Banner Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 14, 2013. Banner is a Washington bank holding company operating Banner Bank and Islanders Bank across Washington, Oregon, and Idaho. The company reported $4.27 billion in assets and $3.56 billion in deposits at year-end.
Key financial results
| Metric | 2012 | 2011 |
|---|---|---|
| Net interest income before loan-loss provision | $167.6 million | $164.6 million |
| Provision for loan losses | $13.0 million | $35.0 million |
| Other operating income | $26.9 million | $34.0 million |
| Other operating expenses | $141.5 million | $158.1 million |
| Pre-tax income | $40.1 million | $5.5 million |
| Net income | $64.9 million | $5.5 million |
| Net income (loss) available to common shareholders | $59.1 million | ($2.4 million) |
| Diluted earnings (loss) per share | $3.16 | ($0.15) |
Net interest margin improved to 4.17% from 4.05%; the efficiency ratio improved to 72.71% from 79.62%. The $24.8 million income-tax benefit materially boosted reported net income. Excluding fair-value and other-than-temporary impairment adjustments, management reported revenue of $211.5 million, up 8% from $196.2 million; this is a non-GAAP measure.
Fourth quarter: Net income was $14.7 million and income available to common shareholders was $13.3 million, or $0.69 per diluted share. The quarter included a $4.6 million income-tax provision, following a large tax benefit in the second quarter.
Financial condition, cash flow, and capital
- Total assets were nearly unchanged at $4.27 billion. Net loans fell 2% to $3.16 billion, while total deposits rose 2% to $3.56 billion.
- Deposits shifted toward lower-cost funding: non-interest-bearing deposits increased 26% to $981 million, while certificates of deposit declined 18% to $1.03 billion. Core transaction and savings accounts were 71% of deposits, compared with 64% a year earlier.
- Year-end borrowings totaled $160 million, down from $213 million, including $10.3 million of FHLB advances, $76.6 million of retail repurchase agreements, and $73.1 million fair value of junior subordinated debentures. The $50 million FDIC-guaranteed bank notes were repaid in March 2012.
- Cash and due from banks ended the year at $181.3 million, up $48.9 million. Cash provided by operating activities was $81.4 million; investing activities provided $52.5 million; financing activities used $85.0 million.
- Consolidated total risk-based capital was 16.96%, Tier 1 risk-based capital 15.70%, and Tier 1 leverage 12.74%. Both subsidiary banks were categorized as well capitalized.
Material changes and notable events
- Asset quality improved substantially: non-performing assets fell to $50.2 million, or 1.18% of assets, from $118.9 million, or 2.79%. Non-performing loans declined to $34.4 million from $75.3 million; REO fell to $15.8 million from $43.0 million.
- Net charge-offs declined to $18.4 million from $49.5 million. The allowance for loan losses was $77.5 million, equal to 2.39% of loans and 225% of non-performing loans, versus 2.52% and 110%, respectively, in 2011.
- Mortgage banking revenue rose to $12.9 million from $5.1 million, supported by refinancing activity; residential loan sales increased to $505 million from $282 million.
- Banner reversed its full deferred-tax-asset valuation allowance, recognizing a $35.0 million net deferred tax asset at year-end. The reversal, combined with current-year tax items, produced a $24.8 million income-tax benefit.
- Fair-value adjustments produced a net $16.5 million loss, principally because improved company credit estimates raised the fair value of junior subordinated debentures by $23.1 million. Management characterized the valuation changes as non-cash.
- All Series A preferred stock was redeemed or repurchased during 2012; the transactions generated a $2.5 million gain. Common shares outstanding increased through the dividend reinvestment plan, which raised approximately $36 million. No common shares were repurchased.
- The FDIC/Washington DFI memorandum of understanding with Banner Bank and the Federal Reserve Bank memorandum with the holding company were terminated in March and April 2012, respectively.
Outlook, risks, and contingencies
Management described recovery as modest and uneven, with low interest rates, weak loan demand, and ongoing economic and real-estate uncertainty likely to remain challenging. It expected continued problem-asset reduction to support more normal loan-loss provisioning, and anticipated modest further deposit-cost declines. Management expected income-tax expense based on a roughly 36.5% statutory rate beginning in 2013, subject to tax-exempt income and credits. The filing gives no specific earnings or revenue targets.
- Credit and concentration risk: Real estate and commercial lending remain significant exposures; commercial real estate was 37% of loans. Management identified weak demand for building lots and further deterioration in regional property markets as concerns. It also reported $100 million in classified loans not then on nonaccrual and $57.5 million in restructured loans performing under modified terms.
- Interest-rate risk: Prolonged low rates may pressure asset yields and margins; rising rates may also affect funding costs and borrowers. About 64% of loans were adjustable or floating rate, and most such loans with floors were already at those floors.
- Valuation and securities risk: Some trust-preferred investments and related collateralized debt obligations have limited market pricing and rely on significant unobservable estimates. The company reported a $19 million fair-value shortfall from amortized cost for trading securities.
- Tax contingency: Amended federal returns could yield up to $13.6 million in refunds, but the IRS review was unresolved at year-end; no asset was recorded, and management expected resolution in 2013.
- Regulatory and legal matters: Proposed Basel III capital rules could affect capital treatment, lending, distributions, and costs. Ordinary-course legal claims largely relate to loan collections and foreclosures; management did not expect pending proceedings to materially affect results, but outcomes are uncertain.
Investor facts to verify
- How much of 2012 common earnings depends on the one-time deferred-tax valuation-allowance reversal and preferred-stock transactions, versus recurring pre-tax operations?
- Whether further improvement in non-performing loans, REO, charge-offs, and the $100 million of classified loans continues, and whether the $77.5 million allowance remains adequate.
- Whether core deposit growth and lower funding costs can offset low asset yields, loan runoff, and changing interest rates.
- The assumptions and sensitivity behind Level 3 fair values for junior subordinated debentures and trust-preferred investments.
- The IRS outcome on the potential $13.6 million refund and the practical effects of final Basel III requirements on capital and shareholder distributions.