Banner Corp (BANR) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Banner Corporation second quarter 2005 conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded Thursday, July 28, 2005. I would now like to turn the conference over to your speaker, Mr. Mike Jones, President of Banner Corporation. Please go ahead, sir.

Thank you, Angela, and welcome everybody. Thank you for joining us this morning for this conference call for our second quarter earnings. With me today is Lloyd Baker, our Chief Financial Officer, and Al Marshall, the Corporate Secretary. I would first like to start off with the paragraph that we're required to read from being read by Al Marshall which will be followed up by some comments by Lloyd Baker. So at this point, Al, would you please read that paragraph?

Thank you, 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 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 March 31, 2005. 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. At this point, Lloyd, I think everybody has a copy of the press release, but would you cover the highlights, please.

Sure. Thank you, and good morning everybody. Mike and I were talking earlier and the press release does pretty well cover all of the issues here in success, I think, probably is a better term than issues. But I will point just out a few things. As we noted, we did have a pretty good quarter. We made $5 million. That was $0.42 a share. Importantly, loan and deposit growth was outstanding for the quarter and really, as an acceleration of what has been going on for some period of time, loans were up 21% over a year ago. Deposits up 19%. Those numbers are consistent with the first quarter and, as I said, what we have been reporting for a period of time.

But if you look through the press release, I think you will notice that nearly every percentage increase that we note in there is accelerating from a fairly similar layout that we had in the first quarter's press release. So, as we note, deposit and loan growth through franchise expansion is really the strategy we are pursuing right now and our efforts are producing the expected results. Loan growth, in particular, for the quarter, $150 million. Deposit growth, $180 million. We are pleased that deposit growth did exceed loan growth. It is no secret that our strategy is focused on growing the deposit base to improve our profitability at the same time that we are having great success in the loan area.

We had planned on having an employee celebration for crossing the $3 billion threshold. It sort of happened so fast and we went by it so fast. We finished the quarter at 3 billion 138, I believe the number was. So growth is an important part of the story.

The other things that are in there. Again, the growth is the kind of growth we would like to see. Transaction accounts, savings and checking accounts up 31%. Non-interest bearing accounts up 44% over a year earlier. So it is the kind of deposit growth we would like to see.

We are also seeing strong growth in some of the higher yielding portions of the loan portfolio. Construction lending and some of our commercial business lending both having good quarters and good year-over-year progress. As a result, the net interest margin expanded by 4 basis points compared to the prior quarter. It is 10 basis points stronger than it was a year earlier. That expansion, while rising interest rates is playing a part in that expansion, and, it is affecting us really the way we anticipated with loan yields going up and deposits lagging just a little bit. The real factor though that is driving that margin expansion has been for the last three to four quarters now is that shift in the mix as we move more into loans and fund those loans more with transaction accounts.

A couple of other things to note, the non-interest revenues continued to expand deposit fees, in particular, expanding along with the growth in the balance sheet. And mortgage banking having a solid quarter -- as most of you know, we continued to have lower than most people anticipated long term interest rates contributing to continued strong activity in mortgage banking. And so non-interest revenues keeping pace and actually accelerating as well along with the balance sheet.

Now, on the other side of the ledger, we continue to see expense growth at a very high rate. We hopefully have made it very clear to everyone that that was part of our expectation. It is occurring. We continue to open a lot of new locations, a couple more opening in the next week. So, people involved with some of those new locations are already on board and in the expense equation and that along with some of the solid performance we are seeing are driving compensation costs up. Occupancy is fairly obvious as we expand our locations.

So growth is the strategy, expanding the margin through the right kind of growth is the strategy we are achieving the expected results there and we look forward to a continuation.

Just a couple of other things. Our nonperforming asset position improved during the quarter as nonperforming loans continued to decline and that ratio improved a little bit. That allowed us to continue to keep the loan lost provisioning at -- It's actually up by comparison to the prior quarter but down a little bit from the quarter a year earlier. That's an area that on a go-forward basis, we would probably expect to see a little bit of an increase in loan loss provisioning given the growth that we have seen but it is an area that was a positive contributor to this quarter's performance as well.

