Banner Corp (BANR) 2002 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Banner Corp first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and then participants will at that time. As a reminder, this conference call is being recorded. And I would like to now introduce your host for today's conference, Mr. Gary Sirmon and Mr. Sirmon, you may begin.

Thank you, Michelle, and welcome everybody to the first quarter conference call of Banner Corporation. I have with me here this morning Mike Jones, the President and CEO of Banner Bank and as you probably know, he will be named President and CEO of Banner Corporation following the annual meeting today. I also have Jesse Foster, Executive Vice President and Commercial Banking Officer, Mike Larsen who is in charge of our Real Estate Lending, Lloyd Baker, our Chief Financial Officer, who is our secretary and Cindy Purcell who is our Chief Operating Officer. Al, I'd like to have you read - and as Mitchell mentioned by the way, we will have a question and answer period following presentations of the officers. Prior to that, I would love to have our secretary to read our safe harbor disclosure.

Statements concerning future performance, developments or events, expectations for earnings, growth and market forecast and any out-guidance on future periods constitute forward looking statements which are subject to a number of risks and uncertainties that are beyond the company's control and might cause actual results to differ materially from the expectations and stated objectives.

Factors which can cause actual results to differ materially include, but are not limited to regional and general economic conditions, changes in interest rates, deposit flows, demand for mortgages and other loans, real estate values, competition, loan delinquency rates, changes in accounting principal taxes, policies or guidelines, changes in legislational regulation, other economic, competitive, governmental, regulatory and technological factors affecting operations, pricing, product and services and the Banner ability to successfully resolve the outstanding credit issues and/or recover guiding loss.

Accordingly, these factors should be considered invaluably forward looking statements and undue reliance should not be placed on such statements. Banner undertakes no responsibility to update or revive any forward looking statements. Thank you.

Thank you, Al. We'll begin this conference call with the report by Lloyd Baker, our Chief Financial Officer.

Thank you Gary, and good morning everyone. As for the press release, I'm going to assume as always that you all have received a copy of the press release. As the press release indicates, for the first quarter of 2002, strong real estate loan production and deposit growth coupled with an improving net interest margin led to a nine percent revenue growth for the company. Expansion of net interest margin was accepted and what's particularly encouraging is deposit costs continued to decline down 32 basis points for the quarter and down 176 basis points in comparison to a year earlier. By contrast, the yield on our earning assets declined only 16 basis points for the quarter and a 134 basis points year over year. Offsetting is good news to with previously announced need to increase our loan loss provision. For the quarter, loan loss provision was $3 million compared to $950,000 a year earlier.

On the other hand, reflecting continued robust activity in our mortgage banking operations, noninterest income increased by $350,000 or 12 percent compared to last year's first quarter. We did experience a bit of a decline in deposit fees. However, that was more than made up by increased gains on loan sales which totaled 1.3 million for the quarter compared to $861,000 last year. On the - on the expense side, excluding the last year's unusual guiding loss, operating expenses increased substantially reflecting the increased mortgage banking activity that I mentioned. The acquisition of the Oregon Business Bank in Portland, Oregon, and increased personnel costs including normal compensation and related benefits, adjustments and additional credit examination and special assets staff.

On a more optimistic note, information services which is result of our conversion activity in recent quarters had been at elevated levels, it was slightly lower level expense for the quarter than the year earlier. The net result of all of this, of course, was the bottom line at $3.9 million or 34 cents a share for the quarter which is generally in line with our expectations. Looking forward, we continued to expect additional improvement in our funding cost and therefore a likely improvement in that interest margin, but like everyone else, of course, we'll be keeping a close eye on the course of the economy and economic activity particularly with respect to the impact on Banner's performance and resulting need for additional loan loss provisioning.

With respect to our balance sheet for the quarter, we saw a slowing in loan growth, although in an average balance basis, loans were about six percent higher than for the quarter, the first quarter of last year. For the quarter, we had a pretty significant decline in the balance of loans for sales and buyers of one to four family loans in particular in the secondary market, they had fairly clogged pipelines that had caused our balances to be a little larger than normal at the end of last quarter finally unclogged and those loans moved off to balance sheet. That decline in one to four family loans and loan for sale was offset to a degree by growth in commercial real estate loans largely as a result of the acquisition of the Oregon Business Bank and additional growth in construction and acquisition and development loans largely at our mortgage banking subsidiary company, financial corporation.

