Banner Corp (BANR) 2006 Q1 法說會逐字稿

Ladies and gentlemen and gentlemen, thank you for standing by. And good morning,.

Welcome to Banner Corporation first quarter 2006 conference call.

[OPERATOR INSTRUCTIONS.]

As a reminder this conference is being recorded Wednesday, 26th of April, 2006, and I would now like to turn the conference over to Mr. Mike Jones President and CEO of Banner Corp. Please go ahead.

Thanks, Mike and thanks to all of you for joining us this morning. We appreciate you taking the time to do that. We have in the room with me Al Marshall who is the Secretary of the Corporation and Lloyd Baker who is the Chief Financial Officer of the Corporation.

We need to start off first with our paragraph that will be read by Al Marshall, who's actually getting this down after several quarters now, so, Al, proceed.

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 yesterday and our recently filed Form 10-K for the year ended December 31, 2005. 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, what I'd to do is have Lloyd review some of the highlights and low lights that are in our press release and we'll have time for me to make a comment and we'll move into the question-and-answer period. So Lloyd, why don't you proceed.

Thanks, Mike.

I think I am going to have to struggle to find some low lights in here, but as the press release indicates, we're off to a nice start for 2006. I am used to coming to the first quarter conference call or going to the first quarter presentation of the board and normally having to discuss why fee revenue wasn't quite as high or margin wasn't -- generally as a result of the first quarter being shorter.

None of that makes a lot of sense given this morning's release. As you can see, we did report $6.8 million of income for the quarter, that is, a substantial increase over the prior quarter and certainly over the quarter a year earlier, a 44% increase in earnings compared to the same quarter in 2005. And as I said, an increase over the fourth quarter as well which is sometimes unusual.

The increase in earnings obviously reflects the dramatic improvement in net interest margin. We certainly anticipated that as a result of our restructuring transaction in the fourth quarter, but in addition to the restructuring transaction, the improvement in the margin and in net interest income in total, is a continuation of what's been going on for some period of time in terms of growing the size of the balance sheet and changing the mix of assets and liabilities, the restructuring transaction is just accelerating that process.

So the margin was up dramatically at 4.24 for the quarter at a 31-day 6 point increase prior to the prior quarter and 53 basis points compared to a year earlier. Again, particularly when we talk about compared to a year earlier, it is important to think about those changes in mix that are going on in the balance sheet.

Loan growth was very strong, continued to be very strong. We've been running at that 19, 20% loan growth for what seems to be about two to three years now. That first quarter loan growth actually accelerated just a little bit -- you can see the totals in the detail that we've provided where that growth was occurring and actually I would point that out that we did put little bit more detail into the numbers on page 6, reflecting the loan growth.

Deposit growth actually slowed just a little bit for the quarter and if I were going to point at a low light, I don't think it's low, a 16% growth rate, but by comparison to the year-over-year numbers, 19, 20% that we have been experiencing, deposit growth was just a little bit slower than it has been.

Revenues in particular or deposit fees at $2.5 million pretty much flat with the prior quarter, but up $0.5 million from a year earlier, again reflecting the significant amount of deposit growth that's occurred over that period of time. And actually backing up on the income statement for just one moment, credit costs, loan/loss provisioning at $1.2 million for the quarter right in what we've been doing for a number of periods now. We continue to have very good improvement in asset quality. You can see that non-performing assets are down now to $8.6 million in just 28% of total assets. So the asset quality situation continues to be good.

Net charge-offs for the quarter of just $204,000. I mentioned deposit fees, growth there, again, for a year-over-year basis reflecting the growth in deposits; mortgage banking revenues, pretty flat, compared to where they were a year ago, and in the prior quarters, and again we've been sort of maintaining a run rate there that is in that $1-1.2 million range pretty much quarterly, and I would anticipate that that would continue. Obviously mortgage banking is a little bit more challenging as mortgage rates continue to rise.

