Banner Corp (BANR) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Banner Corporation First Quarter 2005 Conference Call. At this time all participants in the listen-only mode. Following today's presence instructions will be given for question and answer session. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded today, Thursday, April 28, 2005. I would now like to turn the conference to over to Mr. Michael Jones, President of Banner Corporation. Please go ahead, sir.

Thank you for joining us this morning. We're of course going to use our normal format. We'll start off with Al Marshall, Secretary of Corporation who will read a paragraph relative to statements in the conference, followed by Lloyd Waker who will discuss the first quarter results and move into some comments I will make and have some questions and answers. With that, Albert, would you go ahead?

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, forecasts and financial or other performance measures and statements 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 10K for the year ended December 31, 2004. Forward-looking statements are effective only as of the date they are made and Banner assumes no obligation to update information concerning its expectations.

Thanks, Al. Lloyd?

Thank you, Mike and good morning everyone. Like Mike, I want to thank all of you for joining us this morning, but I have it tell you it feels like they just did this two weeks ago rather than ninety days ago. I know this first quarter is a couple days shorter than the third and fourth quarter. I think the pace of activity surrounding the new branch openings and growth plans as well as the seemingly never ending process of closing the year end books under Sarbannes Oxley has caused the first quarter to just blow right by me. As I said it feels like we just did this, but we're happy to do it again.

As a press release indicates, Banner Corporation continued to experience solid deposit and loan growth in the first quarter of 2005. This growth resulted in positive earnings performance by comparison to the first quarter of 2004. As indicated, net income increased by 8% to 4.7 million or $0.39 a share compared with 4.4 million or $0.38 a year earlier. Importantly net interest income continued to expand, net interest income after 29.2 million increased by 11%, reflecting similar 11% growth in earning assets year-over-year and a stable interest margin. I'll come back to the net interest margin in loan and deposit growth in a my r minute.

First I want to address what might be a slight surprise to some of you, the 10% decline in earnings compared to the fourth quarter. The four factors that primarily contributed to the decline in which in combination were enough to temporarily offset the positive effects of strong earning asset growth. I already alluded to the fewer number of days in the quarter. The day count change takes about $400,000 out of our net interest margin by comparison to the fourth quarter. Also has an adverse effect although more difficult to quantify effect on deposit fees and mortgage banking revenues.

The second factor relates to our earnings or in this case, in case of the current quarter a lack of earnings from our investment and Federal Home Loan Bank stock. For Banner Corporation the swing in earnings on this stock was approximately $200,000 compared to the fourth quarter and for that matter was about $400,000 compared to the first quarter of 2004. Like many we're disappointed by what has happened with respect to earnings on Federal Home Loan Bank stock and we are closely monitoring that situation.

The third factor is related in our miscellaneous operating expense line which in the fourth quarter was reduced by about $550,000 as a result of gain on sale of a piece of REO. Unfortunately we were unable to replicate that performance in the current quarter, and so by comparison we're down or should say by comparison operating expenses appear to be up in that area.

And finally, as we previously announced the current quarter was burdened with the cost of five new branches locations in Puget Sound as well as our the start up costs associated with international banking operation. While we had some costs associated with these locations in the fourth quarter, at approximately $600,000 after tax in the current quarter, they were very near what we expected but about double what we recorded in the fourth quarter.

Of course the only unexpected factor in these four was the negative effect from the Federal Home Loan Bank stock and as we discussed the investment in the new locations, while initially expensive, is an important piece of our long-term strategy.

Back to the balance sheet. The net and net interest margin. As we noted loan growth continued strong for the quarter. We were up about $69 million on loans which was on an annualized basis was 13% growth. We had a particularly impressive quarter with respect to construction and land development area and solid growth in commercial and multi-family real estate, and commercial business loans. By contrast and not surprisingly, agricultural loans experienced seasonal contraction in front of a new growing season. We would certainly expect that con traction in ago loans to reverse itself here as we move through the spring and summer months.