On the liability side of the balance sheet, we had a solid growth in deposits including growth, noninterest bearing deposits. Although the end of the period - end of the period in noninterest bearing deposits probably overstates what happened there on an average balance basis for the quarter. Growth in interest bearing deposits was also strong. We had particularly strong growth with respect to public funds deposits for the quarter and that growth allowed us to pay down Federal Bank borrowings by about a $40 million. Gary, I don't know if you want me to address nonperformings or would you like that ...

I think I will stop there with my prepared remarks with respect to the quarter.

I'd like to introduce now Jesse Foster. He will discuss briefly commercial banking activity at Banner Bank. Jesse ...

Gary, I don't have a great deal to contribute this morning other than the fact that I think that we're seeing great progress in the management of the special assets category. We have special assets and of course, as Lloyd mentioned, we have a bank examination team that's an effort at addressing the issues in the one region where we've had problems. Overall, the asset quality of the bank throughout the bank is excellent. We're still, as I indicated, struggling through with the one - with one region. That's about all I have to say, Gary, I'll respond to questions later if necessary.

Thanks, Jesse. As Lloyd mentioned earlier, our real estate lending activity has remained very strong particularly in the one to four family of both as well as the and Mike Larsen is in charge of that and has been for a number years, and Mike, would you like to comment on that activity.

Just - I had a couple of comments that would indicate we had a strong demand in the first quarter. New home sales were up for the quarter for most of the markets. In addition to that, the purchase market remained strong and we saw increased activity in home sales, but the portfolio continues to perform very well. The delinquencies are very well in that area and most of the activity is sealed by demand cost by lower interest rates. We expect this quarter to continue on with the increased home sales. It's really all I have to add here.

Thanks, Mike. And for the first time, I'd like to introduce Mike Jones, the new President and CEO, new since February 11th at least, President and CEO of Banner Bank and soon will be President and CEO of Banner Corporation. Mike was with West One for a number of years as most of you know, and we had a couple of different press releases out lining Mike's background. We're extremely happy to have Mike with Banner Corporation. He brings a great deal of experience and knowledge about the industry and certainly about this region. Mike, would you like to make some comments?

Actually I think at this point, I'll wait and then respond to questions in queue - question and answer .

OK. I guess we'll open it up for questions and answers then.

Thank you. If you do have a question at this time, please press the number one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, if you do have a question, please press the number one. One moment for questions. Once again, if you do have a question, please press the number one. Our first question is from Rick of Sandler O'Neill.

Good morning, guys.

Good morning, Rick.

A couple of questions this morning. First one, you know, in the release you kind of mentioned it was more than half of the increase in nonperforming assets is due to certain credits and loans. What does the balance of that consist of?

Rick, this is Lloyd. Balance of nonperforming loans?

Yes. Of the increase.

Of the increase. Well, it's largely in business lending, although there are increases in just about every category of lending, but approximately 5.5 million of the increase was, as we noted, was in the area of real estate loans and the largest portion of the other increase was commercial and industrial type lending.

OK. (Inaudible) business, where would the area hardest hit generally in that Seattle area?

We had to have - that continues to be the case that Seattle and areas where we are experiencing the greatest number of delinquencies.

OK. You mentioned the higher end single family residentials. What's the average size of the ?

Funny you should just ask that. We had a discussion around the table here yesterday as to what higher end is. Mike, you want to ...

Well, higher end - higher end means different things to different markets and in the Seattle area, well, we don't participate in the high end market. To a large degree, we do have a few higher end specks and those are categorized by being cash equivalent balance and has bounced, but there's - there's just a handful of those loans in the portfolio.

What's the largest one in that portfolio, if I may ask?

1,308,000. But I don't believe that's applicable to the loans as it to the delinquency position at this quarter. The loans that we were taking out in the first lean position is Rick, we're more in the $800,000 to $900,000 price range.

All right, Rick. Those are very well-located and while certainly don't have any assurances or we can't make any assurances about the market ability to we're still pretty confident as the press release states that they are - they're well-priced, they're well-located and we were hopeful that we will be able to liquidate those or sell those and one's - my is one's already sold and closed and we're - if you can feel good about NPAs, we feel pretty good about that particular group of NPAs. They're fine homes and in good areas.

OK. Last question. Do you think it's fair to say or fair to assume that we can see similar provisioning this quarter, maybe in the next two quarters and then gradually or do you think you're pretty much down this high level of provisioning?

