Banner Corp (BANR) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Banner's fourth quarter 2010 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, January 27, 2011. I would now like to turn the conference over to Mr. -- I'm sorry -- Grescovich, CEO of Banner Corporation. Please go ahead, sir.

Thank you, Christina, and good morning, everyone. I would also like to welcome you to the fourth quarter performance call for Banner Corporation. Joining me on the call today is Rick Barton, our Chief Lending and Credit Officer; Lloyd Baker, our Chief Financial Officer; and Albert Marshall, the Secretary of the Corporation.

Albert, would you please read our forward-looking disclosure statement?

Good morning. Our presentation today discusses Banner's business outlook and will include forward-looking statements. Both 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 a recently filed Form 10-Q for the quarter ended September 30 2010. 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.

Thank you, Al. As announced yesterday, Banner Corporation reported a net loss to common shareholders of $14.6 million or $0.13 per share for the fourth quarter ended December 31, 2010. This compared to a net loss of 44.7 million or $0.40 per share for the third quarter 2010, and 5.5 million or $0.27 per share in the fourth quarter ended December 31, 2009. For the full year, Banner Corporation reported a net loss to common shareholders of 69.6 million or $1.03 per share compared to 43.5 million or $2.33 per share for the full year 2009. However, it is important to note on a pretax basis, our net loss to common shareholders was actually reduced to 51.7 million in 2010, 70.5 million in 2009.

While our fourth quarter and full year resulted in a loss, it also reflected the extraordinary hard work of our employees throughout the Company on the disciplined execution of our strategic plan to strengthen Banner and position the Company for improved performance. We also continued to make good progress at improving our core operating performance and earnings power of the Company. In the fourth quarter of 2010, we maintained our positive revenue momentum with core revenue increasing 8% compared to the fourth quarter of 2009.

Our net interest margin expanded to 3.81% in the fourth quarter of 2010, compared to 3.49% in the fourth quarter a year ago, and our cost of deposits decreased to 1.03% in the most recent quarter, compared to 1.83% in the same quarter of 2009. These improvements are reflective of our Super-Community Bank strategy, reducing our funding costs by remixing our deposits away from high-priced CDs and improving our core funding position. To that point, our core deposits in the fourth quarter of 2010 increased 6% from the fourth quarter of 2009. In a moment, Lloyd Baker will discuss our operating performance in more detail.

Clearly, improving the risk profile of Banner and aggressively managing our troubled assets, which are the main cause for the losses, remain the primary focus of the Company. In the fourth quarter of 2010, we recorded a $20 million provision for loan losses, again providing more than net charge-offs.

Also for the quarter, we recorded a $5.2 valuation adjustment on real estate owned. In a moment, Rick Barton will discuss the credit metrics of the Company and provide some context around the loan portfolio, along with our emphasis on aggressively managing our problem assets and reducing our one-to-four family residential construction, lot and land portfolio, which incidentally reduced another $43 million from the third quarter 2010, and $202 million from the fourth quarter of 2009. And that portfolio now stands at 9% of the total loan portfolio.

Finally, Banner's capital position and liquidity remains strong. In the fourth quarter, our total capital to risk weighed asset ratio is 16.88%. Our tangible common equity ratio is 8.73% and our loan to deposit ratio is at 95%.

I'll now turn the call over to Rick to discuss the trends in the loan portfolio and some of our credit metrics. Rick?

Thanks, Mark. Banner's fourth quarter asset quality scorecard was again driven by outsized credit costs in the residential construction and land portfolios. As Mark has already noted, we are diligently reducing that portfolio and it now makes up 9% of our total loans. However, weak housing markets in the Pacific Northwest, particularly in Portland and Boise, have continued to erode property values.

Before discussing our credit losses in more detail, the point needs to be made that the credit metrics of our portfolio are stabilizing and in some key areas, showed modest improvement during the quarter. Specifically, non-performing assets decreased by $24 million or nearly 9%, with most of this improvement centered in non-performing loans that decreased by 11%. At quarter end, non-performing assets were 5.8% of total assets, down from 6.1% at September 30 and 6.3% at December 31, 2009.

Total delinquent loans were 5.3% versus 5.4% at September 30 and 6.5% at December 31, 2009. Improvement in this metric was negatively impacted by loans 30 to 89 days past due and on accrual that increased $10 million to $28 million at quarter end. Much of this increase was driven by performing loans and the process of renewal or since brought current. While these measures are far from acceptable, the improvement is tangible and we are continuing to [devote] whatever resources are needed to improve results. And additionally, the allowance for loan losses grew to 2.86% of total loans and was 64% of non-performing loans. At September 30, these same two measures were 2.76% and 57%.

Now, let me turn to a brief discussion of our credit costs for the quarter. In the REO portfolio, activity can be summarized in the following manner. Quarter to quarter, REO decreased by $6 million or 6% to $101 million. Additions to REO for the quarter were $16.8 million and included the Tacoma Apartment project discussed in previous calls.

