Banner Corp (BANR) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Banner Corporation's second quarter 2007 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today, Thursday, July 26 of 2007.

I would now like to turn our conference over to Mike Jones, President. Please go ahead.

Thanks, Rose. Welcome, everybody, and thank you for listening in on our conference call. Sitting here with me today is Lloyd Baker, our Chief Financial Officer, and Albert Marshall, the Secretary of the corporation.

Let's first start off with a paragraph that Albert will read for you and then we'll follow that up with some comments by Lloyd. Albert?

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 (inaudible) 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. Information on the risk factors that could cause actual results to differ are available from the earnings press release that was released yesterday and our recently filed Form 10-Q for the quarter ended March 31, 2007. Forward-looking statements are effective only as of the date they are made and Banner assumes no obligation to update information concerning this expectation.

Thanks, Albert. Lloyd, weren't you going to have some comments about the results for the second quarter?

You bet, Mike. Thank you. Good morning, everyone. As always, I think the press release pretty well lays out the quarter and I most look forward to your questions, but I do have two observations, so I guess sort of big picture observations I'd like to make on the earnings release. First one is fairly obvious; we're a much bigger company than we were a year ago at $4.3 billion in assets at the end of the quarter, in round numbers. Importantly, loans increased year over year by just under $800 million, or 28%. Certainly that reflects the acquisitions, but it also reflects strong internal growth. Deposits were up $1 billion year over year. I kind of like to say that number, it's fun. That's a 39% increase in 21% internal growth over that period of time. Transaction and savings accounts importantly up 48% compared to a year ago.

But the signs of the growth in the Company are not just evident in the balance sheet. In the quarterly results, you see net income from recurring operations with $8.3 million. That compares with 5.9 a year ago. That's a 40% increase year over year. Net interest income at $38 million was up $7 million year over year, and that represents a 22% increase. Revenues, excluding the fair value adjustments, were up 24%. Other income up 37%. Deposit fees up 41%. As I said, we're just a much larger company than we were a year ago and that's really the first observations I'd make.

The second one is that though you wouldn't think so, based on recent stock performance, we really had a pretty good quarter. We closed two acquisitions. We announced a third acquisition. We had net income from recurring operations that increased nearly 18% on a linked quarter basis. Our net interest margin expanded from 3.94 in the first quarter to 4.11 in the current quarter, and that produced nearly $6 million of additional net interest income. Deposit fees were more than a million dollars larger than they were for the period just 90 days earlier. Mortgage banking revenues were up by nearly a third -- actually a little more than a third by comparison to the previous quarter. They're also up compared to the year earlier and they're up for the first half of the year. And loan growth accelerated in the quarter by comparison to the first quarter. So all of those were very positive signs.

Now, to be fair, expenses were also up significantly, reflecting the acquisitions, as well as the new branch expansion that continued. And net income per share was on a recurring -- recurring net income per share was essentially -- was not essentially, it was unchanged at $0.56 per share compared to the first quarter, as we had a lot more shares outstanding to divide that increased income for the quarter by, and as we have not yet realized really in the reported earnings any cost savings from the integration of the two acquisitions that we anticipate we will see in future periods.

We also had a slightly larger loan loss provision -- I'd say modestly larger -- at 1.4 million than we had in the first quarter. And it wouldn't be appropriate if I skipped by the fair value adjustment that we -- as you all know, we put our securities portfolio and some of our liabilities on fair value accounting, and while that was a $1.2 million gain in the first quarter, it produced a $1.9 million charge in the second quarter. That income volatility is something that we expect but -- sets that are accounted for that way, but is really, in my mind, a fairly modest amount and would have occurred regardless of the accounting.

So as I said, a fairly good quarter, but I think from my perspective, perhaps the most significant success for the quarter is reflected in the deposit schedule that's on Page 7 of the announcement. On that schedule, you can see that we actually increased deposits by $672 million compared to 90 days earlier at March 31, but what isn't evident and what is really significant is the amount of internally generated growth in those deposit categories over that 90-day period.

