Banner Corp (BANR) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Banner Corporation third quarter results conference call.

At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during today's conference, please press the star followed by the zero on your push button phone.

As a reminder this conference is being recorded today, Friday, October 24, 2003. I would now like to turn the conference over to Mr. Mike Jones.

Please go ahead, sir.

Thank you.

Good morning, everybody. This is our third quarter conference call relative to our earnings performance. Here with me today is Lloyd Baker, our Chief Financial Officer, and Al Marshall, Secretary of the corporation.

Rather than go through reading the paragraph relative to forward statements et cetera, et cetera and estimates, I just refer you to page two of the earnings release relative to those issues with.

What I would like to do first is to have Lloyd kind of go through in an overview summary of what happened during the third quarter. And after that, we will open up to a question-and-answer period.

So Lloyd, go ahead.

Thank you, Mike.

Good morning, everyone. The earnings release this morning, of course, indicates that we did have a $4.2 million, 37% -- or 37 cent per share quarter. That is a significant increase, 23% over a year ago. But of course is essentially unchanged from the prior quarter.

Inside the numbers, the earnings release numbers, the trends are fairly consistent with what we've seen for a number of quarters now. Asset growth, deposit growth, particularly in comparison to year earlier numbers have contributed significantly to increased revenues, although in the current quarter, that trend has softened some and I will get into that in a second.

But the most obvious -- the most obvious thing in this morning's numbers and the best piece of news that we can point to, I think, is the continuing improvement in our asset quality numbers, and therefore, the reduced cost of credit in the quarterly statement. And specifically, loan loss provision for the quarter at $1.4 million is a significant decline from the $2.3 million in the two prior quarters and $4 million a year earlier. And as I mentioned, that reduction in credit costs reflects a significant improvement in the asset quality which we're pleased to report, with nonperforming assets declining by 25%, over the last nine months.

The other piece of news, and as I mentioned, is the impact of -- continuing impact of low interest rates on performance of the company. Both with respect to our mortgage banking activity which continued strong, but importantly in the current quarter, the impact with respect to net interest margin, which compressed a fair amount. Declining to 335 from the quarter. For the quarter. Excuse me.

So if you would turn with me to the income statement,, we can see -- I will point out a couple of the more interesting numbers on the income statement and the balance sheet, then look forward to answering questions.

So if you are with me, net interest income for the quarter was $19,660 million, which is down slightly from about $400,000 from both the prior quarter and from the quarter a year earlier. As I mentioned, assets continued to be significantly more than they were on an average balance basis in both of those prior periods and so that decline does in fact reflect that declining net interest margin.

Particularly important with respect to the net interest margin during the quarter, our securities portfolio, like many around the country, experienced some fairly rapid prepayments and turnovers, which affected amortization of premiums on a lot of stuff that was purchased in prior periods, as well as reinvestment at continuing low levels of interest.

But we also are seeing some declines in the yields on loans and we've been talking about yield pressure on assets for a number of quarters now, and the fact that that would push up against borrowings costs and deposit costs, which while they're declining, are proving to be a little more sticky at this point in time.

Continuing down to the income statement, I mentioned the provision for loan loss, as I said, $1.4 million for the quarter, which substantially helped the quarter's performance. Getting into other income, there is some items I would like to point out as well, loan servicing revenues at $241,000 for the quarter, returned to a more normal level. It will require -- or you will recall that in the previous quarter, we did put up an impairment charge on some loan servicing revenues but current quarter, we've returned to more normal levels.

Fees, deposit fees at $1,895 million continues to be strong and continues to reflect the growth in deposits that have occurred at the company. And I think it is a really important there to look at not only the quarterly numbers but to move across the page to the nine-month, year to date numbers where you can see the fees on deposits are up a million dollars on a year to date basis. And that's something that we feel particularly good about, again, reflecting a lot of growth and activity with respect to deposits.

Mortgage banking revenues declined slightly in the quarter. That's not a surprising fact, $2.9 million, but still we're quite strong. And actually, loan volume and loan sales activity held up very well during the third quarter. And then our other operating income was also fairly consistent with prior periods.

Moving down into the expense section, we continue to see, of course, increases as this franchise grows and expands. We see increases in compensation, and benefits.

Although we also have seen, particularly on a year to date basis, a significant increase in the amount of those costs that are deferred as a result of loan origination activities. I guess the terminology on our press release is capitalized loan origination costs. Occupancy expense continues to expand somewhat as our locations grow and mature and we add to the franchise.

