Banner Corp (BANR) 2007 Q1 法說會逐字稿

[OPERATOR INSTRUCTIONS] And at this time, I'd like to turn today's presentation over to your President and Chief Executive Officer, Mike Jones. Please go ahead, sir.

Thank you, Andrew and thank you all for attending our first quarter conference call. I have here Lloyd Baker, our Chief Financial Officer and Albert Marshall, the Secretary of the Corporation. And again, as we always do at the start of these, Albert, would you read the paragraph relative to disclosures?

Thank you. Good morning. Our presentation today discusses Banner's business outlook and will include forward-looking statements. Those statements include descriptions of management's plans, objectives or goals for future operations, products or services, forecasts of financial or other performance measures and statements about Banner's general outlook for economic and other conditions. We also may make other forward-looking statements in the question and answer period following management's discussion. These forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ are available from the earnings press release that was released yesterday and our recently filed Form 10K for the year ended December 31, 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.

Thank you, Albert. I think next we'll let Lloyd Baker review the quarter and the two acquisitions and then I'll have some comments after that. Lloyd?

Thank you, Mike and good morning everyone. Well, another quarter in the books. As the headline indicates, we did make $7.8 million for the quarter and importantly we did not, during the quarter, but we did announce along with that that we completed the acquisitions of F & M Bank and San Juan Financial Holding Company. Actually, those acquisitions were completed effective day one. So, we're off to a good start with that relationship.

I've tried to think of how to describe the quarter and I guess the two things that come to mind are it was an interesting quarter and it was a challenging quarter. There's really sort of four pieces of information in this morning's press release and I'm going to touch on each one of them a little bit.

The topics really are fundamental banking, accounting, acquisitions and capital management. I think that I'll start with the fundamental banking issue and that may be where I would say the quarter was challenging. Like everyone else, there's a lot of headwind that we're running into economically and the first quarter being short, sort of exacerbates that. I'd characterize it as we're working a lot harder and we're making a little more money. The real issue seems to be pricing pressures effecting net interest margin and we, like everybody else, experienced those pressures in the quarter and as a result, the margin was off a little bit. The pressure continues to be, I think I sound a bit like a broken record, but the pressure continues to be significantly on loan pricing, as competition and an inverted yield curve make that a bit of a challenge. And you can see that in that our loan yields were actually off one basis point compared to the prior quarter.

Deposits are getting a little bit more expensive. In our case, that in part reflects our significant efforts to grow and some of the pricing issues around those new growth initiatives. But the pressure on the margin was offset significantly particularly by comparison to a year earlier by just what I mentioned, growth in loans and growth in deposits. The growth was certainly slower than in some of the previous quarters, but on a year-over-year basis we saw that loans were up 17% and deposits were up 21%. That growth, coupled with changes in the mix was such that net interest income was 8% greater than it was a year ago and revenues were actually 9% greater than a year ago. So, changes in the mix on the asset side continue and they help us deal with what, again is a challenging pricing environment.

In terms of non-interest activity, it was really a pretty good quarter. We saw non-interest revenues up 14% on a year-over-year basis. Deposit fees were 19% more than they were a year ago. Mortgage banking continued at a good pace. And so, on that fundamental side of the banking business, it was a good quarter. It was a short quarter and that affects us not only in terms of net interest income but also in those areas of deposit fees and mortgage banking and yet by comparison even to the prior quarter, those numbers look good. We did have one a nominally in the 4th quarter that, when you're looking at non-interest revenues and you need to remember that's in our miscellaneous income line, we had a $670,000 gain on the sale of a branch site in the 4th quarter. So, really 14% non-interest revenue growth year-over-year was good and by comparison to the prior quarter it was good.

Operating expenses, we continue to grow as evidenced by the four additional offices we opened just during the 1st quarter and certainly all of the growth activity that we experienced last year. Nonetheless, operating expenses were up less than non-interest revenues. They were up 12% and really well-behaved by comparison to the prior quarter versus the 4th quarter. On an annualized growth rate, operating expense was up about 4%.

