776 3.75 Total borrowings 441,263 1,982 1.80 500,355 2,151 1.74 Total funding liabilities 14,878,869 3,990 0.11 14,912,745 4,237 0.12 Other non-interest-bearing liabilities(2) 239,676 225,953 Total liabilities 15,118,545 15,138,698 Shareholders' equity 1,518,904 1,653,582
Total liabilities and shareholders' equity
$ 16,792,280 Net interest income/rate spread (tax equivalent)$ 131,637 3.43 %$ 120,995 3.17 % Net interest margin (tax equivalent) 3.44 % 3.18 % Reconciliation to reported net interest income: Adjustments for taxable equivalent basis (2,626)
(2,341)
Net interest income and margin, as reported$ 129,011 3.37 %$ 118,654 3.12 % Additional Key Financial Ratios: Return on average assets 1.16 % 1.06 % Return on average equity 12.67 10.78 Average equity/average assets 9.13 9.85 Average interest-earning assets/average interest-bearing liabilities 182.31 181.59 Average interest-earning assets/average funding liabilities 103.20 103.40 Non-interest income/average assets 0.66 0.47 Non-interest expense/average assets 2.22 2.20 Efficiency ratio(4) 58.94 66.04 Adjusted efficiency ratio(5) 59.46 62.09 (1)Average balances include loans accounted for on a nonaccrual basis and loans 90 days or more past due. Amortization of net deferred loan fees/costs is included with interest on loans. (2)Average other non-interest-bearing liabilities include fair value adjustments related to junior subordinated debentures. (3)Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was$1.4 million and$1.3 million for the three months endedJune 30, 2022 andMarch 31, 2022 , respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was$1.2 million and$1.0 million for the three months endedJune 30, 2022 andMarch 31, 2022 , respectively. (4)Non-interest expense divided by the total of net interest income and non-interest income. (5)Adjusted non-interest expense divided by adjusted revenue. These represent non-GAAP financial measures. See the discussion and reconciliation of non-GAAP financial information in the Executive Overview section of Management's Discussion and Analysis of Financial Condition and Results of Operation in this Form 10-Q for more detailed information with respect to the efficiency ratio. 67 -------------------------------------------------------------------------------- Six months ended June 30, 2022 Six months ended June 30, 2021 Average Interest and Yield/ Average Interest and Yield/ Balance Dividends Cost (3) Balance Dividends Cost (3)
Interest-earning assets: Held for sale loans $ 103,508$ 1,770 3.45 % $ 94,488$ 1,469 3.14 % Mortgage loans 7,453,483 166,440 4.50 7,146,260 161,253 4.55 Commercial/agricultural loans 1,526,345 32,164 4.25 1,499,902 31,737 4.27 SBA PPP loans 67,111 3,840 11.54 1,158,266 28,588 4.98 Consumer and other loans 116,525 3,383 5.85 125,197 3,775 6.08 Total loans(1)(3) 9,266,972 207,597 4.52 10,024,113 226,822 4.56 Mortgage-backed securities 3,073,630 31,200 2.05 2,198,712 21,035 1.93 Other securities 1,600,164 18,755 2.36 1,150,193 13,775 2.42 Equity securities - - - 866 - - Interest-bearing deposits with banks 1,435,629 3,101 0.44 1,086,241 638 0.12 FHLB stock 10,873 206 3.82 14,971 322 4.34 Total investment securities (3) 6,120,296 53,262 1.75 4,450,983 35,770 1.62 Total interest-earning assets 15,387,268 260,859 3.42 14,475,096 262,592 3.66 Non-interest-earning assets 1,327,169 1,232,196 Total assets$ 16,714,437 $ 15,707,292 Deposits: Interest-bearing checking accounts$ 1,941,766 562 0.06$ 1,685,973 617 0.07 Savings accounts 2,829,098 706 0.05 2,555,144 975 0.08 Money market accounts 2,411,152 1,037 0.09 2,265,819 1,443 0.13 Certificates of deposit 804,167 1,789 0.45 900,970 3,602 0.81 Total interest-bearing deposits 7,986,183 4,094 0.10 7,407,906 6,637 0.18 Non-interest-bearing deposits 6,438,885 - - 5,861,941 - - Total deposits 14,425,068 4,094 0.06 13,269,847 6,637 0.10 Other interest-bearing liabilities: FHLB advances 20,994 291 2.80 122,100 1,589 2.62 