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Banner Corp. Reports Operating Results (10-Q)

August 08, 2009 | About:

Banner Corp. (BANR) filed Quarterly Report for the period ended 2009-06-30.

Banner Corporation is the parent of Banner Bank a Washington state chartered commercial bank which operates a total of 39 branch offices and six loan offices in 18 counties in Washington Oregon and Idaho. Banner serves the Pacific Northwest region with a full range of deposit services and business commercial real estate construction residential agricultural and consumer loans. Banner Corp. has a market cap of $71.7 million; its shares were traded at around $4.08 with and P/S ratio of 0.2. The dividend yield of Banner Corp. stocks is 1%. Banner Corp. had an annual average earning growth of 12.6% over the past 10 years.

Highlight of Business Operations:

Deteriorating economic conditions and ongoing strains in the financial and housing markets which accelerated throughout 2008 and continued in the first half of 2009 have presented an unusually challenging environment for banks and their holding companies, including Banner Corporation. This has been particularly evident in our need to provide for credit losses during the past 18 months at significantly higher levels than our historical experience and has also affected our net interest income and other operating revenues. As a result of these factors, for the quarter ended June 30, 2009 we had a net loss of $16.5 million, which after providing for the preferred stock dividend and related discount accretion resulted in a net loss of $18.4 million, or ($1.04) per diluted share, available to common shareholders compared to a net loss of $52.3 million, or ($3.30) per diluted share, for the same quarter one year ago. Our net loss in the quarter ended June 30, 2008 was primarily the result of a $50 million non-cash goodwill impairment charge, which was not deductible for tax purposes, as well as a $15 million provision for loan losses. Our provision for loan losses was $45.0 million for the quarter ended June 30, 2009, an increase of $30.0 million compared to the same quarter in the prior year. Similar to recent quarters, the significant provision for loan losses in the current quarter reflects material levels of delinquencies, non-performing loans and net charge-offs, particularly for loans for the construction of one- to four-family homes and for acquisition and development of land for residential properties. Housing markets remained weak in many of our primary services areas, resulting in the elevated level of delinquencies and non-performing assets, further deterioration in property values, particularly for residential land and building lots, and the need to provide for an elevated level of anticipated losses. By contrast, other non-housing related segments of the loan portfolio, while showing signs of stress, have performed as expected with only normal levels of credit problems given the serious economic slowdown. Throughout 2008 and the first two quarters of 2009, the higher than historical provision for loan losses has been the most significant

General. Total assets decreased $52 million, or 1%, from $4.584 billion at December 31, 2008, to $4.533 billion at June 30, 2009. Net loans receivable (gross loans less loans in process, deferred fees and discounts, and allowance for loan losses) decreased $64 million, or 2%, from $3.886 billion at December 31, 2008, to $3.822 billion at June 30, 2009. The contraction in net loans was largely due to decreases of $83 million in one- to four-family construction loans and $82 million in land and land development loans, as well as a decrease of $14 million in commercial construction loans. These changes were partially offset by increases of $54 million in one- to four-family mortgage loans, $36 million in commercial real estate loans and $23 million in multi-family construction loans. We continue to maintain a significant, although decreasing, investment in construction and land loans; however, new production of these types of loans during the past two years has declined appreciably and is expected to remain modest for the foreseeable future. As a result of the much slower pace of new originations and continuing payoffs on existing loans, loans to finance the construction of one- to four-family residential real estate, which totaled $337 million at June 30, 2009, have decreased by $317 million, or 48%, since their peak quarter-end balance of $655 million at June 30, 2007, including a decrease of $203 million over the last twelve months. In addition, land and development loans have decreased by $98 million, or 20%, also compared to their peak quarter-end balances at March 31, 2008. Given the current housing and economic environment and our reduced level of construction and land development loan originations, we anticipate that construction and land loan balances will continue to decline for the foreseeable future, although the pace of decline for land development loans will be modest until there are further significant reductions in the amount of completed new construction homes on the market.

