Banner Corp (BANR) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Banner Corporation's third quarter 2006 conference call. [Operator Instructions]

I would now like to turn the Conference over to Mr. D. Michael Jones, CEO of Banner Corp.

Please go ahead, sir. Please go ahead, sir.

Thank you. Thank you all for joining us this morning for our third quarter conference call relative to our earnings just announced yesterday afternoon. We appreciate you taking the time to listen to us.

Here in the room with me is Al Marshall, the Secretary of the Corporation; and Lloyd Baker, who's Chief Financial Officer. My name is Mike Jones. I'm the President of the Bank and the Bank Holding Company.

So at this point, I would like to ask Al to paraphrase, if you would, the paragraph.

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 questions-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 a recently filed Form 10-Q for the quarter ended June 30, 2006. 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 like to have now is Lloyd Baker kind of give an overview of the third quarter results, and I'll have a couple of brief comments after that. Then we'll be ready to answer your questions.

So Lloyd, go ahead.

Great. Thanks, Mike. And good morning, everyone.

As is usually the case, I think our earnings announcement pretty well lays out the story. But for the quarter just ended, the third quarter of 2006, the story for Banner Corporation is clearly one of growth, and the impact of that growth on earnings.

As we noted, we made $8 million for the quarter. That's an increase of 41% over a year ago. Earnings per share, $0.65 for the quarter, is up 38%.

As I indicated, that earnings growth is a direct result of the balance sheet growth. Loans continue to expand nicely, up 23% on a year-over-year basis, and actually 19% growth year-to-date; deposit growth of 21% year-over-year and 18% year-to-date.

That growth in loans and deposits is fueling growth in the net interest income of the Corporation, which was up 16% year-over-year for the quarter and 17% year-to-date. It's also contributing to non-interest income growth. The growth story there is a little less dramatic -- 9% increase in non-interest revenues compared to the same quarter a year ago.

But really importantly, inside of those non-interest revenues, deposit fees and service charges up 19%, which again is reflective of the addition to the deposit portfolio, the growth in the franchise, the number of customers that we're servicing; just a whole list of things that are very positive that come out of growing the Company.

Not growing during the quarter, on a year-over-year basis, of course, the securities portfolio, which is down 46% compared to a year ago, again reflecting the restructuring transaction that we did late last year -- and Federal Home Loan Bank advances, which are now 56% lower than they were a year ago.

Also really not growing significantly during the quarter -- in fact, really very flat, as has been the case for a number of quarters -- is mortgage banking activity and revenues. That's not surprising, consistent with what we've seen for some period of time, as that really becomes a less dramatic driver of the Company's results.

And importantly, growing, but growing much more slowly, is non-interest expense. And this is really a significant part of the performance for the quarter as well. Non-interest expenses, operating expenses, 7.5% higher than they were a year ago; year-to-date basis, just 9%. So you can see the growth in the balance sheet is not driving commensurate increases in expenses, even as we continue to grow [ad] locations and grow the franchise. And debt certainly was a big contributor to this quarter's results. And in fact, non-interest expense was unchanged from the previous quarter.

The other thing that is not growing -- and this is again a good-news item -- is credit costs. Loan-loss provision for the quarter was $1 million. That's down from both the same quarter a year ago and of course down from the much larger provision in the second quarter. That decrease in loan-loss provision reflects continued good performance, if you will, in all of the credit-quality indicators. Nonperforming loans are down from a year ago, essentially unchanged from where they've been for the last quarter.

And it also reflects a significant recovery that we had during the quarter. We had a series of credits that we had charged off really many years ago, and had been working our way through the litigation process. And we were awarded a significant piece of property during the quarter. That allowed us to record net recovery for the quarter. It does show up as an increase in REO, but we're very optimistic about our ability to sell that property in a very short period of time. The other -- so again, growth in the balance sheet is clearly fueling good results for the Company, as evidenced in this quarter's release.

The other area that is not growing, certainly on a linked-quarter basis, is the net interest margin. We continue to benefit significantly on a year-over-year basis by comparison to the margin a year ago. But deposit pricing pressures have been significant in the most -- the first nine months of this year. And the margin actually compressed another 12 basis points from where it was in the second quarter. We anticipate that margin pressure probably continues for some period of time.

It can be very evidently observed in the changes that are going on in the deposit portfolio. We continue to be very encouraged by the number of customers that we're adding throughout the system. But clearly, our customers and other customers -- other banks' customers as well -- have changed the way they are managing their money, and moving those funds more frequently into interest-bearing account.

