Banner Corp (BANR) 2006 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Banner Corporation second quarter 2006 conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today, Thursday, July 27, 2006. I would now like to turn the conference over to the President, Mike Jones. Please go ahead.

Thank you, everybody, and thanks for joining us for our second quarter conference call. I have here sitting with me in the room Mr. Lloyd Baker, who is the Chief Financial Officer of the company, and Mr. Al Marshall, who is the Secretary of the Corporation. We'll start off with the normal paragraph reading relative to forecast, and Albert will do that in a second. That will be followed off by Lloyd giving you an update of the second quarter and a review of the earnings release that was put out yesterday afternoon. And after that I'll have a few comments and then open it up to questions to all of you. So again thank you for joining us, and Al would you please read the paragraph.

Good morning, everyone. 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 the recently filed Form 10-Q for the quarter ended March 31, 2006. Forward-looking statements are effective only as of the date they are made, and Banner assumes no obligation to update information concerning these expectations.

Thank you, Al. Now Lloyd, won't you review the second quarter press release, please.

Great. Thanks Mike, and good morning everyone. I'm going to agree, I guess, with Jim Bradshaw from last quarter's conference call that most of the information that you need is in the press release, and I'm not going to recap it too much. As usual I look forward to questions.

We did report earnings of $9.4 million or $0.77 for the quarter. Obviously those earnings were significantly affected by the bond claim insurance settlement that we had announced earlier, which did amount to $5.3 million--$5.4 million actually before tax—credit to our operating expenses and contributed about $3.4 million or $0.28 a share to the bottom line.

But aside from the bond claim, I think that there are a lot of interesting things that occurred during the quarter that are worth pointing out, and certainly the most significant of those has to be loan growth. We had a lot of kidding around the office trying to decide how to describe the loan growth—exceptional, strong, a number of other adjectives. But any way that you look at it, the second quarter loan growth, which was just over $250 million, was significant. It put loans up 22% year over year, and on a year-to-date basis brought our loan growth to an annualized rate of 32%. For the second quarter the annualized rate was 40%.

So that growth was significant and had a great deal to do with driving the results for the quarter. Now also contributing to the quarterly results was the effect of the restructuring transaction that we did back in December, and when you look at the numbers year over year, the effects of that transaction, along with the balance sheet mix changes that continued as a result of loan growth and deposit growth on a year over year basis, all contributed to a strong quarter.

The other interesting numbers—again deposit growth as I mentioned. Deposit growth lagged loan growth. We were up about $163 million in deposits for the quarter. On any normal basis that would be considered a strong growth, but it certainly was less than was required to fund the loan growth, and so we were obligated to go out and borrow some money to fund that loan growth. And there's some implications for that in the net interest margin, which did contract from the fourth—excuse me, from the first quarter, down to 411 basis points—but again, reflecting the restructuring transaction in the mix changes was 36 basis points wider than a year earlier.

So loan and deposit growth both continue transit that have been very positive. In the deposit area, we saw a shift in our mix which is not—I think is similar to what we're seeing from a number of other of our competitors. As higher interest rates have caused consumers to change their behavior somewhat, moving more money into certificates of deposit and higher yielding interest-bearing accounts. And if there's an area of disappointment for us in the balance sheet changes it certainly is in the non-interest-bearing accounts, which actually contracted just slightly now. A little bit of that is seasonal, but again, part of that in our belief reflects changes in customer behavior.

Notwithstanding that, we continue to be very encouraged by deposit—by the growth in the number of deposit accounts. We continue to open accounts at record levels, reflecting the branch expansion that we've been engaged in for the last couple of years, and the strength in some of the markets that we're dealing, and some really good work by our people out in the field.

So deposit growth, again, year over year 19% increase, up 22% on an annualized basis for the first half of the year and 27% in the quarter that just ended. That loan and deposit growth of course contributed to significant growth in revenues. Revenues were up 16% for the quarter over the same quarter a year ago. They're up 17% on a year over year basis, mirroring that growth in loans and deposits. One of the areas of revenue growth that I wanted to point out, which we think is significant, is the growth in deposit fees and payment processing, other service charges, which were at $2.9 million, are 20% higher than they were for the same period in 2005. The growth in accounts that I mentioned and the growth in balances is driving that activity, and we're really pleased with that.

Operating expenses expanded, as we suggested they would in our last conference call and in our last press release. But the thing that I find very encouraging in the operating expense area—actually those expenses had been held down in the first quarter by some recovery activity and some good expense management. In the second quarter, the loan production activity generated a little more in the way of commission expense. We got a little bit more aggressive with some advertising expense. Expenses grew a fair amount by comparison to the first quarter, but the point that I'd like to bring home here is that on a year over year basis I mentioned revenues are up 16-17%, and expenses year over year for the quarter were up 11%. For the first six months, they're up on a 10% basis.