And the other good piece of news in the, and I call it the highlight in the operating statement is in the expense area. We had actually had a decline in operating expenses by comparison to the prior quarter, but maybe more to the point, compared to a year earlier, operating expenses were up 9%, as you contrast that with the growth in loans and deposits in that 19, 20% range, that expense control was a significant contributing factor. We, as we talked about for some time, we continued to invest in new locations and new operations, the expense growth that you do see, categories with growth generally are in the occupancy area but some of the other costs associated with that growth have become slightly more manageable in recent quarters.

So all in all, a very good quarter, a good start to the year. Nice margin improvement that we anticipated, and with that I think I will just look forward to answering questions, although I think Mike may have a few things he wants to say, first.

Thanks, Lloyd. I just would like to reaffirm a few things that Lloyd brought to the fore.

First of all he talked a little bit about the new branches and the organic growth within the company; since the beginning of 2003 we have opened 25 new branches and we currently have 60 branches in our system. And of those 25 branches, all, except 7, are profitable for us. And of those seven, all of them are amongst the ones that are the most recently opened. So all branches opened in '03, '04 and early part of '05 are profitable for us.

And we've had some great success stories in some of our branches, two of which I've just called to your mind, one of which was opened in East Vancouver which currently has about $48 million in deposits. It opened in August of '05 and became profitable very quickly thereafter. The best success story, and I've been in banking a long, long time was the one we opened in Boise, Idaho on Fairview Avenue also in August of '05; it currently has $39 million in deposits in it and it actually turned a monthly profit in the month of October of last year. And so we have had some great success stories with some of our branch openings.

I get often asked about our mix of businesses as to where it really is located and I just kind of give some totals that we frankly in the past have not, we've been a little negligent in telling you all of this, but if you draw our territory with the three areas of emphasis which is Puget Sound, the Greater Portland marketplace, and the Boise/Southwest Idaho marketplace, are our three areas of emphasis, and that's where you're going to see the bulk of our branch openings and so forth as we go forward.

But if you draw a line, the state of Idaho--excuse me, state of Washington and Oregon is divided by the Cascade mountain range and if you put Puget Sound and Portland together, 60% of our loans are in that area, which is west of the Cascades. We opened in the Idaho marketplace about two years ago now and we currently have 5% of our loans in that particular marketplace, leaving 31% of our loans in eastern Washington and 4% in eastern Oregon.

So there's a big change taking place in the geographical dispersion of assets within this company and we think that those are located in particularly high-growth areas that we should be able to look forward to considerable growth in the future. We're very optimistic about the economy of the Pacific Northwest but most particularly we're optimistic about the Puget Sound and Portland marketplace.

We think that Puget Sound is going to have a terrific next several quarters, almost irregardless of what else happens in the United States; and the reason of that is the Boeing airplane company is loaded with orders that they are going to be delivering for a long period of time here. And the second thing is that Microsoft announced a huge new expansion of their campus in which they're going to basically double the size of the campus and hire 12,000 additional employees in that particular Marketplace. Those are big engines to drive that economy and we look forward to that happening.

On the crop side, over in eastern Washington we're loaded with great crops as we speak right now. We've had a great spring. The crops look terrific and so we're expecting a big year for our agricultural customer base on a go forward basis. So, we're optimistic as we look forward into the future for not only us but anyone else banking in the Pacific Northwest because we think it is going to be a great numbers of quarters on a go-forward basis.

I've rambled on long enough; why don't we let it get back to the topics of real interest to you and open up the questions and answers, if that's okay, Mike.

All right, thank you sir.

[OPERATOR INSTRUCTIONS]

The first question of Louis Feldman of Hoefer & Arnett.

Good morning, nice quarter.

Thank you, Lou.

Two questions--three questions. First off, the $400,000 non-accrual delinquent interest collection in the first quarter, how much did that impact your margin?

Five basis points.

So a more normalized would be about 4.18, 4.19?

