Banner Corp. in Walla Walla, Wash., has been able to build core deposits so well through branch-building that it is vastly reducing its reliance on more costly Federal Home Loan Bank advances.
The balance-sheet restructuring, announced late Monday, will come with a cost: The $3.2 billion-asset Banner expects to take a $8.9 million after-tax charge this quarter — and post a net loss of between $3.1 million and $3.6 million — by prematurely cashing out about $200 million of securities to pay off an equivalent amount of borrowings.
But Banner executives and analysts who follow the company say the expense is worthwhile and should lower its cost of funds and increase its net interest margin and earnings.
“This makes us a better bank, and we’re looking forward to good performance in 2006 and 2007,” D. Michael Jones, Banner’s president and chief executive, said in a conference call Tuesday.
The company expects the restructuring to raise its fourth-quarter net interest margin by 28 to 30 basis points from the third-quarter margin of 3.77%. The restructuring should also increase earnings by as much as $2.4 million, or 10%, beginning next year. Last year its net income rose 20%, to $19.3 million.
Investor reaction to Banner’s plan was positive but cautious; the stock rose 1.9% Tuesday, to close at $32.40 a share.
James Abbott, an analyst at Friedman, Billings, Ramsey & Co. Inc. in Arlington, Va., said Banner made a smart move, considering that the spread between the securities it is selling and the advances it wants to pay off is minus-1.8%.
“These borrowings were weighing down earnings, and these transactions alleviate that,” he said.
Banner can reduce its borrowings now in part because it has been able to build deposits by opening about a dozen branches in its home base of eastern Washington, as well as in the more populated markets of Puget Sound, Portland, Ore., Boise, and Twin Falls, Idaho. In the third quarter its deposits grew 19%, to $2.28 billion.
“My goal is to eventually not have any borrowings with the Federal Home Loan Bank, so the most important thing we can do now is continue to grow our core deposits faster than most of our peers,” Mr. Jones said.
When he came on board in 2002 to improve the performance of Banner, which had recently converted from a thrift charter, was funded substantially by Home Loan bank advance and other borrowings. As a result, its cost of funding was 3.54%, far above the industry average, according to the Federal Deposit Insurance Corp.
Mr. Jones said in the conference call that he had wanted to restructure the balance sheet when he first came to Banner, but doing so at that time would have cost about $24 million, because the company would have paid higher prepayment penalties.
After the restructuring, advances will decrease to about 10% of total liabilities, compared to 16.4% at Sept. 30. Banner’s cost of funds will also decrease, though the company did not say by how much. Its cost of funds was 2.65% at Sept. 30, while the average for banks in its asset range was 1.96%.
James Bradshaw, an analyst at D.A. Davidson & Co. in Portland, Ore., said Banner’s restructuring and its efforts to increase core deposits — combined with it improvement in credit quality since Mr. Jones came on board — should make it a more attractive acquisition candidate. He mentioned the $44 billion-asset BancWest Corp., a San Francisco unit of France’s BNP Paribas, and the $6.8 billion-asset Sterling Financial Corp. in Spokane as potential buyers.
Banner said that it sold about $140 million of fixed-rate securities Monday and expects to sell another $60 million of securities shortly. It expects to incur an after-tax loss of $4.8 million on the transactions. Banner will use about $142 million of the proceeds to repay longer-term advances and incur after-tax prepayment penalties of about $4.1 million.
The company will use the rest of the proceeds to repay about $49 million of short-term advances that carry no prepayment penalties.
Mr. Abbott said that despite all that Banner has done, expenses remain an issue. The company continues to build branches, even though many of its newest ones are only barely profitable. Its expense-to-asset ratio is 3.4%, compared with an average of 2.7% for community banks that Mr. Abbott covers with similar loan and deposit mixes.
“This company could be a billion dollars in assets more today with its current infrastructure, without having to increase its expense base anymore,” he said.
