Banner Corp (BANR) 2009 Q4 法說會逐字稿

Welcome to the Banner's 4Q 09 results conference call on the 28th of January 2010. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator instructions)

I will now hand the conference over to Mike Jones. Please go ahead, sir.

Thank you very much. And welcome to all of you for listening to our conference call from the fourth quarter results. Sitting here with me in Walla Walla I have Lloyd Baker, our Chief Financial Officer. Rick Barton, our Chief Lending and Credit Officer is also here with me and the Secretary of the Corporation, Al Marshall. So at this point what I'd like to have is Al Marshall read our paragraph relative to projections.

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-Q for the quarter ended September 30, 2009. Forward-looking statements are effective only as of the date they are made and Banner assumes no obligation to update information concerning its expectations.

Thanks, Al. What I'd like to have is Lloyd Baker go through the results and give you an overview of the fourth quarter results. So at this point, Lloyd, go ahead.

Okay, thanks, Mike and good morning, everyone. At a recent regional economic forum that I attended, the keynote speaker commented that the best thing that he could say about 2009 was that it was over. And worse yet, he said the exact same thing at the end of 2008. When I was thinking about what to say this morning and the challenges we face this year, it was tempting to say something very similar. But instead I decided that the best thing that I could say is that despite the continuing challenges of the difficult economy, the fourth quarter of 2009 provided more evidence of what we said 90 days ago, that is that things seem to be getting better for Banner Corporation and hopefully for the economic health of our region.

While still not profitable, the fourth quarter's strong improvement in our net interest margin and moderating those still painfully high credit costs allowed us to post a much lower loss and provided further encouragement for improvement going forward.

The 19 basis point improvement in our net interest margin and resulting $2 million increase in net interest income compared to the immediately proceeding quarter was gratifying as it validated some very focused efforts and positive trends that have been occurring throughout 2009 with respect to core deposit growth, deposit mix changes, and disciplined pricing decisions, as well as further maturing of some of newer branch locations.

Deposit costs decreased by 33 basis points for the quarter, and that was after having declined by 20 basis points in the preceding quarter. And again, similar to the preceding quarter, deposit costs were lower each month as the quarter progressed. Although I have to caution that that trend seems to be moderating a little.

The $2 million increase in net interest income followed an increase of $1.4 million in net interest income in the third quarter and it was achieved despite continuing pressure on asset yields from non-accruing loans and the effect of very short -- very low rather, short-term interest rates on our growing on balance sheet liquidity positions.

I'll let Rick and Mike speak to specifics, but the fourth quarter also provided some encouragement through modestly improving asset quality trends, providing further comfort that what we believed 90 days ago to be a peaking in credit problems still seems to be a reasonable assessment of what's going on.

Modestly lower delinquencies and net charge offs allowed us to reduce our provision for loan loss by $8 million. Compared to the preceding quarter that's a 30% reduction. And at the same time, we were improving our reserve coverage ratios and increasing our unallocated portions of our allowance.

We did have a somewhat disappointing quarter with respect to non-interest income reflecting continued weakness in the economy as the influence of significantly higher mortgage rates and seasonal patterns as well.

Payment processing revenues in particular continue to reflect more restrained activity by deposit customers and for merchant card processing than in previous years.

Also adversely affecting non-interest revenue for the quarter was a $500,000 impairment charge that we recorded with respect to the valuation of our mortgage servicing rights.

On the other side of the equation, continuing trends that have been in play all year for 2009. Our fourth quarter results reflect further success in reducing controlling -- controllable -- excuse me -- operating expenses, which unfortunately continue to be partially offset by elevated collection expenses and costs associated with managing real estate owned. Nonetheless, total non-interest expense decreased by nearly $2 million compared to the preceding quarter.

The differences between controllable and non-controllable expenses are particularly evident if you look at the full-year results for 2009 and compare some of those numbers to the -- what we reported in 2008. Combined expenses for items such as compensation, occupancy information, services, payment processing were down by approximately $9 million for the year while professional services, and you can read collection attorneys in there, deposit insurance, and real estate expenses increased by approximately $12 million. FDIC insurance was up by $6 million for the full year, 150% increase over the prior year.

