Banner Corp (BANR) 2008 Q1 法說會逐字稿

Good morning ladies and gentlemen. Thank you for standing by. Welcome to Banner Corporation's First Quarter 2008 Conference Call. [OPERATOR INSTRUCTIONS] This conference is being recorded Thursday, May 1st, 2008. I would now like to turn the conference over to Mr. Mike Jones, President and Chief Executive Officer. Please go ahead sir.

Thank you Kristen. This is Mike Jones. And thank you all for listening this morning to our first quarter conference call relative to our earnings performance in the first quarter. Sitting here today with me is Lloyd Baker, our Chief Financial Officer; Albert Marshall, the Secretary of the Corporation; and Rick Barton, who is the Chief Credit Officer of the company also.

Before we get started, I think we need to have Albert read the first 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 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 10-K for the year ended December 31, 2007. 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.

Thanks Albert. I'm going to start this conversation off with relative performance in the first quarter because I suspect the two primary areas of interest are in the level of the provisioning for possible loan losses that was in the first quarter at $6.5 million, and secondly the net interest margin compression that took place in the first quarter. And then a little later in the presentation Lloyd Baker will be talking about that part of it.

As it relates to the asset quality issue, first of all I need to apologize to you all. I frankly was wrong in the first quarter when I said I thought we had peaked in terms of the growth in our non-performing assets. It's very clear that did not happen. We grew an additional $18 million in the first quarter of this year. We had great expectations on some of our projects for resolution during the quarter and frankly some of those just didn't take place. And in addition to that, a couple of them that we thought were going to do okay turned out to not do as well as we thought.

As you're well aware, the one-to-four residential area is the concentrated area relative to our non-performing assets. It represents about 31% of our loan portfolio and 80% of the problem assets are coming from that particular area. Before we get more deeply into that, I need to say that as it relates to deterioration of credit in the other parts of the portfolio, we do not see that. We in fact see a very strong performance in our consumer portfolio and our C&I loan portfolio. And of course most of you are aware this part of the world has agriculture. And agriculture last year had an absolutely barn burning year and we fully expect they're going to have a similar year in 2008. So those areas of our portfolio are not subject to deterioration.

In the one-to-four area, however, we need to kind of size this and place it for you so that you understand where this portfolio is. As you're mostly aware, 80% of what we do in this particular area is in the Seattle area. And I'm going to phrase it as Seattle/Puget Sound. I say Seattle to you because many of you on the east coast know that better than just the Puget Sound area. But I do have to say the Puget Sound area stretches for about 60 miles south of Seattle and probably for about 90 miles north of Seattle. So when we talk about that, it's a larger area than just the city limits of Seattle. But 80% of our portfolio is done there or in the greater Portland marketplace. And when I speak of Portland, I'm also including a suburb across the border in the state of Washington called Vancouver, Washington, not BC.

The split of the portfolio is roughly about even, 50/50 between those two marketplaces. 9% of what we do in the one-to-four construction and A&D area is located in the greater Boise, Idaho marketplace. And the rest of it is scattered across our system from Spokane, Washington, to the smaller cities in eastern Washington and so forth. And in general, those particular areas are doing very well. Housing is doing just fine. And it's largely driven off of the agricultural economy of those areas.

Now as it relates to the 80% of the non-performing assets in the one-to-four construction area and the A&D area, we need to place them for you. $22 million of that total is in the greater Portland area, which represents 42% of our non-performing assets. $16 million is in the Seattle/Puget Sound area which represents 30% of the non-performing assets. And $12 million is in the Boise, Idaho marketplace, which represents 24% of the portfolio.

I think you can see that we are reasonably diversified across several communities. Those communities are performing differently than and they don't all perform the same. And I'll cover that in a little bit in a moment. Secondly the portfolio in general is very granular in that we do not have big exposures to any individual contractors or builders. And we tend to spread it across those areas fairly carefully so that we don't have concentrations in any one specific neighborhood.

Lastly, I need to tell you we have a very experienced special asset group that worked through this liquidation process. They've been in place with me for about five years here as we went through the earlier phase of this about five years ago when I first came on board. And I elected to continue to keep them on board and to work some other areas in there and they are now back in place and working the special assets. We have very experienced people in those areas.

We have very little exposure to the condo market. We have very few condo projects that we are financing. We have none in the very high end area. I frankly think we could count the number of condo projects we're financing as small and by that I mean under $8 million each and all of them located in our market footprint.

We had very diligently gone after and have gotten current appraisals on all of our projects, well the vast majority of our projects. I'm sure there's some we don't have it on. And we know the builder borrowers very well. We have very few new customers that have come into our bank portfolio and the builder area in the last few years.