Other borrowings 259,078 164 0.13 221,682 233 0.21 Junior subordinated debentures and subordinated notes 190,573 3,678 3.89 247,944 4,412 3.59 Total borrowings 470,645 4,133 1.77 591,726 6,234 2.12 Total funding liabilities 14,895,713 8,227 0.11 13,861,573 12,871 0.19 Other non-interest-bearing liabilities (2) 232,853 203,567 Total liabilities 15,128,566 14,065,140 Shareholders' equity 1,585,871 1,642,152 Total liabilities and shareholders' equity$ 16,714,437 $ 15,707,292 Net interest income/rate spread (tax equivalent)$ 252,632 3.31 %$ 249,721 3.47 % Net interest margin (tax equivalent) 3.31 % 3.48 % Reconciliation to reported net interest income: Adjustments for taxable equivalent basis (4,967)
(4,506)
Net interest income and margin$ 247,665 3.25 %$ 245,215 3.42 % Additional Key Financial Ratios: Return on average assets 1.11 % 1.30 % Return on average equity 11.69 12.43 Average equity / average assets 9.49 10.45 Average interest-earning assets / average interest-bearing liabilities 181.95 180.95 Average interest-earning assets / average funding liabilities 103.30 104.43 Non-interest income / average assets 0.56 0.60 Non-interest expense / average assets 2.21 2.39 Efficiency ratio (4) 62.27 63.79 Adjusted efficiency ratio (5) 60.72 60.77 (1)Average balances include loans accounted for on a nonaccrual basis and loans 90 days or more past due. Amortization of net deferred loan fees/costs is included with interest on loans. (2)Average other non-interest-bearing liabilities include fair value adjustments related to junior subordinated debentures. (3)Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was$2.7 million and$2.5 million for the six months endedJune 30, 2022 andJune 30, 2021 , respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was$2.2 million and$2.0 million for the six months endedJune 30, 2022 andJune 30, 2021 , respectively. (4)Non-interest expense divided by the total of net interest income and non-interest income. (5)Adjusted non-interest expense divided by adjusted revenue. These represent non-GAAP financial measures. See the discussion and reconciliation of non-GAAP financial information in the Executive Overview section of Management's Discussion and Analysis of Financial Condition and Results of Operation in this Form 10-Q for more detailed information with respect to the efficiency ratio. 68 -------------------------------------------------------------------------------- Provision and Allowance for Credit Losses. Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. These factors include, among others, changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions. The following table sets forth an analysis of our allowance for credit losses - loans for the periods indicated (dollars in thousands): ADDITIONAL FINANCIAL INFORMATION (dollars in thousands) Quarters Ended Six Months Ended CHANGE IN THE Jun 30, 2022 Mar 31, 2022 Jun 30, 2022 Jun 30, 2021 ALLOWANCE FOR CREDIT LOSSES - LOANS Balance, beginning of period$ 125,471 $ 132,099 $ 132,099 $ 167,279 Provision (recapture) for credit losses - loans 3,144 (7,376) (4,232) (16,135) Recoveries of loans previously charged off: Commercial real estate 129 87 216 171 Construction and land - 384 384 100 One- to four-family residential 98 40 138 133 Commercial business 234 149 383 1,300 Agricultural business, including secured by farmland 14 118 132 8 Consumer 112 216 328 393 587 994 1,581 2,105 Loans charged off: Commercial real estate - (2) (2) (3,766) Construction and land - (5) (5) - Commercial business (248) (82) (330) (912) Agricultural business, including secured by farmland - - - (2) Consumer (252) (157) (409) (560) (500) (246) (746) (5,240) Net recoveries 87 748 835 (3,135) Balance, end of period$ 128,702 $ 125,471 $ 128,702 $ 148,009 Net recoveries / Average loans receivable 0.001 % 0.008 % 0.009 % (0.031) % The provision for credit losses - loans reflects the amount required to maintain the