Banner Corp (BANR) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Banner Corporation second 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. Should anyone need assistance at anytime during the conference, please press the star followed by the zero on your touchtone phone and as a reminder this conference is being recorded today Wednesday, July 28, 2004. I would now like to turn the conference over to Mr. Michael Jones President, and CEO of Banner Corporation. Please go ahead sir.

Thank you very much and welcome everybody. We appreciate you taking your time to listen to our second quarter earnings conference call. Unfortunately I have to start of with this wonderful paragraph that Mr. Albert Marshall, Secretary of the Corporation will read, he had been practicing all morning.

Good morning. Our presentation today discusses the standards of business outlook and will include forward-looking statements. Those statements include description of management plans, objectives, or goals for future operations, product , forecast of financial or other performance measures and statements about Banners' general outlook for economic and other condition. We also may make other forward-looking statements in the question and answer period following the management 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 is released today and our recently filed Form 10-Q for the quarter ended March 31, 2004. Forward-looking statements are effective only as of the date they are made and Banner assumes no obligation to update information concerning this expectation.

Thanks Al. That will be followed by Lloyd Baker, our Chief Financial Officer who will review the results for the second quarter and then afterwards I will have a few comments.

Thank you Mike and good morning every one. I have not practiced for hours, but have a few comments here as well. In preparation for this morning's call, I not only reviewed the press release you have in front of you this morning, but I also looked back at what we had to say at the end of last year and more recently at the end of the first quarter. As you would hope and we would expect the message and results have been very consistent. We've been talking for some time now about expanding our franchise, growing loans and deposit and improving our asset quality. All of these objectives are evidenced in this mornings report and while is not our custom to provide guidance generally everything we suggested in the forward-looking statements in the first quarter's report have in fact occurred. In particularly we noted that franchise expansion and other growth initiative would add to the revenue generating power of the balance sheet despite anticipated pressure on the net interest margin in a changing interest rate environment.

Further, we indicated,expected increase in overhead cost associated with those growth initiatives as well as our belief that mortgage banking activities are lower than a year ago, should be at sustainable levels. And importantly we noted improving asset quality indicators particularly with respect to net charge offs. Again as I noted, each of these trends are evident in this morning's report. I am not going to detail all of the aspects of this morning's report in my prepared remarks, and of course like always I look forward to answering questions. But, I do want to make what I believe are a few significant observations. Of course the first most obvious is net income which is $4.5m or $0.39 a share is at 10% for the quarter and at $8.9m year-to-date is up 18% for the first six months in 2004 compared to a year earlier. While these numbers are slightly less than most analyst estimates, it maybe disappointing to some.

We find them reasonable given the continued challenging interest rate environment, declining mortgage banking activity and most importantly the significant investment we are making in franchise building. This investment is particularly evident in our increased compensation, occupancy, and advertising expenses and in the additional commitment to property, plant, and equipment on our balance sheet. The early fruits of this investment can be seen in the loan growth on the balance sheet, which was up 15% year-over-year. For me, the most striking way to frame this loan portfolio growth is to review the average balance data on page seven in the press release. For the quarter just ended, Banner bank's average loan balances increased by a $108m. This followed an increase of $51m in the first quarter and resulted in a portfolio that averaged $225m more than in the second quarter a year earlier. As can be seen on the table on page six, in the current quarter, we had growth in every category of loans, led by construction and development loans, commercial and multifamily real estate, and agriculture loans. Construction and development and real estate lending remained strong despite a rising interest rate environment. And while the increased agricultural loan balances reflect some seasonal effects, they also reflect significant efforts by our corporate banking and new Southern Idaho loan production operations.

Equally impressive for the quarter was the growth in average deposit balances, which increased by $106m over the first quarter, and averaged $178m more than a quarter -- the same quarter a year earlier. That represents 8% year-over-year deposit growth, but probably a more important 9.6% growth for the first six months of this year. On a year-over-year basis, our balances were a little bit inflated a year ago by the mortgage banking refinance activity and the effect on a number of our customers' deposit totals. The 9.6% deposit growth year-to-date, as I said $106m in average balances for the quarter is really significant. This growth reflects a substantial boost from recently opened branches, as well as some remodeled facilities, as well as increasing awareness of Banner Bank as a result of our continuing advertising campaigns. First, all of this growth contributed to a significant increase in net interest income, particularly compared to the same quarter a year earlier. Net interest income was up 17% for the quarter on a year-over-year basis and 17% year-to-date compared to a year ago.