So, fundamental banking is that there is pricing pressure that the industry is dealing with, that Banner Bank is dealing with. There's growth going on at Banner Bank, which is offsetting that to a significant degree. And the other fundamental banking issue that's out there is loan quality, which continues to hold up quite nicely and as a result our loan loss provisioning is right in line with where it's been for recent quarters. Generally, our credit quality indicators were all good and net charge-offs continued to be at a very low level.

So, fundamental banking is challenging, for us and everyone but it's going forward and making some nice progress.

The accounting issue that we need to address and I think it's fairly well laid out in the press release. But we did elect to adopt FAS159 effective January 1, 2007 and the related FAS157. These accounting pronouncements deal with fair value accounting. As part of that election, we put our entire available for sale securities portfolio on a fair value accounting basis effective January 1, as well as our home loan bank advances and our trust preferred or junior subordinated debentures. Those accounting adjustments resulted in a charge to retained earnings at the beginning of the quarter, but the bulk of that charge that was about $3.5 million, of course had already hit the equity accounts at the end of December through our normal market-to-market process on our portfolio. So, it was a fairly small adjustment to the capital accounts. And then somewhat to our surprise during the quarter, interest rates actually declined and that led to a gain in the fair value, a net gain I should say because not everything went in one direction, but a net gain on the fair value of the financial assets and liabilities that are subject to FAS159. We made about a $755,000 contribution, after tax to the 1st quarter.

We elected this accounting treatment. We really think that this is just the next step in the inevitable march towards fair value accounting for all financial instruments. And we thought electing that treatment at this time, it [inaudible] for Banner Corporation. It gives us additional flexibility in the ways that we manage wholesale assets and liabilities on a go-forward basis. And we just think it makes sense for the Company.

The third fundamental issue in the press release is the acquisitions. I've already touched on that a little bit. We did close those acquisitions, just yesterday. The F & M acquisition here in Spokane where Mike and I are today added $422 million of assets to the Company's balance sheet. And provides us, we think some really exciting opportunities here in Spokane. I'm sure Mike is going to have a lot more to speak to in that area.

The San Juan Financial acquisition up in North Puget Sound region added $157 million worth of assets, $116 million in loans and $122 million in deposits. So, actually that's about $487 million of new deposit growth, if you will, through acquisition that will begin affecting us in the quarter that we are now in.

The final issue theme in here that I think that I should bring to your attention needs to be addressed a little is capital planning and capital management. We looked at our growth plans and our pending acquisitions and our hopes for possibly future acquisitions and we decided that we needed to augment our capital base a little bit. We put together a shelf offering for $150 million and filed that in December of last year. But we also put together a new element to our dividend reinvestment plan, adding a stock purchase component to that. And we were very pleasantly surprised by how well that plan was received in the market during the first quarter. That reception allowed us to issue 646,000 additional shares at about $40.91 a share. It added $26.5 million to our capital base through that dividend reinvestment plan. We think, as I said, that that gives us the capital position as we move forward with what we think are some pretty aggressive growth plans to manage our capital better. And one of the elements of that, also it's not reported in the current quarter's press release because it actually occurred subsequently was that we added a $25 million piece of trust preferred or junior subordinated debentures that we eligible for call in the month of April. We did call that. That was the first trust preferred security that we issued five years ago and as many of you know, that market has matured significantly. Spreads have come in a great deal and so by calling that debt and at least on an interim basis, replacing it with equity, we eliminated some of the most expensive capital in our capital structure.

So, in combination the pay down of that debt, the issuance of stock, the flexibility that we have going forward with respect to managing some wholesale assets and liabilities, we think we'll bode well for the margin on a go-forward basis. Notwithstanding the fact that like everybody else in the business, we'll still be dealing with a very difficult interest rate environment and some pretty intense pricing pressure.