We've done an analysis on a loan-by-loan basis of the portfolio looking for areas where we need specific allocated reserves against those projects. We frankly rolled that up into a completed reserve analysis. And about a week, two weeks ago came up with a provision for loan losses that we were going to use in the first quarter that was frankly considerably below the level that we ended up putting in, in this current press release and will record in the first quarter.

However, and during that intervening time, we've completed some general market surveys of what's happening in those markets and so forth. And frankly have listened to some of the press releases and earnings releases of our competitors in these particular areas and have talked with some other of the larger banks that have not said too much about our market area, but do some large amount of construction building in this area. And frankly are concerned about the pervasiveness of the problem in some of these markets and the amount of distressed real estate that could come on the market during this period of time. And because of that, we decided to significantly increase our reserve for loan losses and put it in an unallocated area against possible future price declines that are going to take place.

Now, there are some areas that we're feeling fairly good about in our first quarter performance and I should cover them before we get on to a little bit further. First is in the C&I loan category, we have good quality loan portfolio. And frankly, we're very pleased to say we've had reasonably nice growth in that particular area in the first quarter of the year. We've had good growth in our retail and consumer area-- now also during the first quarter of the year and both of those portfolios are performing very well.

The growth in those portfolios however are being almost offset, not quite, but almost offset by the pay downs that are taking place in the one-to-four construction area during the course of the first quarter. And that whole activity is continued into April. We feel good about the growth of our fee income, both in terms of the return of some of the mortgage borrowers to more traditional places such as ourselves to get their financing and away from some of the mortgage brokers that were kind of running around like cowboys out there for a while.

We also feel fairly good about the expense control that took place in the third, fourth, and now in the first quarter. Actually in the first quarter of this year, expenses as compared to the fourth quarter are down approximately 4.5% and our staffing levels are down about 2.5% over that period of time also.

We've had a pickup that's taking place, which is normal in the production loans of our agricultural portfolio. Not so much in the first quarter, but as we've moved into April that's clearly begun to pick up and will continue throughout the summer and into the fall as those crops are grown, harvested, and later in the year sold into the markets.

One of the other big stories that's in this whole presentation for the first quarter, however, is the margin compression that has taken place at Banner Corporation. And for that discussion, I'd like to turn it over to Lloyd Baker.

Thank you Mike. As Mike indicated, the margin has compressed. And as we've indicated in the press release along with continued activity in the housing market, the big news story obviously in the first quarter was the very aggressive actions on the part of the Federal Reserve reducing interest rates. And those reductions hit a very large portion of our portfolio. Our asset yields were off or our loan yields were off 60 basis points during the quarter. And as we've pointed out, we would expect further decline in loan yields because those rate adjustments did not all occur on the first day of the quarter obviously. And of course, we just got an additional quarter of a point yesterday.

We moved fairly aggressively at pricing deposit rates down in terms of our offering rates over that period of time to try to adjust to that new rate environment. But to be honest with you, those rates are always stickier, the adjustments take a little longer to work their way through, and our customer behavior is such that they tend to find the higher yielding products when we do that. And so deposit rates declined significantly less.

The additional factors that are contributing to the contraction in the margin during that period of time are also again back on the asset side where the non-performing loan issue that we've identified fairly clearly is hurting the margin. The 12 basis points of yield give up in the first quarter on non-performing loans was actually not quite as severe as it was in the fourth quarter, but it is considerably more than a year ago. And we always have a small level of non-performings but a year ago I think that was about 3 basis points.

The other thing that's going on is a change in the mix. And we are moving away from some of the higher yielding assets, historically higher yielding assets in construction and development lending. And we're also seeing slowdown in the recognition of deferred fee income on those assets.

So the margin compressed quite honestly more than we anticipated. In some of our analysis I think I asked myself where that was different than what we anticipated going in. We always think that the change in asset yields will be quicker than deposit yields. But I think we did not correlate to the degree that we might have liked to with hindsight that lower interest rates would mean a slowdown in construction lending to the degree that it has.

So the margin compressed. And it likely will continue to compress in the upcoming quarter as I noted because of timing. We do have an exceptional amount of opportunity to lower deposit cost later this year. We, as you all know, have been engaged in an aggressive growth trajectory for the last couple of years. And part of that quite honestly was some rather aggressive premium pricing to support new branch openings. And as a result of that, as the third quarter, the second and third quarter really progressed, we have an outsized opportunity to reduce the cost of deposits to mitigate some of that narrowing. But that'll take some time to work itself through as well.

So a very difficult environment. There was not a lot of clapping of hands at this organization when the Federal Reserve decided to get very aggressive in January. And we would anticipate some pressure going forward.