Rick, this is Gary. We certainly hope and we're working very hard at getting these nonperforming assets resolved. If we go back historically and look at Banner Corporation Banner Bank, our nonperforming assets typically is more in the area of 0.4 to 0.6.

Right.

And that is you know, over a historical - over the last seven years of our existence this amortization that has happened in the last nine months as we all know has been associated with one particular office and one particular region and it seems to me that that remains the case. We certainly hope that we will see some improvement in the nonperforming assets and we certainly are anticipating the loss ratio in going forward is going to be certainly less than what we've had in the last two quarters.

Again, we can't certainly make any assurances or promises that the economy area remains a little soft and I think that's - as that situation, well, the rest of our region actually where we're doing business here, in the residential area, Portland's remained very strong and all the core markets, the market, the market have remained strong, except as Mike mentioned in that upper end in the since this an important situation has developed in this area, there has been some softness in the upper end market and that's what we're adding to those nonperforming asset category, but to answer your question, I think we certainly are anticipating improvement in both areas.

OK. Great. Thanks a lot, guys.

Thank you. Our next question is from Jim of David & sons.

Good morning. A couple of questions. Regarding the the one four family portfolio recorded at about eight percent drop, a little steeper than we've seen in the past. Is that and run-off and that's starting to abate, you expect that to continue to drop? I've got a couple of others, but I'll may be will just let you answer that one first, thanks.

Jim, this is Lloyd. Good morning, by the way.

Good morning.

(Inaudible) certainly were a component of that drop in the first quarter. As we noted, for us, mortgage banking and real estate and lending activity continues to be pretty strong still. It's likely that there will continue to be pre-payments, but the big thing that happened to cause that decline for us is that there had been a buildup of activity in prior quarters not just for us certainly with the activity, but maybe more importantly for some - the end location where we sell those loans and they were just slow in getting their sales processed and funded and that Jim, somewhat broke loose during the first quarter. Now, I consider that to be an indication nation-wide there is some slowdown in activity.

But you didn't sell any seasoned loans in that portfolio in the quarter, it was - it was run-off and sort of normal business rather than, you know, portfolio loans.

No, you're absolutely right, we did not and you can see that on the balance sheet when you look at the loan sale per se which declined from $43 million a year and went down to $14 million in to the current quarter.

OK, that's what I thought the math looked like. So, sale of loans, you probably, you know, peak down from the first quarter run rate, that's probably the peak, and the rest, you know, unless rates back somehow or other.

All right, you know, I think that's a - that's a reasonable expectation, but we've been surprised before so, this - we would like to be able to increase our production, you know, to pick up some of that loss, that's our goal obviously, going forward. So ..

OK, good.

One of the things that's happening for us, Jim, or has happened for us is CFC market, it continued to expand, and so, to the extent that, you know, some of more operations might stabilize. There is still some reasons to be optimistic about CFC's production.

A couple other things, you know, just shortly after Mike came on, you guys revised guidance down to $1.90 to $2 range, I believe it was and if you look at it, you know, if you looked at the quarter and look at that range you need to average something like 52 to 55 cents per quarter to hit that earlier guidance and you know, Gary said, provision numbers are going to come to down in the second and third quarters, of course. So, you know, and if that doesn't, I think it's going to be pretty hard to hit those numbers. Can you give me some clarity on what your feeling is regarding the for this year.

Jim, IT'S Mike Jones.

Hi Mike.

How are you? I'm - we're going to make some fundamental changes in what we're doing in the credit o of the organization, we're hiring some people to put us more what I'm going to call a lower market lending operations and as for the result of the focus, you know, in those particular areas, I think at this point, we have not spent a lot of time on considering whether or not we will achieve $1.90 per share. Frankly, we are going to have to deal with that kind of guidance a little bit in the future depending on how some of my offers are accepted that are out there today.

OK. Thanks, I will step back.

Thank you. Our next question is from of .

Good morning.

Hi, Lou.

Hi. First of, Gary, thank you. It's been an interesting seven years.

You are welcome, .

Since I'm assuming you're not going to be on the very much any more in the higher position.

Well, I hadn't planned not to, but ...

God, . Also , the answer to question was no. Can you talk about, well, in terms of the regional strength in loan demand, can you talk about where you are seeing it, why you said that, you know, CFC was doing very well here in Portland, but can you give comparisons in Western Washington, Eastern Washington and Eastern Oregon also?

jones Well, Lou, this is Mike. I can - I can say that production for the first quarter were a little widely spread over the entire Northwest. We had good in all of our markets.