And the final point, I guess, that I would make with respect to the press release itself, we have noted in there our concerns about the Federal Home Loan Bank stock situation and the lack of dividend income for now, the first half of this year, which is in contrast with the performance a year ago. We’ve continued to monitor that situation but I think that at this point in time, what we can do is monitor it. I think the interesting thing I want to point to is that despite that give-up in earnings on the Home Loan Bank stock, the quarter's improvements on a year-over-year basis was solid and trends were all accelerating during the quarter.

With that said, I will turn the speaker back over to Mike here and look forward to answering questions.

Thanks, Lloyd. Just, well, I have one more elaboration of what Lloyd was talking about. It has to do with the increase in operating expenses. In the second quarter, we are hiring staff and have on board staff for new branches that are going to be opening at Fairview, Vancouver, Beaverton, Twin Falls and downtown Boise, in advance of those branches actually opening. That's a process of training and frankly we put them out in the field to start, get a running start, of the opening of those branches which does impact expenses significantly in advance of opening branches.

Other than that, the amount of mortgage loan originations, the commissions paid on that will have an impact on the amount of operating expense increase that took place in the second quarter. All and all, we think we are accomplishing our long range plan which is to improve our funding levels relative to our peers so that we can improve our overall financial metrics and the key point will be over the next several quarters is do we drive our cost of funds closer to that of our competitors. Because at the end of the day, that will prove whether the strategy is successful or not. With that, Angela, I think we are ready for questions from anybody in the audience that may have one.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press the star, followed by the one on your push button phone. If you would like to decline from the polling process, press the star, followed by the two. You will hear a three tone prompt acknowledging your selection. Your questions will be polled in the order they are received. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment please for the first question.

Our first question comes from Jim Bradshaw. Please state your company name followed by your question.

Good morning. D.A. Davidson. A couple of questions, if I may. First on the margin, Lloyd. We have been hearing throughout the markets you serve that Banner has been pretty aggressive on deposit pricing but the average cost of deposits only went up 20 basis points this quarter. I guess it is probably related to the mix. I wanted to hear your thinking on where you are priced and where you’d like to position yourself?

Sure, Jim. We have run some aggressive deposit campaigns in certain locations but I think that probably the factor that is missed by our competition in observing those rates is that there is a lot of that is tied to bringing in the transaction accounts associated with those campaigns and so we are opening new offices. We do want to get traffic through the door at those offices and we do some promotional pricing there. In general, our pricing has been pretty consistent with the market. And we are getting a lot of what I would, a lot of what we expected in terms of lagging increases on money market accounts, other short term transaction accounts that do have interest associated with it, and then again, as the press release points out, a very solid growth in non-interest bearing accounts as well. So the mix is helping. The lag as we ratchet up over time is helping as well and on the other side of the equation, the increases in fed funds and more importantly, the prime rate is moving the asset yield up at a slightly quicker pace.

You must be doing something right if you are getting your competitors' ire up. So, second question I had related to the one to four family loan portfolio, up a little bit this quarter. But I wonder if you could dissect the fixed versus adjustable, the duration, interest only, things like that in that portfolio.

Lloyd would have to talk to you about it. In general, Jim, we are keeping none of those loans in our portfolio. They are all being sold. We are doing no or very, very little interest only. I mean very little of that. Obviously, as rates start to move up, people get more interested in ARMS. But I mean, even today, with the one point fee, you can get the 5.5% 30 year mortgage. People are still interested in that 30 year fixed mortgage but we are selling them all.

Jim, this is Lloyd. There is some hybrid ARM type loans in that growth in the portfolio. As you point out, we did add some one to four family loans. But the bulk of what we originate, Mike is absolutely right. It is going out the door. We don't mind adding just a little bit of duration there. Because we have over half of the portfolio is in loans that are tied to prime or LIBOR and we need a little bit of a balanced mix there.

A couple of quick ones. As I heard your comments, Mike and Lloyd, it sounds like the rate of growth for compensation expense will start to level off a little bit here. But the FF&E or occupancy line will still rise a little bit as you get the rest of the branch network open. Is that a fair assessment of what the next quarter or two looks like?

