Banner Corp (BANR) 2004 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 on a listen-only mode. Following today's preparation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference, please press the star followed by the zero on your touch-tone phone. And as a reminder, this conference is being recorded today, Friday, October 22, 2004.

I would like to turn the conference over to Michael Jones. Please go ahead, sir.

Thank you, and welcome to all of you that are joining us for this conference call. We have with us in the room, Al Marshall, Secretary of the corporation, and Lloyd Baker, the Chief Financial Officer. Of course we will start off with our first most favorite paragraph to be read to you by Al Marshall.

Good morning. Our preparation today discussing 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; forecasts of financial or other performance measures; and statements about Banner's general outlook for economic and other conditions. We also may make other forward-looking statements in the question-and-answer 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(Q) for the quarter ended June 30, 2004. Forward-looking statements are effective only as of the date they are made, and Banner assumes no obligation to update information concerning these expectations.

Thanks, AL. Now I'd like to have Lloyd Baker give an overview of the third quarter results, and I probably follow that up with comments afterwards. Lloyd?

Thank you, Mike and good morning everyone.

As I was preparing for this morning's call last night, reviewing the press release that you should have in front of you now, I had a hard time getting past the obvious. Banner Bank is growing; Banner Bank is getting better, and that growth and improvement is producing an increasing amount of net income. For the third quarter the results of that growth and improvement was $5.2 million of net income, a 24% increase or $1 million increase compared to the same quarter a year ago and $614,000 more than the preceding quarter. Similarly, for the nine months, the first anyone months of 2004, net income increased 20% to just over $14 million, compared to $11.7 million for the first nine months of 2003. On a per share basis this growth produced 44 cents diluted share, up 37 cents per share in last year's third quarter and 39 cents in the previous quarter ended June 2004. For the nine months -- the first nine months of 2004, earnings per diluted share was $1.20 compared to $1.05 for this same nine month period in 2003.

I don't want to oversimplify the discussion or trivialize the hard work that produced those results, but from a financial reporting standpoint, the facts are fairly obvious. We had tremendous loan and deposit growth, as well as improving asset quality and changes in asset and liability mix, which are producing significant increases in net interest income, as well as increasing deposit fees. These increased revenues have been sufficient to more than offset a decrease in mortgage basking revenues and the higher expense levels associated with expanding our banking franchise.

Loan portfolio growth has been particularly strong for the past nine months, measured in terms of average balances, loan growth for the first nine months of the year exceeded $250 million. A quarter of a billion dollars in loan growth in nine months. Measured by end-of-period balances, total loans outstanding at September 30 had increased $292 million compared to a year earlier. Deposit growth has also been significant with total deposits increasing by $240 million in the past nine months.

If you turn to the income statement on page four of the press release, the results of this growth can be clearly seen in the increased interest income on loans, and more importantly, in increased net interest income, which is $25.1 for the quarter increased a $1.7 compared to the previous quarter and more than $5.4 million greater than the third quarter of last year. Similarly, net interest income for the first nine months of 2004 at $71 million had increased by more than $12 million compared to the first nine months of 2003. Now, as we point out in the press release, the current quarter received a nice boost from the collection of about $600,000 in delinquent interest, but growth in loans and deposits was still the most significant factor influencing the increase in net interest income. Growth in loans and deposits not only drove interest earning assets higher, but also resulted in changes in the mix of assets as increasing loans replaced a declining securities position, and the mix of funding liabilities changed as increasing deposit balances including non-interest balance deposits allowed for reductions in borrowed funds. These changes in the mix as well as continuing and meaningful reduce in the drag on earnings from non-accrual loans as a result of a significant improvement with respect to non-performing loans resulted in an increase in the net interest margin compared to the prior quarter, even if we exclude the recovered delinquent interest. This represents a nice reversal in the previous quarter. We had had a slight, I emphasis slight -- about five days at this point -- in the margin quarter for the ended June. That decline was reversed in the current quarter. Whether we look at the quarter just ended or the nine months year-to-date number, the improvement in net interest margin is encouraging in light of what continues to be a very challenging, very perplexing interest rate environment.

A few additional comments with respect to the income statement. Also reflecting growth in deposits in particular, we continue to earn increasing deposit fees and service charges. For the quarter just ended, fees on deposits were $2,000,148.00. That's a $250,000 increase or 13% increase over the $1.9 million that we earned in the same quarter a year earlier. Year-to-date deposit fees are up to $6 million compared to $5.4 million. As again, as I mentioned, reflecting significant growth in the deposit portfolio.