However, as we expected, the net interest margin did come under pressure in the current quarter declining by five basis points compared to the first quarter of this year. This pressure on the margin is likely to persist near-term as funding costs are expected to rise in response to increasing interest rates. Interestingly, while funding costs declined for the quarter by one basis point, I think June of 2004 represents the first month in well over two years that we reported to our Board of Directors, an increase in the average deposit expense. So, clearly rising interest rates are a fact that -- are now with us and as we have been saying for sometime, it does appear that the continued decline -- significant continued decline in deposit costs has just about run its course. Nonetheless, for the quarter, net interest margin was still eight basis points stronger than a year ago, and for the first six months five basis points stronger than a year ago. The final observation I want to point out is the bank's net charge-off experience, which significantly reflects on our improving asset quality. While non-performing assets remained stubbornly high at 1.05% of total assets, they were down dramatically from the 1.48% a year ago and 1.20% at the end of last year. Net charge-offs were only $298,000 for the quarter, a very manageable number. That $298,000 represents an annualized rate of charge-offs of less than seven basis points and makes us hopeful with respect to loan loss provisioning on a go-forward basis. So, as I mentioned, I look forward to answering questions, the quarter certainly reflects strong growth in the balance sheet, in the franchise, and improving earnings as we move throughout the rest of the year.

Thanks Lloyd. I'm just going to highlight a few of his comments for you and then we will open it up to questions and answers, hopefully. Asset quality, from my point of view, were in a range now where I believe it's appropriate for a commercial bank, it's growing us loan portfolio. Our level of charge-offs are relatively modest for the first six months, to the point that without -- except for the large loan growth that we have experienced particularly in the second quarter, we would have probably lowered our provision even further because we now view the quality of our loan portfolio. The excellent loan growth that Lloyd talked about actually is accelerating. It accelerated in the second quarter from the first quarter.

On an annualized basis, that's about a 25% growth rate for frankly I don't want to be involved in a bank growing the loan portfolio much larger than 25% annualized, because as is already coming through the loan. We've also had good deposit growth of the second quarter on an average balance sheet annualized at about 24% increase, we're pleased with that. But more important in that we're pleased with the number of new accounts we're opening, and the dollar amount that are coming in with those new accounts. And even more importantly than that they're beginning to come in the categories of deposits they carry with its lower interest cost than they do relative to CD's and some other forms of funding. An area that Lloyd touched down is mortgage banking, frankly we're somewhat disappointed in our performance in that particular area, because we can and we will do better in that area.

Now we want to approach last year's results, but because of our large and strong commitment to one-to-four residential construction lending, we didn't get what I thought was our fair share of those influence, as those homes are being sold. We've put some programs in place to make sure we get more of those, which has been our tradition in the past. So, we expect to do better mortgage banking on a go-forward basis. Deposit growth is very important, if needed to fund what will be the future loan growth, which will take place within this organization. And we need to move away from using borrowed funds, as they -- as such a large proportion of our funding base, and begin to fund the deposits from our neighborhood. That's very important for us to improve our margin, therefore would have a major impact on improving our income ROA, ROE efficiency ratio, etc. We to our competitors frankly in our cost of funds give up about 75 to 90 basis points.

Our yields on our loans are as good as anybody, but our costs of funds are significantly higher than our competitors in the Pacific Northwest. It's because of two reasons, one our use of borrowed funds as a funding source proportionally compared to the others is higher, and secondly, because of the mixed deposits in this institution particularly in transactional accounts that lowered than our peers. Those are the two areas that we're trying to emphasize, it is growing our deposits becoming less reliant proportionally speaking on the use of borrowed funds. And that is the goal to drive our organization to become a sure commercial bank that a good return, good results to our shareholders, and do a good job in our area. So, as we tell our employees, we want to grow deposits from our neighborhoods.