And then down under Miscellaneous Expense, we saw a little bit of improvement in the prior quarter as we actually had some improvement with respect to our costs, our collection costs, another one of those positive trends is the asset quality improvement.

So working all the way down to the bottom of the page, again, $4.1 million net income for the quarter, $11.7 million, year to date, and 37 cents and $1.05 on the quarter and year to date basis per share. I would point out that the bottom of that page, that our diluted shares increased slightly during the quarter. Of course, reflecting an improved stock price. And that -- as has been our case for all of this year, stock repurchase activity was essentially none.

Flipping over to the balance sheet, the loan portfolio at $1,665 billion was up slightly for the quarter, and also up considerably on a year over year basis. The portfolio continues to be sort of a story of different pieces of the loan portfolio.

One to four family loans continued to decline as we experienced pay downs, as a result of the refinance market and continued to sell current originations into the secondary market. So one to four family loans actually declined by about $25 million for the quarter. They're down $75 million year to date. On the other hand, most of our commercial real estate, construction lending, and commercial and ag lending portfolios increased.

Now, we did see a flattening for the quarter in business loans, which seems to be mirroring a trend that we're seeing with other lenders. We simply have business borrowers who are choosing not to use credit facilities. And so commercial business loans were essentially flat for the quarter, on the other hand, they're up 17% on a year over year basis.

Construction and land loans are up 17% on a year over year basis. Commercial real estate loans are up 14%. So as I said, there's really multiple stories inside the aggregate numbers for the loan portfolio.

Staying on the asset side of the balance sheet for just a moment, another number I would like to point out is real estate held for sale, another part of the asset quality discussion, we actually saw a decline in real estate held for sale for the quarter, of about $1.8 million. And we're -- Mike will probably touch on this later, but we're fairly optimistic with respect to that number going forward. As well as the asset quality numbers in general.

Moving down to the liability portion of the balance sheet, deposits were -- are up substantially, $220 million, over a year earlier number, but we're a little bit flat in the quarter just ended. We, like a number of people, I believe, saw a fairly significant improvement in deposits at the end of the June quarter this year. A portion of it, not an insignificant portion of it, related to the refinance activity that was going on, and the flow of cash as a result of homeowners refinancing, we in particular, have a number of title and escrow companies that we do business with.

And that -- those balances that had ballooned up a little bit at the end of June, moved out during the quarter, so noninterest bearing accounts were actually fairly flat -- or excuse me interest-bearing accounts were fairly flat during the quarter. But continued to be appreciably above year ago levels supporting the balance sheet and improving the liquidity of the company.

The other item that I will point out on the balance sheet is the trust-preferred securities, where during the quarter, we did issue an additional $15 million worth of trust preferred securities, taking that total up to $55 million now. And on that same page, if you're following along with me, at the very bottom of that page, we have a tier one capital ratio at 864 at the end of the quarter, reflecting the addition of those trust preferred to the capital position, regulatory capital position.

The following page shows our loan portfolio and I have already touched on a number of the growth and changes there, but again, just to bring to your attention that we really do have this issue of a declining one to four family portfolio as a result of decisions to sell current production in the secondary market and refinance activity continuing, and growth in all of the -- generally growth, in all of the other categories of lending, reflecting a lot of effort over the past year in particular, of adding staff and capabilities, to our production, commercial banking production activity.

Also on that page, you can see the statistics with respect to nonperforming assets. I've already touched on that, but 25% decline in nonperforming assets, down to $31.6 million or 1.26% of assets at the end of the quarter. Like I said down 25% from the end of last year and actually down 15% from the end of the prior quarter.

And further down the page, the allowance for loan losses showing the addition of $1.4 million through provision which is -- was sufficient to match up with the net charge-offs for the quarter of $1.3 million, which is down from the prior quarters. And if we look on down the page, we have a good indication of the positive effects of this improving asset quality, in terms of net charge-offs to average loans outstanding, eight basis points for the quarter and importantly, 38 basis points year to date compared to 62 basis points in the prior year.

Finally, the final page of the press release is the page where we get into the net interest margin and some of the other performance statistics. And while I have already mentioned it, it bears repeating, that the -- the margin did -- did suffer, the results of some asset yield compression during the quarter. Particularly with respect to securities and mortgage-backed securities, but also in the loan area, and despite continuing improvement with respect to the cost of funds, which is down another 20 basis points.