And then finally, back to the quarter again with respect to the operating statement. And this is also somewhat encouraging. Our fair value adjustments, while unfortunately resulting in a net charge of $1.4 million, were also more moderate than in previous quarters and by example compared to the $4.6 million gain that was recorded in the preceding quarter. Hopefully this moderation is indicative of more stability in financial markets, which drives these valuation adjustments.

Real quickly, looking at the balance sheet. The loan portfolio declined during the quarter. This was largely a result of continued declines in construction in land loans. This is a good thing. Also we had a seasonal decrease of about $20 million in our ag portfolio, and that's another good thing. It means that customers were successful with their production operations.

Unfortunately, C&I loans also declined and that really is a reflection of the weak economy and continued weakness in demand from borrowers for business lending.

Also on the asset side of the balance sheet, real estate owned increased about $24 million. That was as expected and I think Rick will address this, but we continued to have success selling properties once that we do acquire title. So while we don't like to see that increase, it is part of what we expect as we go through this process.

And the other item on the balance sheet that's worthy of note, the other asset category increased by about $29 million. That actually reflects about a $33 million increase in a prepaid FDIC insurance account as we and all the other banks around the country contributed to that fund late in December.

On the liability side of the balance sheet, I've touched on it, but deposits had another good quarter and had really a great year. We had $363 million in retail deposit growth for the year that more than offset $276 million of public funds in brokered CDs that we chose to move off the balance sheet. It reflects a really strengthened franchise and opportunity going forward.

So again deposits, just a great year for 2009 and leaving us optimistic going forward, particularly as I mentioned as validated by the improvement in the cost of funding and in margin in the fourth quarter.

So those are the prepared remarks I have with respect to the quarter's performance. I think Mike you may want to -- Rick speak? Or maybe you want to speak. But I'm --

No, I'd like to have Rick maybe talk a little bit about the commercial construction portfolio, and the REO, and other areas in the loan portfolio that he'd like to talk about at this time. So, Rick, go ahead.

Okay. What it would take REO as the point of beginning. As Lloyd mentioned, we saw an increase in the REO account during the quarter. In taking a look at some aggregate numbers, we've had about $42 million migrate into the REO portfolio, but we were successful in selling off $17 million out of the REO portfolio during the quarter. And what I like to look at is look at where it was at the end of the third quarter, which was approximately $55 million. So we were successful in selling about a third of the REO portfolio that was there at September 30 during the fourth quarter. And I think that's a sign of the aggressive posture we're taking with regard to managing that portfolio.

Obviously we've had an aggregate decrease in non-performing assets during the quarter. And that was recorded in terms of the overall decrease primarily non-performing loans. Unfortunately, about -- as I mentioned, a good chunk of that migrated into REO, but we were successful in either getting payoffs or partial reduction of -- in excess of $20 million out of the non-performing loan category during the quarter.

One of the areas that is of key concern to everybody is the commercial real estate portfolio. That portfolio continues as we talk today to perform fairly well. We did see a slight elevation in criticized assets during the quarter, but past due loans in that segment of the portfolio remain less than 1% of total loans. And the non-performing segment of that portfolio actually decreased by about $1 million during the quarter. So we continued to be optimistic that that portfolio will make it through the economic environment that we find ourselves in in fairly good fashion.

And Mike, I think those are the three points I wanted to touch on and --

One of the things that we get questioned from time-to-time is what's the step, what's happening in the commercial construction portfolio? Can you just kind of give them a bit of a small -- it's a small part of the portfolio, but something people seem to focus on.

Yes, it is a small part of the portfolio. The loans that we have in that portfolio continue to perform. Construction is largely complete, the projects are in the absorption process, and while some absorption is slower than originally projected, the results still are encouraging there and we continue to see loans in that portfolio qualify for permanent loans either in our portfolio or in third-party portfolios.

Good. Thanks, Rick. Just a couple of overview comments that I would make. Lloyd mentioned to all of you that we had significant decreases in the cost of our deposit portfolio, but that it was moderating. But we do expect that it will be lower in the first quarter going forward than it was in the fourth quarter. And that not perhaps anywhere what it was between the third and fourth quarter this year, but nevertheless significantly less.

