Banner Corp (BANR) 2004 Q1 法說會逐字稿

Please stand by for real time transcript. The Banner Corporation conference call will begin momentarily. Good morning, ladies and gentlemen, and well come to the Banner corporation, first quarter results conference call. At this time, all parentants inner a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone should require assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded. Today is April 22nd, 2004. I would now like to turn the conference over to President and CEO Mike Jones. Please go ahead, sir.

Thank you very much, and we'd like to welcome all of you to our first quarter earnings conference call, and we appreciate you listening in to this. With me in the room is Lloyd Baker, our Chief Financial Officer, and Albert Marshall, the Secretary of the corporation. We'll first start off with Mr. Marshall reading that lovely paragraph you all have heard by heart, and then we'll follow that up with Lloyd Baker talking abut to the first quarter earnings. So with that, Albert would you start out?

Good morning. Our presentation today discusses Banner's business outlook, and will include forward-looking statements. Those statements include descriptions of management's plans, objectives or goals for future operations, products or services, forecast of financial or other performance measures, and statements about Banner's generalal outlook for economic and other conditions. We also make make other forward-looking statements in the question and anwser period following management's discussion. These forward looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from those discussed today.

Information on the risk factors that could cause actual results to differ are available from the earnings press release that was released today, and a recently filed Form 10-K for the period ended December 31, 2003. Forward-looking statements are effective only as of the date they are made, and Banner assumes no obligation to update information concerns its expectations.

Thanks,Al. With that, I'll turn it over to Lloyd Baker, as I said our Chief Financial Officer, to talk about the third quarter result approximation.

Thank you Mike, and good morning everyone. I think my remarks this morning will be fairly brief. As the press release indicates, we made $4.4 million for the quarter. That's essentially flat with the fourth quarter, but up nearly $1 million from the quarter a year earlier, a 27% increase in earnings per share, and 38 cents per share in earnings. The quarter really, for the most part, had good news in it. In particular, I think that -- that what stands out in this press release is solid growth in earning assets both for the quarter, and in particular on a year-over-year basis, an improvement in the net interest margin, and those two factors really contributed significantly to the quarter, and are a big part of the story in adding to that story, or part of that story, is the growth factor in particular, is the continued expansion of the franchises, and we've laid out with additional locations in the Idaho market, additional location in Portland, additional office in Seattle and Wala Wala, so we have a growth -- continued growth in the operations, and we're seeing the effects of that growth, as I said, in the earning asset totals, in particular, as well as deposit growth.

The net interest margin, if we turn to the income statement, I think the line that really stands out on income statement is that net interest income, which at $22.7 million is up 1.3 million from the prior quarter, and $3.3 million over the quarter a year earlier. And that reflects, as I mentioned, growth, but also this expansion in the net interest margin. Two or three quarters ago, we were experiencing pretty significant compression or pressure on the net interest margin, and for the last couple of quarters, that has reversed, as we've continued to see declining costs of funds, in particular, and the effect has been very positive. Again, looking at the income statement, the other numbers that stand out, obviously credit costs continue to be an improving story for the company, with our provision for loan loss considerably less than it was a year ago, although its essentially flat from where we were in the fourth quarter, as the growth that we've, experienced in the loan portfolio in particular, dictated that we continue to provide at that level.

But if you turn to the -- to the page where the changes in the allowances are highlighted, you'll see that is that provision in the $1.450 million in the first quarter is much more than the $625,000 that we took in net charge-off, so credit is another part of the story that's improving. Moving on down the income statement, I think the other -- the other thing that sort of stands out for the quarter is mortgage banking, as you would expect mortgage banking revenues are down from a year ago, but essentially flat with where they were in the fourth quarter. We seem to have stabilized at the levels that we're producing of mortgage banking activity. Interest rates obviously have an effect on that activity, and as you all know, interest rates moved down during the quarter for the most part, although they've recently turned up again. But the mortgage banking activity, think the important thing here is that what we're really seeing is net interest income replacing mortgage banking as the primary factor supporting growth in the earnings statement.

Moving on down, the income statement. The expenses continue to expand, to grow, and for the most part, that's a reflection of what's going on in the expansion of the company that I noted earlier. The one disappointing area I guess, with respect to expenses is the line titled professional services, where the combination of continued high costs, associated with collecting certain -- certain problem credits, and some additional costs associated with very Sarbain's Oxley and audit and examination have all led to a little bit of an increase in professional services. The other areas of -- the other areas of expense growth really reflect growth in the franchise, which are numbers that are positive, and activity that's positive. If we take a look at the balance sheet quickly, what stands out, I've already touched on it, but certainly loan growth continued to be strong both in the quarter, up nearly $69 million in the quarter, and which is a 4% growth over that timeframe, and up 13% year-over-year, $1.769 billion, as oposed to $1.564 billion earlier. That loan growth is a significant contributor to our year-over-year asset growth of nearly 12%.