On the other side of the balance sheet, in significant part reflecting the new branches we had a very good deposit growth. Total deposits were also up $69 million, matching the loan growth. And that was a 14% annualized growth rate in deposits. More importantly we continued to grow the right kind of deposits, nearly all that growth was in the form of transaction and savings accounts, including almost $17 million in non-interest bearing accounts. Transaction accounts increased at a 28% annualized rate during the quarter and at quarter end were 28% higher than a year earlier.

I would be less than honest if I did not tell you there was some promotional pricing associated with some of that growth, however and I know Mike will want to speak to this subject. The type of core deposit growth that is at the heart of our franchise expansion strategy and makes us willing to make the investments that we currently are making in additional staff and facilities. Of course over time our expectation is that this core deposit growth will result in a lower relative cost to funds and improved net interest margin.

With respect to the margin, as I already noted, the current quarter and for that matter many of our recent quarters was marked by stability despite rising yields, rising interest rates, rising loan yields and cost of funds, the margin at 3.71% was up 1 basis point from a year ago, down 1 basis point from the prior quarter. The lack of dividend from the Home Loan Bank took about 2 basis points out of the margin by comparison to the fourth quarter, and about 4 basis points out of the margin compared to the first quarter a year ago. On a go forward basis, we continue to believe our margin will be primarily affected by our success at improving our funding mix and that the degree of interest rate risk we have is a result of maturity mismatch and repricing issues is very modest. That said, I must add my normal, those of you that listened to me a number of times know I alway do, my normal caveat with respect to competitive pressures on both loan and deposit pricing, in both areas that pressure continues to be intense. Finally, I guess I will point to the mortgage banking activity. It was down slightly in terms of our gain on sales for the quarter, but was very consistent with the about five or six quarters worth of activity now and looks to be a very sustainable pace similar to agricultural lending, I think there is a little bit of a seasonal factor there and we are optimistic that results throughout the spring and summer and fall will be a little stronger on mortgage banking.

So as I said, a reasonably good quarter, certainly by comparison to a year ago, down a little by by comparison to the fourth quarter but not for. with the exception of our Home Loan Bank Stock issue. not for reasons that we don't understand or didn't anticipate, and we continue to look forward to improving results as a result of the expansion activity that I know we're going to talk about here. That concludes what I have in the way of prepared remarks. Mike?

Thanks, Lloyd, just a re-embellish a little bit. The five branch facilities that we opened are all located in the Puget Sound area. They're in Kent, Washington, Mercer Island, which is part of the Seattle area, Linwood, Edmunds, and South Everett, and they're an important part of the expanding our distribution in that particular marketplace, and frankly are aimed at areas where we can get core deposits at a much lower cost than we currently have on our balance sheet. We are excited about the progress these branches have made, particularly our South Everett and Mercer Island branch and for that matter our Kent branch. They're off to very, very good starts.

We had our shareholders meeting a couple days ago and talked about the branches that we opened up in the 12 month period before that shareholders meeting and all of those branches, with exception of one and there are six of them in that category, have turned profitable within a twelve month period and we expect the vast majority of these branches to the to do the same thing. We're optimistic as we go forward that the earnings hit from this will be of short term in nature but important for us to drive down the cost of our funds which is considerably higher than that of our peers in the Pacific Northwest, due primarily to our funding mix of borrowed funds and not having enough transactional accounts.

With that statement, why don't we get to what you want to talk about and open it up to questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question comes from Greg Ramsey from Sandler ONeill and Partners. Please go ahead with your question.

Hi. Good morning, guys. As far as the branching here going forward and you touched on the five new branches you opened up. In the release you talked about branching in Vancouver, Walla Walla and Boise and moving forward with four additional Idaho branches. Could we talk about the timing of those branches and staffing and who you found and all of that stuff?

Sure. The next branch that is likely to open is actually one here in Walla Walla and we will be pulling staff out of two grocery stores into that facility. It will be a net savings of staff. That staff is on board as we speak at that particular point.

The second one to open is a branch located in Vancouver, Washington, north of Portland. That will be sometime late in the third quarter. Let me guess, say August 15 or something like that. And that staff with the exception of a teller and a new accounts person has been on board and has been with us for quite a period of time. We're actually operating out of a temporary facility up the road, so the staff increases will not be great there and we already have the people on board. We will get off to a running start with that facility. We already have -- I don't think that is correct but somewhere around $10 million in loans and $4 or 5 in deposits to start with that one.