On a not so positive note, but also not a surprising note, mortgage banking revenues continue to lag year-ago levels. As we noted last quarter, and as I recall actually the quarter before, our mortgage banking activity is maintaining at a fairly constant pace. So certainly not the record levels of a year-ago, but continuing in, as I mentioned, being more than offset -- that decline being more than offset by the improvement coming out of other parts of the banking operation. On the expense side, we continue to see increasing operating costs as we expand both the balance sheet and the franchise.

So as I said earlier, from a financial standpoint perspective, the quarter's results are fairly straightforward to explain. That said, the improvement net income reflect a lot of hard work on the part of our employees. Growing the balance sheet, the service area and customer base one step at a time, producing quality banking products and services throughout an expanding Banner Bank franchise.

Finally, I should direct your attention to page six of the press release, where, in addition to a break down of the loan portfolio, we segment the growth by loan type. And we talked about it in previous quarters, but that growth continues to be well spread out throughout the portfolio. But in addition to that, you can see the continuing improvement with respect to non-performing loans and REO. For the quarter, total nonperforming assets declined by just over $5 million. And the 25% reduction from year end -- 25% reduction from the levels we had a year ago. Non-performing assets now represent 0.84% of total assets. In addition, on that page, you can see the information concerning our allowance, for loan losses, including totals for chargeoffs and recoveries which resulted in net charge offs of just $74,000 for the quarter. As a result of that activity and the provisioning act for the quarter, the allowance for loan losses had increased to $29.4 million at quarter end, or 1.48% of the loans outstanding. As I mentioned, continuing improvement with respect to asset quality in that improvement is showing not only in these balance sheet totals, but it is impacting the earning statement significantly as well.

As I said, the results are fairly obvious. Banner Bank is bigger; Banner Bank is better. We had a good quarter with improving earnings, and we continue to be optimistic going forward.

That concludes what I would like to say at this point in time. After Mike has had a chance to add a few comments, I look forward to your questions as always.

Thanks, Lloyd, for report. I, too, would like to echo that I think we had a significantly improved performance over the second quarter, which was improved over the first quarter, and I expect that to continue as we go forward. We had improvement, but we have a long ways to go to be good. We had good deposit growth during the quarter, we had particularly good growth in the transaction accounts, and what I'm really pleased about is also the number of accounts that are being opened in our bank, which is very important to us because we're going to need to fund the loan growth that's going to occur over the next couple of years. We're therefore going to need to grow our deposits even a faster rate than we currently are. We've gotten an excellent reception from our entry into the southern Idaho market. We started those branch operations in the Boise area in march, and I am pleased to report that the two of them had a profit in the month of September, which is nice to have. We've had great reception, and a number of customers have come to join us, and it's helped us with our profitability in the southern Idaho area.

We've also improved distribution throughout the sound region, and we're go to improve it even a great deal more with what we're what we're going to be doing in the fourth quarter and first quarter. This last year, we' have opened in Canniesburn, Oregon, which is a suburb of Portland; Twin Falls, Idaho; Boise; and Belltown, which is a part of downtown Seattle area. All of those branches have become profitable in less than a 12 month period. I'm talking about on a monthly basis, not on cumulative basis when I say to you. So, we're excited about opening some other opportunity branches for us. It will improve our funding and to lower our funding cost, which is an important thing for this bank to do to get to be a high performance bank. We, in the fourth quarter, have already had some significant improvement in our non-performing a assets. We've actually had recoveries thus far in the fourth quarter equal to what we had in the first quarter in terms of unrecorded interest income and and so forth or gain on sale of REO. Frankly, I expect that will continue sporadically over the next few years as we continue to work the previously charged down or charged off loan portfolios. It normally has happened in my prior life and a couple of other times, and I don't think this will be an exception because we have really good special assets department.

So with that, I think I'd like to open it up to questions. And so, let's do at that at this time.

(OPERATOR INSTRUCTIONS) Our first question comes from Lewis Feldman. Please go ahead with your question.

Good morning.

Hi, Lou.

It's nice to be on the other side of this, isn't it?

A little better.

Can you talk about -- can you give us guidance in terms of the margin? You made the comment there was margin improvement even without the collections. Can you give us guidance on what you believe a sustainable margin is is going into Q4?

Well, as always, Lou, I'm going to couch that guidance with not being very specific. We have seen improvement. We've seen improvement as a result of mixes, as I mentioned. We have consistently told you that we don't have a great deal of interest rate risk in our margin. That said, I don't know where rates are going to go, anyhow. They're certainly confusing to us at the moment. I think that, you know, we will continue to have a fairly stable margin. I'm hopeful that it will improve. The business plan lays out improvement through improving mix, but interest rates are part of that equation as well.