Deposits. Deposits are kind of a mixed bag, and you have to dig into the report here a little bit. If you look at the end of period deposit totals at $1.749 billion. That is up 8% year-over-year, and on a year-over-year basis, that's positive, and if we -- if you turn all the way to the back of the announcement, where we have average balance data, you'll see that the average balances in deposits were up about 11% year-over-year. Having said that is, it's clear deposit growth has flattened out in the last six to nine months. I think that's a trend that is affecting not only Banner Bank, but the banking industry in general, and is certainly something that we need to keep an eye on. We've made the point for a number of -- a number of quarters now that deposit growth will be the challenging activity for this company, and we're certainly seeing that in the statistics not only for ourselves, but for the industry in general.

On the final page, where we do show some of the ratio analysis, the trends that I've pointed out are fairly evident there. I've mentioned the net interest margin at 370 basis points. That's up 13 basis points from the previous quarter, and importantly it's up actually 35 basis points from where we were in the third quarter of 2003. So this trend in margin is encouraging, as I said, contributing significantly to it is improvement in our cost of funds. The other performance ratios are pretty consistent with where we were in the prior quarter, where we were in the prior year. Certainly -- certainly we need to continue to work to see some improvement in the return on assets, return on equity type performance ratios, but as I've pointed out, there's a lot of growth activity, growing of this company, that is imbedded in those numbers, and is affecting those numbers, but is also playing out in the growth and earning assets and growth in net interest income.

So with that, I will end my comments and look forward to questions, but I want to be careful here, because last quarter when I made that closing on my statement, it I didn't give Mr. Joans a chance to speak again, so before we have questions, I will turn the microphone back over to Mike.

Thanks, Lloyd. I'd just like to reaffirm and reiterate what Lloyd says. We are very busily building a fanchise here. We need to focus on growing our deposit portfolios more rapidly than we have in the past. We have had some success in that the first half of the year. Both the loan growth and deposit growth as shown at the end of March have continued into April, so we are pretty optimistic about where this is headed during the year of 2004. We are very pleased, we announced earlier in the quarter that we have entered the southern Idaho market by establishing operations in Boise and Twin Falls, which is in that particular area of the country, and we've had a very good reception from the customer base there.

And because of that we're very optimistic that that over a not very long time will become a fairly large contributor to the earnings and balance sheet of this company. So with that, I think I should open it up to questions and answer the questions that you all would have.

Operator?

Yes, sir. Thank you. 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 1 on union Bush button phone. If you would like to decline from the poling process, press the star followed by the 2. You will will hear a 3 tone prompt acknowledging your selection. Your questions will be polled in the order they are received, and if you are using speaker equipment, you will need to lift the handset before asking the question. One moment please for our first question.

Our first question comes from Jim Bradshaw. Please go ahead with your question, sir.

Good morning. Thanks. A couple of questions, if I may. Lloyd, probably first off for you is compared to year end, has there been much change in your asset liability sensitivity over the last three months or so, is and if not, are you sort of actively trying to change it, record you comfortable with where you sit?

Good morning, Jim.

Good morning.

We are pretty comfortable with where we sit. It has not changed significantly. It has not changed significantly probably for the last six to nine months, and again we're pretty comfortable with where we are, and obviously we're sensitive to what's going on with interest rates now, as they've returned to levels that obviously they're sharply up from a few weeks ago, but as you know, pretty near the levels where we were at the end of the year, so we like to watch the Fed like everybody else, but we also like to manage the balance sheet and the sensitivity to a level where we're fairly neutral on the direction in interest rates.

And Lloyd, your loans as a percent of assets has been creeping up over the last year, and I think it's 66 or 67% now. Would you like to see that creep up even further over the next year?

I think that we will see it move up a little bit. We have added significant loan generation capacity in the company, and that ratio probably will move up a little bit. We don't want to see it expand a lot. The way we would like to manage that position, however, is through deposit growth, as both Mike and I indicated, to support that loan production activity that we've added to the company

And it's, you know, as I read the new branches and new loan production offices I sort of read in the short run at least that's probably better loan originating capacity for you than deposits, so I wonder are you looking at branch acquisitions or something else to augment that growth?