The largest branch that we talked about is the one that will be in Boise Idaho and my best guess is in downtown Boise Idaho. It's under construction as we speak. That it will be in December and/or January or February of next year before that gets opened. The owner of the property is more optimistic than that and thinks he will have it done by the first of November, but I am not thinking that's going to happen.

Then lastly behind that of course are two other more suburban branches in the Boise/Twin Falls marketplace and they will be right towards the end of the year.

Thank you, guys.

Thank you, sir. Our next question comes from will you Louis Feldman from Hoefer and Arnett. Please go ahead with your question.

Good morning. Can you touch on what the changes were in your non-performing for the quarter?

Actually, we had some collection on a couple of agricultural accounts and added an additional agricultural loan to the category of non-performing.

So the 12% increase had to do with an agricultural loan?

Yes.

Okay. In terms of do you feel, Lloyd, and I think you touched on this, but you're cutting in and out for me. Do you feel that you were about negatively or neutrally GAAPed at this point not negatively GAAPed where you feel your yield improvement's will be offset by the costs of funds improvements at this point in time and that we should be relatively stable on the margin for the balance of the year?

Yes, Louis. I do they we should be. We're optimistic that the way we are moving with the mix could help the margin throughout the year, but in terms of the GAAP or rate sensitivity, full, it is pretty neutral. We have hovered right around the same levels for quite a few quarters then. Our projections would continue to keep us that way again with the caveat. The caveats surrounding our success, changing the deposit mix and we're optimistic there and on the other side of the coin, what's going on with pricing.

Thank you.

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

Good morning.

Good morning.

Wondered if I could get color on the timing of the loan growth. It looks like a strong month of March maybe, if I am looking at the end of period earning asset balance versus the average for the quarter. There seems to be a skew much towards the end of the quarter. Is that accurate?

Actually, the earning asset growth I think was spread out. It may have been a little bit weighted at the end of the period. We had I think the area that I have been more interested in is we had fairly strong last couple weeks of March on the deposit growth side, and that could have affected the earnings as well and we have been encouraged by the deposit growth in the month of April to date.

On those deposits, I am consuming it is across the board or heavily weighted towards promotional accounts in some way?

We're heavily weighted towards transactional accounts.

Heavily weighted towards transactional accounts, so that should have margin benefit in the second quarter then, I suppose.

Second, third, and fourth quarter if we continue to do this.

Also, a question on any borrowings that might be repricing in late in the first quarter that may have maybe affecting the second quarter or conversely if there were any borrowings repricing in the second quarter in the early part that would affect the second quarter?

We have if you look into our 10K where we schedule out our home loan bank advances as well as our trust preferred securities, you will note that we have a fair amount of those borrowings that are short term in nature and are continuing to ratchet up in cost. You can see that in the cost of deposits increasing for the quarter. We do also have some that are higher rate, longer maturity deposits that are coming due and so we look forward to those rolling off and there is a reasonable amount of that through the summer, but we also know we have a lot of short term stuff, so it cuts both ways unfortunately.

Okay. All right. That helps me on that area. A couple other quick items. The securities balance, how would you anticipate that trending throughout the rest of the year relatively flat or down or up?

I would say flat to down. That's been part of our strategy over the past year now if you look you will see that portfolio is continued to shrink. There is less opportunity in our to make money in the securities market right now and equally important our loan growth over that period of time is has been substantial and it's the area we would rather invest the funds.

Is it based on you primarily just allow it to run down as the cash flows come in?

That's correct.

And last question is related to provision expensing and so forth, just curious as to how the watch list might perform. I know the non-performing assets went up but saw improvement in the watch list?

The classified loan list continues to move downward and our past due loans continue to move -- actually that's not correct. At the end of March they moved up from the end of December slightly, but they're still at a very acceptable level. Knowing what I know today, my guess is the provisioning that you will see going forward is about the same as it was in the first quarter.

Okay. Thank you very much. Those are my questions. Thanks again.

Our next question comes from Ross Haberman from Haberman Funds. Please go ahead with your question, sir.