I think that it's with respect to the margin. I think Mike has touched on most of the other operating issues that are included in the release. And it probably would be a good time now to just open it up for questions. Don't you think Mike or--?

No, I'd like to talk a little bit first about the economy of the area. Cause I think it has a lot to do with why we're a bit more optimistic than some others about what could happen in the housing markets.

I'm going to go through this very briefly for all of you. But we serve primarily five different markets. And I'm going to talk and focus a little bit on the two that are most important to us which is the Puget Sound market, the Seattle marketplace and so forth. And it could best be said that the Seattle marketplace's general economy is very strong, growing. Jobs are being created. And we have significant in migration taking place into that particular area. It's being driven largely by Microsoft and Boeing. And of ramping up and hiring that's being taken place at both of those companies. And it spills off into their various subcontractors in the region. There are other reasons for it in that marketplace. But by in large, that's a very strong economy and we expect it to remain so into the future. And we still believe, irrespective of what happens nationally relative to a recession or not a recession that the Puget Sound/Seattle area will avoid that.

Turning to Portland where the other half of the 80% that we do on the one-to-four construction is, that area of the economy is doing okay. It however has had a slowdown in terms of the rise in unemployment that's taken place in that particular area. It now kind of mirrors the national average for unemployment rates in that particular-- the greater Portland area. And as a result of that, we don't think we're going to have the level of activity in housing that we expect in the Puget Sound region during the course of the next couple of quarters.

Thankfully we don't have much at all in the way of construction lending elsewhere in the state of Oregon. As you're probably aware, that is a commodity priced commodity business. It's heavily oriented towards the timber industry and lumber and so forth. And as a result of that, because of the slowdown in housing that part of the state of Oregon is feeling the slowdown.

The last area that I'll talk about in general terms is the Boise, Idaho marketplace where we still have very significant in migration taking place. We have good job creation there. Unemployment is at about the 3% level in the greater Boise marketplace. And at the present time, things look reasonably good in the Boise market. A large company there laid off about 3,000 of its people. It was in the ship manufacturing business. But 2,000 of those people were hired the next week by another engineering firm in that market. So as a result of those things, we feel good about the general economy in the Boise marketplace; not so much however in the construction area and the land development area.

Lastly, as we cover the areas such as Spokane and eastern Washington, an area we cover, it's largely driven by agriculture. And agriculture is on a very strong area, particularly in the area of wheat and areas like that. And we expect good crops this year with exceptional pricing. So those areas should do fine as we go forward.

Lastly, just focusing a little bit on what we expect for loans during the course of the year. Through the early part of April, our loans are at a rate to grow at just about 10% over the course of the year. That could be less than that if we continue to get large payoffs in the one-to-four construction area. But we're pretty-- we have a very strong loan growth taking place in the C&I and consumer area in the month of April as we go forward. So we feel pretty good about those particular areas.

So with that background, let's get to the questions and the issues that you'd like to talk about.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Louis Feldman from Wells Capital Management. Please go ahead with your question.

Good morning.

Hi Lou.

Lloyd, can you break out on the $6.5 million how much of that went to the unallocated as opposed to allocated?

It's a little hard to break it out of the provision itself. Let me, as we pointed out in the press release, the unallocated--

Total was $10 million.

$10 million and if memory serves me right, it was about $6 million, $6.5 million at the end of December. So you could measure it that way. I guess it's approximately $4 million. But we have-- in the allowance roughly $30 million is allocated to past credits, $10 million to NPAs and $10 million to unallocated. So-- and the other way to look at that I guess Lou would be obviously net charge-offs were $1.9 million, so we provided significantly in excess of what we charged-off.

Okay. Can you talk about-- I mean you touched on this, can you give a little bit more color about what made you change your mind versus statements made last week to the press release going out yesterday?

Yes. It was-- it had to do with some market studies we're doing-- general market studies we were doing in addition to specific appraisals on projects. But more importantly than that was the level of announcements being made by competitors that are doing business in some of the same areas we are. Not the same competitor in all the neighborhoods, but it was a bit shocking to see the size of what they were talking about. And because of that we think there's going to be-- could be real pressure on valuations as they start to dump properties into these markets.

Do you feel this is a hedge then going forward and that you might feel that that reserves in the back half of the year, you're kind of trying to kitchen sink now versus later in the year and tried to play catch-up?

Well that would be a happy circumstance. The thing I can tell you Lou is we are very happy with our specific reviews of-- happy's a terrible word. Comfortable with where we are relative to the allocation of reserve to specific asset projects that we have. And in a vacuum we're pretty comfortable we would not need this unallocated reserve as it relates to that. This however is not going to get done in a vacuum. We're going to have other people dumping real estate at the same time. That's my concern.