In the area of the loan portfolio growth -- and it's really the last thing I think I'll touch on before we get into questions -- the activity there continues to mirror what we've seen for some time. We've had very strong growth in construction, in land development loans; and much more muted growth in business C&I loans. We actually had a decrease in one- to four-family loans during the quarter. That in part reflects a portfolio sale that we executed, that repositioned a small portion of that balance sheet.

And the other -- the one other one -- and I mentioned this to our Board of Directors recently, that we're really encouraged by, that gives another example of evidence of the success in franchise growth -- is the growth in consumer loans. It continues to be a small portion of our portfolio. But it continues to grow as we add customers. And we think that's an important number for you to look at.

So all in all, $8 million quarter; 41% increase over where we were just 12 months earlier. We're pleased with that. The trends that we have seen in place for a number of months and quarters now continue. And we look forward to future quarters, and look forward at this point to your questions, although I think Mike will want to make a few comments first.

Thanks, Lloyd. Let me make just a few comments.

One of the things that's not growing in our portfolio is our core deposit growth, which we're not really happy about. And I understand the industry has this problem. But that's not our game plan; that's not why we've built the branches we've built. And as a result of that, there is intense pressure in this organization to grow your core deposits throughout our branching system.

However, on a good note, having said that, I think you're all aware, annually all banks have to report deposits by branch as of June 30th of each year. That information just became available within the last two weeks.

And in the 18 markets the FDIC identifies that we compete in, I'm pleased to report we gained market share against our competition in 15 of the 18 markets. So we're pleased with the fact we're gaining market share. What we're not pleased is we're not growing core deposits fast enough.

On the other hand, one of the things I've told all of you for a long period of time is, I want to make the Federal Home Loan Bank borrowing line zero. And we're making progress and moving in that direction. So we are having some improvement in our funding base, but we still have a long ways to go to improve what I consider the important part of a commercial banking franchise -- its deposit composition.

So we have -- I'm pleased with the quarter from a results standpoint. But nobody's going to sit around here thinking we're doing better. We've got a long ways to go to get to be good. But we are making progress.

So with that, I'd like to open it up to questions if we could, please.

All right, thank you, sir. [Operator Instructions]

Jim Bradshaw, with D.A. Davidson.

Good morning.

Hi, Jim.

Hi, Jim.

Couple questions -- Lloyd, when you talked about the single-family loan sales, about how big was that? And is there a gain that's in the mortgage banking line from that?

The sale -- and the reason I pointed that out is, on the sixth page of the Press Release, you can see that mortgage -- one- to four-family loans actually declined by about $48 million. The part of that represents the portfolio sale was $78 million.

Okay.

The gain was negligible, Jim. It was -- that transaction was not designed to generate gain on sale; it was really designed to reduce that portion of ortfolio a small amount. It has some benefits to us from a liquidity standpoint; from an interest-rate risk-management standpoint. So we did that during the quarter.

Okay, good.

And Lloyd, obviously, FHLB borrowing's down $150 million or so this quarter, and CD's up $170 million. Could you characterize sort of what the rate spread variables were between sort of what ran off, or what you paid off, versus what you added in the CD side?

Honestly, Jim, that was just about a push.

Okay.

CDs -- we had a very successful CD campaign in the month of August. And wow, it didn't do a lot in terms of replacing the cost of the borrowings. What it does is it allows us to get customers in the door, and the opportunity to sell them other products and services.

And Lloyd, that was pretty short-duration stuff; one-year, 13-month, that kind of stuff, right?

Yes. In fact, I think the special was 11-month.

Okay, that's what I thought. Good.

And then last question I had was -- Mike, if you could characterize how the loan payoff and prepayment activity's going -- are you producing a lot but still losing some on the payoff side?

I don't know that I know the answer to that. Maybe Lloyd does.

Yes, let me help there just a little bit.

If you look at the table, which is on page six, you're going to see some categories up, some categories down. And in particular, non-residential real estate categories were down just a little bit for the most part during the quarter; not a lot. But that is the payoff activity that you're thinking about, Jim. I think we've talked about that before. It's an area where pricing is very, very intense and thin. [You're] competing with conduits. And we choose not to put long-term fixed-rate non-residential real estate loan-funded books at levels that are unattractive. We lose some there now and then.

Got it. Thanks very much. Congratulations. That was a great quarter, you guys.

[Ramsey Gregg, with Fig Partners].