Valuation adjustments for the quarter were $5.2 million, down from $8.6 million last quarter. The largest individual adjustments during the quarter were on assets in the Portland-Vancouver market. And last, but certainly not least, sales of REO during the quarter totaled $19.1 million. On these sales, we realized 97.2% of book value. This select liquidation activity included two significant land parcels in the Puget Sound market, plus our recurring sales run rate of 10 to $12 million.

Net loan charge-offs for the quarter were $19 million or unchanged from the third quarter. Once again, losses were centered in the construction and land portfolio where $8.11 million was written off during the quarter. $4.5 million was taken in the greater Puget Sound market with 3.7 million taken against loans in Portland-Vancouver. The balance of the construction and land losses were relatively small in size and spread throughout our geographical footprint.

Other key items to note about fourth quarter loan losses are commercial business losses were down nearly 50% from the third quarter when we had a large non-recurring loss that involved fraud in a single relationship. [Ag] losses remain low and in fact, were down nominally. Consumer and one-to-four family losses were elevated, but remained below industry averages, and commercial real estate losses totaled $1.6 million for the quarter. This continues to be a very modest amount considering Banner's commercial real estate portfolios total over $1 billion.

A final theme I would like to reiterate before concluding my remarks is that we continue to aggressively collect and value our problem assets, and have a disciplined strategy in place that includes direct executive management involvement and strong board oversight.

With that, I'll turn the mike over to Lloyd for his comments.

Thanks, Rick, and good morning, everyone. As Mark and Rick have already indicated, and as we noted in our press release, for the fourth quarter and for the year ended December 31, 2010, our operating results continued to be adversely impacted by a still much too high level of credit cost. However, for the fourth quarter of 2010, also [capped] for Banner Corporation, it has been a truly remarkable year, including in particular a very significant progress growing revenues from our core operations.

We all realize that reducing credit cost to more acceptable levels is the primary requirement necessary to return Banner to profitability, and we remain confident that despite a still challenging economic environment, we will turn the corner on credit cost and will return to profitability. As we turn that corner, the improvements we've made increasing our revenue generation will provide a strong foundation for 2011 and for future growth.

Our revenues from core operations, which includes net interest income before the provision for loan losses and other non-interest operating income, but excludes volatile fair value and OTTI adjustments. So revenues from core operations have been consistently increasing throughout the year and then [reached] a record quarterly level of 49.2 million in the third quarter.

At 49 million in the fourth quarter, we nearly matched that quarterly level again despite an expected decline in mortgage banking revenues. That $49 million of core revenues for the fourth quarter represents an 8% increase compared to the same quarter a year ago. For the full year ended December 31, our revenues from core operations increased to 189.4 million, also a record level, an increase of 7% or $12.2 million compared to the year ended December '09.

This improvement in core operating revenues has been driven by a significant increase in net interest income. For the quarter, Banner Corporation's net interest income at $40.8 million increased by 2% compared to the immediately preceding quarter, and was more than 6% greater than the same quarter a year earlier. For the full year 2010, net interest income was 157.8 million, again a record level, an increase of 9% and $13.2 million more than 2009.

As Mark noted, our net interest margin was 3.81 for the quarter, an increase of 18 basis points compared to the third quarter and 32 basis points compared -- increase compared to the fourth quarter a year ago. This margin improvement has resulted from continuing reductions in our funding costs and more specifically, in deposit costs. Deposit costs decreased by another 26 basis points during the fourth quarter and were 80 basis points lower than a year ago, reflecting further changes in the deposit mix and significant downward pricing of maturing certificates of deposit and downward pricing on transaction savings accounts.

The deposit mix changes reflect the focused efforts of our retail staff and provide further evidence of the maturing of our branch network and implementation of a number of strategic initiatives designed to strengthen the foundation of the Company.

While the economy has certainly played a role for Banner Corporation, growth of core deposits and reduced deposit costs have been a very important success story over the past year. Both non-interest-bearing transaction and savings -- excuse me -- both non-interest-bearing and interest-bearing transactions savings accounts have had year-over-year balance increases resulting in core deposit growth of 6% based on year-end balances.

However, as a result of some unusual fluctuations in daily totals at both December 31, 2009 and 2010, these year-end balances really understate this growth. Our average balances for these core deposits for the month of December 2010 were actually 9% higher than the monthly average for 2009. As a result of the growth of these transaction savings accounts and planned reduction in higher cost certificates of deposit, core deposits now represent 57% of total deposits, compared to just 50% a year earlier.

The improvement in our net interest income again occurred despite further pressure on asset yields as a result of the very low rate environment, and while we continue to (inaudible) high levels of on-balance sheet liquidity, loan yields decreased slightly to 5.67% for the third quarter, 2 basis points lower than the preceding quarter and still only 3 basis points lower than the same quarter a year earlier.

However, as I have noted for the last two calls, and if I keep noting it, I'll eventually be right, pressure on loan yields is building and likely will become more evident in future periods. By contrast with loans, we did experience a meaningful decrease in yield on our securities portfolio as repayments and calls of higher yielding securities accelerated in the last two quarters of the year, requiring reinvestment in the current environment which produced a very low yield. As a result, the yield on earning assets did decline by 28 basis points.