Okay. Thank you very much.

Thank you. Our next question comes from Sarah Hasan from McAdams Wright Ragen. Please go ahead with your question.

Hi guys.

Hello.

I was wondering if you could talk about your dividend policy?

Well this last quarter we're going to pay 100%.

Well that's great. That's great. And--

No that's not fair. That's a flipping answer. In general, we'd like to have our dividend policy pay in over a period of time in the 30 to 35% of earnings level. Okay.

And what would cause you to change your current payout?

If we went through a prolonged period of several quarters of not paying out close to 100%, we would clearly have to look at the dividend.

Okay. But I take it you're not feeling pressured at this point? It looks like you bought back shares in the quarter.

We actually feel pretty good about our capital position. So no we're not.

Okay, good. And then a couple of banks that are trading way down did write off some goodwill in the quarter. And your stock is trading below book value. And I'm just wondering how much pressure you're feeling to do something similar or are you feeling pretty good about it at this point?

Well we in the quarter took a look at it and because of what you just said and actually had an independent impairment analysis done relative to the company at the end of March. And are not in a position to write off goodwill at the present time.

Wonderful. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from Kipling Peterson from Columbia Ventures Corporation. Please go ahead with your question.

Good morning. Just a question on some of these non-performing assets. For the projects, are any of the projects completed and just in the sales process or are they-- most of them continuing to build on them or what does that look like?

We have one that's mostly in a completed phase that with the homes are basically completed. And that's not-- there are some homes on the project that are completed. That are some that are being completed as we speak. So they will be available for sale during the selling season. Largely these relate around land and lot development.

And your general philosophy as far as loan-to-value on making these loans, is there-- was it 60 to 80% or 100% or--?

Rick you want to cover that one?

Our general underwriting standard was 75%. And depending upon the size of the project and the location it could have been less than that.

Okay and then just kind of an overall 30,000-foot level, it looks like a couple of your major competitors in Spokane got into trouble in California and Utah. Your huge competitor in Seattle basically had to recapitalize the business and dilute everyone. You're not exposed to central Oregon or southern Oregon. And I'm wondering are you playing defense since you've had to take these additional write downs or do you think that you can play some offense?

It's possible to be able to play some offense. But I frankly was very shocked, I guess is the best word, at the level of non-performings that were being announced by some of our competitors. We did not go out of our footprint. We have no projects that I'm aware of that are very far away from where we have branches with maybe the exception of down in the Tacoma, Washington area. So we are just being-- well I think we're being is cautious as to what we think valuations could be during the second and third quarter of this year.

Thank you.

Our next question comes from Barry White from River Capital. Please go ahead with your question.

Thanks guys. I just wondered on the expense line what you're looking to do with the rest of the year to bring the efficiency ratio down?

Well the first thing we need-- thanks Barry for listening in. The first thing we need to do is we've obviously got to improve our net interest income to improve the efficiency ratio. And that frankly to be honest with you is probably not going to happen in the second quarter. We may get some help as we go into the third quarter and so forth.

As it relates to the expenses themselves, we have a goal to drive that back down into the 2.95 as a percentage of assets. And I think we can clearly do that particularly if we get the loan growth that I mentioned a little bit earlier. The only thing I'm a little concerned about as it relates to that, we will control the absolute level of expenses. But what I am concerned about is, and this might actually be a happy thing, if we get significant payoffs out of our one-to-four construction portfolio. We may not get the growth in the balance sheet to make those numbers look the same.

But further headcounts, are you basically done with that or is that still in the works?

We think we will continue to work our way through the operation and try to streamline it. One of the things I didn't talk about Barry and to the others is that we completely reorganized our approach to larger C&I lending and have really focused a little different way of doing that kind of lending, which resulted in some significant reduction in people in that particular area. And there are other areas of the bank that are currently under study for us to make sure that we're doing it in the most efficient way we can. So we expect to not have growth in the headcount and frankly I'm hopeful we'll have a reduction.

Okay.

Our next question comes from Kristen Hotti from Howe Barnes Hoefer & Arnett. Please go ahead with your question.

Yes good morning gentlemen.

Good morning.

I had a question regarding the-- I know the effective tax rate was reduced as a consequence of the stock-based compensation program. And I was wondering if you could give us some idea as a run rate going through the rest of the year for the effective tax rate?

Well Kristen this is Lloyd. The tax rate was lower in the quarter in large part because of the loan loss provisioning, the additional--

Yes, okay.

