Banner Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also provides fourth-quarter results. Banner Corporation is a Washington bank holding company operating Banner Bank and Islanders Bank across Washington, Oregon and Idaho.
Financial results and position
| Metric | FY2013 / year-end | Prior comparable period |
|---|---|---|
| Net income | $46.6 million; diluted EPS $2.40 | FY2012 net income $64.9 million; common-shareholder income $59.1 million and diluted EPS $3.16 |
| Net interest income, before loan-loss provision | $166.7 million | $167.6 million |
| Net interest margin / interest-rate spread | 4.11% / 4.08% | 4.17% / 4.13% |
| Total revenue | $210.1 million | $194.6 million |
| Core revenue, excluding specified fair-value, securities, impairment and one-time items | $208.0 million | $211.4 million |
| Operating expenses | $141.0 million | $141.5 million |
| Net loans / total assets | $3.343 billion / $4.388 billion | $3.158 billion / $4.266 billion |
| Deposits | $3.618 billion | $3.558 billion |
| Stockholders’ equity | $539.0 million | $506.9 million |
| Cash flow from operations / investing / financing | $95.4 million / $(215.1) million / $75.8 million | FY2012: $81.4 million / $52.5 million / $(85.0) million |
- FY2013 cash and due from banks ended at $137.3 million, down $43.9 million during the year.
- The allowance for loan losses was $75.0 million, or 2.19% of loans and 303% of non-performing loans. No loan-loss provision was recorded in 2013; the provision was $13.0 million in 2012.
- Non-performing loans fell 28% to $24.8 million; non-performing assets declined to $28.9 million, or 0.66% of assets. Real estate owned fell to $4.0 million from $15.8 million.
- Core deposits were 76% of deposits, up from 71%; non-interest-bearing deposits grew 14% to $1.115 billion. Certificates of deposit declined 15% to $873 million.
- Borrowings included $27.3 million of FHLB advances, $83.1 million of retail repurchase agreements and $73.9 million of junior subordinated debentures carried at fair value. Both subsidiary banks were “well capitalized”; Banner Bank’s total risk-based capital ratio was 15.75% and Islanders Bank’s was 18.73%.
- Return on average assets was 1.09% versus 1.54%; return on average common equity was 8.85% versus 14.03%. The efficiency ratio improved to 67.11% from 72.71%.
Material changes versus FY2012
- Net income declined, while reported total revenue rose largely because the 2013 fair-value charge was much smaller and Banner received a $3.0 million fee for the terminated Home Federal transaction. Core revenue declined about 2%.
- Net interest income and margin eased as asset yields fell faster than funding costs. Interest income declined $7.5 million, partly offset by a $6.5 million reduction in interest expense.
- Mortgage banking revenue fell to $11.2 million from $13.8 million as refinancing activity slowed; loan-sale proceeds were $445 million versus $505 million.
- Loan balances grew 6%, led by commercial real estate, commercial business and construction lending. Total deposits rose 2%, with a shift toward lower-cost transaction and savings accounts.
- Credit metrics improved: net charge-offs fell to $2.5 million from $18.4 million, and the allowance-to-non-performing-loans ratio increased to 303% from 225%.
- FY2012 results included a $24.8 million tax benefit from reversing the deferred-tax-asset valuation allowance and substantial preferred-stock-related items. These make reported earnings comparisons less representative of recurring performance.
Outlook, commentary and risks
- Management described recovery in its Northwest markets as modest and uneven and identified low interest rates, modest loan demand and margin pressure as continuing challenges. It expected further, but limited, deposit-cost reductions; no formal quantitative earnings or margin guidance was provided.
- On February 19, 2014, Banner announced an agreement to acquire six Oregon branches from Sterling Savings Bank, subject to approvals and other conditions, with completion expected in Q2 2014.
- The proposed Home Federal Bancorp acquisition was terminated in October 2013 after the target accepted a superior offer. Banner received a $3.0 million termination fee and incurred about $550,000 in related expenses.
- Key risks include regional economic and real-estate weakness; commercial real estate, construction and land credit exposure; adequacy of loan-loss reserves; interest-rate and securities valuation risk; deposit competition and liquidity; and regulatory changes. Basel III capital requirements were scheduled to begin phasing in from 2015.
- Management’s estimates for loan-loss reserves, deferred taxes, mortgage servicing rights and less-liquid securities involve judgment. Some trust-preferred securities and related instruments use Level 3 fair-value estimates with limited observable market data.
- Common dividends increased to $0.54 per share in 2013 from $0.04 in 2012, but future dividends remain subject to board discretion, bank earnings and regulatory and capital restrictions.
Important facts for investors to verify
- Reconcile the FY2012 earnings comparison: the filing reports $64.9 million net income but $59.1 million available to common shareholders after preferred dividends, discount accretion and the preferred-stock repurchase gain.
- Assess the sustainability of earnings excluding the FY2012 deferred-tax benefit and FY2013 termination fee and other fair-value or securities items; review the filing’s non-GAAP reconciliations.
- Review loan growth and concentrations, including $1.332 billion in commercial and multifamily real estate loans and $351 million in construction and land loans, alongside criticized and impaired loan data.
- Evaluate the allowance against future charge-offs and the $88 million of classified loans not on nonaccrual at year-end; confirm performance of restructured loans.
- Monitor net interest margin, asset yields, rate-sensitive deposits and the effect of interest-rate changes on earnings, securities values and capital.
- Confirm liquidity and funding capacity, including $660 million of certificates of deposit scheduled to mature within one year, outstanding loan commitments of approximately $1.1 billion, and the conditions and expected economics of the six-branch acquisition.