Banner Corp (BANR) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Banner Corporation Fourth Quarter 2006 Conference Call.

During today's presentation, all parties will be on a listen-only mode. If you have a question at any time during the conference, please press the star followed by the one on your touch-tone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using speaker equipment, please lift the handset before making a selection.

As a reminder, this conference is being recorded today, Thursday, January 25, 2007. I would now like to turn the conference over to Michael Jones, Chief Executive Officer. Please go ahead, sir.

Thank you very much, and thank you to all of you that are listening in to our fourth quarter 2006 conference call. I have with me Al Marshall, the Secretary of the corporation, and Lloyd Baker who's the Executive Vice President and Chief Financial Officer of the Company.

So at this point in time what I'd like to do is have Albert read the paragraph that you all love very much. So, Albert [inaudible].

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, forecasted 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 September 30, 2006.

Forward-looking statements are effective only as of the date they are made and Banner assumes no obligation to update information concerning this expectation. Thank you.

Thanks, Albert. What I'd like to do now is have Lloyd Baker give you kind of an overview of the fourth quarter and 2006 results, and then that'll be followed up perhaps by some comments with me and questions from you. Lloyd?

Thank you and good morning everyone. The fourth quarter earnings report for Banner Corporation was generally as expected. There were no significant surprises I don't believe.

We recorded just over $8 million in income, or $0.65 a share for the quarter. It's essentially unchanged from the previous quarter, but it's an increase of 42% from our fourth quarter 2005 recurring income and recurring income, of course, excluding the restructuring charges a year ago.

That brings total income for 2006 to $32 million or $2.63 a share. I think it was the late Senator Everett Derkson who first coined the phrase "A billion here and a billion there and pretty soon you're talking about real money." Banner Corporation is not at that level yet, but clearly when you look at our performance for the past year, for the quarter and for the full year, the half a billion dollars worth of loan growth that Banner enjoyed, particularly growth in higher yielding loans, was really a driving factor in performance.

Year-over-year loans were up $526 million. That's a 22% increase. Average balances for the fourth quarter were $556 million more than a year earlier. That's a 23% increase, and the average balance for the entire year was up just slightly under a half a billion dollars as well.

That loan growth is replacing to a significant degree some securities that went away and is also funded with strong deposit growth. Deposits were up $471 million for the year. That's a 20% increase, and actually when we throw in our retail repurchase accounts, which we use for a sweep account product in our cash management services, we were up $496 million. Again, just under that half billion dollars.

That growth and the change in the mix fueled net interest income. Net interest income for the quarter was $33.1 million. That's up 15% over a year ago, nearly $4.5 million increase in net interest income compared to that year earlier quarter. And for the year, net interest income was up $18 million to $126 million. That's a 17% increase.

The change in the mix is working along with that increase in the size of the balance sheet. As I mentioned, we grew loans significantly replacing securities, not only the securities that we sold a year ago, but continuing runoff in the securities portfolio through the year. And also as we replace borrowings with deposits, the pressure on deposit pricing, of course, in the recent quarter meant that deposit costs were rising rapidly, but despite that increase in deposit cost, the shift in mix on both sides of the balance sheet allowed us to enjoy a much improved net interest margin for the year, a slightly improved interest margin for the quarter compared to the previous quarter, and contributed to the earnings. Actually, the margin was up two basis points compared to the third quarter, and again, that's driven significantly by mix changes.

Growth in deposits is also fueling deposit fee and other service charge revenue, which was up 19% to just roughly $3 million for the quarter, 19% higher than a year ago and an increase of nearly $2 million for the entire year in deposit fee revenue. So, again, a significantly bigger balance sheet fueling considerably stronger earnings.

That balance sheet growth comes with costs as always, and operating expenses continued to expand primarily reflecting increased occupancy expense as we continue to grow the branch network, but I think it's important to note that both for the quarter and for the full year, operating expense from the recurring operations increased just 9% compared to [inaudible] earlier contrast out with growth in the margin, net interest income, and revenues that was 15, 16, 17% depending on which time frame and [inaudible] totals we charge choose to look at.

We're getting certainly a better operating efficiency out of that growth, as well, so more earnings power in the quarter, reasonable expense growth resulting in really a pretty good quarter, and certainly as I mentioned, a much improved year. To be fair, the growth in both loans and deposits slowed in the fourth quarter. Loans were up $63 million for the quarter, deposits up 50. That's about an 8% annualized rate.