So there's some operating leverage that's occurring there as we're growing revenues faster than expenses, and that certainly is consistent with the game plan that we've laid out. Having said that, we still have significant expansion activity that's under way, and so we would expect those expenses to continue to grow.

The other number I guess that I want to bring a little bit of attention to right now is the loan loss provision, which you can see was $2.3 million in the quarter just ended. The loan growth that I mentioned already was a continuation of what we thought was really strong growth in the first quarter, exceptional growth in the second quarter, and we just thought that it was certainly appropriate to increase the loan loss provisioning. Our credit quality indicators all remained very good. We had a slight increase in net charge-offs. We had a slight increase in non-performing loans, but that additional million dollars in loan loss provisioning really is just—reflects that very strong growth in the loan portfolio, and in our mind is just an appropriate, cautionary approach to take to that amount of loan growth.

So we put it all together. It was a good quarter. There were interesting things going on in the balance sheet, interesting things going on in the net interest margin, continued positive activity on the part of all of our employees, generating business. And we feel pretty good about where we're going on a go-forward basis. We'll get into—perhaps get into some discussion on the margin, if we, like others, are dealing with some pressure that pricing is bringing to the margin and higher levels of interest rates and a flat yield curve. But a good quarter, adjusting out for the insurance settlement, and the loan loss, additional loan loss provisioning. I think all of the trending information looks very positive. With that, I'll turn it back over to Mike and look forward to hearing questions from all of you.

Thanks, Lloyd. Again I want to second his comments on our pleasure of the second quarter loan growth that took place and the fact that our pipeline on a go-forward basis is considerably full this time. The Pacific Northwest, particularly Puget Sound and the Portland area, are experiencing a very strong economy. And as I've said to a number of you in the past, what happens on the Asian Rim is at least as important as what's happened in the national economy to Seattle and the greater Portland area. And right now, as you know, that area of the world is doing very, very well. And you can see it reflected in the economies of those two areas that we serve.

Just as an area of reminder, the vast majority of our loan growth is taking place in the—what we call west of the Cascades, which is the Puget Sound, the Portland marketplace--with our loans in those areas now in excess of 60% of the totals. Offsetting that slightly a little bit is the success we've had in the greater Boise marketplace. We've really began to see that again in the second quarter. We've had very nice deposit growth and nice, good, solid customer, commercial banking growth taking place in the greater Boise market also.

We're enthused about where we are headed as a company. We did spend a considerable amount of money in the second quarter in the advertising area, in terms of expensing some production costs relative to some commercials, and secondly some advertising we did relative to the use of other banks' ATMs by our customers and so forth. So we're looking forward to the second half of the year. We're hopeful that it follows the trend that we've seen the last three years, which shows the significant growth of our deposits taking place in the second half of the year. That's not an assurance it's going to happen this year, but that's what's been the trend in the past, and we are hopeful that will continue, and we think it will based on the number of new accounts that we're opening.

In the second quarter of this year, we did not open any new branches. We will, however, open one branch very late in the third quarter of this year. So there will be one new branch being opened in the—towards the end—well, in September of this year. And we have already hired the vast majority of the staff for that particular location. So with that I think we should get to the areas of interest to you all and let you ask questions. So we'll turn it back over for questions at this time.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from David Rochester with Friedman, Billings, Ramsey. Please go ahead.

Hi, good morning. Congrats on some great loan growth.

Thank you.

Just a quick housekeeping item. It sounds like you already addressed that you said the advertising expenses were higher. I would imagine that those were in the non-interest—the other non-interest expense line. Is that what drove that increase to $6.8 million from $5.2?

They're in the miscellaneous line. Yes they are. And they were significantly higher.

So in terms of a run rate going forward, would you say that $6.8 comes down to--$400,000/500,000, or would this be a good run rate going forward?

No, it will come down. We actually—more than you want to know, but when you produce a TV commercial, you expense it when you first run it, and you expense all of it. And we have one of those that's about a $200,000 charge, plus another about $260,000 that we spent relative to a kind of a unique campaign we ran in the second quarter. So it will come down.

Okay. On the loan side, could you comment—and it doesn't sound like there's any softness, but if you're seeing any potential softness coming on the construction side in fringe areas. We're hearing some evidence of that in California. Are you seeing any of that in Washington?

We are. There are a couple of markets that I think we've talked about in prior calls—the Tri-Cities area of our state, which is right in the central part of the state, clearly has sloped down dramatically. We kind of began withdrawing from the market about—well, now probably 18 months ago. And it's clearly happened in that marketplace. Home sales have really slowed down. The levels of activity in Portland and Puget Sound have slowed down from where they were a year ago, but they are still at very robust levels. And so we don't sense that right now. I think most of you are aware that in Puget Sound, Boeing is loaded with airplane orders and in the process of hiring a number of people. Microsoft is in the process of adding about 12,000 people to their staff here in this local area. All of that tends to drive the housing market in the areas we serve. So right now in those two markets we're not seeing that.