We talked a little bit about the impact of on-balance sheet liquidity has on us and it has had an impact on the yield of the investment portfolio. The goal for us is we would like to build our on-balance sheet liquidity to 5% of our total assets and have it there on a sustained basis on a go-forward basis. And we'll be doing that.

We have elected for the most part to exit some public deposit relationships because of changes in the collateral authorization that's required of those in the state of Washington and the state of Oregon. And so that will continue to go down a little bit.

But the branch system, which we have built a lot of the de novo and the acquisitions over the last five years, six years, is beginning to really make a difference out there. And so we expect core deposit growth to continue throughout the year 2010.

So all in all I think we'll have a much stronger balance sheet. We believe that we're going to hit a crossover point into profitability. Perhaps not in the first quarter, but possibly, but certainly in the second quarter. And largely as a result of the continued improvement of our net interest margin, and we expect the provisioning to be significantly below the levels it was in the year 2009.

So at that point, why don't we just get to the issues that are important to the people and open it up to questions at this point?

Thank you. (Operator instructions) The first question comes from Jeff Rulis from D.A. Davidson. Please go ahead. Thank you, Mr. Rulis. Your line is open. Thank you.

We'll go with the next question. One moment please. The next question comes from Russell Gunther from KBW. Please go ahead.

Hi guys. Thanks for taking my call. Quick question. It looks like you continue to have success with the home financing program you began I think with the promotion the Great Northwest Home promotion. As the last quarter you mentioned that those loans were holding up well without any delinquencies and I was wondering if you could give us an update.

That is still the case. That portfolio continues to perform and we have had no fallout in terms of delinquency to date. We closed the first iteration of the Northwest Home Rush out at year end and we've come up with a second program called The Peace of Mind Mortgage that will again have preferential interest rates offered, but also have hatched with it employment protection and a homeowner's warranty program so that buyers have some assurance that any kind of construction defects will be covered for a 10-year period under the policy that we are providing with the financing.

Great. Thank you for that. And then lastly, could you remind us where your MPAs are marked? Where you're currently carrying your MPAs?

We'll take a look at the REO portfolio first of all. And our convention there is that we get a current market appraisal to (technical difficulty) falling cost. So on the REO portfolio it's in the 90% at current market value range. On the non-performing loans, that is a little tougher to get a handle on because there are so many different kinds of collateral and different situations, but fair to say that we go through a 114 analysis on all of them and they are carried at we feel the net realized full value of the collateral supporting those loans.

Okay, great. Thank you.

Okay, thank you. We'll go back with Jeff Rulis' line. Can you hear us now?

Yes, can you hear me?

Yes we can. Thank you.

Good morning.

Good morning.

In the third quarter and in the 10-Q and also in the press -- last quarter's press release, you state that restructured but performing balance was 55.2. This quarter for the third quarter's 39.2. Was there a change in the classification of those?

There was, Jeff. We had a conversation with our accountants and concluded that one fairly large balance that was being carried as a restructured really should not have been. So we were overly punitive to ourselves when we put that release out at the end of the third quarter.

And the securities on non-accrual, what exactly is that? And --

That's a northwest financial institution that stopped making payments.

Okay.

And you guys can figure that one out pretty quickly.

Sure. I guess you guys touched on this a couple of times, this sort of the maturation of a young branch network. You're still seeing the fruits of that and sort of reduced cost of funds. And Lloyd, I think you mentioned that may be moderating. But if you could touch on how long do you think that benefit can continue. It's sort of a broad question, but I guess any commentary on future deposit costs decreases would be helpful.

Sure. I didn't mean to imply that the maturing of the branch network was moderating. But as I noted, we've had 53 basis point drop in fund -- in deposit costs over the last -- combined over the last two quarters. And that certainly is going to slow down some. But as Mike pointed out, going forward we still believe that there will be a further reduction in deposit costs in the first quarter of this year. And beyond that it will be driven significantly by continuing improvement in the mix as opposed to some of the effects of declining pricing that have contributed so much this year.

Yes, I -- and just to add on to that a little bit, the average branch size in our system today is $44 million. But we have a goal of driving that into the mid-50s and that means we've got a lot of de novo branches that were started within the last three years. Getting them to a certain size will certainly help that.