The reduction in fully taxable income if you will and therefore the relative increase in the effect of things like the municipal bond portfolio and bank-owned life insurance and some of the investment credits. It really didn't relate to the stock-based compensation.

So, the rate-- I hope the rate goes up. Now how's that for backwards thinking. But what would drive the rate up obviously would be a lower level of loan loss provisioning going forward.

Okay. So if not then the current rate would be more or less ballpark for the rest of the year then?

Yes if we stay at the level of earnings that was announced this quarter that--

Right.

Rate would not change appreciably.

Okay. And in terms of you've been very active in buying back shares in the last quarter. Do you have any plans of continuing at that rate or anything that you can talk about in terms of the buyback program?

I think it's at the present time, we're going to wait and see what happens with real estate valuations before we do anything because of the-- I just at the present time am very uneasy about where some of those values could go in areas such as Boise and perhaps Portland.

I was interested-- and I know another caller asked the same question about the market studies that you had done. Were they targeted at particular regions or particular sectors?

Yes, particular regions. And in all in the one-to-four area.

And in particular that you seem-- I seem to get the feeling that you are really less optimistic about the Portland and then Boise areas? Is that the case given what you read in the market studies?

I'm worried about the size of the markets versus the amount of real estate in those markets. So proportionately I'm worried about the amount of distressed property that could come on to those markets. And what could be, depending on how some regulators treat some banks that maybe are short of capital, could be kind of a fire sale type of a thing.

Right. So it's a forced liquidation is going to exacerbate the inventory overhang that's already existing.

That's my concern.

Okay. Great. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is a follow-up question from Louis Feldman with Wells Capital Management. Please go ahead sir.

Thank you. Mike you talked about how you felt there was strength in the agriculture. Any concerns in terms of the fact, certainly in eastern Washington, first off higher gas prices, higher fertilizer costs, higher overall transportation costs and any potential impacts on that? Cause what I've been reading was that the farmers were not seeing a heck of a lot of gains on this despite the strength in crop prices.

I don't know who you're talking to but we got a whole bunch of farmers with a lot of money in the bank that are doing really well. And frankly yes their costs are up. And I don't mean to make small of it Lou but I mean when you get wheat at the price it's at today and where it's probably going to stay if we continue this program of growing corn to make ethanol across the country and across the world, they're going to do very well on a go-forward basis. And to be fair about it, their transportation costs, most of our wheat, as an example, is exported into the Pacific Rim. It frankly floats down the Columbia River. And so it really doesn't cost that much more to float it down there.

Until it runs into the dam and breaks the lock. And that happened last year. I think maybe I've been hanging out with the soybean guys too much. Lloyd, conversely we've touched on this in the past, how secure are your yields? What percent of your loans are at floors at this point in time and how stable do you feel the floors are?

The bulk of the construction loan portfolio has floors in it Lou, construction and development. The question is and we've had this conversation, is it in the current environment, are we going to have the same level of success holding those floors that we have the last time we went through an experience like this, which was 2004 timeframe, 2003, 2004. I think we're going to have less success there. The other thing is that those loans payoff over time. And they're being replaced right now with more often with C&I loans that are less likely to have floors. So there's some help there. And that's one of things that I think will be a slight positive in the next quarter. But I don't think the floors are going to help to the degree they have historically.

Okay. In terms of the C&I, do you offset that in terms of your fee-based revenue opportunities?

Fee-based revenue with those customers?

Yes.

Well I think that that clearly is a contributing factor as Mike pointed out. One of the really nice pieces of news in this announcement is that our deposit and service charge revenues continue to grow. And that's a contributing factor there as is the maturation of all the new locations and quite honestly the addition of the acquisitions last year. All of those things have contributed to better fee income. And I'm optimistic going forward that that continues. There's a lot of margin give up or earnings give up on some of the construction portfolio that that has to compensate for though.

Okay. Thank you.

Thank you. Management at this time there are no further questions. Please continue with any further remarks that you would like to make.

Thank you Kristen. Well we appreciate you all taking the time to listen to this first quarter earnings announcement. We are not very proud of what we've done but I can assure you people are working very hard to correct the asset problem we have here. And it's not like we have new green beans out there doing it. We have a very experienced group of people doing this. They've done this before for me in other lives and other banks. And I'm quite confident that we will resolve this problem as we go forward in an expeditious way. So we look forward again to having a chance to talk with you at the end of the second quarter. With that, we're adjourned.

Ladies and gentlemen, this concludes Banner Corporation's first quarter 2008 conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 and use the access code of 11111719. Once again that telephone number is 303-590-3000 and the access code is 11111719. We thank you for your participation. You may now disconnect.