So, I think that that touches on the themes for the quarter. I'm sure that you'll have specific questions, once we open it up. But before we do that, I think we'd like to ask Mike to comment.

Thanks, Lloyd. Yes. The 1st quarter, if you would have asked me about the 1st of February or the 8th of February, we actually had [loans] decline at that point and time, which is a part of being an agricultural banking getting paid down in your ag credits. But also because of the weather that had taken place and where we'd billed an awful lot of residential construction. In Puget Sound and Portland in the November, December, January timeframe they had record amounts of moisture and therefore not a lot of starts were done during that period of time.

So, at that point and time I was a little nervous about how the 1st quarter was going to come out. But frankly, as we got into the March timeframe and then continued into the April, we've seen very nice growth in our loan portfolio and our deposit portfolio has even accelerated its growth rate during that period of time.

So, if you annualized our numbers at the end of April, we would be seeing loan and deposit growth both at about the 18% clip for the year 2007. And I have something that we've been working hard at trying to accomplish, which is to improve and deepen our commitment and the number of customers in the commercial banking area. So, in the month April we actually had our commercial industrial loan portfolio grow at a faster rate than our real estate portfolio did. And real estate had nice growth. But the point of it is that we're starting to make some progress in the commercial side of banking also.

Lloyd covered the commentary relative to the [inaudible] margin which will come to us through these acquisitions. They both have considerably lower priced deposit portfolios than we do and we think that they will help our margin on a go-forward basis.

The other comment I would make relative to Spokane and the F & M franchise is they have the best branch distribution network in the Spokane area of all the banks that we compete against. And we're very pleased to add that to our franchise. It really needs very little addition to it, the branch distribution network, to be a complete franchise service for this particular area. So, we're excited about that, having them come onboard. And the other thing is that we've gotten to know them over the last three months, even better, during this period of getting ready to do the acquisition and so forth, is we were impressed with the quality of people that are in the F & M bank franchise and we're excited to have them join our organization.

So, with that, I think we'll get to the things that more interest you and let you open it up for questions at this point.

Thank you, sir. [OPERATOR INSTRUCTIONS] One moment please for our first questions. Our first question will come from the line of Ramsey Gregg. Please state your company affiliation followed by your questions.

Yes. Good morning. Ramsey Gregg with Fig Partners. How are you doing Mike and Lloyd? [Inaudible] going on in the quarter, I'd say. Just basically talking about F & M and Islanders, looking forward here, just the efficiencies you'll be realizing, that would probably be coming more in the 3rd quarter than the 2nd quarter? And then also, just talking about branching, still looking to add what? Three to six more branches for the reminder of the year and the timing of those branch openings?

Thanks, Ramsey. You're right. The actual conversion of the F & M franchise into our operating systems will be in the third quarter of this year. And the Islander Bank will be either in the 4th quarter or the 1st quarter of next year. So, those key a big part of the efficiencies that we're looking for out of the F & M transaction.

We estimate that there's about $1 million in saving in the data processing arena by making that conversion in the F & M transaction. And of course somewhat considerably less than that as it relates to Islander because it's a big smaller.

But that's important to us. In the meantime, of course, a number of other functions within the F & M franchise will be incorporated into our operations and with that will come some efficiencies that we expect in the 2nd quarter. You will actually see some of those taking place in our numbers that are reported.

Islander Bank will be pretty much left alone, as a franchise. We also think they have some very good people up there. But we want to make sure we do this conversion of F & M well and don't get ourselves over committed to trying to do two at once. So, we've elected to do the F & M franchise first and then followed with Islander.

So, the expense savings will be not as quick in the Islander franchise, although we were going to do some restructuring of their balance sheet, which will significantly enhance their earnings on a go-forward basis.

Lastly as it relates to our [Jernoble] branches, we do have some more branches that we hope to open during the course of 2007, but for the most part they're late in the year in the 4th quarter for those to take place. So, we don't expect to have a whole bunch of branches opening up here in the next 2nd and 3rd quarter.