It is. As I indicated earlier, Jim, we have hired the staff in advance and almost, and some parts of the staff in almost all those new branches that are coming up and in several of them that I specifically mentioned, the entire staff has been hired. So that should not continue in the third and fourth quarter as we go on. But I do point out to you that because of the size of our mortgage banking operations and the fact that those people are largely paid on a commission basis, that that does impact the compensation increases as it takes place quarter over quarter.

Yes, that was a big number this quarter too.

It was for us, yes.

Lastly for me, the construction portfolio really was materially higher this quarter. Can you talk about what the pipeline looks like and I presume still most of that's single family but are you doing any commercial or even any multifamily stuff in there as well?

The preponderance of it is in the one to four residential area and the preponderance of that is in what I call the more affordable price range. We have made a conscious decision to not be involved in the high end residential construction lending to any great emphasis. We have some but not very much and not as much as we had a year or so ago. We are doing some commercial construction lending and probably a bit more than we were doing a year ago at this time but the preponderance of what we are doing is in the one to four residential construction area.

It’s still skewed over here in the Portland market, is that right?

And Seattle.

And Seattle? Okay. Thanks very much. Appreciate it.

Jim? Let me say that, when I say Seattle, I used that word wrong. In the Puget Sound area, not just Seattle.

Broader market. Excellent. Again, thanks very much.

Thank you, our next question comes from Louis Feldman. Sir, please state your company name followed by your question.

Hoefer and Arnett. Good morning. Jim just got my construction question. In terms of the agriculture, obviously there is a strong seasonal factor there but are you seeing increases in commitments there at all?

We have some increase in commitments, Lou, but we are experiencing an interesting phenomenon. Agriculture hasn't been bad. We have about three or four exceptions but it hasn't been bad over the last few years and the farmers have gotten pretty healthy and we are seeing a number of farmers that are doing some of their production financing out of their own cash. So we haven't seen the build-up on our agricultural loan portfolio that we frankly anticipated and so, the commitments have increased moderately and the usage has not been at the level we thought it would be.

Okay. I missed your opening statements because I couldn't get the operator to log me in. Did you touch on why your cash was up, cash and due (ph)?

That's actually just sort of an end of the quarter phenomenon. Obviously, we had very strong loan growth the last day or two of the quarter. Or excuse me, not loan growth, but deposit growth. And once in awhile, that causes us to end up with a little bit of overnight cash.

So you'll spike on that.

It is just a spike.

Okay. Thank you.

Thanks, Lou.

Thank you. Our next question comes from Ramsey Gregg. Please state your company name followed by your question.

Good morning, guys. Sandler O'Neill and I have a few questions here. Just as far as the commercial loan side, was that from new relationships or draw downs on lines?

Both.

A combination of both, okay. Then tying into that, on the deposit side here as far as the non-interest bearing, is that pick up mainly tied to these additional commercial relationships?

You know, it is coming, the growth, the transactional accounts are coming across the full spectrum of what we are doing and it is much more retail oriented customers than we have seen in the past but it also relates to the companies that are banking with us now that weren't banking with us a year ago. So it is broad based which is what I was hoping would occur.

Okay. Then just touching on the margin very briefly here. On the last call, last quarter, you mentioned, which has actually happened, some incremental linked quarter margin expansion. So I would expect this to continue here probably through the remainder of the next two quarters?

We hope so. We are concerned, however.

We are always concerned.

I guess if you have the funding there.

We have told you for a long time that our interest rate risk posture is reasonably neutral. As the fed continues to move the way they have in a fairly predictable disciplined fashion, we see it impacting asset yields a little quicker than deposit yields. When those increases stop, we would expect that to, you know, a little bit of a catch up on the deposit side. Again, a lot of what is moving it, improving the margin here is the change in the mix.

Exactly.

Okay. Then, you know, just touching very briefly here on the operating expense side. I know you guys include that operating expense ratio in your quarterly reports. So is about 3% or slightly above a pretty good indicator here going forward, you think?