allowance for credit losses - loans at an appropriate level based upon management's evaluation of the adequacy of collective and individual loss reserves. During the quarter endedJune 30, 2022 , we recorded a provision for credit losses - loans of$3.1 million , compared to a recapture of provision for credit losses - loans of$7.4 million during the prior quarter. The provision for credit losses - loans for the current quarter primarily reflects loan growth and, to a lesser extent, a deterioration in forecasted economic conditions. The recapture of provision for credit losses - loans for the prior quarter primarily reflects improvement in the level of adversely classified loans, as well as in the forecasted economic indicators utilized to estimate credit losses. Future assessments of the expected credit losses will not only be impacted by changes to the reasonable and supportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required changes in the reasonable and supportable forecast reversion period. No allowance for credit losses - loans was recorded on the$31.0 million balance of SBA PPP loans atJune 30, 2022 as these loans are fully guaranteed by the SBA. Net loan recoveries were$87,000 for the quarter endedJune 30, 2022 compared to net recoveries of$748,000 in the preceding quarter. The allowance for credit losses - loans was$128.7 million atJune 30, 2022 compared to$125.5 million atMarch 31, 2022 and$148.0 million atJune 30, 2021 . The allowance for credit losses - loans as a percentage of total loans (loans receivable excluding allowance for credit losses) was 1.36% atJune 30, 2022 as compared to 1.37% atMarch 31, 2022 and 1.53% atJune 30, 2021 . The decrease in the allowance for credit losses - loans as a percentage of loans atJune 30, 2022 compared toJune 30, 2021 reflects the recapture of provision for credit losses - loans recorded during 2022, primarily as the result of the improvement in the forecasted economic indicators as well as the decrease in adversely classified loans. The provision for credit losses - unfunded loan commitments reflects the amount required to maintain the allowance for credit losses - unfunded loan commitments at an appropriate level based upon management's evaluation of the adequacy of collective and individual loss reserves. The following table sets forth an analysis of our allowance for credit losses - unfunded loan commitments for the periods indicated (dollars in thousands): 69 -------------------------------------------------------------------------------- Quarters Ended Six Months Ended CHANGE IN THE Jun 30, 2022 Mar 31, 2022 Jun 30, 2022 Jun
30, 2021 ALLOWANCE FOR CREDIT LOSSES - UNFUNDED LOAN COMMITMENTS Balance, beginning of period
$ 12,860 $ 12,432 $ 12,432 $
13,297
Provision/(recapture) for credit losses - unfunded loan commitments 1,386 428 1,814 (3,388) Balance, end of period$ 14,246 $ 12,860 $ 14,246 $ 9,909 The allowance for credit losses - unfunded loan commitments was$14.2 million atJune 30, 2022 , compared to$12.9 million atMarch 31, 2022 and compared to$9.9 million atJune 30, 2021 . The increase in the allowance for credit losses - unfunded loan commitments reflects the provision for credit losses - unfunded loan commitments recorded during the current quarter. During the quarter endedJune 30, 2022 , we recorded a provision for credit losses - unfunded loan commitments of$1.4 million , compared to a$428,000 provision for loan losses - unfunded loan commitments during the preceding quarter. During the six months endedJune 30, 2022 , we recorded a provision for credit losses - unfunded loan commitments of$1.8 million , compared to a recapture of provision for loan losses - unfunded loan commitments of$3.4 million during the same period a year earlier. The provision for credit losses - unfunded loan commitments during the current and preceding quarter was primarily the result of an increase in unfunded loan commitments.