The second part of it is that if you sit and look at the ports of Seattle and Portland and look what's going through those ports now to the Far East, it is truly incredible what's happening, in terms of railroad cars and ships coming in and out of that place compared to the level of activity a year or two ago.

Okay, great. Thanks for the color there. Just a couple quick ones on margin. Could you give some color on the progression of the margin throughout the quarter, maybe provide the June margin, if you have that.

I'll have Lloyd do that if you don't mind.

Okay.

I think the press run in the margin got a little bit more intense during the quarter. I really am reluctant to give you a number on June. There's some real problems with annualizing a month's margin—

Okay.

--But the pricing pressures were there, and candidly with us, as we continued to have loan growth that outstripped our deposit growth, that required us to use some more expensive funding later in the quarter as well.

Right.

It might be helpful to you—and I actually have not done this down to the tenth point here, but if we would have taken out the loan growth and excess of deposits, which we funded with borrowing, our margin would not have contracted in the second quarter. So, it's that marginal business that caused that to change. So as you go forward, and we certainly expect that our deposit growth with exceed our loan growth on the second half of the year, that impact will not continue into the second and third quarter. Now, having said that, rates on the deposit side are going up fairly rapidly. How's that for a non-answer?

No, that's very good color.

[Inaudible – background noise]

But all of those factors—you know, margin is always a very complicated thing.

Sure, sure. And just one last one. In the last call you had talked about loan pricing pressures being some of the worst you'd seen in a while. Has any of that subsided at all, and maybe if you could touch on pricing for commercial real estate products and commercial business products?

Yes, two things to that. The pricing pressure particularly on C&I loans in the Pacific Northwest and the structural changes being offered by some of our competitors in some of the credits has intensified. Instead of coming in second, as I think I alluded to in the last conference call, on a lot of deals—we've come in on several of these deals third, fourth and fifth on some of them now. And we are not willing to give up on loan structure. So that's all having a little bit of an impact in the lack of growth in our C&I loan portfolio.

We have a reputation in the Pacific Northwest amongst the builder community as providing exceptional service to those kinds of builders. We have long-time customers that deal only with us and like the way we do business. We have not seen real pricing pressure in that sector this—at this time. As I told the Board of Directors yesterday, it's easy to say that when homes are selling very rapidly because the interest component to that construction is pretty small. As those home sales start to slow down, we may in the future begin to see some of these builders wanting some relief from the interest rates that we're being charged. But right now we're not seeing that at all.

Okay. Great. Thank you very much.

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

Good morning.

Hi.

Hi Jim.

Hey, Lloyd. The $100 million or so of [sluff] advances you put on this quarter—what's the duration look like on those?

Short.

[Inaudible – background noise]

So the idea is if—assuming the pattern holds and deposits grow the second half, you'd be able to run some of that off too?

Yes. Yes, we have—if we have the luxury of deposit growth exceeding loans, we'll easily be able to pay down advances. Yes.

Okay, good. The growth in CDs this quarter--$100 million also or so—was that brokered or in footprint or special campaign? How did you raise that money?

We did use some brokerage CDs, and that's a component of that. It's not anywhere near all of it. And the rest of it's in footprint—no real special campaign.

Also pretty short I suspect.

Yes, customers have really shortened up their preference. There is very little customer appetite for deposit maturities over 12 months. Now, interestingly, and this is not a prediction on my part at all, but I just recently have seen some stuff where more people are starting to talk a little bit longer term on the deposits again, and as I've told our management team a number of times, the customers are usually right. So we'll keep watching that and see if they start extending. That may tell us a little bit more about where interest rates are going.

Good. Okay. And Mike, are there any significant hiring plans, or are you just being opportunistic now at this point?

No, I did allude earlier, Jim, that we have hired the staff for the new branch that's opening in Boise at the end of this quarter. And we have about three other branches where we've begun to hire some key people for those in those specific locations. I don't have any big plans to add a new commercial lending staff or any new line of business into the company at this time. So hiring should be pretty moderate on a go-forward basis.

And then last for me, Lloyd, I'm still sort of puzzled over the increase in miscellaneous expenses, even including advertising. Is there anything else that was abnormal or significant in that $6.8 number?

Well the number that was more abnormal was the first quarter—

Got it.

--when you look at the comparison there. If you go back to the fourth quarter of last year you can see that it was a larger number than the first quarter of this year. We had some recovery that we mentioned to you in last quarter's press release, and legal expenses, collection costs. I think we actually had a liquidation of an REO property that goes into that line as a credit rather than a debit. Beyond the marketing expense, as I mentioned—we had, because of loan production, we had a little more commission expense. We have a number of compensation-related areas that tend to tick up as the year progresses, and that's all embedded in that. But the real outlier, candidly, was advertising.