That said, how much of your portfolio -- given the recent moves, how much of your portfolio was able to move, and how much will likely move on another 25 base point increase from the set?

Well, if you look at the -- if you look at the page in the press release that shows portfolio yields and rates, you can kind of work the numbers as well as I did. Interest yield on loans was up. Part of that adjustments results from the increase, but -- or the recovery, I should say, of the $600,000. But part of it we're at 5 to 8 basis point increase in yield there. That isn't as much as the Fed has moved, so obviously not all of those loans are floating or not all of them have come off of floors if they are floating. The yield there was up, and certainly, if we see continued increases in prime, those loans that are floored, or have been floored, are much more likely to go up going forward. On the other side of the coin, you can see the deposit costs were only up 4 basis points for the quarter. That, you know, continues to be probably the biggest question mark with respect to margin. How Banner Bank and more to the point how all banks will price deposit portfolios as we continue to see changes in short term rates. As you know, though, the term structure, out beyond a couple of years, wee seen rates declines recently. So I'm talking about around in circles a little bit, Lou, I know that. The point being we don't have a great deal of interest rate risk in the position. We do believe that we'll improve margin as we improve portfolio and liability mix.

Okay. I'll step back at this point.

Our next question comes from Jim Bradshaw. Please go ahead with your question.

Good morning.

Hi, Jim.

Lloyd, could you -- the loan servicing fee line was up nicely, almost double in the quarter. Could you go through the components of that? Was there an MSR recovery there?

Go ahead, Lloyd, talk about it.

Well, there was some MSR charges a year ago, but in addition to what you would think of as normal loan servicing, there are fees that we collect for collecting payments for loan service items. That line item in our financial statement also includes late charges, and we had some -- we have late charge activity every quarter, and it was up a little bit, but not an enormous amount during the quarter. It also includes some prepayment fees on fixed rate loans, and we did have higher than previous quarters' activity there. And we also have some income in there as a result of some referral activity in commercial real estate lending operations that we have. That number is not -- that improvement is not just reflective of changes with respect to amortization of MSRs, although that number was down a little bit.

Okay. Good. A couple of others if I could. The miscellaneous expense was up $500,000 or $600,000 in the quarter, Q2 versus Q3. Anything unusual on there, or is that sort of the real run rate now?

I think that was a little bit high on the quarter. I hope it was a little bit high on the quarter. We had some expenses associated with growth, which will continue, certainly. We also had a little bit of expense there associated with real estate owned, which is kind of the unusual part of it. And some operating charges that were couple hundred thousand dollars higher than we normally expect.

Okay. Good. And one more. It looks like the year sort of been better than, certainly, than I was expecting, and maybe better than you were budgeting or expecting, too. Are you cut caught up on incentive accruals now, too, or do you think that will rise in Q4?

Earlier in the year we were running behind where we thought we were be, or otherwise running behind our budget. We are now beginning to approach our budgeted level, and some of the increase that appears in the compensational line in the third quarter is catching up incentives to reflect that improvement.

Okay. Good. And then lastly, Lloyd, did you reclass some consumer loans and one to four family stuff this quarter, or did I miss it last quarter?

We just had a slit off separately. Last year we used to have consumer one to four residential -- or last quarter one to four and then just pure consumer loans. We just put all the consumer loans together, the home equity loans, the bulk loans, et cetera.

Got it . Okay. Thanks, appreciate it.

Thank you. Our next question comes from Jonathan Ash. Please go ahead with your question.

I just got a question regarding the expenses. And obviously if the ratio will improve, better cost of funds. Is there anything else they can do, maybe rationalize the branch network? And I know you need the deposits, but are there remote branches that you might be able to sell off to someone? Thanks.

Actually, we don't have any remote branches that we'd be willing to sell. It's interesting, some of our remote branches we have, their fee income exceeds their operating cost by a lot. A good example is we have a branch in Floyd Roberts, which is a little tip that sticks out in Canada, its bank services charges far speeds its expenses and so there's no reason to sell it. We're not expecting to sell any of our branches. What will happen is we do have, to your point, excess capacity as we exist today in our branch system. That is working the streets to bring the deposits in. And therefore, as those deposits come in, and I'm pretty confident they will from our neighborhoods, those operating costs will look much better. The increase in compensation expenses that you see is largely driven by incentive accruals that were made in the third quarter as we improved, and frankly in anticipation of what we expect in the fourth quarter.

Thank you.

Thank you. Next question comes from Ross Habermann. Please go ahead with your question.