Non-interest Income. The following table presents the key components of
non-interest income for the three months ended
Quarters Ended Six months ended June 30,
Change Change Change Change
Jun 30, 2022 Mar 31, 2022 Amount Percent 2022 2021 Amount Percent
Deposit fees and other service
charges $ 11,000 $ 11,189 $ (189) (1.7) % $ 22,189 $ 18,697 $ 3,492 18.7 %
Mortgage banking operations 3,978 4,440 (462) (10.4) 8,418 18,692 (10,274) (55.0)
Bank owned life insurance 2,239 1,631 608 37.3 3,870 2,552 1,318 51.6
Miscellaneous 2,051 1,683 368 21.9 3,734 5,988 (2,254) (37.6)
19,268 18,943 325 1.7 38,211 45,929 (7,718) (16.8)
Net gain on sale of securities 32 435 (403) (92.6) 467 562 (95) (16.9)
Net change in valuation of
financial instruments carried at
fair value 69 49 20 40.8 118 117 1 0.9
Gain on sale of branches, including
related deposits 7,804 - 7,804 nm 7,804 - 7,804 nm
Total non-interest income $ 27,173 $ 19,427 $ 7,746 39.9 % $ 46,600 $ 46,608 $ (8) - %
Non-interest income was $27.2 million for the quarter ended June 30, 2022 ,
compared to $19.4 million for the preceding quarter, and $46.6 million for both
the six months ended June 30, 2022 and 2021. The increases in non-interest
income for the quarter, compared to the preceding quarter is primarily due to
the previously mentioned $7.8 million gain recognized on the branch sale
completed during the quarter. Our non-interest income for the quarter ended
June 30, 2022 included a $69,000 net gain for fair value adjustments and a net
gain of $32,000 on sales of securities. For the quarter ended March 31, 2022 ,
fair value adjustments resulted in a net gain of $49,000 and we had a net gain
of $435,000 on sale of securities. Our non-interest income for the six months
ended June 30, 2022 included a net gain of $118,000 for fair value adjustments
and a $467,000 net gain on sale of securities. During the six months ended
June 30, 2021 , fair value adjustments resulted in a net gain of $117,000 and we
had a $562,000 net gain on sale of securities. For a more detailed discussion of
our fair value adjustments, please refer to Note 8 in the Selected Notes to the
Consolidated Financial Statements in this Form 10-Q.
Deposit fees and other service charges decreased by $189,000 , or 2%, for the
quarter ended June 30, 2022 , compared to the preceding quarter. Deposit fees and
other service charges increased by $3.5 million , or 19%, for the six months
ended June 30, 2022 , compared to the same period a year earlier, primarily as a
result of increased deposit transaction account activity. Mortgage banking
operations, including gains on one- to four-family and multifamily loan sales
and loan servicing fees, decreased $462,000 for the quarter ended June 30, 2022 ,
compared to the preceding quarter and decreased $10.3 million for the six months
ended June 30, 2022 , compared to the same period a year earlier. There were no
sales of multifamily loans during the quarter ended June 30, 2022 . Gains on
sales of multifamily loans resulted in income of $340,000 during the preceding
quarter and the six months ended June 30, 2022 , compared to $3.4 million for the
same six-month period a year ago. Gains on sales of one- to four-family loans
resulted in income of $3.7 million and $7.8 million for the quarter and six
months ended June 30, 2022 , respectively, compared to $4.1 million in the
preceding quarter, and $15.4 million for the six months ended June 30, 2021 .
These decreases in mortgage banking operations between the periods primarily
reflect a reduction in the volume of one- to four-family loans sold, as well as
a decrease in the gain on sale margin on one- to four-family held-for-sale
loans. The reduction in volumes reflects a reduction in refinancing activity as
interest rates increased during 2022. Home purchase activity accounted for 82%
of one- to four-family mortgage loan originations in the second quarter of 2022,
compared to 64% in the prior quarter. The lower mortgage banking revenue for the
six months ended June 30, 2022 compared to the same period a year ago is also
due in part to a $1.1 million lower of cost or market downward adjustment
recorded on multifamily held for sale loans during the six months ended June 30,
2022 due to increases in market interest rates.
70
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The decrease in miscellaneous non-interest income during the six months ended
June 30, 2022 , compared to the same period a year earlier is primarily due to
higher gains recognized during the six months ended June 30, 2021 related to the
disposition of closed branch locations.