Well, actually the branches are both, and we've had good deposit reception in the Boise and Twin Falls area, but more importantly we've had nice deposit growth since the opening of places Tanisburn which is down there in the Hillsboro area and also right here in Wala Wala, we had a special opening there that we've had good growth. The plan for these branches is to emphasize deposit growth for the most part, with the exception perhaps in Boise and Twin Falls, where we will get good loan growth from them.

Okay. Good. And then the last one I had is, it looks like you're -- Mike, finally in the position now where you're starting to add capacity. I just wondered if capacity expansion is enough, or do you need to do more to you know, just sort of support 10 to 15% loan growth over the next year or even two if you can look out that far.

I think the capacity is in place to support it from the infrastructure of the company. And actually that -- that's impacting our efficiency ratio. What we need now is the balance sheet to go with the capacity that's here, and if we don't get it, then were ging to have to cut some of the infrastructure off, because that's one of the ways [inaudible] we're goint to have to inprove our efficiency ratio.

Okay, and Mike would you say you're done with sort of allowing the low loan portfolio that you didn't like when you got there to run off? Is that sort of a steady state at this point?

I still think we're rotating out marginal customers, Jim.

Okay.

And it isn't that they were classified credits or non-performing credits, it's just customers that in the long run we shouldn't be banking. And so that still goes on, particularly in the C & I loan portfolio.

Okay. Great. Hey thanks a lot, guys appreciate it.

Thank you sir for your question. Our next question comes from Ramsey Craig. Please go ahead with your question, sir.

Good morning, guys. Just had a quick question here following up on the branches. I guess profitability of 14 to18 months I think was in the release, is that pretty conservative, or is that -- what are your thoughts on that?

That's been the limittry of when these branches break even 0 for that particular month, not cumulatively, on the ones we've opened so far, since I've been here, and so we feel pretty good that we will stay in that area of 14 to 18 months for these branches to break even.

Okay. And then as far as expansion plans now going forward, additional branches, maybe in the second quarter or for the rest of 2004, what are your thoughts there?

We have some that are going to come on, but they're going to be much later in the year, as it relates to some branches as an example up in the northwest corner of Washington, we'll have a branch come on board, and we'll have some other branches, but they'll they're going to be very late in the year.

Okay.

It just happens we had a flurry of them.

Right, yeah. Now going forward here, you know, certainly very solid loan growth. I guess one thing though that looks like it's still stagnant is commercial business. What do you expect there going forward?

That's part of this row case we were talking with Jim Bradshaw about. I think we're asking a number of what I call marginal customers to bank elsewhere, and we're replacing them with good customers at least in my -- our opinion, better customers, and so that's there's a rotation taking place in the C & I portfolio.

All right, thanks guys.

Thank you sir for your question. The next question comeless from Lewis Feldman.

Please don't tell me you guys are going to swim. Good morning.

It's sunny there.

It's sunny there. It's hard to get to. In terms of -- first off, a deposit question. Lloyd you talked about the deposit and the deposit growth. You know, certainly on an end of period basis, deposits are up, but on the average basis, it's actually down on a sequentially quarter basis. Is there a transitory nature to these deposits?

It's the nature of the an agricultural bank.

In other words, the reference, then, is due to the Ag lending that you have?

It is an important part of our organization. And, Lou, there is a second feature there, and that's that particularly in the summer of 2003, there was a lot of money floating around the system, include something title and escrow companies that we bank, but floating around the whole economy in general as a result of the that refinance boom, and there has been some runoff in balances related to that, and so your observation is correct, and I think I made that point, that for the last six months, deposits, the end of period number probably overstates the deposit growth, and that is a challenging area for us.

You consider that still to be true?

It?

That's your end of period number here overstates?

Apparently not by what's happening in April. In April we've had great deposit growth so far.

Okay, then based on these -- can we look on the expense ratio as a -- you know, as a fairly good basis now since you stated that you're, for the most part, done in terms of the capacity addition, and at least for a quarter or more done in terms of branch expansion? Can we consider this a fairly good run rate on the expense side?

Yes.

Yes, although I would cause you that certain offices open mid-quarter, some of that expansion wasn't in there for a full quarter in first quarter.

Okay. I'll step back. Thank you.

Thank you, sir. Once again, ladies and gentlemen, if you do have a question, please press the star, followed by the 1. Our next question comes from Ross Habermann. Please go ahead with your question, sir.

How you, gentlemen?

We're good, Ross, how you?

Good. Could you share a little built of light on the operation you're going to set up in Idaho? How big, and any further -- you know what -- what kind of break even time you're looking for there?