How are you, gentlemen? I was wondering -- I got in a little late, Lloyd, I know you touched upon Boise and I could you give us a little sense of how much of your loan growth is coming from Idaho and what's your expectations are for that segment of your loan business?

Idaho loan portfolios that initially came onto our bank in south Idaho is primarily agricultural or more agricultural more oriented type loans, and the growth that took place in the first quarter on our balance sheet was probably not supported much by growth from Idaho as those loans continued to pay down in the first quarter. They are annual production loans. And the other growth that's taking place there is the CNI business in the Boise market place, and that growth has been good but did not offset the pay down that took place on the agricultural loan.

The four or five new branches you touched upon, how many of those in Idaho?

Five that are open now are all in Puget Sound over in the Seattle area. Later this year or probably more likely the very first of next year there will be branches being opened in the Boise marketplace. Boise and Twin Falls.

And just going back to the five in the Puget Sound, what is the total cost of those and what's your hopes for in terms of break even time and deposit dollars for those, if you want to give an aggregate dollar amount that would be great.

The five branches for all intents and purposes opened plus or minus the first or second week of January of this year. Actually one was a little later than that because of a building problem, but those five branches probably have deposits today of about $40 million and we would expect that that deposit growth will grow in those particular branches at the end of the year to somewhere in the $75 to $80 million range, and overtime all of those branches particularly the one on Mercer Island, Kent, and all we expect will be $50 million over a three or four year period.

Each?

Each.

You're saying you hope to go from 40 to 2.25 over two or three years?

And we hope to be or we should be somewhere north of $80 million at the end of this year.

And how much did it cost you in aggregate to get them up and going?

The branches themselves are different. The -- we actually own the facility in Kent. We own the facility in Edmunds and we own the facility in Everett. Those are on our books and cost of those was about $10 million, 8 or 9 million. Somewhere in that area. Let's be safe and say $7 million for those branches, and the other two, Mercer Island and Elderwood are leases.

That will hopefully be a shorter break even? Or lesser dollar cost?

Actually, the branch that I predict will break even first is Mercer Island followed by South Everett, and it happens to be the nature of what's growing in that particular branch in terms of deposits.

Did I understand you, Lloyd, to say that roughly there was -- the quarter included roughly $600,000 in after tax expenses related to the drag of these new branches? Was that accurate?

That's correct.

Plus our start up of international department as well.

The start up was included in that number.

And that should hopefully get smaller over the next couple quarters?

Well, we would certainly hope so. Caution, because we're going to bring on some other branches over the next few quarters, too.

How many more just final question, how many more are expected to bring on between now and the end of '05?

Two for sure and in the southern Idaho branches, we're a little bit at the mercy of some construction schedules and contractors.

At least two.

At least two that we'll open as Mike said earlier in the middle of this summer, actually the one here in town could be early as the end of the second quarter.

Thank you. Appreciate the time.

Thank you. Our next question is a follow-up question from Louis Feldman. Please go ahead with your question.

Two questions actually. First off, your charge ups were higher than your provision. Now, in the past you stated that you would probably be utilizing your work the provision down and since you already stated on the call that you expect provision levels to be at the same for the balance of the year, do you have any anticipated guidance in terms of charge off do you expect to continue to work this down? Will you provide to a greater level based on loan growth?

Actually, our net charge offs were less than our provision. If you net the recoveries against it, and I would be very surprised if we ever have a quarter where our charge offs exceed our provision. As to where the reserve ends up, has a lot more to do with specific analysis of our past due loans, our non-accrual loans, trends we see in the portfolio, and the level we have of what's called an unallocated portion that reserve. We have fairly clear understandings from our accounting firms and regulators about the size level they would like that to be at.

Okay.

Let's put it this way, the sides level they don't want it to grow beyond.

That's the new trend. The other issue, Lloyd, you made the comment about FHLB stock which you stated in the past is your single quote unquote largest asset. What action do you feel you would take there in the problems continue?