Excluding the balances that were brought across in the merger, total deposits increased by $200 million in the quarter. That represents an annualized growth rate of about 23, 24%. Importantly, non-interest bearing deposits were up about 11 or 12%, internally generated rate. And total transaction accounts increased by 37%, internally generated. So we really believe that this deposit growth is laying the foundation for improved earnings performance and sustained franchise value as we go forward into future periods and it's really the key reason that I can suggest to you that we did have, as I said earlier, a very good quarter in the second quarter 2007.

So with those two sort of broad themes -- bigger company and really a pretty productive quarter -- I'm going to turn the speaker phone back over to Mike here and, as I mentioned, look forward to your questions.

Thanks, Lloyd. Couple of observations that I have. As you're all aware, since we last had a chance to talk with you all, we have closed the acquisition of the two banks -- F&M Bank in the Spokane, Washington, area and Islanders Bank, which is located in the North Puget Sound region. I would like to reaffirm what we suspected and knew from the beginning, that the quality of people we have found in those two organizations, and particularly at F&M Bank, has been a very pleasant surprise because it's a need for us in the banking industry to continue to have good people, and we have found some very good people that are looking forward to joining our organization and will help us as we continue to grow.

We have a similar small bank that we acquired in the -- or going to acquire, excuse me -- in the Wenatchee, Washington area that will take us from being a fifth place market share in that market to a second place market share in a market that's a nice market that's growing fairly rapidly, and we're excited about that opportunity to also. And we expect to close that in the fourth quarter of this year.

So with that, I think what we should do is probably answer your questions as best we can, so we'll turn it over to questions at this time.

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. (OPERATOR INSTRUCTIONS) Our first question comes Matthew Clark with KBW. Please go ahead.

Good morning, guys. Just a few questions. Can you first give us a sense, you were able to bring on board San Juan, which I know had really negligible problem credits in F&M, but you brought them both on with a limited uptick in terms of dollars of NPAs. Have you already or do you expect to merge them onto your classified methodology that might result in a more conservative risk ratings that might drive your balances up next quarter?

At the present time, F&M is under our risk rating methodology, and we're just in the process of completing that at Islander, and we don't expect any uptick from our changing their system to ours. Both of those banks had good loan portfolios and we're pleased to have not found any major surprises.

Okay. And just your general outlook on credit, I mean, are you still somewhat surprised that you -- and maybe you are seeing it, we just haven't seen it yet, but are you seeing any migration on the watch list, for example? Are you surprised that, you know, at the level you're at right now, given what we've seen among some of your other competitors?

No, I'm not surprised because of the credit people we've had in place and a discipline we've had in place over a long period of time as it relates to those kinds of credits. I think you maybe have heard us say -- and others for sure have heard us say -- that we have seen people that we compete against give up on structure of credits far too easily over the past several quarters, and we decided and have not done that. So as a result of that, we feel that our portfolio is in better condition than perhaps some of our more aggressive peers.

Now, let's be honest about it also. We see and have slowed down significantly our growth of construction lending in the Bellingham, Washington, marketplace -- we actually did that several months ago -- and in the Boise, Idaho, marketplace because we believe those two areas are much more likely to mirror the national economy than are other areas that we do a lot of that construction -- in the Puget Sound and Portland, Oregon, marketplace. So we have anticipated those problems and therefore will probably have less issues coming out of those markets.

Okay. And then on the margin, it was obviously up, partly benefiting from the deals. Can you give us a sense of magnitude as to what the two deals contributed to the margin expansion this quarter?

Yes, Matt, it's Lloyd. You know, they certainly had -- the lion's share of the improvement in the margin can be attributed to the two transactions, and so we were up -- what was that, we were up 17 basis points. But we also had continued improvement in our asset liability mix that was driving that. We did sell some lower yielding securities. We did pay down some higher costing debt during the quarter. And as I mentioned earlier, we had good success on transaction account growth. But I'd probably -- I haven't scaled it exactly, but I'd probably attribute about 80% of that to the acquisitions.

Okay. And then lastly, if I may, on the buyback -- the new buyback -- can you give us a sense as to your appetite or the pace at which you might buy back your stock over the next few quarters?

At this level pricing, we're going to exercise it all and buy it all back. I think that's the best thing we can do for our shareholders. We think the stock is, in our mind, is undervalued, so.

Fair enough. Thanks, guys.

Thank you. Our next question comes from a Jim Bradshaw from D.A. Davidson.

Good morning.

Hi, Jim.