Hi, good morning --

-- [Gregg].

-- Mike, Lloyd and Al. How are you guys?

I just want to talk about [the] funding side a little bit more. Just kind of trying to figure out, as far as where rates are on deposits. And then, just kind of -- are you seeing CD pricing moderate at this point at all in the market?

Yes, I think the answer -- the short answer is yes. The long answer is not a lot. But clearly, deposit pricing has softened just a little bit in the last 90 days. Now having said that, it's considerably higher than it was a year ago. But the intense pressure that was there 90 to 120 days ago has softened just a little bit.

And then, was there a -- was it a savings account special you guys had in the quarter? Is that why the kind of the change there over to savings?

Yes. Actually, we had -- we ran a savings account special at our Boise grand opening, which had a contributing factor there. I think also there's some movement that occurred -- that was late in the quarter -- there was also some movement that occurred early in the quarter, as people moved from one type of interest-bearing transaction account to another -- some pricing that encouraged that. And again, it was an area of emphasis early in the quarter.

And then, just to be -- as far as the margin was concerned, the recoveries in the quarter -- did that have much of an impact there as far as helping the margin during the quarter?

The recovery really didn't -- that I'm speaking of -- didn't have any impact on the margin. We were awarded an asset -- there were other recoveries, small ones -- but we were awarded an asset, which all was booked as recovery to the loan-loss allowance and had no effect on the margin.

Want to be clear on that.

And then -- all right. And then one more thing here, just as far as recoveries are concerned. Do you see more recoveries here coming down the pipe?

We do. Can't tell you whether they're going to be in the fourth quarter or the first quarter. But we have -- actually, we've already had one smaller than this that's occurred in the fourth quarter. And we have the possibility of two more in this quarter, of somewhat -- not perhaps quite as large as this one, but similar type of activity. So yes, we think we have a chance for some significant recoveries during the next two or three quarters.

All right. Thank you very much.

[Adam Parker, with the Endicott Group].

Morning, guys.

Morning.

Congratulations on the quarter.

If I could just piggyback a little bit on Ramsey's question there, and if you could maybe give me some insight as to the rates paid on those savings accounts, and the progression from, say, December of '05, the year end. Are you able to give any of that information? I apologize if I missed it. I don't think I saw it in your Qs.

Well, I'm not sure if you're looking for the average rate on savings accounts during the quarter, which --

I'm just trying to figure out how -- I mean, you had the balance grow quite a bit. And I know you had the branch opening, and whatnot. But I'm trying to make sense of the strong growth there, and how you're enticing customers into that account, versus, say, a CD or just the money market. Because I'm seeing some attrition in the money market accounts.

Well -- and particularly, if you look at the movement into the savings account in the second quarter, there's no doubt that a significant portion of that came out of our own money market accounts. We also brought new money in. But there was movement there as we -- we have about three or four accounts that are somewhat fungible to the customer. And our pricing schemes will cause some customer movement between those accounts. And that clearly happened in the second quarter.

In the third quarter, most of the growth in that savings account arena came -- a little bit of carryover from that -- but mostly came as a result of our opening promotions in the Boise market.

Okay. Great. Are you able to provide any more specific information on that, in terms of the numbers, though?

Not off the top of my head, at the moment, no.

Okay. Thanks, guys.

Sorry.

[Mike McMahon, Sandler O'Neill & Partners].

Good morning. Couple questions.

First, you've been adding about $200 million in average loans the last two quarters in a row. And I'm wondering how the pipeline is, and what the outlook is for the fourth quarter.

The loan growth in the fourth quarter will be muted from what it was in the second and third quarter. It's an effect of a couple of things. One, builders don't start nearly as many things in the Pacific Northwest in the fourth quarter as they do in the late first quarter and second and third quarter. And secondly, we have a component of our portfolio in the agricultural lending area, which will begin to pay down at the fourth quarter.

So the loan growth in the fourth quarter will be considerably muted from what it's been in the second and third quarter.

Okay.

And then I wanted to ask about the fine art of reserving. And despite your best efforts to answer my question, I anticipate not knowing more than what I start, but let me try.

Other than your reserves are adequate -- you had $200 million in average loan growth in the third quarter. And you had a $500,000 recovery in round numbers a $1 million provision. Even if you didn't have that recovery, and you provided, say, $1.5 million, that would be about 75 basis points on your average loan growth. And I guess what I'm trying to get at is, can you give us some general guidance on what you reserve for unknown but inherent losses on loan growth, if that makes sense?