Our options there, Louis are pretty limited. At this point in time very unclear to us and to everybody just what the situation will be surrounding the stock at Home Loan Bank. I think the one thing that is clear to us is that it will not be a significant contributor to the bottom line for some period of time, so it will -- we've had discussions about whether it is an earning asset or not from a practical standpoint for the next number of quarters, we suspect not. Beyond that, I am sure you're aware there are issues at the bank that the banks trying to deal with themselves right now, and we have no greater insight into those than anybody else.

They actually have not even released their 2004 financial statements yet. Which we would really like to see.

I guess everyone is looking forward to that supposed speech at the conference in June.

I will bet their service people are not looking forward to it.

I know they're speaking at OBA. I don't know if they're speaking at WBA.

I should say you're all aware, we are following it very closely. We actually had a meeting on Monday with the interim CFO of Federal Home Loan Bank of Seattle, and his representatives relative to what is going on there because we do have some concerns about that stock.

Thank you, sir. [Operator Instructions] Our next question is a follow-up question from Ramsey Greg. Please go ahead with your question.

Just one more thing here as far as the none interest income items. I know, Lloyd, you touched on mortgage banking revenues and the expectation there. As far as those going up a bit here going forward but I guess there was a small decline in the deposit fees and other services. As far as going forward here should we expect those to see a good ramp up here for the rest of '05?

You know, if we continue to have success growing our transactions accounts, we would anticipate seeing some improvement there. To be honest with you though, Ramsey, we have been a little bit surprised by deposit fee revenues for the last two quarters. And I have read a few statements from some of our competitors and it appears that there may be a small change in customer behavior going on here with respect to off the OD-NSF fees, so we're watching it closely. We will see if that in fact is the case. I don't anticipate large growth there, but again, if we're successful with transaction growth, accounts, you would expect some.

Have you had to waive any deposit fees, have you been waiving deposit fees at all?

No, not that at all.

It clearly in the first quarter is a change in behavior by our customers.

That's not unique. Okay. Thank you.

And in finally the fewer day count does impact that just slightly. There is a few less business days for people positive overdraw their accounts.

Right. Okay.

I actually, Ramsey, expect that because we are growing at a record rate transactional accounts in terms of both numbers of accounts and dollars that just because of that we will see some increase in our service charge and deposit accounts even with the customer behavior changes.

And one more thing here. I don't want to keep you guys. As far as once again good construction and land development loan growth, and I assume then the construction side there a lot of that is going to be from residential construction; is that correct.

That is correct. In that scenario we maybe should expand on just a little bit because we continue to see incredibly robust housing markets. I know the GDP numbers came out this morning and you saw them and it was softening in the first quarter, but the housing activity in -- particularly in the Seattle and the Portland market areas continues to be extremely robust and so we're encouraged by that.

Our builders can't finish the houses before they're all gone. We have virtually no finished inventory.

Okay. Great. Thank you.

Thank you. Our next question is also a follow-up question from James Abbott. Please go ahead with your question.

Just quickly on the deposit service charge income. I was wondering if it might be explained possibly to business accounts that are on analysis maybe at rates rise?

That has a small effect. And it could be a small component of it as well. It appears to be more in the area of over draft charges.

Okay. Thanks again.

Thank you. Management, at this time there are no further questions. Do you have any further comments?

We just want to say we appreciate all of you taking the time to listen to our first quarter results. Parts of it were -- I am encouraged with and feel good about. Other parts of it I am a bit disappointed.

I know Lloyd talked to you about what the net market is but I frankly think with the change in funding mix appearing to takes place in our balance sheet particularly on the transactional accounts that I expect the margin to grow even taking the Federal Home Loan Bank dividend out of the equation. And I would expect that to grow over the next several quarters.

I was disappointed in the level of revenue from that net interest income in the first quarter personally. But I am expecting it to be better. We are a bit of a seasonal bank and that has to do with the agricultural part of it, and the early first quarter is probably the low point in the amount of agricultural loans outstanding. They will come on, and we're looking forward to having stronger second, third and fourth quarters as we go forward.

Thank you to listening to us. We will look forward to talk you to you in about ninety days.

Ladies and gentlemen we appreciate your participation on today's Banner Corporation first quarter 2005 conference. You may now disconnect. If you would like to listen to a replay of today's tell conference please dial 303-590-3,000 and enter the pass code of 11027824.