That kind of seasonal slow down is not unusual for us in the fourth quarter, but I think it's also indicative of a slightly slowing pace of growth throughout really the banking network. Yeah, the other two points I guess that I make about the quarter and then I'll look forward to questions along with everybody else, there was slightly disappointing news with respect to non-conforming loans. They were up $3.3 million for the quarter. That's 43 -- took non-performing assets to 43 basis points compared to 36 at the end of the prior quarter, but on the other hand, net charge-offs were only $625,000 for the quarter and more importantly for the entire year $863,000 were the charge-offs. That's three basis points of net charge-off. Credit quality continues to be a very positive part of the earnings story for Banner Corporation in 2006.

The other point that I want to mention before we get to questions and Mike's comments before that would be that you'll notice that we did have an additional issuance of trust-preferred securities or junior subordinated debentures on the balance sheet, $25 million that funded very late in the fourth quarter supplementing our capital position a little bit in taking advantage, we think, of some very attractive market conditions with respect to that type of an instrument.

So, again, a pretty good quarter, a much improved year, and look forward to Mike's comments and your questions.

Thanks, Lloyd. I think what I'll do is confine my comments just at this point in time and not talk about the impending acquisitions, but talk a little bit about the results. I agree with Lloyd that the economic activity level has slowed down a bit in the Pacific Northwest, and it is reflected in the growth of our loan totals, although it's a very similar growth pattern to that that we experienced in the fourth quarter of 2005 in both categories.

However, in the fourth quarter of 2006, a big chunk of our loan portfolio, which is well north of 50% of the loan portfolio, is domiciled in the Puget Sound region, which probably had the worst run of weather in the fourth quarter that is possible to consider. I mean, we had the all-time record 30-day rainfall take place in late October through November, followed up by some colossal windstorms that knocked power out in this region for a long period of time and clearly reflected the business activity levels in this area during that time.

Secondly, as it relates to the non-performing asset increase, I think it's important to point out that while we had several loans move into that category and several small loans also get paid of and move out of that category by being paid off, the difference, in essence, really revolves around one large account that's limped along in a kind of a semi-performance mode for a long period of time and finally as we decided to put it into non-performing status and that's a cold storage operation up in the Bellingham area, which, in essence, accounts for the vast majority of that increase. It's one credit that's been around for quite a period of time and now we're in a position where we can actually start to do something to move it off the balance sheet.

So with those two comments, I think at this point I'll open it up and let you all ask the questions that are of real interest to you.

Thank you, sir. [OPERATOR INSTRUCTIONS.]

Our first question comes from Jim Bradshaw from D.A. Davidson. Please go ahead.

Good morning.

Hi, Jim.

Mike, after the merger conference calls late last year, I sort of left those with the impression that those might have impacted your sort of zest to branch in '07, but I noticed the comments in the press release today you suggest that you've got a number of opportunities on the branching side. Could you talk a little bit about markets you're looking at and about how many openings you think you might get this year?

We do have opportunities and they're concentrated in three markets. They're concentrated in the greater Boise market. They're concentrated in Puget Sound and in the Portland, Oregon marketplace. Those are where the opportunities for branch openings could occur in 2007, and I do believe that there are somewhere between seven and ten that can take place.

We have more than that on the drawing board, but when you deal with cities, we're all aware that that isn't going to happen because you just don't get your [inaudible] improvements anywhere nearly that quickly nor do you get your occupancy certificates that quickly.

As an example, we have a relocation of a branch in Redmond, Washington, which is an extremely good community for us in this area, that we've had this facility for now almost two years, and we just got the site permit.

Wow.

It takes a long, long time for some of these things to do, and so as a result, I'm going to guess that we're going to be somewhere in the seven to ten openings during the course of next year. Some of those, to be fair about it, are not new locations. They're relocations of some poorly located operations we previously had.

Got it. Thanks. Lloyd, does the trust preferred, I think it was $25 million or so that you issued in the quarter, is that in anticipation of the two small mergers, or were you -- do you think you might do more for the cash portion of those deals?

I don't think we're going to need to do more for the cash portion, so in part the answer is yes, Jim, but it's also in anticipation of a potential refinance or call or some other trust preferred that has a call date in April of '07.

