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Banner Corporation Message Board

  • senior6analyst senior6analyst Mar 20, 2010 11:02 AM Flag

    Banner Management-New Equity?

    I suspect that Banner management may not understand that to issue stock at ~$4 per share, when you can recover earnings to nearly ~$2/share, to acquire another bank is probably a destructive proposition for shareholder value. That is like agreeing to buy a bank by giving it your stock at a 2x P/E? If your normalized earnings can approach $2 per share, it means you are issuing stock at only 2x normalized earnings. The banks getting the FDIC closed banks have excess equity that was issued probably at close to 15x earnings, or, built over time with healthy mid-teen ROEs, both cheap sources of equity. Even management, unless they plan to issue themselves large clumps of new stock options, would lose money on their existing stock through EPS dilution. I believe the mathematics defeat the benefit of acquiring a bank at zero cost if you have to issue stock at a fraction of book value or a small multiple of normalized earnings. IMHO, if management floats a large secondary at the expense of shareholders, they deserved to be held accountable.

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    • A lot of discussion here about dilution. Usually a stock offering will result in some dilution. What matters is what the capital generated is used for. If it is used to acquire some company that will be immediately accretive to earnings - then, maybe, it is not too dilutive. If it is used to retire government or other higher rate debt - then, maybe, it is not too dilutive but actually a cost saving. If it is used to save the company so it can wait fight its way out of an economic downturns, then perhaps it is dilutive, but necessary to retain some stockholder value 'til better times. If it is used for luxurious new offices, to pay dividends or bonuses then it is definitely dilutive. So, some uses of stock offering generated capital is not so dilutive. jimho fwiw bwdik dyodd

    • senior6analyst, thank you for your candid information. I was wondering if you have also taken a look at uwbk. My limited knowledge shows ratios that are far from critical, so I am wondering if I am missing something. And I apologize for partially hijacking this thread.

    • what a great thread! :o)

    • You just don´t get it, do you?

      My guess is that they are not issuing equity to buy banks, they would be issuing it to get their Texas ratio improved and originally cover NPAs here. On such things there may not be much of an option, they are covering losses.

      While it looks like they are doing an impressive job so far by avoiding dilution when the stock was near its lows and by reducing their NPAs, they did a poor job of lending through their cycle, their NPAs peaked at over 8% here so I wouldn´t reach any other conclusion. If you all think they can just ignore that and you can escape dilution, and this bank can just keep going on with a bad Texas ratio and be a ¨strong¨ bank in any recovery, I would suggest you are pretending.

      Their NPAs are still high here at $295M I believe, the number I saw. They got that down to 6.26% or so which is better than before. The problem is that their TCE and reserves are not high comparatively, and it is not enough to render the Texas ratio unconcerning here. Some NPLs may go back to performing here, and some cash flow might start coming in, and at some point they might sell some NPAs for more than they have written off, all of which can improve their Texas ratio without any dilutions. But the numbers in their Q4 indicate that to be prudent they may need to raise some equity, as they still have a high Texas ratio/troubled asset ratio it looks like.

      Perhaps they have debt to convert which can help, as could converting some TARP to common, that might work for them without a secondary as their TRBC ratio here is good as it stands now.

      Or they might do limited shelfs of maybe 20M shares, then maybe one with 10M shares, or something like that.

      If this one ends up on good footing and going from only 16M to 48M shares or so, ie, diluting by a factor of three, I would say that is a pretty impressive job of working through this mess starting in 2008, considering they had messed up so badly and their NPAs got to over 8% here, when their reserves and TCE were not strong in comparison.

      Or you can all whine about it and go like STSA which should have raised at $2 and instead waited, what a mess that is.

      What I suspect is that what you may not understand is that a troubled asset ratio of 70% or more is not something you want a bank to run with, over 90% and you start getting FDIC interventions.