How are you gentlemen? Nice quarter.

Better.

You're getting there. You touched upon the operations in Idaho. I was wondering if you could elaborate a little bit on that. Where are they up to in deposits and loans? And what is your expectation over the next 12 months in terms of growth there?

We are actually, right now, Ross, going to through a budgeting process as it relates to all of those operations. Frankly, they're being revised upward because of the success we've had in those particular market places. In terms of outstanding loans in that area, I think it's about the $60 million, $50 - $60 million level. We'll actually about $14 million in deposits. And we don't even, at this point, as you think of a bank branch,have one of those there. So we have desks and loan offices. So it's -- we expect that that will ramp up significantly over a much longer period of time. Not next quarter, not next year, not five years from now. Our goal is to have a major market share in the greater Boise market place.

How many specific branches are planned for Boise, and will you go to some of the surrounding areas, Caldwell, Emmett, Napa, as well?

I'm impressed, Ross. You know the names of towns down there. The answer to your question is, we currently have by board approval, a branch in Boise, a branch in Meredian, and a second one in Boise inside the city limits is under consideration. If that one got approved, there will be three in Boise. There are going to be others over a longer period of time to do what I just indicated we are going to try to do. On top of that we have a branch in Twin Falls. We have no plans to go to Emmett or Caldwell or anything like that. We may well, someday, go to Napa, which is really kind of a bedroom community of Boise.

Okay. Thanks again. Nice quarter.

Ladies and gentlemen, if there are any additional questions press the star followed by the one at this time. As a reminder, if you're using speaker equipment, you will need to lift the handset before pressing the numbers. Our next question comes from Ramsey Greg. Please go ahead with your question.

Good morning, guys.

Hi, Ramsey.

I actually just want to talk about the branches in the sound area. I'm wondering if you have a team of lenders set up and if their specialty is CNI or real estate or what the plan is there and if you expect to see much much loan growth in the fourth quarter. I'm not even sure when the branches are going to be opening in the fourth quarter.

Well, they're going to -- the ones that are in this press release are going to open very late in this quarter. There won't be operating costs increases associated with them in the fourth quarter to speak up, and there won't be a lot of totals that come from them either. But, on a go-forward basis, to your question, Ramsey, we have people in place in those branches when I call a three-pronged effort. First of all, as relates to loans, we want to have CNI loans from that particular area. Not always will we have CNI lenders in each of those branches. But we will have a lending team in the general area. We're also very interested in expanding our one to four four residential construction in that particular area. We are very good at that. We are as good as anybody at that. We will get a good reception from the builders when we have distribution in their areas that they're building. The last one that we really want to work on is the consumer loan side. We are going to work hard in our area to do consumer lending out of these branches. Some of these are in areas where we should be very successful at that.

Great. Thank you.

Mr. Jones, there are no further questions at this time. Please continue.

Thank you all for listening to our third quarter results. We're pleased that they're an improvement. We certainly recognize we have a long ways to go. The only thing I would caution you are two things -- don't read too much into the operating costs in the third quarter. There are some unusual items in there that we hope will not repeat. I think Lloyd alluded to one, which was an operating charge of about $180,000. Frankly, it was a mishandling of some checks in our organization that were written off for the quarter. We're not entirely certain that we won't actually get that money back. But we decided to write it off in abundance of caution. Secondly, there was a charge to REO property. I am of the mind that probably isn't in total vogue with GAAP, that even though we have appraisals and market values on properties that exceed the value, if they're not moving, we're writing them down. And we've started that process. So that we can have a process of making sure that we don't have any big surprises on a go-forward basis. Lastly, in the compensation area, the body count in the organization did not increase that much during the third quarter. In fact, it's a very nominal increase in terms of numbers of people working for us. It has more to do with incentives that are being accrued for that will be paid in perhaps in early 2005. On the other side, we have already in this quarter booked and banked recoveries of interest and/or gains on sales of properties equal to what was recorded in the third quarter. While we can't promise that's going to happen on every quarter go-forward basis, it will happen periodically over the next couple of years. So with that, I appreciate the opportunity to chat with you all. We hope we have better result results to report in the fourth quarter, and we look forward to that call at that time. Thank you.

Ladies and gentlemen, this concludes the Banner Corporation third quarter result conference call. If you would like to listen to a replay of today's conference call, please dial (303) 590-3000 followed by the passcode 11010735. Once again, if you would like to listen to replay of today's conference call, please dial (303) 590-3000 followed by the passcode 11010735. You may disconnect and thank you for using AT&T teleconferencing.