Banner Corporation — Q1 2012 Form 10-Q
Business context and reporting period. Banner Corporation is a Washington bank holding company operating Banner Bank and Islanders Bank, with community and commercial banking, lending, deposit-taking, and residential mortgage origination and sales in Washington, Oregon, and Idaho. This unaudited report covers the quarter ended March 31, 2012; balance-sheet comparisons are with December 31, 2011, and operating results with Q1 2011. Amounts below are in millions unless otherwise noted.
Key financial results
| Metric | Q1 2012 / March 31, 2012 | Comparison |
|---|---|---|
| Net interest income before loan-loss provision | $41.1 | $40.1 in Q1 2011 |
| Provision for loan losses | $5.0 | $17.0 in Q1 2011 |
| Other operating income | $11.0, including $1.7 net fair-value gain | $7.2, including $0.3 fair-value gain |
| Operating expenses | $37.9 | $38.1 in Q1 2011 |
| Net income (loss) | $9.2; $7.2 available to common shareholders; diluted EPS $0.40 | Net loss $7.8; common loss $9.8; diluted EPS $(0.60) |
| Net interest margin / spread | 4.11% / 4.06% | 3.94% / 3.88% in Q1 2011 |
| Net cash from operating activities | $18.5 | $36.1 in Q1 2011 |
| Cash and due from banks | $199.6 | $132.4 at December 31, 2011 |
| Total assets / net loans | $4,160.8 / $3,148.1 | $4,257.3 / $3,213.4 at December 31, 2011 |
| Deposits / borrowings | $3,426.2 / $151.1 | $3,475.7 / $212.6 at December 31, 2011 |
| Stockholders’ equity | $548.8, including $121.2 preferred equity | $532.5 at December 31, 2011 |
Material changes and management commentary
- Banner returned to quarterly profitability. Management attributed the improvement principally to lower credit costs, a higher net interest margin, and increased deposit and mortgage-banking revenue. Core revenue excluding fair-value adjustments rose 7% to $50.4 million.
- Interest expense fell 36% year over year, as deposit costs and average interest-bearing liabilities declined. The average cost of deposits was 0.52%, versus 0.89% in Q1 2011; the yield on earning assets also declined, to 4.72% from 4.88%.
- Loan balances continued to contract, while REO fell to $27.7 million from $43.0 million at year-end. Deposits declined $49.5 million in the quarter as higher-cost certificates and other funding ran off; transaction and savings accounts were 65% of deposits, compared with 59% a year earlier.
- Borrowings declined by about $61 million, mainly following repayment at maturity of $50 million in FDIC-guaranteed notes. The company reported cash increased $67.2 million during the quarter; investing activities provided $151.9 million and financing activities used $103.2 million.
- The $124 million of Series A preferred stock originally issued to the U.S. Treasury was sold by Treasury on March 29, 2012. The company said the sale did not change its capital position but removed many Treasury-imposed restrictions; Treasury retained warrants to purchase common shares.
Credit quality, capital, liquidity, and risks
- The loan-loss provision was $5.0 million, down from $17.0 million a year earlier. Net charge-offs were about $6 million. The allowance was $81.5 million, or 2.52% of loans and 126% of non-performing loans.
- Non-performing assets were $93.1 million, or 2.24% of assets, down from $118.9 million at year-end and $228.6 million a year earlier. Non-performing loans were $64.9 million; impaired loans were $118.3 million, and $53.4 million of TDRs were performing under modified terms. Management also identified $131 million of additional classified loans not on nonaccrual status.
- Management said credit costs could remain elevated for a few more quarters, while further reductions could improve results. It considered the allowance adequate but warned that future losses, economic conditions, collateral values, and regulatory review could require additional provisions.
- Management reported regulatory capital ratios above applicable minimums. Banner Bank’s total capital, Tier 1 risk-based, and Tier 1 leverage ratios were 16.47%, 15.21%, and 12.10%; Islanders Bank’s were 16.44%, 15.19%, and 12.48%. Tangible common equity was $421.9 million, or 10.15% of tangible assets.
- Liquidity sources include deposits, cash, loan repayments and sales, securities, and borrowing facilities. The company reported up to $840 million of Banner Bank FHLB capacity and estimated $579 million of additional FRBSF Borrower-In-Custody capacity; there were no FRBSF borrowings at quarter-end. Outstanding commitments totaled $854.4 million, including $797 million of other commitments to fund loans.
- Interest-rate sensitivity modeling estimated that a 400-basis-point increase would raise next-12-month net interest income by 0.1% but reduce economic value of equity by 21.6%. These estimates depend on assumptions about rates, prepayments, and deposit behavior.
- The full deferred-tax-asset valuation allowance remained in place, so no income-tax expense or benefit was recorded despite pretax income. Amended federal tax returns could produce a refund of up to $13.6 million, but IRS review is pending and no asset was recognized.
- The FDIC/Washington DFI MOU with Banner Bank was terminated March 19, 2012; the similar Federal Reserve Bank MOU with the holding company was terminated April 10, 2012, after quarter-end. Management reported no pending legal proceeding expected to materially adversely affect the company and no material changes to previously disclosed risk factors.
Outlook and items to verify
The filing provides no quantified earnings or revenue guidance. Management cited a modest, uneven economic recovery, weak loan demand, low interest rates, and continuing housing and commercial-real-estate pressures. It expected modest further deposit-cost declines and said credit costs might remain elevated for several quarters. Results remain exposed to loan losses, collateral values, deposit retention and pricing, interest-rate movements, regulation, and fair-value estimates.
- Track non-performing and classified loans, charge-offs, REO dispositions, and whether the $81.5 million allowance remains sufficient as problem assets resolve.
- Assess whether core revenue, mortgage-banking activity, and net interest margin persist without reliance on fair-value gains or unusually low funding costs.
- Monitor deposit mix and runoff, certificate maturities, liquidity commitments, and use of available borrowing capacity.
- Verify regulatory capital and the implications of the terminated MOUs, including any continuing supervisory requirements.
- Follow the IRS review of amended returns and the basis for any future release of the deferred-tax valuation allowance.
- Review assumptions behind the significant modeled economic-value decline under rising rates and Level 3 fair values for trust-preferred securities and related instruments.