Non-interest Expense. The following table represents key elements of
non-interest expense for the three months ended
Quarters Ended Six months ended June 30,
Change
Jun 30, 2022 Mar 31, 2022 Amount Change Percent 2022 2021 Change Amount Change Percent
Salaries and employee benefits
$ 1,346 2.3 %$ 120,318 $ 126,754 $ (6,436) (5.1) % Less capitalized loan origination costs (7,222) (6,230) (992) 15.9 (13,452) (18,464) 5,012 (27.1) Occupancy and equipment 13,284 13,220 64 0.5 26,504 25,812 692 2.7 Information/computer data services 5,997 6,651 (654) (9.8) 12,648 11,805 843 7.1 Payment and card processing expenses 5,682 4,896 786 16.1 10,578 9,301 1,277 13.7 Professional and legal expenses 2,878 2,180 698 32.0 5,058 7,699 (2,641) (34.3) Advertising and marketing 822 461 361 78.3 1,283 2,444 (1,161) (47.5) Deposit insurance expense 1,440 1,524 (84) (5.5) 2,964 2,774 190 6.8 State/municipal business and use taxes 1,004 1,162 (158) (13.6) 2,166 2,148 18 0.8 REO operations (121) (79) (42) 53.2 (200) (124) (76) 61.3 Amortization of core deposit intangibles 1,425 1,424 1 0.1 2,849 3,422 (573) (16.7) Loss on extinguishment of debt - 793 (793) (100.0) 793 - 793 nm Miscellaneous 6,032 5,707 325 5.7 11,739 11,665 74 0.6 92,053 91,195 858 0.9 183,248 185,236 (1,988) (1.1) COVID-19 expenses - - - nm - 265 (265) (100.0) Merger and acquisition-related expenses - - - nm - 650 (650) (100.0) Total non-interest expense$ 92,053 $ 91,195 $ 858 0.9 %$ 183,248 $ 186,151 $ (2,903) (1.6) % Non-interest expenses were$92.1 million for the quarter endedJune 30, 2022 , compared to$91.2 million for the preceding quarter, and$183.2 million for the six months endedJune 30, 2022 , compared to$186.2 million for the same period last year. The current quarter non-interest expense includes increased salary and employee benefits expenses, payment and card processing services expenses and professional services expenses, partially offset by increased capitalized loan origination costs and decreases in loss on extinguishment of debt and information / computer data services expense. We recognized no COVID-19 expenses during both the quarter endedJune 30, 2022 and the preceding quarter. The decrease in non-interest expense for the six months endedJune 30, 2022 primarily reflects decreases in salary and employee benefits expenses, professional and legal expenses and advertising and marketing expenses, partially offset by a decrease in capitalized loan origination costs and the loss on extinguishment of debt recognized during the first quarter of 2022. The six months endedJune 30, 2022 results included no COVID-19 expenses, compared to$265,000 for the same period last year. Salary and employee benefits expenses increased$1.3 million to$60.8 million for the quarter endedJune 30, 2022 , compared to$59.5 million for the preceding quarter, primarily due to an increase in salaries due to annual merit increases along with increased production related commission and bonus expense, partially offset by a decline in severance expense. Salary and employee benefits expenses decreased$6.4 million to$120.3 million for the six months endedJune 30, 2022 , compared to$126.8 million for the same period last year, primarily due to a reduction in staffing. Capitalized loan origination costs increased$1.0 million for the quarter endedJune 30, 2022 , compared to the preceding quarter, primarily due to increased loan production, and decreased$5.0 million for the six months endedJune 30, 2022 , compared to the same period in the prior year, primarily due to the origination of SBA PPP loans during the first quarter of 2021. Payment and card processing services expenses increased$786,000 for the quarter endedJune 30, 2022 compared to the preceding quarter, and$1.3 million compared to the same period last year, primarily reflecting expenses related to fraudulent deposit account activity. Professional and legal expenses increased$698,000 for the quarter endedJune 30, 2022 compared to the preceding quarter, and decreased$2.6 million compared to the same period last year, primarily due to a decrease in consulting expense. Advertising and marketing expenses increased$361,000 for the quarter endedJune 30, 2021 , compared to the preceding quarter and decreased$1.2 million for the six months endedJune 30, 2022 , compared to the same period in the prior year, primarily due to a reduction in direct mail marketing expenses. In addition, Banner recorded a$793,000 loss as a result of the redemption of$50.5 million of junior subordinated debentures during the prior quarter. Banner's efficiency ratio was 58.94% for the current quarter, compared to 66.04% in the preceding quarter. Banner's adjusted efficiency ratio was 59.46% for the current quarter, compared to 62.09% in the preceding quarter. See the discussion and reconciliation of non-GAAP financial information in the Executive Overview section of Management's Discussion and Analysis of Financial Condition and Results of Operation in this Form 10-Q for more detailed information with respect to the efficiency ratio. 71 -------------------------------------------------------------------------------- Income Taxes. For the quarter endedJune 30, 2022 , we recognized$11.6 million in income tax expense for an effective tax rate of 19.5%, which reflects our blended statutory tax rate reduced by the effect of tax-exempt income, certain tax credits, and tax benefits related to restricted stock vesting. Our statutory income tax rate is 23.6%, representing a blend of the statutory federal income tax rate of 21.0% and apportioned effects of the state income tax rates. For the quarter endedMarch 31, 2022 , we recognized$9.9 million in income tax expense for an effective tax rate of 18.4%. For the six months endedJune 30, 2022 , we recognized$21.5 million in income tax expense for an effective tax rate of 19.0%, compared to$23.9 million in income tax expense for an effective tax rate of 19.1% for the same period in the prior year. For more discussion on our income taxes, please refer to Note 9 in the Selected Notes to the Consolidated Financial Statements in this report on Form 10-Q.