Right. And thank you for bringing that up. I meant to mention that and I forgot to.

Now, you talk about, you know, further expansion going forward, but the 4.18 is the better base point versus the 4.24?

Yes.

Okay. And second off, if Ag is having such a great year, is there better cash flow from your borrowers which is reducing the need for their drawing down on their credit lines leading to what is normally the seasonal decline on the Ag portfolio.

The Ag portfolio did decline in the first quarter of the year.

Normally, that's seasonal, but you said they're having a great year. Are the farmers more flush with cash leading to the conclusion that they don't necessarily need to draw on those lines?

Well we saw that phenomenon a little bit last year because our Ag lines last year were not drawn as heavily as they were in the preceding years. But, yes, they are in a pretty healthy condition but we expect to have significant increases in our agricultural credits during the current year.

Their big problem is going to be labor. This immigration debate that's going on in the United States is going to make it difficult for us to get the laborers in the field here in the Pacific Northwest. But they've got great crops coming, I mean really great crops coming.

Lots of wine for us later in the year.

Apples, everything.

Okay. And I guess, Mike, one last question, given your geographic dispersion, has there been any talk, and I would bet that Gary would be opposed to it, of moving out of the town so nice they named it twice in terms of the corporate headquarters.

You know what? I think this town serves us well given the three markets we're aimed at.

If we were -- and I've run banks that have been headquartered in Seattle, and I've run banks that have been headquartered in Boise. If you're headquartered in Seattle, Portland doesn't like you real well. If you're headquartered in Portland, Seattle looks down their nose at you. If you're headquartered in Boise, neither town has much to do with you. If you're from Walla Walla, and for a lot of reasons this town has a real cachet about it, now, we're starting to get a lot of tourists, you're okay when you go into all three of those towns. So we're doing just fine where we are.

OK. Thank you very much.

Thank you. Jim Bradshaw of DA Davidson has the next question. Please go ahead.

Good morning.

Hi, Jim.

By the way, Lloyd, I want to say thanks for the press release. You guys do a really good job of giving great detail for me and I'm sure others, too, so thanks for that.

Thank you.

One question I had -- total assets at the end of the quarter, versus the average, looks a little funny, that it's the average is a lot closer to the start of the quarter. Anything unusual that went on?

Run down the investment portfolio.

Total assets... I got to think about what you're saying. One second, Jim. Total assets.....

Were like 3.1, [2.1] at the end of the quarter and [3.0, 4.9] on the average, 9 million or so more than the start number.

Well, I think that we had a big month in March for loan growth, for one thing. And actually we had pretty decent sized month in March for deposit growth, as well. And in finally right at the end of December, I've got to think about how this plays into it, we had an unusual $26 million overnight position that we pointed out in the 10-K, actually.

Got it. Forgot all about that. I appreciate it. Mike, how is the hiring pipeline?

Hiring pipeline?

Yes.

Getting scarce.

That's bad.

Jim, you live in the Northwest and hiring and retaining and keeping and motivating loan officers is tough because everybody in the world is chasing after them. But so far we've done very well and we're very pleased that most people we've asked to join our organization have looked forward to doing that and so things are going along okay. There is not a wild or big supply out there though that you can pick somebody off the shelf.

Right. And then last for me, your 2-1 ratios holding up really well despite all the growth. I guess have you, as much as you like to forecast or prognosticate how do you think your tier 1 ratios will be holding up over the next year or so?

Well.

Great question.

That is a good question. Couple of things happened there is we achieved growth and we certainly anticipate continued strong growth that puts some stress on that. On the other hand, we actually have a little bit of excess position in trust-preferred securities.

Okay.

And so as other components of equity grow, we get to bring more of that back into the tier 1 calculation.

Got it. That's a handy little thing to have in your back pocket, isn't it? I appreciate it and congratulations. Just phenomenal success you guys are doing right now. Thank you.

Thank you.