Actually, that one probably will break even faster than some of the others based on the plan on growth we're seeing in the market place now. The intent is to bank the greater Boise market, the Twin Falls market, in that area. We don't have any intent to go to other parts of southern Idaho, and our three year projections have it sitting there with a loan portfolio of around $150 million at the end of three years, and deposits of somewheres around 75, $80 million, in in that particular region.

Most of that ex-fangs, and most of that growth is going to come on the -- on the commercial side? Commercial loans? Or Ag, or what sort of categories are you expect something?

All three of those areas, but probably not a lot of consumer.

Okay. And could that support -- if my understanding is right, you're going to open up one branch in, or more than one?

There will be more than one over time. The numbers I gave you, however, incompass us having four facilities in those two operations, two areas.

Okay, so the 150 million is for facilities. Okay. And just one final question. Could you give us a sense of what you're seeing in overall loan or -- or pipeline from the -- from the Seattle area?

Well, Seattle is difficult for us, because we only have two small branches in that. If you talk about Puget Sound area, where we have branches, we're seeing increasing filling up of the pipeline of loan requests, we're actually doing more lending over there, we are doing this rotation that we're talking about of move some customers out, but as it relates to good customers coming in to draw down or set up new lines or credit, we're seeing an increase of activity in the Puget Sound area.

Besides Idaho, is Puget Sound your area of concentration for the coming calendar year?

Well, and also Portland.

Okay. Any pick up in the Portland market the last couple of months?

Last couple of months? Some. Not as much as we're seeing in the Puget Sound area, but in the residential construction area considerable pick up taking place.

We continue to have good in residential construction in both the Seattle and Portland markets, as well as request for new loan activity.

Okay. Thank you, gentlemen.

You bet.

Thank you, sir. Our final question is a follow-up from Lewis Feldman. Please go ahead, sir.

Thank you. You would you put some color on the overall credit quality situation, and what your expectations are for the balance of the year, in terms of working off -- how much of what's left is left over from the problems over the last couple of years, and how much of it is new stuff, and can you give us some color on what the inflow and outflow has been?

Yeah, in the $27 million of non-performing loans, about half of that are agricultural loans that are not related to the Puget Sound area, that are primarily in the eastern Oregon area.

That's where most of the agriculture is.

Pardon me?

That's where most of the agriculture is.

And it's concentrated in about five credits that we feel good about collecting the principal, but as you are aware, agricultural credits take a little longer to work through. The remainder of it is scattered throughout the system. If there is a concentration, it's in the northwest Washington area, up in the Bellingham area, and by that I don't mean it's a vast majority of it, but it is a chunk of the remaining $13 million. And at -- probably at the end of the day there are four or $5 million of credits related to the issue in '01 that are still there. And that's the area in which there is a considerable amount of litigation expense.

Can you talk about what's going on in terms of the litigation, and has there ever been any follow up in terms of the insurance issue, the insurance issue, and those remaining factors?

Yes, we -- as I think we've told you all several times before, we have filed a bond claim for the limit of the policy. We estimate the losses significantly exceed the limit of the policy. Insurance company is still in the process of considering whether they're going to honor our claim or not, or whether we're going to go to litigation. We think we're in a very good position, but we aren't going to get it in the next quarter. It's going to be a period of time until we receive that money.

The end of the day, we will collect from the insurance company. As it relate those litigation, inevitablely when you start to foreclose on people, start to collect judgments on guarantors and all that sort of thing, they always try to file cost cross claims relative to verbal loan commitments, ecetera, ecetra. And that's the area where the litigations come. We have no exposure for additional expenses in that area, in our opinion, from the litigation, but it does take time to work through the courts on those particular credits, and they're not something you can just ignore from a litigation standpoint, so you'd have to defend their counter claims.

And so essentially most of what you have Celeste new stuff that's flowing in and out?

That's right that's correct.

Okay. Thank you.

Thank you sir for your question. Gentlemen, it appears there are no further questions at this time. Are there any closing comments you'd like to make?

Again, we appreciate all of you participating and listening to our commentary. We feel that the bank is continuing to get fundamentally better. We are building a franchise. We need to address our cost of funds, which is part of what we're doing, for us to improve our net interest margin, to improve our efficiency ratio, and to improve our return on asset, and that's going to take a period of time for us to do that, but we believe quarter by quarter we're going to get better as we go forward, and we do appreciate you listening to our story.

Thank you, gentlemen for an excellent presentation. This concludes the Banner Corporation first quarter results conference call. If you would like to listen to replay of today's conference, please dial 800-405-2236, and enter a pass code of 576707. Those numbers once again are 800-405-2236, with the pass code of 576707. I would like to thank everyone for their participation in today's teleconference. You may now disconnect.