Asset Quality
Maintaining a moderate risk profile by employing appropriate underwriting standards, avoiding excessive asset concentrations and aggressively managing troubled assets has been and will continue to be a primary focus for us. We actively engage our borrowers to resolve classified loans, problem assets and effectively manage REO as a result of foreclosures. Non-Performing Assets: Non-performing assets decreased to$19.1 million , or 0.12% of total assets, atJune 30, 2022 , from$23.7 million , or 0.14% of total assets, atDecember 31, 2021 , and from$31.5 million , or 0.19% of total assets, atJune 30, 2021 . Our allowance for credit losses - loans was$128.7 million , or 688% of non-performing loans atJune 30, 2022 compared to$132.1 million , or 578% of non-performing loans atDecember 31, 2021 and$148.0 million , or 481% of non-performing loans atJune 30, 2021 . We believe our level of non-performing loans and assets continues to be manageable atJune 30, 2022 . The primary components of the$19.1 million in non-performing assets were$16.7 million in nonaccrual loans,$2.1 million in loans more than 90 days delinquent and still accruing interest, and$357,000 in REO and other repossessed assets. Loans are reported as TDRs when we grant concessions to a borrower experiencing financial difficulties that we would not otherwise consider. If any TDR loan becomes delinquent or other matters call into question the borrower's ability to repay full interest and principal in accordance with the restructured terms, the TDR loan would be reclassified as nonaccrual. AtJune 30, 2022 , we had$4.4 million of TDR loans performing under their restructured repayment terms. The following table sets forth information with respect to our non-performing assets and restructured loans at the dates indicated (dollars in thousands): June 30, 2022 December 31, 2021 June 30, 2021 Nonaccrual Loans: (1) Secured by real estate: Commercial$ 10,041 $ 14,159$ 17,427 Construction and land 200 479 541 One- to four-family 2,002 2,711 4,007 Commercial business 1,521 2,156 3,673 Agricultural business, including secured by farmland 1,022 1,022 1,200 Consumer 1,874 1,754 1,799 16,660 22,281 28,647 Loans more than 90 days delinquent, still on accrual: Secured by real estate: Commercial 899 - 911 One- to four-family 1,053 436 579 Commercial business 20 2 495 Consumer 83 117 131 2,055 555 2,116 Total non-performing loans 18,715 22,836 30,763 REO, net 340 852 763 Other repossessed assets held for sale 17 17 17 Total non-performing assets$ 19,072
$ 23,705
Total non-performing assets to total assets 0.12 % 0.14 % 0.19 %
Total nonaccrual loans to loans before allowance for credit losses
0.18 % 0.25 % 0.30 %
Restructured loans performing under their restructured terms (2)
$ 4,370
$ 5,309
Loans 30-89 days past due and on accrual$ 8,336
$ 11,558
72
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(1)Includes $51,000 of nonaccrual TDR loans at June 30, 2022 . For the six months
ended June 30, 2022 , interest income was reduced by $132,000 as a result of
nonaccrual loan activity, which includes the reversal of $86,000 of accrued
interest as of the date the loan was placed on nonaccrual. There was no interest
income recognized on nonaccrual loans for the six months ended June 30, 2022 .
(2)These loans were performing under their restructured repayment terms at the
dates indicated.
In addition to the non-performing loans as of June 30, 2022 , we had other
classified loans with an aggregate outstanding balance of $134.5 million that
are not on nonaccrual status, with respect to which known information concerning
possible credit problems with the borrowers or the cash flows of the properties
securing the respective loans has caused management to be concerned about the
ability of the borrowers to comply with present loan repayment terms. This may
result in the future inclusion of such loans in the nonaccrual loan category.