Okay. So, we're looking more towards the 4th quarter of the year then?

Yes.

And just kind of looking here at the margin. I know in the release you talked about, I mean I know pressure remains, but then just talking about some of your other parts that have occurred here with the acquisitions, [press] [preferreds] and all that. And just kind of trying to get that [inaudible]. And there will probably be some decent margin expansion here on a link quarter basis in the 2nd quarter.

Well, we think so. Although we need to do several things, including eliminating the investment portfolios of both of those banks and which we're now in a position to be able to do. I'm going to digress just for a moment here, Ramsey. We, since I came on board, we have paid down the Federal home loan bank borrowings from about $750 million or thereabouts down to less than $100 million during the course of the 1st quarter.

Right.

That went up a little bit because there was a cash component to the purchase of those two banks. But nevertheless, we fully expect to have the Federal home loan bank completely paid off by the end of this year. And with that, it can serve as a secondary source of liquidity for us the way we used to think of investment portfolios doing that. And so, with a smaller proportionally speaking investment portfolio, not only from those two banks but also our own, you will see a growth in our net interest margin take place, beyond just the acquired deposit portfolios of those two banks.

Thanks

Thank you. Our next question comes from Jim Bradshaw. Please state your company affiliation followed by your question.

Good morning. D.A. Davidson. Hi Lloyd. Hi Mike. Lloyd, as I understand the stock purchase component, it was an annual election so there's a big surge of share issuances in the first quarter and then you'll have more normal dividend reinvestment issuances in Q2, Q3 and Q4; is that right?

Not quite. That purchase plan has a waiver provision for beyond a [deminimus] amount that shareholders can purchase, an election on part when people request that waiver whether we do or don't want to issue additional shares. We were very pleasantly surprised in the 1st quarter by the amount of interest in those waive-type purchases. And so that really accounted for the biggest portion of that $26 million. Now, we only registered 1 million shares under that plan. And we issued 65% of it in the 1st quarter. So, it's obviously not going to continue at the same pace. And beyond that, I don't how to tell you what [technical difficulty] our expectations are in terms of requests for waivers. I do think that it's clear that we're not going to continue issuing $26 million worth of stock every quarter.

Got it.

Jim, when we first started on this program, we were thinking in terms of about $40 million of common equity. And we clearly at $26.5 million in the 1st quarter are along ways towards what we were going to need. So, you will see a slow down in the remaining quarters of the year.

Fair enough. The second question I had is it looks like about a $5 million jump in the quarter in property and equipment and I suspect that's from the branches. But I just wanted to confirm that, the new branches I should say. I just want to confirm or is there something else going on?

No, it is all in the branches.

Okay.

And a little bit in some software systems.

Got it. And then the last thing. I've been seeing a lot of advertising and marketing on the deposit side for you guys recently and a big jump in regular savings account balances this quarter. Can you talk to me a little bit about the marketing and pricing on that product?

Sure.

Sure. That, you know, I think we've talked to all of you in the past that one of the things that we do when we open new offices is we generally have some sort of a special product that we try to get people into. And one of the most recent ones was right there in your neighborhood, Jim, with our downtown Portland office that opened in late March. And by the way, we're really excited about that office. So, the product of choice there an also in an office that we opened over in Boise in the 1st quarter was a high-yielding savings account where we do pay a higher than our normal rate for a period of time. I believe we guaranteed that rate for 6 to 12 months, depending on the location.

So, that accounts for a significant portion of that jump there. But we're also just seeing good growth throughout the system.

And that promotional pricing was just in those two offices? So, those offices accounted for must of that growth in the quarter?

Well, we also let the offices that are surrounding that -- branches surrounding that new location offer it to their customers. I can't imagine a way to make our customers more irritated than make them go down to the other branch to open up the same account.