We're making good progress in the second quarter based on the number of new accounts being opened, and we're looking forward to it, continued growth in that particular area. It is the reason that drives us to open the new branches that we've been opening, this bank historically did not pay a lot of attention to retail transactional accounts, we're now. We're having great success, thanks to some lack of effort from some of our competitors in those particular areas. And we look forward to making progress over a long period of time in this area to significantly improve our margin, and therefore the other ratios I've talked about. And at the end of the day that's the hallmark of a good commercial bank, when you're funding your operations from your own neighborhoods, that's our goal, we will continue to go for that in the future. And to be honest with you, it has impacted our earnings on fund of short term, as we've opened this number of new branches, and it will affect us for a period of time going forward, as we continue to grow our deposit base. With that, I'd like to open it up to questions if we could.

Thank you sir. Ladies and gentlemen, this time we'll begin the question and answer session. If you have a question, please press the star followed by the one in your push button phone. If you'd like to decline from the following process, press the star followed by the two. You will hear a three tone prompt acknowledging your selection. Your questions will be pulled in the order that they are received. If you are using speaker equipment, you will need to lift the handset for pressing the numbers. One moment please for our first question, our first question comes from Jim Bradshaw. Please go ahead with your question.

Good morning, couple of questions, first of Lloyd, the bond portfolio had quite a bit changed this quarter, and really looks like you funded a lot of loan growth out of the available for sale portfolio, and added to help the maturity and such. Could you give me a little bit of color on what your thinking is in the bond portfolio?

Your observation is correct. It did decline during the quarter, we were fairly cautious, we were as we noted funding a lot of loan growth, and redirected some in the funds in that area. But equally we will be in cautious, the move into help the maturity, we did take a small portion of our mini-school bond portfolio that we concluded was really no likelihood whatsoever that we would sell out of those securities, and move them into the help to maturity portion in the portfolio, but we were cautious more than anything else there Jim. And we did, as I said, did use some of the fund load of fund loan growth, which was as we noted, very strong.

Couple of other question if I may, your advertising costs were up 65% to 70%, year-over-year, and even up on a length to quarter basis. Are you even of the throttle now there, and trying to get a feedback for how well the advertising is working, or could we expect that number to keep going up?

Jim, I had first got here, we did a top of the mind awareness survey of Banner Bank in our service area. And to be honest with you, and to be kind about -- we registered zero. And so we have been pounding away at this market now for two years, three about a year and a half. And we just finished a survey of top of the mind awareness of people, and you are all familiar with what that this. If you are thinking about changing to a bank, who do think of, and it's an unaided response that you get from that. And I was very pleased to report that we are now fourth on that list, and I like that position, given my goal of growing the deposit portfolio. Are we going to back off in the third quarter? Well not many people advertise that much in the summer time, because frankly nobody is listening. But, in the fourth quarter, we'll back again doing some advertising, perhaps not at the same level, because we did do some extra advertising, as we headed in to Boise marketplace to introduce the name Banner Bank to Boise.

Excellent. And then my last question was related to the pretty strong deposit growth, could you characterize regionally, where it came from, and or is it seasonally higher also in the second quarter excuse me?

Well, we're an agriculturally based economy for want of reserve. We'd love to tell you, we are only in the metropolitan markets of Seattle and Portland, so seasonally deposits historically are higher in the fourth and first quarter, but with an agriculturally based economy. So, I don't know how much seasonality's that are in it. Our growth is coming across the board, but more importantly, it's coming in transactional accounts or lower interest rates types of accounts. And so we're hopeful that we can continue that trend of getting more transactional oriented accounts into this bank and be less CD reliant.

Thanks a lot guys. I appreciate it.

Thank you. Our next question comes from James Abbott. Please go ahead with your question.

Good morning, gentlemen.

Good morning.

I was hoping, I could get a little color on the securities. It looked like -- based on, comparing the average balance to a two point average, it just looks like most of the securities put there for the majority of the quarter, and then maybe dropped off fairly significantly at the end. It looks like the end of period balance is about $70m below the average balance. Is that I guess and looks like the loan growth, given the sort of the same analysis, looked like the loan growth came in a little bit towards the front of the quarter. Is that an indicative that the average earning assets growth in the third quarter should be somewhat muted, compared to the strong growth that we saw at this quarter?