We, like everybody else, are challenged by the current low interest rate environment in terms of managing this net interest margin. But the -- as I mentioned earlier, the other side of that low interest rate environment continues to be a positive effect on mortgage banking activity, which shows up in the strong, other operating income to average assets. And the other performance measures on the bottom of the page.

So with that, I will look forward to answering any questions.

Thank you, sir.

Ladies and gentlemen, at this time we will begin the question-and-answer session.

If you have a question, please press the star, followed by the one on your push button phone. If you would like to decline from the polling process, please press the star followed by the two. You will hear a three tone prompt acknowledging your selection, and your questions will be polled in the order they are received. If you are using speaker equipment, you will need to lift the hand set before pressing the numbers. One moment for our first question.

Our first question comes from Jim Bradshaw with D.A. Davidson & Company. Please go ahead.

Good morning.

Good morning, Jim.

A couple of questions. if I may. The -- looks like part of the improvement in net charge-offs, you had a decent quarter of recoveries, I wonder if I should be encouraged by that? I know you charged off a lot of loans over the last couple of years and it looks like maybe some of that is coming back into the stream.

I think that's correct, Jim and I think we do look forward to some recoveries on the go forward quarters. Are they going to be in the millions of dollars? Probably not. Except as it relates to a bond claim for about $7 million. Which we expect to collect over the next several quarters. But we will have increasing amounts of recoveries on a go forward basis in the quarters ahead.

Okay. A couple others real quick here.

Lloyd, what's the -- in your mortgage servicing rights, you took a temporary impairment rather than a permanent impairment there, I think. So could you tell me what the impairment reserve is at quarter end?

Well, the impairment reserve is a couple hundred thousand dollars at quarter end, Jim. I'm not sure that I would call it a temporary impairment.

What we did is recognize at the end of June that some of those servicing rights were not going to stay on the books as long as had been anticipated at prior periods. And so we recognize that through an impairment charge at the end of June, and in fact, during the quarter that just ended, we did have increasing amounts of servicing rights that paid off early, prematurely, so -- but -- Maybe more to your point, our servicing asset that's on the books is on the books at the -- at the end of this period at about 95 basis points on total servicing.

That's where I was leading eventually.

And just one more, sort of, maybe more philosophical than anything else, it looks like net revenue growth from a year over year basis this quarter is about 5%. And expense growth is about 17%.

And I think your head count, you know, went up fairly appreciably over the last year, but you know, my thesis would be that your expense growth ought to slow and if we don't have much more margin pressure, we ought to see, you know, -- so those numbers reverse themselves to some degree. Is that a fair assessment for the near term future?

Unless interest rates continue to decline.

Got it. But in term was head count, you're not expecting much more in the way of increases over the next few quarters, correct?

Actually I think we're expecting some decreases.

Okay as the loan collection issues sort of abate here?

And as we begin to rotate some of our lower performers amongst our loan officers out of the bank and start to -- because as our new people coming in, and those people that have been here doing a good job, we frankly have people that aren't producing at a level I thought they would. So we will be parting company with some of them.

Thanks a lot guys.

Thank you our next question comes with Ramsey Greg with Sanford O'Neill. Please go ahead.

Good morning.

Good morning.

Basically I had a question for you, a few questions about nonperformers. Obviously there is some -- been some progress made again. I just want to talk a little bit about some of the turnover, some of the movement in the nonperforming assets, and then maybe a little bit about I guess there were two of the larger or the two land development credits I think one was an OREO, and then also, if I could get some idea of where you may expect NPAs to be by the end of the year.

To your point, Ramsey, there were two pieces of property that I think we talk about at the end of the second quarter, one we sold, the smaller of the two but still significant, about $2 million. The second one, we thought we were going to close by the end of the third quarter, and in fact, it is going to close at the end of October. That is about $5 million. We expect our nonperforming assets to be down quite a bit in the fourth quarter.

If for no other reason than the sale of -- so for in October we're going to close about $6 million of sales of current -- NPAs that were reported at the end of September. We expect continued improvement. In fact, at the end of December, we kind of expect our level of nonperformings and classifieds to begin to approach satisfactory levels.

Okay.

We -- that's one area that this bank has really made significant progress.

So as far as the provisioning level here then, I know, you know, we've certainly gone down and that would probably be a pretty good run rate here for the fourth quarter as well?

A little hard for me to say.

