News Details

WALLA WALLA, Wash.--(BUSINESS WIRE)-- Banner Corporation (NASDAQ:BANR), the parent company of Banner Bank and Islanders Bank, today reported that net income increased to $25.4 million in the second quarter of 2012, compared to net income of $9.2 million in the preceding quarter and $2.2 million in the second quarter a year ago. For the first six months of 2012, Banner reported net income of $34.6 million, compared to a net loss of $5.6 million in the same period a year ago. Banner’s results for the quarter ended June 30, 2012 include a $31.8 million tax benefit as a result of the reversal of its deferred tax asset valuation allowance, which was partially offset by a net loss of $19.1 million for fair value adjustments.

“Banner’s continued successful execution of its strategic turnaround plan and return to profitability was punctuated in the second quarter by the elimination of nearly all of the valuation allowance against our deferred tax asset. This decision reflects our confidence in the sustainability of our future profitability,” said Mark J. Grescovich, President and Chief Executive Officer. “However, the real highlights of the second quarter were our continued improvement in asset quality, customer account growth and record revenues from core operations. Banner’s second quarter revenues from core operations* (net interest income before the provision for loan losses plus total other operating income excluding fair value adjustments) increased 8% when compared to the second quarter a year ago. Our net interest margin expanded 17 basis points to 4.26% in the second quarter compared to 4.09% in the second quarter a year ago. Our deposit fees and other service charge income remained strong, increasing by 10% compared to the second quarter a year ago, and revenues from mortgage banking operations were more than three times larger than the second quarter of 2011. This progress clearly demonstrates our strategic turnaround plan is effective and is building shareholder value.”

In the second quarter of 2012, Banner paid a $1.6 million dividend on its $124 million of Series A senior preferred stock and accrued $454,000 for related discount accretion. Including the preferred stock dividend and related accretion, net income available to common shareholders was $1.27 per share for the second quarter of 2012, compared to net income available to common shareholders of $0.40 per share in the first quarter of 2012 and $0.01 per share for the second quarter a year ago.

Second Quarter 2012 Highlights (compared to second quarter 2011 except as noted)

• Net income was $25.4 million, compared to $2.2 million in the second quarter a year ago.
• Revenues from core operations* increased 8% to $52.3 million.
• The net interest margin improved to 4.26%, compared to 4.11% in the preceding quarter and 4.09% in the second quarter of 2011.
• Net interest income before provision for loan losses increased 3%.
• Deposit fees and other service charges increased 10%.
• Revenues from mortgage banking increased 234%.
• Non-performing assets decreased to $73.2 million, or 1.73% of total assets, at June 30, 2012, a 21% decrease compared to three months earlier and a 61% decrease compared to a year earlier.
• Non-performing loans decreased to $47.4 million at June 30, 2012, a 27% decrease compared to three months earlier and a 59% decrease compared to a year earlier.
• The ratio of tangible common equity to tangible assets increased to 10.92% at June 30, 2012.

*Earnings information excluding fair value and other-than-temporary impairment (OTTI) adjustments (alternately referred to as other operating income from core operations or revenues from core operations) represent non-GAAP (Generally Accepted Accounting Principles) financial measures.Management has presented these non-GAAP financial measures in this earnings release because it believes that they provide useful and comparative information to assess trends in the Company’s core operations reflected in the current quarter’s results.Where applicable, the Company has also presented comparable earnings information using GAAP financial measures.

Credit Quality

“Improving our risk profile and aggressively managing our troubled assets has been, and will remain, a primary focus for our management team,” said Grescovich. “As a result of this focus, credit costs continued to decline and were significantly below those of a year ago, and although they remain above our long-term goal, we are confident credit costs will decline further in the near term. All of our key credit quality metrics have improved and Banner’s reserve levels are substantial.”

Banner recorded a $4.0 million provision for loan losses in the second quarter of 2012, compared to a $5.0 million provision in the preceding quarter and an $8.0 million provision in the second quarter a year ago. The allowance for loan losses at June 30, 2012 totaled $80.2 million, representing 2.50% of total loans outstanding and 169% of non-performing loans. Non-performing loans decreased 27% to $47.4 million at June 30, 2012, compared to $64.9 million three months earlier, and decreased 59% when compared to $115.2 million a year earlier.

Banner’s real estate owned and repossessed assets decreased 7% to $25.8 million at June 30, 2012, compared to $27.7 million three months earlier and decreased 64% when compared to $71.3 million a year ago. Net charge-offs in the second quarter of 2012 totaled $5.3 million, or 0.16% of average loans outstanding, compared to $6.4 million, or 0.20% of average loans outstanding for the first quarter of 2012 and $13.6 million, or 0.41% of average loans outstanding, for the second quarter a year ago.

At June 30, 2012, Banner’s non-performing assets were 1.73% of total assets, compared to 2.24% at March 31, 2012 and 4.48% a year ago. Non-performing assets decreased 21% to $73.2 million at June 30, 2012, compared to $93.1 million three months earlier and decreased 61% when compared to $188.4 million a year ago.

