Banner Corporation — Q3 2012 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2012. Banner is a Washington bank holding company operating Banner Bank and Islanders Bank, serving customers primarily in Washington, Oregon and Idaho. Its business centers on commercial and consumer banking, lending, deposits and residential mortgage originations and sales.
Financial performance and condition
| Metric | Q3 2012 / Sep. 30, 2012 | Comparable period / change |
|---|---|---|
| Net interest income before loan-loss provision | $42.7 million; net interest margin 4.22% | $41.7 million and 4.10% in Q3 2011 |
| Provision for loan losses | $3.0 million | $5.0 million in Q3 2011; $12.0 million year-to-date versus $30.0 million in 2011 |
| Net income | $15.6 million; diluted EPS $0.79 | $6.0 million and $0.24 in Q3 2011 |
| Net income available to common shareholders | $15.2 million | $4.1 million in Q3 2011 |
| Nine-month results | Net income $50.2 million; diluted EPS $2.48; common earnings $45.8 million | Net income $0.4 million and common loss $5.5 million in 2011 |
| Total assets / loans / deposits | $4.269 billion / $3.135 billion net loans / $3.486 billion deposits | Assets $4.257 billion, net loans $3.213 billion and deposits $3.476 billion at Dec. 31, 2011 |
| Stockholders’ equity | $566.1 million; tangible common equity to tangible assets 11.47% | $532.5 million and 9.54% at Dec. 31, 2011 |
| Cash flows, nine months | Operating +$68.9 million; investing +$79.0 million; financing −$76.5 million; cash increased $71.3 million to $203.8 million | Cash decreased $73.3 million in the first nine months of 2011 |
Material changes and key developments
- Core revenue excluding fair-value and other-than-temporary impairment (OTTI) adjustments rose 8% to $54.3 million in Q3 and 8% to $157.0 million year-to-date. Growth reflected mortgage banking, deposit fees and net interest income.
- Q3 operating expenses declined to $33.4 million from $41.0 million a year earlier, largely due to lower REO-related costs, deposit insurance and professional services. Year-to-date expenses fell to $106.9 million from $119.4 million.
- Net loans declined about 2% from year-end, reflecting repayments, portfolio repositioning and continued management of problem assets. Total deposits were broadly stable, while non-interest-bearing deposits rose to $919.0 million from $777.6 million and transaction and savings accounts reached 69% of deposits.
- Nonperforming assets declined to $59.1 million, or 1.38% of assets, from $118.9 million at year-end 2011 and $151.6 million a year earlier. Nonperforming loans were $38.7 million; REO was $20.4 million. The allowance was $78.8 million, 2.45% of loans and 204% of nonperforming loans.
- The company repurchased 50,584 Series A preferred shares—41% of the outstanding shares—for $48.5 million, recording a $2.1 million gain. It also issued 1.81 million common shares through its reinvestment/direct purchase plan, raising $36.3 million. Treasury had sold its preferred shares to private investors; it retained warrants.
- Regulatory memoranda of understanding with Banner Bank and the Federal Reserve were terminated in March and April 2012, respectively.
Outlook, risks and unusual items
- Management cited continued but modest and uneven economic recovery, weak loan demand, low interest rates, high unemployment and ongoing housing and commercial real-estate pressures. It expects these conditions to remain challenging.
- Management said it expects modest further declines in deposit costs as certificates reprice and lower-cost core deposits grow. It expected to use the remaining $3.0 million deferred-tax valuation allowance against Q4 tax expense, and expected to recognize tax expense at approximately the statutory rate from Q1 2013, subject to tax-exempt income and credits. These are expectations, not guarantees.
- The company reversed most of its deferred-tax valuation allowance in 2012; the allowance fell to $3.0 million from $38.2 million at year-end 2011. This supported a $29.4 million year-to-date income tax benefit; Q3 nevertheless included $2.4 million of tax expense. Deferred-tax-asset realization depends on generating taxable income. An IRS review of amended returns could result in refunds of up to $13.6 million, but no asset was recognized because approval is uncertain.
- Year-to-date GAAP results included a $16.9 million net loss from fair-value changes, primarily the increased fair value of junior subordinated debentures; management characterized these adjustments as noncash. Q3 recorded a $0.5 million net fair-value gain and $0.4 million of OTTI charges. The Q3 REO expense line benefited from property-sale gains, which management said are not expected to recur.
- Reported regulatory capital ratios exceeded well-capitalized thresholds. Banner Corporation’s total risk-based capital ratio was 19.01%; Banner Bank’s and Islanders Bank’s were 15.71% and 17.13%, respectively. Management reported adequate liquidity, including unused FHLB and Federal Reserve borrowing capacity. The company had $983 million of outstanding loan commitments, including $893 million of undisbursed loans and unused credit lines.
- Material risks include loan losses and collateral values, deposit retention and funding costs, interest-rate and fair-value estimation risk, regulatory changes or examinations, and the uncertain recovery in housing and commercial real estate. Management reported no pending legal proceeding expected to materially adversely affect the company and no material change in previously disclosed risk factors.
Important facts for investors to verify
- How much of reported profitability reflects recurring operations versus the deferred-tax valuation-allowance reversal, preferred-stock repurchase gain and noncash fair-value marks?
- Whether asset-quality improvements continue, particularly for construction, land-development and residential loans, and whether the $78.8 million allowance remains adequate.
- Whether growth in lower-cost deposits continues and how certificate maturities, deposit competition and loan demand affect funding costs and net interest margin.
- Whether management realizes deferred tax assets and the remaining expected valuation-allowance benefit, and the outcome of the IRS amended-return review.
- How Level 3 valuations for trust-preferred securities and junior subordinated debentures respond to credit spreads and other assumptions; these estimates materially affected reported results.
- Whether available liquidity and capital remain sufficient to meet commitments and absorb potential credit or regulatory stress.