We are going through this fight, we aren't, but the AICPA and the regulators are going through this fight, we are building significant amounts of unallocated reserves for loan losses, and my best guess is if the regulators have their way, they like that, if the AICPA has their way, they don't like that and if the AICPA wins we will probably have a lower provisioning and if the regulators do, I think our provisioning in the third quarter is somewhat indicative of what we will do for a couple of quarters.

Thank you.

Thank you, sir. Our next question comes from Paul Miller with Friedman, Billings, Ramsey.

Thank you very much. I had a couple of quick followup questions. On your servicing portfolio what is your weighted average servicing fee?

It is -- it is right in the neighborhood of a quarter of a percent.

Quarter of a percent? So this -- their servicing multiple is right around a four multiple when you divide that into the 95 bibs(ph) .

Yup. A little less than that.

A little less than that. Okay. You said on commercial lenders that you let some go. How many commercial lenders do you currently have and how many did you let go?

We're in the process of reevaluating a number of people. We currently have 74 commercial lenders.

74. And most of them I would guess is on the I-5 corridor?

Most of them are on -- west of the Cascades but they're scattered throughout our whole bank.

Has there been a lot of turnover since the change of management? And since the NPA problems in that employee head count?

It has increased but -- and there has been some turnover. There will be more now that the bank stabilized.

And the other issue can you make any comment about the M&A picture out in the Pacific Northwest. We've seen a couple of high profile acquisitions. Klamath got taken out by Sterling and InterWest got taken out about six months ago by Wells Fargo. Can you add any color to those acquisitions and what do you think that area is going forward?

Well, we're told by a lot of visiting investment bankers there is going to be a lot more activity in the Pacific Northwest. Walla Walla is a somewhat isolated place so we don't see too much of that here, but frankly, I think that's going to happen.

You would be, if the right -- would you continue to be buyers? Are you hopefully you're just really concerned about your getting your NPAs in order?

I think what we need to do, and the focus of this bank and our business plan is to improve our balance sheet, grow our balance sheet internally, with the kinds of credits we want, not go out and buy a bunch of credits that we frankly don't know a lot about in a purchased bank. So I don't think you should look for us to be in the acquisition market as a buyer in the near future.

And are you planning to open any branches on the lending side or the deposit side over the next 12 months?

We have and we will continue to do that on a go forward basis. In the next 12 months we will probably only open one but beyond, that we have some sites in mind that could get open beyond that 12-month period. Frankly it takes 12 months to buy it, permit it, and build it in this current part of the world.

And where would you look to open up the new branches? Seattle market area?

Portland and Puget Sound.

Thank you very much.

Paul, that this is Lloyd. We just opened an office, since the close of this quarter, we had a grand opening on a new office in the Belltown area in Seattle. So as Mike pointed out, we continue to expand.

Okay. Thank you very much.

You bet.

Thank you, sir. Ladies and gentlemen, if you have an additional question, please press the star followed by the one on your push button phone.

Our next question is a follow-up question from Jim Bradshaw from D.A. Davidson, please go ahead.

Sorry I forgot one earlier. The tax rate, Lloyd, is right around 30% it look like that quarter. Is that the effective rate for Q4 at least?

It looks like it will be pretty close to that, Jim.

Again, it always depends on how much of our revenue is the result of tax exempt sources and how much of it expands in other areas that -- in that tax exempt area tends to be fairly constant. We are -- we have for the last two quarters started recognizing the benefit of some tax credit investing we've done for CRA purposes which has helped the tax rate a little bit. It should be fairly close to that level.

Okay, thanks again.

Thank you.

Next question comes from Ross Haberman with Haberman Brothers. Please go ahead.

How are you gentlemen?

Nice quarter. Glad to see you're on the mend. Lloyd,could you just talk a little bit, I've got my reservations I should say about this BOLI. Could you just -- I know you've got quite a bit on your books. Is there any risk that they -- that they could change the rules with that? Or like I guess their -- I guess they're currently examining the trust preferreds, and have yet to come down, whether they are going to possibly change those rules?

Well, there is always risk in anything we do. We do have $33 million worth of BOLI. My best guess is, though, that the risk of any of the rules changing on that, it would have an impact on existing positions owned by us or by other banks is very, very small.

This -- there is an enormous amount of this on the books of banks across the country. So you have a very strong lobby there. And you've got a very strong lobby from the insurance industry. You know, it continues to perform as a very nice asset. It currently is -- is there an outside chance that the tax rules could change? Yes. But I'm not -- I'm not losing sleep over that one.

Okay. How about -- what is your knowledge of what's going to -- when and if there is going to be something coming down in regard to the trust preferreds?