Let me try a long answer at this, and then try to get to it fairly quickly.

Okay.

We have a now six-year history of loan losses by category, in what we call pass credits; otherwise credits that we are not watching, special-mention and/or are classified. And we apply that rolling average -- recent actions count more than what happened six years ago, in that portfolios on percentages against the pass portion of the portfolio.

And in some categories, we've experienced no losses in a lot of years. So literally speaking, we're putting something in the pass category for things like commercial real estate loans and one- to four- residential loans, where we've had no loss in six or seven years.

On the other hand, we look at every classified credit on the books, and every non-accrual loan on the books, and put a specific reserve against them based on what we know at that particular moment in time relative to the probability of collection, time value of money to that, and we put that into the equation.

Lastly, because we've been fairly quick to write things off in the past, we have recognized that we are going to have some recoveries that are going to take place over the next few quarters. And you saw one that took place in the third quarter. I think we had one in the first quarter of this year. And I think -- we've already had another one in the fourth quarter. And we have a prospect of a couple more; if not in the fourth quarter, in the first quarter of next year.

So all of that goes into it. We try to keep our reserve reasonably flat, if you will, as a percentage of the outstanding loan portfolio. But we also have to be mindful of the portion of the portfolio called unallocated reserves. And we like to keep it in a range of somewhere between $1.5 million and $3 million. And it's been higher than that, and it's been lower than that. But in general, over a period of time, that's what we're trying to do.

So our only magic in this is a rolling average against our pass credits or performing credits, but then also a specific look at every asset that's classified, criticized or on a watch list.

So I don't know if that helps, Mike, or not.

It does.

But that's what we do.

It --

Mike?

It does. And where's the unallocated now?

Think it's about $2.2 million.

Okay.

Mike, one additional thing you were relating that to average balances. Everything that Mike Jones said is correct. But you were -- I think you were relating that to average balances. And we really are looking at period-ending balances with respect to the reserve. And if you'll recall, we had about $250 million worth of loan growth in the previous quarter, which necessitated that large provision in the second quarter.

Okay.

And then finally, your securities portfolio was basically flat in the third quarter, at least average securities. Can we -- you going to manage that towards staying -- leaving it flat? Or will it gradually drift down?

It may drift down a little bit more. But there's a certain level below which we can't go. We need securities to collateralize certain liabilities on the balance sheet. We need a degree -- an appropriate degree of liquidity in the asset portion of the balance sheet as well.

Okay. Thank you very much.

[Louis Feldman, Punk, Ziegel & Company].

Good morning.

Hi, Lou.

Mike, I wanted to touch base with you. You made the comment here, and you've talked about this many times before, about getting rid of the Federal Home Loan Bank borrowings. And certainly, you've said that your franchise value is based on your deposits. To what extent would wholesale or brokered CDs be an acceptable alternative, certainly from a cost-control standpoint on cost of liabilities?

We look at that every time, Lou. And because those do not have to be collateralized, as Federal Home Loan Bank borrowings do; all things being equal, we use those, and we have used them, when the pricing is equal to what we can get from the Federal Home Loan Bank. And in several cases, it's been slightly lower. But it really has to do with saving collateral, so that you have some backup for liquidity needs in the event of a real issue that comes down.

Would we start to see an increase in that going forward?

I hope not. What I really want are core deposits for customers that live in our neighborhoods.

You've stated that many times.

Sorry.

Thank you.

All right, thank you.

[Operator Instructions]

And gentlemen, there appear to be no further questions at this time. Please continue with any closing comments.

Well, again, we want to thank all of you for taking the time to listen to our explanation of our Press Release. If you have additional questions or want some elaboration, feel free to give Lloyd or myself a call. And we'll endeavor to do that within the rules of [FD] as we can, reg [FD].

But we do appreciate you taking the time. We're pleased with the bottom-line number of the income. It's not good, but it's getting better. But there are some fundamental things, and we clearly have some fire built under some of our managers, one of which is core deposit growth. And secondly, we need to have some better C&I loan growth also.

So we'll get better as we go forward, and we'll look forward to talking to you at the end of the next quarter. And thanks again for listening.

All right, thank you.

Ladies and gentlemen, this does conclude the Banner Corporation Third Quarter 2006 Conference Call.

If you would like to listen to a replay of today's Conference Call in its entirety, you can do so by dialing 303-590-3000, using the access code 11071745. Again, 303-590-3000, and enter the access code 11071745.

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