All right, thanks. Mike McMahon, Sandler, O'Neill & Partners, Please go ahead with your question.

Good morning, gentlemen, and I echo those positive sentiments on the performance. Two questions, can you give us some color on current trends in DDAs and, second, can you remind me how many branches you have in that Puget Sound area and the potential for adding more? I notice in your press release that is an area that you've identified and I'm wondering how much more expansion in that market we might expect.

Let me tackle the first question, first. The trends in the DDA accounts, we are opening core transactional account numbers in absolute record numbers as we speak.

What happened to us this year and we think this is a seasonal thing that kind of relates to the part of the world we talk about, is we actually have a lot of accounts, but smaller balances in some of those accounts as some of the farmers are making their income tax payments and payroll tax--excuse me, property tax payments in these particular areas.

So it doesn't show up in the numbers through the first quarter as we would have expected it would be, but based on the number of accounts we're opening and suspect, we think it will follow the pattern we've had in the last few years where we'll have fairly large deposit growth in the remainder of the year 2006, and most particularly in the second half of the year 2006.

I knew you were going to ask me that. I should have known that answer, Mike and the number of branches we have in Puget Sound I have to get back to you about that and give you a very specifically accurate number, but we have approximately 25 of our branches are in that area. And I will get back to you with the real number as soon as today.

I appreciate that. Thank you.

Thank you, Ramsey Gregg, FIG partners. Please go ahead with your question.

Good morning, guys.

Hi, Ramsey.

First looks like obviously construction and land development loans were very, very strong once again in the quarter, and I calculated about over $100 million growth linked quarter total all in with construction and land development. I'm just curious -- is that going to be predominantly going to be coming from the Puget Sound?

And Portland.

So, a pretty good -- pretty much split between the two?

It gets pretty close, although the Puget Sound is going to be larger between the two.

Okay. That's kind of what I figured.

In both of those economies, the housing markets are still very strong.

Right. Okay. And as far as just one little nitpicky thing here, as far as the tax rate, is 32% pretty good going forward here?

It is pretty good. We go through this conversation, Mike and I have this conversation now and then because obviously our marginal tax rate's higher than that, and as we grow fully taxable revenues faster than we're growing our municipal bond portfolio, or our bank home life insurance, which we are in both cases, growing the taxable revenue faster than those items grow, and as we--we have some tax credits out of certain CRA activities that we're engaged in, the taxable revenue growth, the effective tax rate goes up, but it's a slow process.

Okay.

And it's also going to go up a little bit, Ramsey, as we continue to grow proportionately in Idaho, because Idaho has an income tax. Idaho and Oregon both, actually.

That's a good point.

Okay. Thanks for that clarification. One last thing as far as the margin's concerned, what was the margin for the month of March?

You know that?

Actually it was right around 4.24. It was surprisingly close to the quarterly margin.

[OPERATOR INSTRUCTIONS]

Our next question is coming from James Abbott from FBR. Please go ahead.

Hi, good morning.

Hi, James.

Hi, Jim.

I wondered just as a follow-up on that March net interest margin, does that include the recovery in the month of March, or was the recovery during another month? I just don't want to...

Well, that recovery was in March but we need to be careful here. We're dancing in some dangerous territory, because when you start annualizing one month's worth of activity and try to project that forward into a margin, the math can distort things pretty quickly there, so I would really spend more time focused on the quarter.

I think maybe -- maybe the point that you're all trying to get at is -- is the margin going to improve going forward or is it going to be under pressure? And the answer is both. To the extent we're successful in growing transaction accounts, non-maturity deposits, those sorts of things, and that we're successful in growing the higher yield and components of the portfolio, that speaks well to the margin.

That said, there is the pricing pressure on deposits in particular. Pricing pressure on both of the equation, is very challenging. I think the pressure on loan pricing right now is the worst I've ever seen. Which is ironic because everybody is reporting record loan growth. But also the deposit pricing there is this lag process that goes on in a rising rate environment, and then once the resistance to higher deposits is broken by the market, there tends to be a catch-up period, and I think we're somewhat in that, in terms of deposit pricing.