In what - in what loan categories?

Mainly, one to four - one to four family , probably you'll see in the commercial real estate and income down as planned, you know, we certainly don't want leaning into the market with commercial real estate right now, but on the one to four family area, it's pretty well across the board in terms of the production with a heavy emphasis on the and the .

Does direction that you guys had been moving previously in terms of your, you know, your goal of moving away from mortgages as opposed to just buying, replenishing and selling, focusing more on the .

Well, I think right now, Lou, you know, that's not by accident, that's more by design. Like Mike said, I don't think we need to be leaning into the commercial real estates, you know, in the selling. Then on the other hand, we have a great opportunity with the structure we have in place to produce some awfully good quality residential mortgage and take advantage of the environment and creating some bottom line when the other area is as slow as I think we're kind of our strategy right now to the economy and to the markets, and that certainly does mean and as Mike just mentioned, like Jones just mentioned, that he certainly has some plan to revise some of our lending strategies particularly regarding commercial real estate and lending and with moving more towards the middle market, getting some very high quality individuals in to manage and produce those type of loans. So, I don't - I don't know that we're changing our strategy at all. I think we're again taking advantage of the economic conditions and certainly sensitive to the economies of the future area, but you know, I think the strategy is going to continue and I think our goal is to continue to look towards changing that asset loan mixture to reflect more on commercial banking environment as opposed to environment. I think we made good progress, but I think we have to recognize the economy. It gives us and we did slow that down a bit, but that's again by design.

OK.

jones Just let me just add on. This is Mike Jones. A year from now, when you look at our balance sheet, the original strategy that you were alluding to will be shown in the financial statements. We will have a significant growth in the portfolio relative to where we are today, but there is going to be a little bit different type of customer than we have been banking on in the past, little higher quality.

OK, based on Mike, your statements then in terms of the conditions. Can you give us some guidance on your expectations for the expense line specifically in the, you know, in the salary benefits lines.

Well, I'm sorry. If some of these people come on board, they are before they took the first loan. So, as Jim that is going to have some impact on where we go on a short-term long run, it's going to significantly improve the earnings performance of this company both in terms of its ROA and in terms of it ROA.

OK. Thank you.

Thank you. Our next question is from of .

Good morning, gentleman, a couple of questions as well. First of all, if you look at current periodic expenses, they were obviously . Could you tell us what was kind of unique to the that's in elation to the bank examination team and so forth?

Well, , this is Lloyd.

Hi, Lloyd.

Unique to the quarter, I think, two or three things. First, you have to remember that we added another bank to the mix, with the acquisition of Oregon Business Banks. So, there was some additional staffing there. As we have mentioned a number of times, there is some additional staffing with respect to credited examination and special assets activity. With respect to production activity in the mortgage area, of course, we did have a strong quarter and there is - and there is a significant degree of variable commission type compensation there, and then finally, with comparison to the prior period, you have to recall as we noted in the announcement in the fourth quarter of last year, we made some adjustments with respect to compensation and profit sharing accruals, and so that the fourth quarter of the last year was unusually low on the expense side.

OK. And just a second question, if I may. Do you have any update as far as the check cutting and litigation there and whether or not you can quantify the expected recoveries from that?

, this is Gary. I won't quantify, but I can tell that we have pursued and are pursuing both of those issues, the check cutting as well as the manipulation we've - as I mentioned in the last couple of conference calls, it seems like it's gong really slow, but it's a complex issue and the suspicious activity reports have been sent to all the regulatory and government agencies that are - that are to receive those, and interestingly enough, you know, this whole thing started developing at just about the time the of the 911 tragedy - 09/11 tragedy, and the FBI has been focused on apparently what they consider to be much more important matters and certainly they are, and have not pursued these issues quite as aggressively as we would have hoped they would, but we're - we will continue to work on those, both those issues and we're, but we've - collected a lot of resources and lot of time, lot of effort to those recoveries and we're going to continue to do that.

Yes. Thank you.

Thank you. Once again, if you do have a question, please press the number one. Your next question is from

Good morning, gentleman. How are you?

Good morning, .

Just a quick question for Mike. Mike, you talked about the, I guess, it's renewed emphasis on a little higher quality CNI loans. Could you talk about what you want to see on the deposited side and how focused will you be on bringing in the accompanied checking accounts with those - with those loans. And any geographical locations where you want to better concentrate on making those loans?