Although you talked about the attractive pricing, I suspect that it probably had some modest impact on margins in Q4 also and still your margin looked to be pretty strong, so did it have really any impact this quarter?

Pretty modest because it funded the 15th of December.

I see. Okay. All right. Thanks very much. Appreciate it.

Thank you, and our next question comes from Ramsey Gregg from Fig Partners. Please go ahead.

Good morning, Mike and Lloyd.

Good morning.

Hi Ramsey.

Just to be clear, I got that as far as the branch, just following with Jim's question there, so at the end of the year they'll probably have about 85 total branches. Is that including the acquisitions?

Well, let's see. Farmers & Merchants has 14. The bank up at -- the Islander Bank up north at the North Puget Sound region has three, so that's 17. We're currently, I'm told, at 61. Is that correct, Albert?

Yes.

That'd be 78. So yeah, you're about exactly right on. I'm going to guess 85, maybe 88. Somewhere in that area.

All right. Got it.

Yes.

Okay. All right. Then, just kind of any goals here that you might want to talk about as far as loan growth goals, organic loan growth or deposit growth goals for '07?

I actually -- and in our budgets, we have loan growth levels that are not much below the level that we achieved in 2006, and we have every reason to believe that we're going to achieve those goals. We've got lots of opportunities available for us out there in the lending arena. Lending is never our issue.

The other side is always our issue, which is the growth of deposits, and I'm pretty confident you'll see reasonably similar growth in our balance sheet in 2007, as to what you saw in 2006, from organic growth.

All right, and then just one more thing here. Talking about core non-interest income items in the fourth quarter, I think there were a little bit less from a link quarter basis. I'm just kind of curious what your take on that, like mortgage operation impact on income there would be going into the first quarter of '07. Do you think it's going to bounce back?

Well, we actually again in our estimation of what we're going to do in the next year expect to have our mortgage banking operations have a slightly larger number in it in terms of gain on sale and so forth than we experienced in 2006. We think we're going to get rid of several marginal players and we think that those entities that are aligned with builders that are building homes in our particular regions, which we believe are [inaudible] to be in that particular position are going to do considerably better in a proportional basis in the marketplace.

Okay.

Ramsey, this is Lloyd. There's a little seasonality in that business, as well, and if you look as you've done in comparison to the third quarter, it really is important to look in comparison to the earlier quarters in the year as well as last year. Again, I think you see year over year just a slight improvement in mortgage banking, and we continue to believe that we will enjoy success there, so don't let that seasonality in the fourth quarter catch you off guard.

I figured -- I mean, I figured as much, but I just wanted a little --

Actually, as Mike pointed out, given what was going on the Northwest in the fourth quarter weather-wise.

Right. Okay. Thank you.

Thank you. Now our next question comes from Mike McMahon from Sandler O'Neill & Partners. Please go ahead.

Good morning, gentlemen.

Hi, Mike.

A couple questions. I'm wondering if there are any non-recurring or unusual expenses. I mean, it doesn't look like it the link quarter growth was minimal, but was there any that we need to know about? Of significance.

Let me tell you [inaudible] took place. We knew that we were going to have the sell of this -- or condemnation of this branch we had. It's actually in Walla Walla, and it's one of those win-win deals for us in that the branch, when it was built, I'm sure it was fine 15-20 years ago, but it was in an area of a town and a failed shopping center didn't work and it was poorly located and they want to run a major bypass highway through there and so that's great, so they paid us off and we're going to relocate the branch down the way, it's one of the ones we were just talking about, into a much better location.

Because that happened, we were watching the Boise State boys and their opportunities to do in the Fiesta Bowl, and actually Oregon State and Oregon, and we bought some advertising that we would have not purchased because we had that gain coming in the quarter. So that's one for sure that's in there. I have no idea but one of our larger competitors elected not to pick up the advertising in Boise State versus Oklahoma in the Fiesta Bowl in the State of Idaho, and we were very happy to take that coverage over.

What did that cost?

You know, now -- I'm just -- this is an estimate on my part.

Okay.

Something in the magnitude between those three games of about $250,000.

Okay. That's meaningful. So we don't build that into a run rate.

No. Hopefully not.

Mike McMahon. Yeah. Then --

Boise State fans would like us to build it into a run rate.