Got it. That's what I was fishing for. Thanks. Appreciate it, guys.

[OPERATOR INSTRUCTIONS] Our next question will come from the line of Jason Werner. Please state your company affiliation followed by your question.

How Barnes. Good morning, guys. My question is in regards to the adoption of FAS159. I was kind of curious what your intentions are with the securities portfolio now that you've got it at fair value. Do you intend to reduce that or just kind of keep it on the books at fair value and adjust it market to market for the quarter?

We will be reducing it probably to the tune of $75 to $100 million over the course of this quarter. Most of those positions, as you can well imagine are carrying very low interest rates by comparison to some o four short-term debt. I mentioned the fact that we paid down some trust preferred debt in the month of April. We also have some wholesale liabilities that were part of that [mark] to market that we'll be taking a look at.

So, as we made clear for some time, our intention is to continue to shrink that portfolio until such time as there is an opportunity to make any money off of it, which clearly isn't there today. If we found ourselves in the fortunate position of having a lot more deposits than loans, then we'll take another look.

Now having said that --

I would be really unhappy if --

Having said that, we are not going to sell everything that we put on a fair value basis by any stretch of the imagination. And so, we will, on a go-forward basis have some volatility in our earnings, with respect to those fair value adjustments. We don't think they're going to be large by comparison to the other earnings components in this statement. But that potential is there. We will have assets and liabilities, both on fair value and so they tend to offset each other to a degree. But right now there is more duration on the asset side than on the liability side.

Okay. And then also I'm curious if you can address any concerns regarding accounting risk for the adoption? Obviously, there are a number of financial institutions across the country that were looking at doing this and a lot of them chose not to, given some potential repertory scrutiny. I'm kind of curious of what you guys think about the risk there?

I think that, and this was a big part of me talking that inevitably we're all going to be doing this. And we might as well get about it and get used to operating within that environment, sooner than later. I just think that the AICPA and the SEC want financial instruments market-to-market and the way they did it this quarter by giving you this early adoption opportunity, was to encourage you to do it. Pretty soon they're going to make it very difficult not to adopt them.

Jason, we did have extensive conversations with our accountants over this issue and we're reasonably comfortable that the way that we have gone about this, which again included not just a selected cherry picking of the investment portfolio, if you will, but the entire available for sale portfolio, including portions that we intend to hang on to, as well as liabilities that in the case of the junior subordinated debentures in particular, are going to be on the books for some period of time. Addresses the concerns that surfaced with some of the strategies that were being pursued to really rifle shot this thing to just those few positions that was a big advantage to doing it on. So, we're reasonably comfortable. Obviously, the accounting profession has been looking at this very hard over the last 45 days.

Okay. And one last question. I think you said and just to confirm what you said that loan growth through April was 18% annualized?

Yes.

Okay. Thank you.

Thank you, sir. Management, at this time we have no additional questions in queue and we'll turn the conference back to you for any closing remarks.

Thank you very much, Andrew. We appreciate you all listening in on our 1st quarter conference call. We're very pleased with the two new acquisitions that have come into our organization. We think they will add a lot to us as we go forward. I'm also much more pleased with the growth that was taking place on our balance sheet in April and during the 1st quarter of the year. I think it had a lot to do with the weather. The economy in the Pacific Northwest remains very strong, particularly where we do a lot of our work in Puget Sound and the greater Portland marketplace. And so as a result of that, we're optimistic as we go forward for the remainder of 2007.

I look forward to talking to you again in July. Thank you.

Thank you, sir. Ladies and gentlemen, at this time we will conclude today's teleconference. We do thank you for your participation on the program. If you would like to listen to a replay of today's conference call, please dial 1-303-590-3000, with the access code of 11086723 pound. Once again, if you'd like to listen to a replay of today's teleconference, please dial 1-303-590-3000 with the access code of 11086723 followed by the pound sound. We thank you for your participation on today's conference. We will conclude and please have a pleasant afternoon.