And it's very clear when you look at a branch with deposits of $55 million to $60 million versus $44 million how much more profit it brings to the bottom line. And we think that's an important component in the growth of our balance sheet without the comparable growth in our operating expenses.

Got it. As the REO balance grows, would you guys turn to sort of bulk sales to unload some of that? And maybe comment on why or why not that would work for you in this market.

Well, that's something that we continuously evaluate, but what we have found to date is the machine that we have set up to dispose of REO is more efficient and more economically beneficial to us than bulk selling it.

And I think that to elaborate just a little bit further on that, particularly as it relates to some of the land components of that portfolio. If our REO was in other parts of the state of Washington and/or the state of Oregon where there is a tremendous amount of it. We probably would be much more interested in bulk sales.

But we actually have some of this land -- quite a bit of this land in areas in Puget Sound, as an example, that are down to a two or three-month supply of completed unsold homes and therefore there's construction taking place in that area, which is clearly a better way from a profit standpoint to work your way through that REO. And we're doing that. And we really are kind of chewing through, particularly some of the smaller pieces of our land that we have, both in non-performing loans and REO. So we think we can do it the other way better.

Okay. And let me I guess take a different angle on this. You've got about $26 million in residential and commercial land that is unimproved. I guess what percentage of that would you consider sort of building on a construction basis versus outright sales?

I would say that there's probably about 50% of that that we're actively discussing options with people in terms of build-out. The balance of it we're either looking to sell or in a couple of cases hold for a longer period of time because of its location to -- because we think the values are going to step back further than they are in some other locations.

Jeff, we've said this a number of times and it's hard to put your finger on it, but each property is very unique and there are plans that relate to each one that allow us at times to be very successful moving some. And there's a few others that are going to take some time, there's no doubt about it. But as Rick pointed out, we really do have a group of folks who are dealing with this on an every day basis and enjoying really some good success with a number of these properties. So see it's not going to go away overnight, but it's also not something that we think it makes sense to take really large discounts on.

Okay, thanks for the input. That's it for me.

Thank you. The next question comes from Tim Coffey from FIG Partners. Please go ahead.

Yes, thank you. Morning, gentlemen.

Hi, Tim.

Hey, Rick, could you give us a little color on the $17 million in sold already owe in the quarter? And if you have any kind of play (inaudible) by property type or pricing.

Two-thirds of it were completed homes that were sold. A third of it were, as Mike mentioned, the sale of small groups of lots or small subdivisions. In terms of what we realized out of those sales, for the most part we got our net book value. There were some slight short sales out of that portfolio, but nothing of a major magnitude.

Okay. And then, Mike, talking about the expectations of a few offers against the occupancy (inaudible) provision expense in 2010 being less than 2009. What is that a function of? Is that a function of you've seen better absorption activity? Fewer loans going -- becoming classified? What is it?

I think it's a couple of things. Number one, we have a whole bunch less left in our portfolio than we did a year ago. And that that's there we're pretty well up to speed on what's going on and a significant portion of it continues to perform. And it looks to us like it will.

Secondly, it's a solidifying of the prices in some of the markets we have our homes relative to some of the values of these lots and so forth that are there and the ability for people to move houses through construction. And that may not be the original borrower that builds the house on that. We may bring in another builder to build the house and work out a deal. But the values, and particularly in Puget Sound, as an example, were most -- or a big portion of this is has continued -- actually has begun to show some slight increases.

That isn't true throughout all of Puget Sound, but it is where ours -- some of our -- most of our property is.

Okay, great. Thank you.

Thank you. The next question comes from Brent Christ from Sirius Capital Management. Please go ahead.

Good morning, guys.

Good morning.

Just had a couple of follow-ups on the land portfolio. It looked like the balances came down pretty significantly in the quarter and also the third quarter balances may have been restated a little bit lower with the increase in consumer. Could you talk about what happened there with the third quarter migration and then also kind of how we work down from third quarter to fourth quarter balances in terms of how much moved into REO, how much was charged off, and how much was actually paid off or sold?

Well as I mentioned earlier, there was a migration into REO of about $42 million during the quarter. And we sold out of REO $17 million. There were some insignificant by way of order of magnitude write-downs against the REO portfolio in aggregate. Those were probably in the $1 million to $1.5 million range. That's not a number I've added up.