Income Statement Review

“The improvement in our net interest margin reflects continuing reductions in our funding costs, particularly in our deposit costs, and a significant reduction in the adverse effect of non-performing assets, as well as collection of some previously unrecognized interest income,” said Grescovich. Banner’s net interest margin was 4.26% in the second quarter of 2012, compared to 4.11% in the preceding quarter and 4.09% in the second quarter a year ago. In the first six months of the year, the net interest margin was 4.19% compared to 4.01% in the first six months of 2011.

Deposit costs decreased by four basis points in the second quarter compared to the preceding quarter and 32 basis points compared to the second quarter a year earlier. Total funding costs for the second quarter of 2012 decreased 11 basis points compared to the previous quarter and 37 basis points from the second quarter a year ago. Asset yields increased four basis points compared to the prior quarter and decreased 19 basis points from the second quarter a year ago. Loan yields increased four basis points compared to the preceding quarter and decreased 16 basis points from the second quarter a year ago. Nonaccrual loans reduced the margin by approximately eight basis points in the second quarter of 2012 compared to approximately 13 basis points in the preceding quarter and approximately 23 basis points in the second quarter of 2011. The collection of previously unrecognized interest on certain nonaccrual loans added five basis points to the margin in the current quarter ended June 30, 2012.

“The continued growth in core deposits and the reduced drag from non-performing assets over the past year have led to a solid increase in our revenues from core operations* compared to the second quarter a year ago,” said Grescovich. Second quarter net interest income, before the provision for loan losses, was $42.3 million, compared to $41.1 million in the preceding quarter and $41.2 million in the second quarter a year ago. In the first six months of 2012, net interest income, before the provision for loan losses, was $83.4 million compared to $81.3 million in the first six months of 2011. Revenues from core operations* were $52.3 million in the second quarter compared to $50.4 million in the first quarter of 2012 and $48.5 million in the second quarter a year ago. Year-to-date revenues from core operations* increased 7% to $102.7 million compared to $95.6 million in the same period a year ago.

“The decision to reverse the deferred tax asset valuation allowance during the second quarter reflects Banner’s return to profitability and our expectation of sustainable profitability in future periods,” said Grescovich. “This expectation also led to the significant adjustment of the fair value estimate for the junior subordinated debentures issued by the Company. The substantial changes to both of these significant accounting estimates are directly linked to the improved performance and profitability of the Company. We expect to recover the remaining $7.0 million balance of the deferred tax asset valuation allowance as an offset to our provision for income taxes in the third and fourth quarters of 2012.”

Banner’s second quarter 2012 results included a net loss of $19.1 million for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value. The net fair value adjustments largely resulted from a $21.2 million increase in the estimated value of the junior subordinated debentures issued by the Company, which was partially offset by increases in the estimated value of similar trust preferred securities owned by the Company. In the preceding quarter, Banner recorded a net gain of $1.7 million for fair value adjustments and in the second quarter of 2011 Banner recorded a net gain of $1.9 million for fair value adjustments. Banner’s year-to-date results included a net loss of $17.4 million for fair value adjustments compared to a net gain of $2.2 million for the same period a year ago.

Total other operating income (loss), which includes the changes in the valuation of financial instruments, was a loss of $9.1 million in the second quarter of 2012 compared to a net gain of $11.0 million in the preceding quarter and a net gain of $9.3 million in the second quarter a year ago. In the first six months of 2012, total other operating income was a net gain of $1.9 million compared to a net gain of $16.5 million in the first six months of 2011. Other operating income from core operations* (total other operating income, excluding fair value adjustments) for the current quarter was $10.0 million, compared to $9.3 million for the preceding quarter and $7.3 million for the second quarter a year ago, reflecting strong growth in payment processing and mortgage banking revenues.

As a result of continued account growth over recent periods and increased customer activity, deposit fees and other service charges were $6.3 million in the second quarter of 2012, compared to $5.9 million in the preceding quarter and a 10% increase compared to $5.7 million in the second quarter a year ago. Significant homeowner refinance activity contributed to strong revenues from mortgage banking activities, which increased 8% to $2.9 million in the second quarter of 2012, compared to $2.6 million in the immediately preceding quarter. Income from mortgage banking operations was $855,000 in the second quarter of 2011.

“Operating expenses declined for the second quarter compared to the preceding quarter and the second quarter a year ago, largely due to lower costs associated with the real estate owned portfolio, particularly valuation adjustments, and a reduction in our deposit insurance premiums,” said Grescovich. “We believe credit costs, including REO expenses, will continue to decline as we continue to resolve remaining problem assets.”

Total other operating expenses (non-interest expenses) were $35.7 million in the second quarter of 2012, compared to $37.9 million in the preceding quarter and $40.3 million in the second quarter of 2011. In the first six months of 2012, total other operating expenses were $73.6 million compared to $78.4 million in the first six months of 2011. The decrease was largely a result of decreased costs related to real estate owned and FDIC deposit insurance.