Lloyd, were there any merger related costs that you expensed in the second quarter?

Fairly minimal other than the -- you know, we began the amortization of the core deposit intangible. That was about $350,000 for the quarter. Remember, we only had the acquisitions in place for two months, but as I mentioned earlier, we have not implemented all of the integration activities that we expect to, and so there wasn't a lot of expense in the quarter, but there also wasn't a lot of cost savings in the quarter.

What's the time line then on integration on the back office side for the two deals?

We will be converting the F&M data processing system on the weekend of August 17th. There's a whole lot of people here working very hard on that process right at the moment. They had their first test conversion over this past weekend and it went very well and so we're optimistic. So it's really -- you know, really it's going to be the fourth quarter of this year when we'll start seeing the real benefits of the integration.

And as it relates to Islanders Bank, we will wait until we acquire the other small bank. They're both serviced by the same IT provider -- i-Tech -- and we will convert both of them probably in the mid first quarter of next year, but as it relates to the F&M transaction, which we will convert in the middle of August, there's a million dollars of savings in data processing on an annualized basis that relates to that conversion.

Okay. Thank you. Mike, would you comment on the M&A environment? You've been one of the more active guys, and I guess your stock's down 10% or so since the Wenatchee deal was announced. Sounds like your shift into buyback mode, but would you say that sellers' expectations would come down a little bit with stock prices, too?

Yes. Some of them. Some of them. As you're well aware, Jim. You could clearly see it in our acquisition of the Wenatchee bank. And I have to reiterate -- I really want everyone to understand this -- that we are really not in an acquisition mode. And frankly, we are not in a position, with our back room and the conversions we have, to be able to do a lot more of that for quite a period of time. We want to capture the savings from these transactions we currently have, but a lot of smaller banks are for sale in the Pacific Northwest and we are hearing from various investment banking firms that want to provide books on those banks to us. And we'll look at them, but I'm going to guess we're going to have to slow down here for a period of time. And frankly, our organic growth is strong enough now that we don't need to do some acquisitions. 18 months ago, we looked pretty hard for an acquisition in the Boise, Idaho, marketplace and with the branch expansion we've done down there now, we don't need them. We're just going to take their business away from them.

Sort of playing on Boise, are you seeing a slowdown in other loan categories and the deposit side there, as well as construction lending?

Not on the deposit side. And you know, Boise's economy, other than the one to four, currently is still fairly strong. And as you -- we can all talk about it, but Boise is driven a lot by what happens in ag in Idaho and, you know, ag in Idaho right now is pretty strong. So clearly the Micron situation is going to have a damper on it, but there's still a lot of immigration into the Boise, Idaho, marketplace.

And then last for me, with the reserve up this quarter, can you talk a little bit about how the general versus specific reserve allocation has changed over the course of the last quarter?

The unallocated reserve I'm going to guess is about 400,000 or $200,000 less at the end of June than it was at the end of March.

Okay. And have the classified asset levels begun to slow down, too?

Well, we've added -- we've put just about every one of our builders on the watch list just because we're nervous about that area, but in general, the classifieds are about where they were before, and the past dues are at an amazing level. Our past due loans are at 0.5%.

Great. Thank you very much for the color, guys.

Thank you. Our next question comes from Ramsey Gregg from FIG Partners.

Good morning, guys.

Hi, Ramsey.

Just wanted to follow up with the operating expense items and just kind of -- you know, looking forward here over the next couple of quarters, so then it sounds like in the third quarter, you might see another kind of a bit of an uptick, not simply -- not to the level that it was here of the second quarter over the first quarter, but an uptick in the third quarter and perhaps more flattening then in the fourth quarter. Is that accurate?

Well, for starters, Ramsey, in the third quarter, we'll have three months instead of two months from the two acquisitions. And we also will have the effect of additional branch openings that occurred this quarter, and I think we have one or two that are going to happen in the next quarter. And that's the quarter where you may see a little bit of unusual one-tenth activity in terms of integration costs. But the other side of the coin, you know, we will start more effectively achieving some of the integration savings that we expect and we'll see increased revenues as a result of the size growth.