Got you. But just in terms of the balance reduction in the land portfolio this quarter, do you have a sense of how much was charged off versus completed and moved to another bucket? And how much --?

Well we had charge offs right at $17 million during the quarter. And a good chunk of that, probably 80% was against the land portfolio -- either lots, raw land, or A&D. And I haven't broken apart pure pay downs against the non-performing bucket that we had of $20 million, but I would imagine about 50% of that was out of the land portfolio. Out of the performing side of the house, we have builders who are taking lots down on a continuing basis to build-out their projects, so there was a steady stream of absorption out of that portion of the portfolio as well.

And then you mentioned that the $17 million of REO that you sold you moved pretty close to your net book value. What was that earn -- the terms - how much were those loans kind of written down by relative to their original balance?

That's honestly a number that I can't give you off the top of my head. We -- as I say, we realized roughly our carrying value, so I'm not going to postulate a guess at that at this juncture.

Okay, great. Thanks.

Thank you. The next question comes from Greg Eisen from ICM Asset Management. Please go ahead.

Thanks, good morning. If I could ask about the -- if I may ask about the land from a slightly different angle. At December you had between residential and commercial you had land and land development loans of $284 million and 43 -- call it $44 million in those two categories between A&D improved, and unimproved lots. My question is as you look at that whole bulk portfolio you still have left, how much of that do you believe has the realistic potential to be funded to support vertical construction on those properties? The point being that you could -- you would carry it until such time as you can get the vertical built and then the final product sold, which would seem to be the best way of minimizing losses.

Well that's correct. And about $250 million of that portfolio is either finished lots or finished A&D developments, or A&D developments that are just on the verge of completion. And that's exactly what's happening. The builders who are and still performing are absorbing and using those lots their building programs.

And we've got an ongoing program with the non-performing part of that portfolio, either to figure out a way to do something with existing builders or bring in third-party builder to work in conjunction with or purchase the lots from the developer to consume in that third-party builder's build-out program for 2010-2011. And we've got a lot of anecdotal evidence of that beginning to get some traction.

And half that portfolio is performing.

Correct.

Okay. So essentially the bulk of the A&D as well as improved lots could be expected to get built vertically at some point.

Yes.

Yes.

Faster in Puget Sound and slower in Boise.

Yes. Fortunately Boise's the tail not a dog.

Yes.

That was my question. Thank you.

Great.

Thank you. The next question comes from Kipling Peterson from CVC. Please go ahead.

Good morning. Couple of questions. The first question is how many shares remain in your DRIP program? And the second question is how motivated is the bank, or how much pressure does the bank feel to get the common stock offering done?

Well we are obviously looking pretty hard at -- answer the question first about the DRIP.

On the DRIP there's about 1.5 million remaining shares under the current authorization. We actually have -- are in the process of preparing a new filing that will authorize likely in the neighborhood of 4 million shares that would, I expect, will be filed within the next 60 days.

Okay.

On the public stock offering itself, we have some slight issues that we have to work our way through. Number one, no one's going to buy stock in this Company without us getting our 10-K done. So that's clearly the 1st of March.

Secondly, because of our market cap, we're going to have to file an S1 registration statement to accomplish that sale. Clearly that can't be filed until after we do the 10-K. So it's probably in the March/April timeframe at the best and that's assuming the SEC elects not to review the S1. So it's out there in that particular area.

The regulators would like us to raise cap. We have no agreement with them, but they have verbally told us they'd like us to have a tier one capital ratio in the bank of 10%. We're about probably $20 million, $25 million away from that. And so we're going to be responsive to the request and we'll work on that as quickly as we can.

Great. Thank you very much.

Thank you. We have no more questions at this time. Are there any further points you wish to raise?

Well I'd just like to thank all of you for taking the time to listen to our fourth quarter results. And we look forward to showing you our first quarter results because we actually think it has a chance not to have a bracket on it. Not as good a chance perhaps as the second quarter, but we believe we're going to make real progress in '10. But thank you very much.

Thank you. This concludes the conference call. Thank you for participating. You may now disconnect.