I understand. Then I noticed that you had a very, very good reduction in average borrowings of about $112 million, which I suspect was made possible by the increase in average deposits of $127 million, and I know that's exactly what you want to do and you made great progress in the quarter. I'm wondering if you can back of the envelope tell me what the incremental difference in funding costs from that was. We can get back to it later, Lloyd.

Yeah, I'm back to the envelope. I might struggle there just a little bit. I mean, it certainly improved the funding cost marginally, but if there's a trend out there that I continue to be uncomfortable with, it's deposit costs, which, I think for everybody in the business, are going to continue to inch up here for a while.

The offset to that is that we continue to see significant, significant competitive pressure on loan pricing, so our margin improvement for the quarter was mixed changes that helped, as you're pointing out, on both sides of the balance sheet, but came in the face of really significant pressure on the core product pricing if you will.

Okay. Then finally, Mike, as you pointed out, seasonal slow down in loans in the fourth quarter last year -- my numbers are right here -- you had average loan increase in the third quarter of '05 of $120 million, which dropped to $51 million. Somewhat similar this time around, and I'm wondering you're expecting -- you just commented on your expectations for loan growth. Could we -- what are your undrawn commitments? I'm trying to get a handle on what I can look at to guesstimate how much loan growth might rebound in the first quarter here.

I mean, presumably with the bad weather there was lower draws on construction loans, which simply should be delayed until the weather got better, so we should see that -- an improvement in the first quarter. Am I thinking correctly on that?

Yeah, I think you are, but I think where the real pickup -- and it will be a bit in the first quarter, but typically speaking in the Northwest, it's going to be starting in the March timeframe and it's going to move into the spring. If you look at that same growth for us, Mike, in the second quarter a year ago --

Right.

It was huge. It's not going to be that big this time, but it's going to be large in the second quarter for us again as I see things today. So yes, the weather -- not only did it affect draws and continuing construction on one to four residentials, it also affected starts, and we -- you could see people not starting stuff for obvious reasons with that kind of mud and crap that was out there. So, we'll expect them to start those houses in the February/March timeframe.

I do have to say though I do believe that we're seeing a bit of a slowdown in the Northwest that I'm frankly a little surprised at. That doesn't answer your question, but we are going to see growth in the first quarter, probably similar to what we had a year ago, but it's going to be stacked towards the end of the quarter.

That's what I have in my model, so that's good. Okay. Stay out of Florida.

We'll try. We actually are trying to stay out of the Tri Cities.

Thank you. [OPERATOR INSTRUCTIONS.]

Our next question comes from Sara Hasan from the McAdams Wright Ragen. Please go ahead.

Hi, guys.

Hi, Sara.

Could you talk about kind of your expectations for the provisioning going forward for '07?

Yeah. Our provisioning and with the loan growth that we're expecting in this next year, which is going to be just slightly less than what we've had in '06 as we sit here today and look at it, is going to be very similar to what we have for provisioning this year. We don't really see significant concerns in our loan portfolios and God knows we've looked really hard at them over the last several months just to make sure that we aren't looking at this thing through rose-colored glasses, but so the provision will be about the same. I actually expect to see that the write-offs will be not that much higher. Net write-offs.

Great. Thank you.

Thank you, and at this time we have no further questions in queue. I would like to turn the conference back to management for any concluding comments. Please go ahead.

Well, thank you very much for all of you joining us on this conference call. We're pleased with the progress we made in 2006. We clearly have a long, long ways to go before we are a good performing bank. We're working on it. We think we actually are fundamentally building a pretty good franchise here that over time is going to be able to sustain some significant profit growth, and we look forward to doing that. We think we're also going to have a chance to be a real force in the banking world in the Pacific Northwest with the addition to our [inaudible] of the operations in Spokane and North Puget Sound.

We think those are important for us. Spokane is the fourth largest financial market in the Pacific Northwest, and we think we're aimed at the right markets in this region, and we're excited about the prospects in 2007. So with that we'll look forward to talking to you at the end of the first quarter.

Thank you. Ladies and gentlemen, that does conclude the Banner Corporation Fourth Quarter 2006 Conference Call. If you'd like to listen to a replay of today's conference, redial 303-590-3000 and use pass code 11080798# to access the conference. Thank you again for your participation today and you may now disconnect.