Okay. I appreciate that. And then I know that in the release, you mentioned that you are rapidly reaching -- I think the word "rapidly" was used -- a sufficient number of branches to decelerate the de novo expansion. I'm just trying to get a sense of, you know, if you know kind of what that number might be and then when you expect to reach it. Looks like kind of an uncertain number at this point.

That was the one word they let me put in there. You can take these words out. But we actually are -- at the end of the year, we're going to be at about 85 to 87 branches, counting the new acquisition that we'll be doing in the Wenatchee area at the time. And my idea is that a bank that's doing anything in building it franchise probably, from that side, could open six to seven branches a year and not even have to talk about it because it ought to be a part of what you're doing in trying to fill in in your marketplace, which is what we will do. But as you can see in the statement here, the number of branches we've been opening would clearly slow down dramatically from that level and we've already built that into our strategic planning process here.

The goal here was, from the very beginning, was to pay off the Federal Home Loan Bank borrowings, use it only as a secondary source of collateral, build a deposit base gathering base that is big enough from a branch system to fund our loan growth, which we would like to do, and then we would have what we think is fundamentally a good bank. The second step of that whole process is that we would then begin to gradually price down our deposit portfolio and widen our margin by doing that, particularly as we fill out this de novo branch expansion program.

Okay. And just, you know, I guess in that vein, as far as what you're seeing on the positive pricing competition these days, is it getting any better or does it pretty much just continue to be as challenging as ever?

I think we've got some crazy credit unions out there right now that are doing some amazing things, and frankly, a couple of the large banks are doing some amazing things on the deposit side. And you've probably seen it across the United States, but we've seen Key and US Bank do some -- and Wells Fargo, for that matter -- on a couple of specials do some pricing that just makes you scratch your head. So it's no less competitive than it was before.

Okay. Thank you very much.

Thank you. Our next question comes from Sara Hasan from McAdams Wright Ragen.

Hi, guys.

Hi, Sarah.

Kind of piggybacking off of Ramsey's question, as you look forward to slowing down your de novo expansion, do you have an efficiency ratio goal kind of in mind?

Well, our board of directors does. (laughing) And they would like to see it in the low 60s and that's where we need to get it, but we need to drive our margin to get there and slow down our expenses from the de novo expansion.

Great. Thank you.

You bet.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from Jason Werner from Howe Barnes. Please go ahead.

Good morning.

Hi, Jason.

Just a couple of kind of follow-up questions. Most of my questions were answered. On the margin side, given that the acquisitions, which drove 80% of the increase, were only two months' worth, does that go to say that you expect some additional expansion on that just solely due to those two deals in the third quarter?

There's great danger in what I'm about to tell you, and the CFO wouldn't tell you this, but the net interest margins for the bank in the month of June was at about the 4.20 level and it's always a great danger in annualizing a one-month deal margin, but I would be hopeful that we would continue to see some modest growth in our net interest margin over the next few quarters.

Okay, and then another follow-up question on the expense side, you guys had in the press release that you repaid your junior subordinated debentures -- trust preferred. I was curious if there were any amortizing costs that you had to incur when you repaid that.

No, we actually did have some deferred underwriting expenses associated with that at the start of the year, but as you'll recall, when we adopted FAS-159, we did put those trust preferreds were one of the items that we put on fair value.

Okay. I see. All right, thank you, guys.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) And next question comes from Kipling Peterson from Columbia Ventures Corp. Please go ahead.

Good morning. I thought perhaps you could provide some color on your ag business.

Happy to do that this year. This is going to be one of those great years where things have lined up, almost without exception, across the whole crop spectrum of good quality harvests with good product and nice prices. The farmers are going to have a terrific year this year.

And do you see yourselves growing that business or will that become less and less of a mention?

Well, we'll grow the business in absolute numbers. We believe to bank those communities that that revolves around you have to, and we will, bank agriculture. As a percentage of our overall portfolio, I believe it will continue to decrease in size.

Great. Thank you.

Thank you. And we have no further questions. I'd like to turn it back to management for concluding comments.

Well, thank you all very much for taking the time to listen to our second quarter results. We appreciate chatting with you and we look forward to talking to you again at the end of the third quarter. So again, thank you very much.

Thank you. Ladies and gentlemen, this does conclude the Banner Corporation second quarter 2007 conference call. You may now disconnect. Thank you for your participation and please have a pleasant day.