Securities decreased $21 million, or 7%, from $317 million at December 31, 2008, to $296 million at June 30, 2009, as repayments and fair value adjustments exceeded purchases. During the six months ended June 30, 2009, net fair value adjustments for trading and available-for-sale securities reduced their carrying values by $5 million. Effective January 1, 2007, we elected to reclassify most of our securities to fair value following our adoption of SFAS No. 159. At June 30, 2009, the fair value of our trading securities was $46 million less than their amortized cost. The reduction reflected in the fair value of these securities compared to their amortized cost primarily was due to a net decrease of $42 million in the value of single-issuer trust preferred securities and collateralized debt obligations secured by pools of trust preferred securities issued by bank holding companies and insurance companies as well as a decrease of $7 million in the value of Fannie Mae and Freddie Mac common and preferred equity securities, offset by a small gain in all other trading securities. Although we do not normally engage in trading activities, these securities are reported as trading securities for financial reporting purposes. (See Note 10, Fair Value Accounting and Measurement, in the Selected Notes to the Consolidated Financial Statements.) Periodically, we also acquire securities which are designated as available-for-sale or held-to-maturity and accounted for under the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. During the quarter ended June 30, 2009, we recorded a decrease of $1.0 million ($802,000 net of tax) in net fair value adjustments related to available-for-sale securities, which was included as a component of other comprehensive income.

Deposits decreased $29 million, or 1%, from $3.779 billion at December 31, 2008, to $3.750 billion at June 30, 2009. Non-interest-bearing deposits remained essentially unchanged at $508 million, while interest-bearing deposits decreased $28 million, or 1%, to $3.242 billion at June 30, 2009. Deposits declined during the six-month period primarily because we encouraged $156 million in public funds, including $72 million of interest-bearing transaction accounts, to run off since December 31, 2008 in anticipation of the higher costs of collateralizing these deposits and to reduce the shared risk exposure under new Washington and Oregon State regulations. We anticipate further declines in public fund deposits as we continue to adjust to these new regulations. In addition, we elected to reduce brokered deposits by $21 million during this six month period, including $2 million during the quarter ended June 30, 2009. Most of this decrease in public funds and brokered deposits was offset by solid growth in retail deposits, particularly in the most recent quarter.

Reflecting the weak economic conditions, ongoing strains in the financial and housing markets, and further deterioration is property values for the quarter ended June 30, 2009, we had a net loss of $16.5 million, which after providing for the preferred stock dividend of $1.6 million and related discount accretion of $373,000, resulted in a net loss of $18.4 million, or ($1.04) per diluted share, available to common shareholders. This loss compares to a net loss of $52.3 million, or ($3.31) per diluted share, for the quarter ended June 30, 2008, when we did not have any preferred stock issued but when we did record a $50 million goodwill impairment charge. For the six months ended June 30, 2009, we had a net loss of $25.8 million, which after providing for the preferred stock dividend of $3.1 million and related discount accretion of $746,000, resulted in a net loss of $29.6 million, or ($1.70) per diluted share, available to common shareholders, compared to a net loss of $48.5 million, or ($3.06) per diluted share, for the six months ended June 30, 2008.

Our operating results for the quarter ended June 30, 2009 also included an increase in other operating income, which was particularly influenced by an $11.0 million ($7.0 million after tax) net gain as a result of changes in the valuation of financial instruments carried at fair value pursuant to the adoption of SFAS No. 159, compared to $649,000 ($415,000 after tax) net gain for the same quarter a year ago. Excluding these fair value adjustments, other operating income increased to $8.9 million for the quarter ended June 30, 2009 compared to $7.9 million for the same quarter in the prior year, primarily as a result of increased gain on the sale of loans from mortgage banking operations. Other operating expenses of $36.9 million for the quarter ended June 30, 2009 increased from $35.2 million, excluding the $50.0 million goodwill impairment charge in the 2008 quarter, a year earlier, as reduced compensation and costs for information/computer data services and payment processing activities were more than offset by significantly increased deposit insurance charges as well as costs related to real estate owned and higher advertising expenditures.

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