Business context and reporting period
Banner Corporation is a Washington bank holding company operating Banner Bank and Islanders Bank, with 89 branches in Washington, Oregon and Idaho. This Form 10-K covers the fiscal year ended December 31, 2011; it also reports unaudited fourth-quarter results. Unless noted, amounts are U.S. dollars.
Financial performance and condition
| Metric | FY 2011 / Dec. 31, 2011 | Comparable 2010 |
|---|---|---|
| Total assets | $4.257 billion | $4.406 billion |
| Net loans | $3.213 billion | $3.306 billion |
| Deposits | $3.476 billion | $3.591 billion |
| Net interest income before loan-loss provision | $164.6 million | $157.8 million |
| Net interest margin | 4.05% | 3.67% |
| Provision for loan losses | $35.0 million | $70.0 million |
| Net income (loss) | $5.5 million | ($61.9 million) |
| Net income (loss) available to common shareholders | ($2.4 million), or ($0.15) per diluted share | ($69.7 million), or ($7.21) per diluted share |
| Operating cash flow | $101.3 million | $114.5 million |
| Cash and due from banks, year-end | $132.4 million | $361.7 million |
| Total stockholders’ equity | $532.5 million | $511.5 million |
For fourth-quarter 2011, net income was $5.1 million and diluted earnings per share were $0.18; income available to common shareholders was $3.1 million.
Material changes versus 2010
- Results improved substantially as the loan-loss provision fell by half, net charge-offs declined to $49.5 million from $67.9 million, and non-performing assets fell to $118.9 million from $254.3 million. Non-performing assets were 2.79% of assets, versus 5.77%.
- Net interest income rose 4.3% despite a 9% decline in interest income: interest expense fell 45%, reflecting lower deposit costs and a shift toward core deposits. Deposit costs averaged 0.75%, versus 1.39%.
- Other operating expenses decreased 2% to $158.1 million. REO declined to $43.0 million from $100.9 million, though REO operations still cost $22.3 million.
- Total deposits declined, but non-interest-bearing deposits rose $177 million and certificates of deposit fell $307 million. Total borrowings were $212.6 million at year-end; the $50 million FDIC-guaranteed note matures March 31, 2012.
- Cash and due from banks decreased $229.2 million during 2011. Investing cash use was $171.2 million and financing cash use was $159.3 million, including deposit runoff and debt repayments.
Outlook, risks and unusual items
Management reported a modest, uneven economic recovery and expected credit costs to remain elevated for a few more quarters. It anticipated construction and land lending would remain restrained and balances would continue to decline, while focusing on commercial, agricultural and consumer lending and on resolving problem assets. No formal numerical earnings guidance is provided.
- Credit and collateral risk remains material: construction and land loans were $319 million, or 10% of loans, and accounted for 37% of non-performing loans. Management identified land development as a particular concern. The allowance was $82.9 million, 2.52% of loans and 110% of non-performing loans; $187 million of classified loans were not non-performing.
- Banner Bank and the holding company remain subject to 2010 regulatory memoranda of understanding. Banner Bank must maintain Tier 1 leverage capital of at least 10% and obtain regulatory approval for dividends to the parent. The company also needs Federal Reserve non-objection for dividends, stock repurchases and payments on junior subordinated debt. Banner Bank’s leverage ratio was 11.71%; both subsidiary banks were categorized as well-capitalized.
- Preferred-stock dividends and discount accretion reduced 2011 earnings available to common shareholders by $7.9 million. The $124 million Treasury preferred stock carries a 5% dividend for five years, increasing to 9% if not redeemed by February 2014; redemption requires regulatory approval.
- The company filed amended tax returns seeking refunds of up to $13.6 million. IRS review is pending and no related asset or tax benefit was recognized. A full valuation allowance remained against deferred tax assets.
- Fair-value estimates for trust-preferred securities and related instruments rely materially on unobservable assumptions. The company also cited low-rate and interest-rate sensitivity, regional economic weakness, regulatory change, litigation and liquidity access as risks. It reported effective disclosure controls and internal control over financial reporting, with an unqualified audit opinion.
Important facts for investors to verify
- Whether asset-quality improvements continue, and how non-performing loans, classified loans, REO dispositions and charge-offs compare with the allowance.
- Compliance with both regulatory MOUs, including capital requirements and restrictions on dividends, debt payments and repurchases.
- Repayment or refinancing of the $50 million note due March 31, 2012, and the sustainability of liquidity after the year’s cash decline and deposit runoff.
- IRS resolution of the amended-return claims, and the evidence supporting eventual realization of deferred tax assets.
- Whether core-deposit growth and margin gains can offset lower asset yields, weak loan demand and continued problem-asset costs.