No. I don't believe so. Your point is correct. The securities balance is on an end of period were particularly high at the end of the first quarter, on an average balance. As you noted for the first and second quarter, they were relatively flat. To add some increases during the first quarter and some run-off during the second quarter in securities. Loan growth occurred throughout the quarter, and continues strong in July, and the pipeline is -- feels good.

So, do the securities portfolio, would you anticipate that it remains roughly at this level, and so you would get loan growth, sort of continued at the same pace. You are looking at $100m to $120m of average earning asset growth in the third quarter?

That's probable there; the $100m to $120m will probably be where our loan growth is.

Okay, I'm not necessarily holding into that. I'm just trying to get a sense as to the trends obviously. And then the second question I had was related to some of the durations of things, and do you have the duration of the securities portfolio, roughly?

Roughly, 4.5. Yes.

And on the borrowing side, I know that you've run that down a lot recently, which is obviously positive. Do you have a duration on that?

I don't have the number on that. These borrowings are considerably shorter however.

Okay. Is this there are lot of overnight in the portfolio, I am trying to get at the interest rate risk of the borrowings portfolio?

The borrowing portfolio is kind of barbells to be honest with you, with the fair amount of overnight and fair amount of stocks. But they are in maturities a little longer. But, further it is sensitive to rising interest rates, to your point.

And then also on that same vein the, just looking forward these loans that you put on during the quarter, did you characterize that as extending or shortening the directional portfolio or maybe no change to the portfolio. What are the terms of the loans that are coming on?

I don't think there is any change in the characteristic worth coming on.

Okay.

It certainly heart-beating. We are not doing a lot of term financing.

Okay. So, most of the variable rates, they are . Are the floors an issue for you guys as rates rise, I think you mentioned something about that in the press release, I just don't know how much.

They are an issue, to point we've made for a long time, this asset yield has been enhanced in the declining rate environment by floors although the level of interest rates floors has eroded over time as rates remained low. But it does present an interesting interest rate risk challenge in that, there are loans that have variable rate characteristics, but they may not move with the first, second or even third move out of the Federal Reserve to the degree that truly floating rate loans would.

You are not alone. I think probably, approximately 90% of the companies are following that same situation. So, in your modeling or anticipation, you would think it's at least 50 before it really sort of start to see benefit to the Weighted Average yielding portfolio? Or is it a 100 or --?

Well, I think you see it benefit it, but it is not a one-for-one benefit to --.

Okay, and on the loans that are being added during the quarter compared to the Weighted Average yielding portfolio, are they, is the pipeline -- is it -- are you looking at something that might still be dilutive in the third quarter or do you anticipate that it will close to break-even at this point or rising or accredited to the yield?

I actually think if our loan portfolio yield at 656 in the second quarter, what we are putting on the books today is not much below that.

Okay. Wonderful. Thank you very much. Those are all the questions I had.

Thank you. Our next question comes from Louis Feldman. Please go ahead with your question.

Thank you. Lloyd, would you talk about the overall sensitivity on your cost to funds at this point in time. Mike made the comment that you guys have paid up a little bit more. Is this likely to continue for a while despite your efforts to try and transfer some, a lot of your deposits towards the transaction accounts, and based on this, where do you think you the margin squeeze is going to go and then conversely, in terms of the year new underwriting, where do you see your yield on the loans going, because we've had other institutions have some nice moves to the upside on the yields on their loans, but I didn't see that here.

That was a whole bunch of questions, Lou.

That was two questions.

You know that what is going to happen with deposit pricing, I think is really an interesting guess at this point in time, because it is driven so much by customer behavior and management behavior not only in this institution, but across the board. I suspect that the interest sensitive transaction deposits will, there will be a fairly reasonable lag before there is an appreciable increase in those costs, but as I pointed out June was the first month that we've seen cost of deposits actually increasing. It is not alike but we've had it as an extended period of them declining. How--?

Yet the interest rate moved did not occur until to the tag end of the month, so but the move was in advance.

Yes, the Fed didn't move till the end of the month. That means the interest rates move started about mid-April.

May.