No, it is going to be lower than that. Probably in the third or fourth quarter. We are not going to operate at this level but I am going to hire staff in advance of opening branches which we've been doing and as a result of that, we do have some build up that takes place, particularly when we have a good mortgage banking quarter. But we will drop back down in the 285 to 290 range.

Probably next year then?

Yes. Hopefully you will see some of it in the third and fourth quarter also.

All right. Just touching on the reserves very briefly here also. You guys are down about 134 basis points right now. So is that, is there a point where you are going to say, this is low enough or is that something that is just really difficult to gauge at this point?

That's a really good question, Ramsey, and I am going to give you a slightly rambling answer to that. The answer we go through is an analysis that I think every financial institution goes through of looking at the quality of the loan portfolio and our loss experience over the last five years. We run the rolling averages we have with them and come up with what we think is a reasonable allocation based on risk rating of the various portions of the loan portfolio. That clearly will continue to improve as we go forward. And we are pretty confident that the level of losses that we are currently incurring with what we know today, we don't anticipate any spike up in those losses on a go-forward basis. Having said that, the growth in the overall loan portfolio causes that overall reserve as a percentage to that loan portfolio to decrease and the question then becomes, can we run the old analysis of it needs to be 1.3 or 1.4 or 1.2 versus the quality of the loan portfolio? And with the component that we have in it that is a little different from some people in the one to four residential area which we have virtually zero losses in a decade. It may be slightly lower than others. If the loan portfolio continues to grow at the rate it grew in the second quarter, we will have to increase our provisioning to cover the growth of the overall loan portfolio.

Okay. Thank you very much, Mike.

Hopefully that --

It answers it to an extent, yes it does.

Thank you. Our next question come from Ross Haberman with Haberman Funds. Please go ahead with your question.

How are you, gentlemen? We missed you at [Street.]

Sorry.

But just a quick question. A number of the banks there were discussing you moving and your endeavors in Idaho. I was wondering if you can catch us up there. What happened there in terms of growth over the quarter and what are the plans for the rest of the year in '06 in terms of loan growth and branching?

The first part of it, or the second part of your question which is the branching side. We currently don't have a street branch in southern Idaho and we probably got, I mean with a desk on a second floor location in two different towns, we probably have 25 to $30 million in deposits.

And how much in loans?

Well, let me get there just in a second. The second part, part of that is in the next nine months we will open four branches in the greater Boise market and in Twin Falls. We expect deposit growth to grow much more rapidly as we do that. We are very pleased with where we are. But it just takes a long time to get these branches built.

On the loan side, we are having exceptional success of growing loans in that particular marketplace. We've had good growth in the second quarter and frankly, we've had good growth since the day we moved into the market and I would expect that will accelerate as we get branches on the street.

Just to add one more piece of perspective to that, Ross, the first of those retail branches opens next week.

I mentioned a nine month period for those, but the first one is next week.

Where exactly are those going to be now?

The first one that will open is an on a street called Fairview in Boise. The second one that is most likely to open is going to be in Twin Falls and the third one that will be opening, this is going to be a contest between a branch in the fastest growing city in the state of Idaho, Meridian, versus downtown Boise. We have taken the first floor of a 12-story office building in downtown Boise and it will be the hub branch or the mother branch for those branches in that area and we think it will have a major impact on us. We have had great reception in that marketplace.

Can I just ask a question as to total size? Do you -– would do much lending in Sun Valley or McCall?

We do none in McCall and at the current time are doing none in Sun Valley.

Thank you.

Were you hoping to come visit us there, Ross?

It is always a thought. Especially in December, January, and February. Thanks again.

Thank you. Our next question comes from Kipling Petersen. Please state your company name followed by your question.

Good morning. Kipling Peterson, Columbia Ventures Corp. Just curious as to if you have a time line or if you think it's realistic to expect Banner at some point to get the efficiency ratio back into the mid to low 60s, your return on assets back over 1%, and your return on average equity up into the low teens.

The answer is yes. It is reasonable but it's probably going to be in the two to three year time horizon for us to do that, because we are going to continue this branch expansion.

Do you have a target for the total number of branches?