      • 1 Reply to kabtb
      • The ratio that you mention deserves attention, and I looked at it along with about ten others. You may be focusing too much attention on one ratio. Sure, Banner could look better with a small amount of incremental equity, but banks like STSA appear to have critical ratios that were/are far, far worse than Banner. If you follow Banner, you are aware that their R/E lending was never as great as the binge by the problem banks; their NPAs are much smaller; their NIM is much healthier; their Capital Adequacy ratios are quite decent; their core deposit liquidity is excellent; and management (good bankers) jumped on the R/E problems early and heavy. Banner appeared to address R/E loan problems as they first developed with provisions, chargeoffs and sales. Be careful that you and the shorts do not focus on just one point of singularity or the laws of dimensional physics will burn you and leave you far behind...?!

    • Senior, I agree with you. Current stock price is too cheap to exchange for other fail bank = expensive stock. Banner needs better result in loan loss provision.
      If management is reading this, pick up the Warren Buffett book called "Snow Ball". You need to understand book value and shareholder value. Growing will end up losing stock holder value.

    • thanks for your analysis and opinion. we can get too far into the weeds on fundamental analysis and technical anaylysis imo. emotion, rumor, good or bad news can trump both. BANR may be turning the corner and, if so, ought to take part in the inevitable pac n.w. bank consolidations imo. the pps rocketed up lately, and that may be due to the optimism of the management on earnings. or is it something else? bwdik dyodd anyway, thanks for the analysis and discussion. glta

    • You do not seem to read or understand what has been said? You cannot make money on an acquisition, even if it is free, if you get it by issuing equity at a P/E of approximately 2x your normalized earnings once you recover. It is EPS dilutive. It is better to just manage the bank back to prosperity and reap the benefits. If Banner had excess equity, it would be a different case. For two years I have had three lists of PNW banks: the ones that would survive, the ones that would fail, and the "tweeners." It has been very rewarding for me. If Banner does not issue a large amount of equity at these rediculous low prices IMHO, I hope to make a bundle when it reaches upwards of $20 per share in the next two years. Patience hath virtue, in my opinion and experience.

    • just thinking out loud ( i really know nothing about possible BANR moves). are any of the following likely candidates for FDIC assisted takeovers?: STSA (32M), MBNC, AWBC (3.6M), - or - FTBK (14M) CTBK (21M), CASB (23M)?

      BANR (79M) would get cheap assets, cheap deposits, FDIC sharing on losses, and the reinforcement of confidence, in view of the FDIC implicit approval of BANR. Doesn't appear to be dilutive; should be accretive, and might pop the pps. bwdik dyodd

    • I believe that you, and Banner management, should take an Excel spreadsheet and project two cases: 1) a two year recovery to an 0.80% ROA which yields almost $2 EPS with the current outstanding shares, and 2) you get a $1 billion bank for free from the FDIC by issuing $150 MM of stock at ~$4 per share which yields an EPS of less than $1 per share in the same two years?!?!? The best companies stay true to fundamentals, not impressions of what the market wants over the next 90 days. IMHO, as an analyst and executive, management would be wrong to issue stock at these prices with the expansionary desire to increase its size. Look at what it seemed to have done for Washington Mutual or Toyota.

    • "Who shall have this?" - Capt William Bligh

      What's it to be?: FTBK?, CTBK?, STSA (or parts of STSA), First Sound?, American West?? How about a reverse split to get it well above $5 and invite in some large institutional holders? wjw bwdik dyodd

      • 2 Replies to franciswool
      • FDIC assisted takeovers are a way to heavily leverage: bank gets assets and deposits at a low price and the FDIC helps shoulder any losses. Not necessarily dilutive as long as there is good strategic growth. fwiw jimho dyodd

      • How about just continuing to manage the bank back to normalized earnings with the economic recovery. As the loan loss provision drops, that could mean a return to nearly a 1% ROA or almost $2 per share of earnings. At a 10x P/E, the stock could possibly recover to near $20. There is no need for grandiose shenanigans that cost money and provide distractions from the best strategy--fundamental management of the bank, its loan portfolio, asset/liability balance and ROA (return on assets). Capital and M&A creativity here may destroy value rather than building it! Remember when a lot of WA banks took the quick route to riches in 2006 and 2007 by increasing their R/E lending during the resal estate surge.........?!!!!!!!!

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