The following table presents the Company's portfolio of risk-rated loans and non-risk-rated loans by grade at the dates indicated (in thousands):
June 30, 2022 December 31, 2021 June 30, 2021
Pass $ 9,274,655 $ 8,874,468 $ 9,315,264
Special Mention 27,711 11,932 66,103
Substandard 154,463 198,363 272,814
Total $ 9,456,829 $ 9,084,763 $ 9,654,181 The decrease in substandard loans during the six months ended
REO: REO was$340,000 atJune 30, 2022 compared to$852,000 atDecember 31, 2021 . The following table shows REO activity for the quarters endedJune 30, 2022 andMarch 31, 2022 and the six months endedJune 30, 2022 andJune 30, 2021 (in thousands): Three Months Ended Six months ended Jun 30, 2022 Mar 31, 2022 Jun 30, 2022 Jun 30, 2021 Balance, beginning of period$ 429 $ 852 $ 852 $ 816 Additions from loan foreclosures - - - 423 Proceeds from dispositions of REO (257) (607) (864) (783) Gain on sale of REO 168 184 352 307 Balance, end of period$ 340 $ 429 $ 340 $ 763 Non-recurring fair value adjustments to REO are recorded to reflect partial write-downs based on an observable market price or current appraised value of property. The individual carrying values of these assets are reviewed for impairment at least annually and any additional impairment charges are expensed to operations.
Liquidity and Capital Resources
Our primary sources of funds are deposits, borrowings, proceeds from loan principal and interest payments and sales of loans, and the maturity of and interest income on mortgage-backed and investment securities. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, competition and our pricing strategies. Our primary investing activity is the origination of loans and, in certain periods, the purchase of securities or loans. During the six months endedJune 30, 2022 andJune 30, 2021 , our loan originations, including originations of loans held for sale, exceeded our loan repayments by$578.4 million and$294.5 million , respectively. There were$75.9 million of loan purchases during the six months endedJune 30, 2022 and$33,000 of loan purchases during the six months endedJune 30, 2021 . This activity was funded primarily by the reduction in the balance of cash held as interest-bearing deposits and the sale of loans in 2022. During the six months endedJune 30, 2022 andJune 30, 2021 , we received proceeds of$324.4 million and$722.6 million , respectively, from the sale of loans. Securities purchased during the six months endedJune 30, 2022 andJune 30, 2021 totaled$664.0 million and$1.93 billion , respectively, and securities repayments, maturities and sales in those periods were$254.8 million and$895.2 million , respectively. Our primary financing activity is gathering deposits. Total deposits decreased by$114.4 million during the first six months of 2022, as certificates of deposit decreased by$82.3 million and core deposits decreased by$32.1 million . The decrease in total deposits during the first six months of 2022 was primarily due to the sale of four branches, which included the transfer of$178.2 million of related deposits. Certificates of deposit are generally more vulnerable to competition and more price sensitive than other retail deposits and our pricing of those deposits varies significantly based upon our liquidity management strategies at any point in time. AtJune 30, 2022 , certificates of deposit totaled$756.3 million , or 5% of our total deposits, including$611.1 million which were scheduled to mature within one year. While no 73 --------------------------------------------------------------------------------
assurance can be given as to future periods, historically, we have been able to retain a significant amount of our certificates of deposit as they mature.