Okay, good. Appreciate it. Thanks very much, guys.

Our next question comes from Ramsey Gregg with FIG Partners. Please go ahead.

Hi guys. Good morning. Most of the questions that I want to ask have already been asked, but just as far as protocol is concerned, is there anything on the horizon at all that gives you any pause at all, on perhaps the charge-off side or anything at all that's of concern?

No. In actuality, and I think, and I think I said this at the end of the last quarter, I think our numbers, as it relates to NPAs and that sort of thing in charge-offs, it's probably as good as it's ever going to be in this organization because I think if you have a growing loan portfolio it's just not going to be any better in absolute numbers than it currently is. We see nothing of any substance or size that we are looking at as a possible charge-off in the next couple of quarters. On the contrary, we expect a very significant recovery sometime in the next two or three quarters that will be a substantial augmentation. And it's entirely possible that we will begin to run in the second half of this year at net recovery instead of a net charge-off.

Okay, great. Thank you very much, guys.

Our next question comes from Kipling Peterson with Columbia Ventures Corporation. Please go ahead.

Good morning. In previous calls you've discussed the new branches you've opened and how they are, for the most part, quickly turning profitable. And in this release you said, "Generally these new branches are proving to be very successful." I'm wondering if perhaps you could describe in more detail what some of these branches are looking like.

You bet. In the last three years, we've opened 25 branches. All of the branches that were opened more than 12 months ago, with one exception—a branch that's been open a lot longer than three years—are profitable. And the only branches that are not profitable, and there are a total of five in the whole system, are those that have been opened in the last 12 months. And frankly, those are also doing well. So we're pleased with what's happening in our new branches. We think we have a little plan that we used to get them to a profit, and it's worked very well for us.

Of the 25 branches we have, all of them, with the exception—well with no exception—all but three of them have deposits in excess of $10 million already. And all—many of the branches go up in size to as large as $50 million within an 18-month period of opening. So we think we've had great success in those markets we've chosen to open branches. So we're very pleased with it. We've got a number of them that we're talking about in the future.

It's no secret for all of you to look at us and see that it we're going to get our performance to the level of our competition throughout the West and so forth, we need to improve our cost of funds. We need more deposits to make this happen. And so we're going to be opening some new branches on a periodic basis over the next several years to improve our funding base, and frankly to improve our distribution in the greater Puget Sound, in Portland and in the Boise area markets. So we're enthused about it. We think we have a program that works, and we'll bring those branches quickly to a profit.

Great. Thank you.

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

Good morning gentlemen. How are you? Nice quarter.

Thank you, Ross.

Hopefully it's a little—a little less one-time items in the future.

Well as long as they're credits, we'll take them, but--.

Could you talk—could you specifically discuss Boise and Spokane and discuss those markets specifically and the loan demand there and any specific markets that are softening quicker than others in loan demand?

Well, yes. If you take a quick look at our Agriculture lending portfolio, it has not grown back to where it was three years ago, or two years ago. It has picked up a little bit in the second quarter, but very clearly we are not as oriented toward agricultural lending as we were in the past. As it relates to the Boise marketplace, we are seeing robust loan growth for us. Now to be fair about that, a lot of that is coming from people that many of us that worked in that market used to bank at other banks. So it's not probably being seen by everybody in the Boise marketplace that same way.

As it relates to Spokane—we don't have a big presence in Spokane at the present time. We have three branches in that marketplace. We have a plan to add a fourth some time in the next nine months in that particular market, and hopefully down the way maybe a fifth in that marketplace. So we're probably not the most qualified to say what's happening in that market. My impressions are Spokane is getting much, much better than it has been historically over the last five years. They have real growth of population and real growth of median income amongst the people there. And the unemployment level in that town is much improved over where it was.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from Sara Hasan with McAdams Wright Ragen. Please go ahead.

Hi guys.

Hi Sarah.

On the provisioning—I'm sorry if I missed this earlier. Does this kind of catch you up or should we expect the magnitude to be similar going forward if loan growth continues at this rate?

I think you heard me earlier refer to a recovery that we expect—

Okay.

And I think that that will have a—if in fact that takes place, that will have a significant reduction in the level of our provisioning that will take place. And I don't expect that we’re going to be adding a million dollars each quarter to our provision because I don't think we're going to have quarters with loan growth at the same rate we had in the second quarter.

Thank you.

Management at this time there are no further questions.

No, I think at this time-- I appreciate you all taking the time to listen to our story for the second quarter results. We look forward to talking to you in the future, and if you have additional questions please don't hesitate to give us a call. So with that we'll bid you ado.

Ladies and gentlemen, this concludes the Banner Corporation second quarter 2006 conference call. [OPERATOR INSTRUCTIONS] Thank you. You may now disconnect.