Yes, and occurred and accelerated overtime and it shortended, it had some effect on cost. That is the $64 question right now. Do we expect our margin to be under some pressure, yes. Am I willing to quantify it for you right now, no, I am not going to do that. Loan yields should improve here a little bit but as we pointed out, we are adding loans that maybe of a higher credit quality that have a little wet margin in some of them previously been there and everyday that passes, some high rate yielding asset that was, about some period of time ago, goes away. So, the margin is under pressure, how quickly transaction interest rates and transaction pricing adjusts would be an interesting thing to observe, we are certainly going to try to be disappoint in that process, as I expect the rest of market will as well.

Okay. And then one follow up on that. In terms of deposit funding -- Mike, it appears that you're trying to go after a somewhat of a two-pronged approach. You're obviously, definitely interested in expanding your transaction accounts to C&I lending, yet you also continue to expand your retail base, which is obviously higher cost deposits. Which are you placing more emphasis on?

Both. I mean, our asset and growing deposits in this bank, but I don't necessarily view on long run retail deposits being higher than C&I deposits. When your grow through the sweeps and everything you have with the more large sophisticated corporate customers. This bank needs to grow deposits, that's the value of our franchise. No body in the world is going to pay me from borrowings for the Federal Home Loan Bank, and so we're going to grow deposits and I think it's very important that we have the discipline to growing in our neighborhood. And so, we're out-knocking on doors and we're going to bring them through the door. Well, we're going to go after both, then in the past, the bank did not feel it's necessary to go after retail deposits, I do. I think, that's a very strong part of keeping the bank stable and healthy on the going forward future basis. I think, corporate and treasurers have gotten very sophisticated. And as you have to offer the various cash management products you need to compete in that area. The level of deposits generated from the C&I customers that stay on your balance sheet and confirm the other things are getting less and less, proportionally.

Okay. I've got another question, but I'll sit back for right now.

Thank you. Our next question comes from Ramsey Gregg. Please go ahead with your question.

Good morning, guys. I think, you got quite a few branches from Wells in the quarter and a piece of undeveloped land. Basically, I know that those are getting a six-month moratorium on those branches. Also, when will these branches open? And I think, the cost was $4.5m, but I'm not sure about that, I think that's what it was. And then also what your plans are for expansion of second half of '04 and '05?

All right, the second half of '04 -- you're correct, we did acquire three branches from Wells Fargo and a piece of land that has the permits to build a branch in the Bellingham area. All the branches that we acquired are located in Puget Sound. Those branches could technically open on October 25th of this year. We do not expect to that, those branches would probably open in the early part of the first quarter of next year. The actual branches that will be opening in the second half of this year are fairly not modest. We have a rebuild of our Yakima main branch where we have a large market share that will be completed in the fourth quarter, and other than that, I'm not aware of a branch that will open -- unless we open early on those three acquired branches.

Okay. So, it's likely to be opened in the first quarter of '05?

Right.

And then, going over to ask the quality, I know that it just would -- certain NPAs were certainly high. Just trying to get idea of what's the kind of -- I assume that, I guess last quarter was, half were -- I think it add credits. I mean, just kind of what's going on there with the NPAs -- non-performing loans?

Same half are still in agriculture loans. Several was recurring, but are still not accrual and are performing well. Tops most particular farmers look particularly good this year. So, we're optimistic relative to them making some progress during the course of the year. But, those types of credits, which frankly the risk of loss is relatively minimal, but the period of time to work out of it is longer, are the reasons that the NPAs are staying at the level they are. But, to be honest with you, if you're going to be growing your loan portfolio, I wouldn't expect us to get down to a NPA portfolio of 25 basis points. I just don't think that that's being realistic.

Okay. Thanks.

Thank you. Our next question comes from Louis Feldman. Please go ahead with your followup question.

Thank you. Can you talk, Lloyd, can you talk about the books value in relation to the Securities Portfolio or did the entire decline in the tangible book value come from the shares repurchased or were there any, did you swing from an unrealized gain to an unrealized loss in some of these portfolio?

So, we did not repurchase shares to any degree at all, leave it.

You report what you purchased? Turn me to the page.

It is very minimal amount.

Okay. Its is a very minimal amount.

The swing in book value per share does relfect the one-fifteen adjustment to be held to

For the comprehensive welcome --

Sale securities and in the comprehensive income, yes. Net deduct actually you can see that on the balance sheet in the comprehensive income number which one about $10.5m.