Well, as you obviously know, the accountants and regulators are looking at this one as well right now, with respect to the deconsolidation of trust preferreds. It could have some impact on the financial statement presentation as early as the end of this year but this is another area where I suspect that because of the conflicting interests here, and the lobbies at work, that we won't see a significant change.

It may kill it on go forward trust preferred issuances, though.

And one just final question. Could you give us a flavor, Mike, maybe market by market, how you are seeing loan demand and what is your expectations are, I guess in overall loan growth for the coming, say 12 months assuming rates, you know, are up to up on a 50 basis points for argument sake?

I think that we are seeing improvement in the economy of all of our markets. Perhaps the weakest of which is the Puget Sound marketplace. But nevertheless, because of some acquisitions that were talked about earlier, and some other things that are happening in those marketplaces, by some of the larger banks, we expect to have very good loan growth in that marketplace over the next 12 months.

We expect similar growth because with the economy is getting better fastener the Portland marketplace, in terms of growth there. And as you roll into the other side of our operation -- when I just finished that, by the way, we have now talked about 55% of our loan balances are on that side of the mountains.

So now as you come to the east side, you come into an agriculture area, if you look at our statement fairly closely, we are doing more ag lending than was previously done at this bank. We have some people that have joined us that I have known from a prior life that are good ag lenders and we like to do that sort of thing to a point. And we expect that to grow. But not as fast as we expect it to grow in Puget Sound.

On the real estate, construction lending, if interest rates stay with where they are, the home market is going to be terrific on a go forward basis. And we expect to participate on an ever-increasing market share in that area.

Just one follow-up regarding the residential. Historically, Lloyd, re-fis have represented what percent of I guess your originations versus purchase?

Well, in recent history, I think it has been running about 60%, similar to most people.

Re-fi, okay.

Yeah.

Okay. Thank you. The best of luck, guys.

Thanks.

Thank you, the next question is a follow-up question from Paul Miller. Please go ahead, sir.

Thank you very much. I just had a question really about the mortgage banking side of the business.

As we know, we've had this great re-fi during the last three years and made a lot of small mortgage banking shops very profitable, but it looks like going into '04 origination rates will be cut in half. And a lot of small banks have told me that a lot of banks your size rather have told me that the mortgage banking side is really becoming less and less of a profitable entity given the, you know, the scale of the Countrywides of the worlds and the Wa Mus. Is this a business you think you will stay in or something you will outsource like some other companies your size?

We are very good at this. We will stay in it and we will continue to make a great deal of money at it.

Have you done any profitability studies and if you have, could you just tell me the profitability you are getting off of it on a ROE basis.?

I wouldn't want to split that out separately because we don't report separately but I will say this. We are good at this. We make as much money at this as anybody, and we will continue to stay in this business and frankly, we expect to take a larger share of this because there are a whole lot of people out there that are going to exit this and a lot of the small mortgage shops won't be here 12 months from now.

You can tell me why you're good at it? Why you think you're good at it other other people and why you're making money, why other people aren't going to make money?

I think we have long term relationships with a lot of realtors in a lot of markets that go way back. And secondly we finance a whole number of the premiere home builders throughout the regions and as they sell homes to their buyers we tend to get the listings for the sales for the homes as they move into them. You have to be in the business a long time to have those kinds of relationships.

Okay. Thank you very much.

Thank you, sir. Mr. Jones, we have no further questions at this time. I would like to turn the conference back over to you for any concluding remarks.

Thank you very much.

We appreciate you all listening to our third quarter report. We look forward to talking to you at the end of the fourth quarter.

We do expect to report to you at that time our nonperforming assets to be down significantly from where they are today. We are looking forward to improved asset quality, which would be reflective in our provision for loan loss on a go forward basis.

We frankly think that our net interest margin was pretty well pounded a bit by some things that happened in our investment portfolio during the third quarter. We expect that to get better in the fourth quarter. And as we get some loan growth, we hope -- or frankly, if we just get some of the commitments we have outstanding drawn down upon, we expect to have an improvement in our net interest margin on a go forward basis.

So we're looking forward to talking to you at the end of the fourth quarter and a go forward basis from then. Thank you very much.

Thank you, sir.

Ladies and gentlemen, this concludes the Banner Corporation third quarter results conference call. If you would like to listen to the replay of today's conference, please dial 303-590-3000 and you will need to enter the pass code of 556309 followed by the pound sign.

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