Yes, I think the first part is really important because if you tend to move up-market in terms of quality of the borrower and away from the marginal borrower, surprise, surprise, they tend to - they tend to have money, they tend to make their loans revolve, they tend to have money in their checking accounts, and we would want all of their business. We are not going to do the business just to do the loan on a go forward basis. So, I do expect that we will be bringing significant amount of the transaction accounts with them when they come, and I actually believe that we will have very good success with this on a go forward basis.

As the regions of the we're going to be looking at - we're going to look at it throughout our entire banking area, but the areas that you can expect to grow are going to be in the Portland , and to an extent in the market place, and it isn't that we're going to be so looking hard, yes, trying to penetrate the marginal customers in the future down based on - but they are quality companies there that are looking for new banking relationships today because some actions or the some larger institutions. So, we expect to be pretty successful throughout those areas, but just because of the size of the economies, you can probably Portland and Seattle market place followed by the .

And just a question, as an aside, maybe this is a question for Gary Mr. Jones and how is he going to get assuming he can pull off what he wants to?

I tell you, he is a real tough negotiator, - I don't know whether I want to talk about incentive plans. The incentive plans that we might have is the same incentive plans that the other officers have had for the last couple of years we had outlined pretty early in our statement, but I think it's going to be - it's going to be stockholder and does have a few options. So ...

So is he - he's not taken 90 percent of his compensation and options.

No, not quite.

OK. Thank you, guys.

Thanks, .

Thank you, and we have a follow-up question from Jim .

Yeah, a couple of things. (Inaudible) date of processing number is settled down nicely and I wondered if that's a more normal number now that you are done with just about all the except maybe Oregon Business Bank but could you give me some feel on whether that 600,000 number the run rate?

Jim, we think it is pretty close to the run rate. The worst deal with our new service and new set-up developing a little history. So it's - it's a little bit hard to say with certainty that it is, but it looks pretty close to where we would expect to be and it is a encouraging number. The Oregon Business Bank conversion should be a relatively inexpensive one, it's a - it's a small operation and certainly will be an easier conversion than those that we experienced last year.

OK. Good and then one more question. I'm confused about the change in the level - loans on status this quarter. Could you walk me through the - about the $11 dollar increase? It sounds like portion or a significant portion of that comes from buying out the , but if you could characterize how much of that came from that, how much it came from et cetera?

Jim, just $5 million of that increase came as a result of purchasing some loans that we had, not through our - necessarily through our construction lending area, but through some type of commercial banking activity, we had some positions that we felt we could better control and liquidate by taking out those lean. The balance of it again, somewhat just over half of the increase was in real estate lending, the largest portion was some additional nonperforming loans with respect to small business loans.

OK. Thanks.

I think it was a little increase in consumer delinquencies .

I think, Jim, this is Gary. I think it is important to note that we are not - we are not finding a great deal of new loans - of new nonperforming loans associated with the recent, you know, developments that we've been discussing in the last couple of quarters, I think the increase is more associated with the economy slowing down a bit in the sale areas. So there is not a great number of dollars involved with

areas pretty tough too. Are you seeing - experienced down there that is indicative of the other guys?

No, we are not.

OK, good. Thank you.

Thank you and our last question is a follow-up from .

On the Oregon Business Bank, you know, being down the with CFC, has there been any discussion about what you plan to do with those spaces, will you hold both spaces, will you consolidate the two offices into a third space?

Well, this is Gary. Both of those spaces are certainly they're very close in there, we are starting to by way, some we're starting to see some customers customers consumers using a using Oregon Business Bank and that was one of the but in both cases, both the organizations are growing quite nicely and subsequently, we're running out of space. So, we are looking for areas that we can consolidate and expand that, the commercial banking market as well as continue to grow community corporation. So, we'll - I think we will leave our options open there, but ultimately, I think we all agree that we would like to have them at least some of their operations in the same building. That's what we're looking to do. No, we don't have a definite goal as to when that's going to happen, that's the goal.

OK. Thank you.

Thank you, and once again, if you do have a last question, press the number one. And I'm showing no further questions. I'd like to turn the program back to you.

Thank you, Mitchell and thank you all of you for participating in this conference call today. Like I mentioned before, we're very, very pleased that Mike Jones is on board with us and we're very pleased that you remain interested in our corporation and appreciate your calls and your questions. We'll talk to you later. Thank you.

Ladies and gentleman, this concludes today's conference. Thank you for your participation. You might disconnect at this time. Have a good day.