No, but I have a target of getting rid of borrowing some of the Federal Home Loan Bank. Or making them substantially smaller as a proportion of our liabilities.

Perfect.

I do not want, I need to elaborate that. We have put an internal limit on us that we want no more than 10 of our branches to be non-profitable at any one time. And we are currently exactly at 10 branches on a monthly basis that are non-profitable. Most of those, all of those are de novo start up branches that we have had. That will limit the number of branches we open.

Our next question is a follow up from Louis Feldman. Please go ahead, sir.

I thought the golfing was pretty good at Sun Valley this year. Deposit fee service charges. Nice 19% gain. This is definitely related to the strong increase in your transaction accounts?

Yes.

Is this sustainable? Are you encountering any increases in business credit backs from higher balances?

Well, you know, all of our business accounts go through an account analysis program that we have and as they maintain higher balances, yes, then some of the fees will drop away. If they don't maintain those balances, which is entirely possible as rates rise, then the fee structure will rise a bit more. It is a tradeoff that they run against their analysis. A lot of this is on the retail side.

Okay. So you feel this is a sustainable number?

We do. It better get better over the next several quarters. Or this whole strategy is worthless.

Okay. Can you comment on what you are seeing in terms of NSF (ph) because we've been seeing a lot of, a strong decline regionally in NSF fees.

I think the same thing is true with us. I think people are more disciplined.

Although that leveled out a little bit, Lou, that phenomenon was real clear in the first quarter and it sort of leveled off here in the second quarter.

Okay. 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 speaker equipment, you will need to lift the handset before pressing the numbers. Our next question is a follow-up from Ross Haberman.

I didn't hear anything in terms of possible acquisition as part of your growth strategy. Is that out, is that totally out of the picture? Is the de novo route the preferred route at the moment? Could you give us a feel of that?

Thanks, Ross. We actually continue to look at acquisition opportunities. They're being brought to us, of course, by various investment bankers, and frankly we get calls directly from other commercial banks from time to time that would like to join forces with us. The problem is the prices being paid in the Pacific northwest at the current time. There is no way that Lloyd and I can make this work to the point that we could ever take one of these to the board to recommend an acquisition and my history in banking over a longer period of time is, I have done a lot of acquisitions. But they just currently don't work for us very well. As a result of that, we have elected to do the de novo and the reason the de novo works well for us at the present time is because of the long term that a number of us have been in banking in the Pacific northwest. We have a lot of people that have worked for us in a prior life that we would like to have back working for us that are perfect branch managers in certain areas we are opening up. So right now, with those people available to us, de novo seems to be working. We, in general, can break even a de novo start-up branch in our system somewheres around the 11 to 15 month range and if we can continue to do that, that's a much cheaper way of doing it than it is through acquisitions for our shareholders.

I was just thinking about your much better currency and multiple and if that makes it a little more palatable or a lot more reasonable to look at some of these other deals given your improved currency. That's what I was sort of focusing on.

Improved currency obviously does help. But still the prices are just, they don't make sense to me.

We will never say never.

Okay. I am sure you won't. Thanks again, guys.

Thank you.

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

Well, thank you, people for listening to our second quarter results. In general, we are pleased with our progress that we are making. We clearly recognize that we are not a high performance bank at the present time. Part of that is deliberately by design as we try to build a deeper and more worthwhile franchise by building our core deposits and by building our distribution network to better serve our customer base. Part of it also is because of our high cost of funds which is the goal within this entity to drive down. We were disappointed with the growth that frankly I allowed to take place in the form of operating expense increases in the second quarter in anticipation of branch openings. But nevertheless, in the long run, I think this bank will be a lot better off for having done this. In the short run, of course it is a bit painful in terms of operating expense growth. But we are pleased with the overall progress. We expect to show more progress into the third and fourth quarter and clearly into 2006. So again, thank you for listening. We look forward to talking to you in another quarter.

Ladies and gentlemen, this concludes the Banner Corporation second quarter 2005 conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 and enter the reservation number 11032893. Once again, if you would like to listen to a replay of today's conference call, please dial 303-590-3000 and enter the reservation number 11032893. Thank you for participating. You may now disconnect.