Okay, and then on the agricultural side, you stated that it is your intention to expand that overall portfolio. specifically in Idaho? Surely not necessary as a percentage of the total loan portfolio but certainly, in dollar terms.

The agricultural loan portfolio has grown in absolute dollars and as a proportion of the loan portfolio over the last several quarters. And we expect on a go-forward basis that the absolute dollar level of the agricultural portfolio will continue to increase, particularly now that we are penetrating with some success, the Boise and the Twin Falls market in Idaho. That's the nature of what's there.

Okay, and how do you show your risk exposure on -- how u diversifying the risk exposure of this or other new concentrations within this portfolio?

Most of all of these customers that are coming on board are customers that which I was a President of before. I have known these customers for a long time. These are natural marginal farmers. As the crop concentrations, we don't have a crop concentration now. If we were only banking the self-Idaho market, we would be very, very top interested in the price of potatoes and what's happening relative to the freeze of potatoes. But the tailor ---

GR .

Yeah, well exactly. But I don't worry about him but the point I make is, we have a very large diversity of crops, animals that we are financing on an agricultural sense. And we have very good people doing it that have been in the business for a long time.

Okay, thank you.

Thank you ladies and gentlemen. If there are any additional questions, please press the star followed by the one at this time. As a reminder if you are using speakerphone, you will need to lift the handset before pressing the numbers. Our next question comes from Peter , please go ahead with your questions.

Yes, I would like to go back to the opening of the branches and taking longer than the blackout period, I am wondering what the business plan behind that is?

Well, not many people are interested in opening banking accounts during the holiday season. It's not a, historically speaking, its not a time on people do that sort of things. The time for us, we will have some people on board at that time, but the actual opening and the big push from our public view standpoint will take place, lets guess sometime early in January and the reasons for that of course is that's when people tend to make those kinds of decisions.

Okay and can you speak to the M&A activity that's been going on in the area?

We have no discussions going with anyone at this time, either up streamer or down streamer?

Mr. Cobbler. Do you have any further questions?

No, that's fine, thank you.

Thank you. Our next question is a follow-up from James , please go ahead with your follow-up question.

Hi, one of the quick follow-up housekeeping item on the non-interest income, the other line decline link quarter by that a penny per share and I was just curious if there was some color there, as to list there was a one time lift down, it looks like its little bit lower than it historically has run at. There was a contract account going on behind the scenes or some like that, that caused its offset?

On our next quarter basis what's going on we have some partnership investments in CRA qualifying partnerships and those partnerships actually, they report losses and they come through the income statements or in the miscellaneous income line. There is an offsetting of fact, although not always equal and it wasn't quite equal in the current quarter in the tax provisioning, but that from a linked quarter basis is primarily what happened during that other income.

Okay. Alright, that makes a lot of sense. So, is that actually -- this is maybe my naivety here, was that one of the biggest elements of why you tax rate is at the track that it is?

It's one of the elements; it's not necessarily the biggest, the municipal bond portfolio contributes to that, bank owned life insurance contributed to that.

Okay. Alright. I appreciate it. Thank you gentlemen.

And the other thing that you should remember, I am sure you know this is the -- when you look at other banks not headquartered or operating in the state of Washington. The state of Washington has no corporate income tax, and other banks in other states tend to have that on that particular line, whereas ours appears up above in operating expenses under P&L taxes.

Okay, thanks.

Thank you, gentlemen, there are no further questions at this time, please continue.

Well, we appreciate you all taking the time to talk with us. We are relatively pleased with the progress. Obviously we need to improve our net income and we will on a go forward basis, but in general, we're pleased with progress and the growth of the balance sheet, growth of the number of customers in this particular organization, and the improving asset quality within the organization. And so with that, we look forward to talking to you at the end of the third quarter. Thank you very much.

Thank you. Ladies and Gentlemen, this concludes the Banner Corporation second quarter results conference call. If you like to listen to a replay of today's conference call, please dial 303-590-3000 followed by the pass code 11003070. Once again if you'd like to listen to a replay for today's conference call, please dial 303-590-3000 followed by the pass code 11003070. You may now disconnect, and thank you for using AT&T teleconferencing.