We had no FHLB advances at
We must maintain an adequate level of liquidity to ensure the availability of sufficient funds to accommodate deposit withdrawals, to support loan growth, to satisfy financial commitments and to take advantage of investment opportunities. During the six months endedJune 30, 2022 and 2021, we used our sources of funds primarily to fund loan commitments and purchase securities. AtJune 30, 2022 , we had outstanding loan commitments totaling$4.34 billion , primarily relating to undisbursed loans in process and unused credit lines. While representing potential growth in the loan portfolio and lending activities, this level of commitments is proportionally consistent with our historical experience and does not represent a departure from normal operations. We generally maintain sufficient cash and readily marketable securities to meet short-term liquidity needs; however, our primary liquidity management practice to supplement deposits is to increase or decrease short-term borrowings. We maintain credit facilities with the FHLB-Des Moines, which provided for advances that in the aggregate would equal the lesser of 45% ofBanner Bank's assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB stock). AtJune 30, 2022 , under these credit facilities based on pledged collateral,Banner Bank had$2.41 billion of available credit capacity. We had no advances under these credit facilities atJune 30, 2022 . In addition,Banner Bank has been approved for participation in the Borrower-In-Custody (BIC) program by theFederal Reserve Bank of San Francisco (FRBSF). Under this program, based on pledged collateral,Banner Bank had available lines of credit of approximately$876.8 million as ofJune 30, 2022 . We had no funds borrowed from the FRBSF atJune 30, 2022 orDecember 31, 2021 . AtJune 30, 2022 ,Banner Bank also had uncommitted federal funds line of credit agreements with other financial institutions totaling$125.0 million . No balances were outstanding under these agreements as ofJune 30, 2022 orDecember 31, 2021 . Availability of lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs and the agreements may restrict consecutive day usage. Management believes it has adequate resources and funding potential to meet our foreseeable liquidity requirements.Banner Corporation is a separate legal entity from the Bank and, on a stand-alone level, must provide for its own liquidity and pay its own operating expenses and cash dividends.Banner Corporation's primary sources of funds consist of capital raised through dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. We currently expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is$0.44 per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2022 at this rate of$0.44 per share, our average total dividend paid each quarter would be approximately$15.0 million based on the number of outstanding shares atJune 30, 2022 . AtJune 30, 2022 , the Company on an unconsolidated basis had liquid assets of$57.7 million . As noted below,Banner Corporation and its subsidiary bank continued to maintain capital levels significantly in excess of the requirements to be categorized as "Well-Capitalized" under applicable regulatory standards. During the six months endedJune 30, 2022 , total shareholders' equity decreased$204.5 million , to$1.49 billion . AtJune 30, 2022 , tangible common shareholders' equity, which excludes goodwill and other intangible assets, was$1.10 billion , or 6.88% of tangible assets. See the discussion and reconciliation of non-GAAP financial information in the Executive Overview section of Management's Discussion and Analysis of Financial Condition and Results of Operation in this Form 10-Q for more detailed information with respect to tangible common shareholders' equity. Also, see the capital requirements discussion and table below with respect to our regulatory capital positions.
Capital Requirements
Banner Corporation is a bank holding company registered with theFederal Reserve. Bank holding companies are subject to capital adequacy requirements of theFederal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA), and the regulations of theFederal Reserve .Banner Bank , as state-chartered, federally insured commercial bank, is subject to the capital requirements established by theFDIC . The capital adequacy requirements are quantitative measures established by regulation that requireBanner Corporation and the Bank to maintain minimum amounts and ratios of capital. TheFederal Reserve requiresBanner Corporation to maintain capital adequacy that generally parallels theFDIC requirements. TheFDIC requires the Bank to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital to risk-weighted assets as well as Tier 1Leverage Capital to average assets. In addition to the minimum capital ratios, bothBanner Corporation and the Bank are required to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital of more than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. AtJune 30, 2022 ,Banner Corporation and the Bank each exceeded all regulatory capital requirements. (See Item 1, "Business-Regulation," and Note 14 of the Notes to the Consolidated Financial Statements included in the 2021 Form 10-K for additional information regarding regulatory capital requirements forBanner Corporation and the Bank.) 74 --------------------------------------------------------------------------------
The actual regulatory capital ratios calculated for
Minimum to be Categorized as Minimum to be Categorized as
Actual "Adequately Capitalized" "Well-Capitalized"
Amount
Ratio Amount Ratio Amount Amount
Banner Corporation -consolidated
Total capital to risk-weighted assets $ 1,667,107 13.80 % $ 966,205 8.00 % $ 1,207,756 10.00 %
Tier 1 capital to risk-weighted assets 1,439,822 11.92 724,654 6.00 724,654 6.00
Tier 1 leverage capital to average assets 1,439,822 8.74 659,250 4.00 n/a n/a
Common equity tier 1 capital 1,353,322 11.21 543,490 4.50 n/a n/a
Banner Bank
Total capital to risk-weighted assets 1,601,881 13.27 965,374 8.00 1,206,718 10.00
Tier 1 capital to risk-weighted assets 1,474,596 12.22 724,031 6.00 965,374 8.00
Tier 1 leverage capital to average assets 1,474,596 8.95 658,890 4.00 823,612 5.00
Common equity tier 1 capital 1,474,596 12.22 543,023 4.50 784,367 6.50
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