Balance Sheet Review

“Loan balances declined modestly compared to the previous quarter primarily as a result of the impact of refinancing activity on residential mortgage loans and further reductions in commercial construction and land development loans. Aside from seasonal increases in agricultural loans, net loan originations and credit line utilizations have remained modest, and a bit disappointing, as the weak economy continues to temper loan demand by both businesses and consumers. We expect a continued challenging economic environment going forward as businesses and consumers maintain a cautious approach to spending and borrowing,” said Grescovich.

Net loans were $3.13 billion at June 30, 2012, compared to $3.15 billion at March 31, 2012 and $3.21 billion a year ago. Commercial and agricultural business loans were $811.8 million at June 30, 2012 compared to $798.5 million at March 31, 2012 and $774.7 million a year ago. Commercial real estate and multifamily real estate loans were $1.22 billion at June 30, 2012, compared to $1.21 billion at March 31, 2012 and $1.24 billion at June 30, 2011.

The combined total of securities at fair value, available for sale and held to maturity, was $596.8 million at June 30, 2012 compared to $541.3 million at March 31, 2012 and $453.2 million at June 30, 2011. The aggregate total of securities and interest-bearing deposits increased to $729.3 million at June 30, 2012 compared to $685.2 million at March 31, 2012 and $621.4 million a year ago. The change in the mix of interest-bearing deposits and securities holdings compared to a year ago reflects a modest extension of the expected duration of this aggregate position designed to increase the yield relative to interest-bearing deposits. The securities purchased in recent periods were primarily short- to intermediate-term U.S. Government Agency notes and mortgage-backed securities and, to a lesser extent, intermediate-term tax-exempt municipal securities.

Deposits totaled $3.43 billion at June 30, 2012, the same as at the end of the preceding quarter. Deposits were $3.47 million at June 30, 2011. Non-interest-bearing accounts increased 4% to $804.6 million at June 30, 2012, compared to $771.8 million at March 31, 2012, and increased 25% compared to $645.8 million at June 30, 2011. Interest-bearing transaction and savings accounts were $1.45 billion at June 30, 2012, compared to $1.46 billion at March 31, 2012 and $1.42 billion a year ago.

“The improvements in our deposit mix are reflective of our super community bank strategy that is reducing our funding cost by remixing our deposits away from high-priced CDs, growing new client relationships, and improving our core funding position. All of this growth is organic growth from our existing branch network,” said Grescovich. Banner’s cost of deposits declined four basis points to 0.48% for the quarter ended June 30, 2012 compared to 0.52% for the quarter ended March 31, 2012, and declined 32 basis points from 0.80% for the quarter ended June 30, 2011.

Assets totaled $4.22 billion at June 30, 2012, compared to $4.16 billion at the end of the preceding quarter and $4.21 billion a year ago. At June 30, 2012, total stockholders’ equity was $587.2 million, including $121.6 million attributable to preferred stock, and common stockholders’ equity was $465.6 million, or $24.80 per share. Banner had 18.8 million shares of common stock outstanding at June 30, 2012, compared to 16.7 million shares of common stock outstanding a year ago. At June 30, 2012, tangible common stockholders’ equity, which excludes other intangible assets and preferred stock, was $460.3 million, or 10.92% of tangible assets, compared to $421.9 million, or 10.15% of tangible assets at March 31, 2012 and $383.7 million, or 9.14% of tangible assets a year ago.

Banner Corporation and its subsidiary banks continue to maintain capital levels significantly in excess of the requirements to be categorized as “well-capitalized” under applicable regulatory standards. Banner Corporation’s Tier 1 leverage capital to average assets ratio increased to 15.07% and its total capital to risk-weighted assets ratio increased to 19.76% at June 30, 2012.

Conference Call

Banner will host a conference call on Thursday, July 26, 2012, at 8:00 a.m. PDT, to discuss its second quarter results. The conference call can be accessed live by telephone at (480) 629-9645 to participate in the call. To listen to the call online, go to the Company’s website at www.bannerbank.com. A replay will be available for a week at (303) 590-3030, using access code 4548321.

About the Company

Banner Corporation is a $4.22 billion bank holding company operating two commercial banks 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. Visit Banner Bank on the Web at www.bannerbank.com.

This press release contains statements that the Company believes are “forward-looking statements.” These statements relate to the Company’s financial condition, results of operations, plans, objectives, future performance or business. You should not place undue reliance on these statements, as they are subject to risks and uncertainties. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Company may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors which could cause actual results to differ materially include, but are not limited to, the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and non-performing assets and may result in our allowance for loan losses not being adequate to cover actual losses; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates and the relative differences between short and long-term interest rates, loan and deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market; results of examinations of us by the Board of Governors of the Federal Reserve System and of our bank subsidiaries by the FDIC, the Washington Department of Financial Institutions or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute a formal or informal enforcement action against us or any of the Banks which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets and liabilities, which estimates may prove to be incorrect and result in significant changes in valuations; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; the failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our business strategies; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; our ability to pay dividends on our common and preferred stock and interest or principal payments on our junior subordinated debentures; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed in Banner Corporation’s reports filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2011. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for the remainder of 2012and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect our operating and stock price performance.