Banner Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Banner is a Washington bank holding company operating Banner Bank and Islanders Bank, primarily in Washington, Oregon and Idaho.
Financial performance and condition
- Q3 earnings: Net income and income available to common shareholders were $11.7 million, or $0.60 per diluted share, versus $15.6 million and $0.79 a year earlier. Nine-month net income was $35.0 million, or $1.80 per diluted share, versus $50.2 million and $2.48.
- Revenue and margin: Q3 total revenue was $52.0 million, down 4% year over year; revenue excluding fair-value changes, securities gains and OTTI was $52.4 million, down 4%. Net interest income before loan-loss provision was $41.9 million, down 2%. Q3 net interest margin was 4.09%, versus 4.22%; nine-month margin was 4.15%, versus 4.20%.
- Expenses and credit costs: Q3 operating expenses were $34.5 million, up from $33.4 million; nine-month expenses were $104.0 million, down from $106.9 million. No loan-loss provision was recorded in Q3 or the first nine months, compared with $3.0 million and $12.0 million, respectively, in 2012.
- Balance sheet at September 30: Assets were $4.283 billion; loans before allowance were $3.275 billion and net loans $3.199 billion; deposits were $3.535 billion; stockholders’ equity was $530.0 million. Cash and due from banks was $176.0 million.
- Debt and liquidity: FHLB advances were $20.3 million, other borrowings $82.9 million, and junior subordinated debentures $73.6 million. The company reported $40.4 million of standalone liquid assets; available facilities included up to $733 million from FHLB Seattle for Banner Bank and approximately $559 million through the Federal Reserve BIC program, subject to collateral and other requirements. No Federal Reserve funds were borrowed.
- Cash flows, nine months: Operating cash flow was $68.3 million, investing cash flow was negative $62.6 million, and financing cash flow was negative $11.1 million. Cash declined $5.3 million to $176.0 million.
- Capital: Tangible common equity to tangible assets was 12.32%, up from 11.80% at year-end 2012. Banner Corporation’s total capital ratio was 17.41%; Banner Bank and Islanders Bank were above applicable “well-capitalized” minimums.
Changes and significant items
- Reported earnings fell year over year, but comparisons were affected by the 2012 deferred-tax valuation-allowance reversal, which produced a $29.4 million tax benefit for the first nine months of 2012, and by prior-year preferred-stock dividends and discount accretion. 2013 included normal income-tax expense.
- Q3 interest income declined 5%, while interest expense declined 30%; lower asset yields continued to outweigh reduced funding costs. Mortgage banking income also weakened as higher mortgage rates slowed originations.
- Credit metrics improved: nonperforming loans were $24.9 million, down 36% from $38.7 million a year earlier; nonperforming assets were $29.8 million, or 0.70% of assets, versus $59.1 million and 1.38%. The $76.7 million allowance equaled 2.34% of loans and 308% of nonperforming loans. Separately, $87 million of classified loans remained accruing and could deteriorate.
- Deposits declined $22.5 million from December 2012 as certificates of deposit fell $129 million, partly offset by growth in non-interest-bearing and transaction/savings accounts. Non-certificate deposits were 75% of deposits, versus 69% a year earlier. Loans grew modestly from year-end, with growth in commercial real estate, commercial business and construction lending offset partly by declines in residential, agricultural and consumer loans.
- Q3 included a $9.8 million tax receivable recorded after IRS review of amended returns and $450,000 interest income related to the refund. Q3 also included a $400,000 reduction in the mortgage-servicing-rights valuation allowance. Fair-value movements were a $352,000 net loss for Q3 and a $2.0 million net loss for the nine-month period.
- After quarter-end, Banner’s proposed Home Federal Bancorp acquisition was terminated when Banner elected not to match a superior proposal from Cascade Bancorp. Home Federal paid Banner a $2.95 million termination fee.
- The quarterly common dividend was increased 25% to $0.15 per share. No specific financial guidance was provided.
Outlook, risks and contingencies
Management described the recovery as modest and uneven and cited persistently low rates, limited loan demand and the possibility of further margin compression. The company’s rate simulation estimated that an immediate, sustained 100-basis-point increase would reduce next-12-month net interest income by 0.9%; a 400-basis-point increase would reduce it by 1.0%. Management cautioned that results depend on assumptions about deposit behavior, prepayments and repricing. Principal risks include borrower credit deterioration, real-estate values, interest-rate and funding pressures, deposit retention, regulation and valuation estimates. The filing reported no pending legal proceeding believed likely to have a material adverse effect and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether improving delinquency and nonperforming-asset trends persist, particularly given $87 million of accruing classified loans and $50.4 million of performing troubled debt restructurings.
- Whether the allowance remains adequate as loan balances and economic conditions change; the zero provision reflects management’s current assessment, not a guarantee of future credit costs.
- How low rates, asset yields and deposit repricing affect net interest margin and earnings, and whether actual results align with the disclosed rate-sensitivity assumptions.
- The composition and valuation sensitivity of securities and other Level 3 instruments, including trust-preferred securities and collateralized debt obligations.
- The accounting and timing of the $9.8 million tax refund receivable, related year-end tax adjustments, and the post-quarter $2.95 million acquisition termination fee.