So for us, we're optimistic about our ability to grow those important components of the balance sheet, but we're also realistic that there is some pressure out there.

Okay. Thank you. I didn't mean to overdo the margin question in the month of March but I just wanted to make sure I understood. And then another question on the expenses, the other expense line I was looking at, was declined quite a bit linked quarter. There is probably not anything non-recurring but I thought I would give it a shot if there was anything in there that we should be thinking about.

There is a small non-recurring in respect to some recovered legal fees on that one transaction that we pointed out. I think that's about $150,000. Beyond that, it's really just some good discipline on expense management more than anything else.

And.

But offsetting that there is some operating loss we took on the first quarter on a wire transfer for $100,000 which we would also hope is non-recurring.

Okay. And what would you--I mean, that's one of the challenges it is nice to see overcome the asset quality challenge, by the way, but what would you say the size of the balance sheet you can achieve without really a significant increase in middle management or executives on the credit or lending side, et cetera?

I wouldn't imagine that you get your G&A-to-asset ratio down through cost cuts at this point, but rather through growth.

That's true. But I think we have considerable capacity in our system to generate the loan growth that is going to take place. It was clearly front-loaded as a part of our business plan and is still there.

There are certain areas in credit approval and certain areas in bank operations, as we start to get a lot more transactional accounts that could have some increase but not nearly the amount that would offset the revenue increases we expect to incur during that period of time. So I think we're feeling pretty good, you won't see big expense increases because of increased volumes. I think they're going to be far more proportional and hopefully little bit less than the revenue growth.

Okay. And as far as asset size, do you have any sense on what you might be able to achieve there?

What is our budget for the year? For asset size? About 3.48 at the end of the year. That's about where I think we'll be. Twenty days do not--or 25 days do not make a quarter, but the loan growth in the first 25 days in April would take--it takes my breath away and it would take somebody else's breath away, too, because we have really experienced significant loan growth in the first 25 days of April.

Those are great answers, but can you get the $4 or $5 billion in assets before you expand your infrastructure again? I mean, there is obviously going to be bits to add branches here and there along the way, but the next major increase in your infrastructure might occur at what asset size?

Probably 4.5.

4.5?

But we'll be adding branches.

Sure, sure.

We have lots of plans for additional branching and there is costs associated with that, obviously.

But those are at the branch level, not the infrastructure.

Thank you again and one other question an commercial real estate loans. What are you seeing as far as pricing goes? Is it typically prime plus a half? Prime plus a quarter now on that type of product?

Actually we're getting better pricing than that.

Better than that.

What we are not doing and have not been doing are term commercial real estate deals. We have basically stayed away from those unless they're owner occupied and part of a relationship. So we wouldn't be real helpful on the pricing of those.

Okay. Thanks again, guys.

[OPERATOR INSTRUCTIONS]

Management, there are no further questions at this time. Please continue with any closing comments.

Well, we appreciate all of you taking the time to listen to our story and see the progress and improvement that is taking place at Banner Bank.

We fully recognize we are better than we were in the first quarter of last year and better than we were in the fourth quarter of last year but we also recognize we have a long way to go to get to good performance, and we think we're on the track to get there.

There are some things that are probably going to be announced by us that will be favorable to the financial performance of this company in the next few months. So I would watch your 8-K announcements that are going to be put out here over the next two or three months. So we're looking forward to seeing and talking with you at the end of the second quarter.

Thanks for participating.

Thank you, sir. Ladies and gentlemen, this does conclude Banner Corporation's first quarter 2006 conference call. If you would like to listen to replay of today's conference call in its entirety, you may do so by dialing 303-590-3000, using the access code 11057624. That number again, 303-590-3000, access code 11057624.

You may now disconnect. Thank you very much for using ACT teleconferencing. Have a very pleasant day.