Net interest margin for the full year of 2010 was 3.67%, a 34-basis point increase compared to all of 2009, and as I noted earlier, was responsible for an increase of 13.2 million in net interest income for the year, despite a significant decrease in the average loan balances. Loan balances declined further in the fourth quarter, as we experienced relatively modest demand for new loans. Line utilizations remained low and we continued planned reductions in construction and land loans.

Turning to non-interest revenues, deposit fees increased compared to the same quarter a year earlier, but were down modestly compared to the preceding quarter. For the full year of 2010, deposit fees increased by nearly 3%. Inside this year-over-year increase in deposit fees, there were a number of interesting cross-currents at work. Reflecting changes in customer behavior and later in the year, changes in the regulatory environment, average overdraft charges per account decreased by about 15%. However, the reduction in this source of revenue was offset by an increase in the number of accounts, as well as increased interchange revenues from higher customer usage of debit and credit cards.

Although there's a great deal of uncertainty about how the final rule of implementing last year's financial reform legislation might impact this interchange revenue, it is clear that the growth of accounts and customer relations that Banner has enjoyed this year will help support revenue-generating opportunities going forward.

As we noted in the press release, revenues from mortgage banking activities decreased in the fourth quarter, in part reflecting rising interest rates in the last two months of the quarter, but primarily because the third quarter's results were augmented by our decision to sell a portion of the loans we had accumulated to our Great Northwest Home Rush.

By comparison to the same quarter a year earlier, our revenue for mortgage banking increased substantially. However, for the full year 2010, mortgage banking activity and revenues decreased from levels that were significantly enhanced in 2009 -- early in 2009 -- by refinancing opportunities brought on by the much lower interest rate environment. Despite the full year decrease, we believe the third and fourth quarters' improvement -- I should say significant improvement -- compared to a year earlier reflects some of the benefit we anticipated from the realignment of our mortgage origination process, which has now been fully integrated into our retail delivery system.

Similar to recent periods for the fourth quarter of 2010, controllable operating expenses were only modestly changed from both the preceding quarter and the same quarter last year. However, expenses related to real estate -- acquired real estate, including taxes, maintenance and valuation adjustments, while decreased from the preceding quarter, remained elevated. Legal and appraisal and other collection costs also remained high. As a result of our efforts to manage controllable expenses throughout 2010, all of the increase in our aggregate non-interest operating expense for 2010 can be attributed to the REO and collection of costs. Although we expect those costs to remain elevated for a few more quarters, we expect that they will decrease substantially over time.

Finally, as Mark noted, the capital base of the Company and Banner remained strong at the end of the quarter and both entities have consistently exceeded the regulatory guidelines to be considered well-capitalized. At December 31, Banner Corporation's total risk-based capital ratio was 16.88%. Its tier one leverage ratio had increased to 12.24% and the ratio of tangible common equity to tangible assets was 8.73%.

Further, although we made no capital contributions in the fourth quarter, following our capital raise earlier in the year, we have down-streamed $110 million in capital into the equity of Banner Bank. As a result at December 31, Banner Bank's total risk-based capital ratio was 15.06% and its tier one leverage ratio had increased to 10.84%, which is well in excess of the level targeted in our agreement with the FDIC.

So while the results for the quarter and the year remain a long ways from where we want to be, and where we expect to be in the future, throughout 2010 we made significant progress increasing revenues from core operations and further strengthening our retail deposit base, as we move forward on the execution of our strategic plan.

With that brief overview, I'll turn the call back to Mark. As always, I look forward to your questions.

Great. Thank you, Lloyd and Rick, for your comments. That concludes our prepared remarks and Christina, we will now open the call and welcome your questions.

Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Jeff Rulis with D.A. Davidson & Company. Please go ahead.

Good morning, guys.

Hi, Jeff.

Lloyd, I had a question on the -- given the drop in cost of funds, did you have -- what was the amount of CDs maturing this quarter? And I guess the second part of the question was do you have upcoming buckets of CDs that may mature in future quarters?

Sure. The maturities during the fourth quarter, Jeff, were probably about $400 million. That number always gets confused as we roll three months and six months forward all the time, but there was a significant move there. The maturities in the third quarter actually had a bigger impact, where there was a large bulge of high-cost CDs that came off throughout the third quarter and really continued to impact the fourth quarter.

The other thing that happened is we did adjust some pricing down on some transaction accounts that I mentioned that still were carrying in some instances some promotional rates. Looking forward, we have a fairly significant maturity coming up in the first month of this quarter. Beyond that, it sort of levels out. We've nearly run the cycle now of rolling off high-cost CDs, but there is one large block that comes off in the month of January.

Okay. So if I read you right though, I mean, if you had a benefit in Q4 from some Q3 maturities, you could still see a benefit from Q4 maturities, and then even this first month of this quarter that, I guess -- is a one sub 1% cost of funds unreasonable in the next quarter? I guess that's rather (inaudible).

Cost of funds below 1% is not impossible. It may be a stretch. Deposits are already there in the fourth -- in the last month of the quarter, but let me caution you. We will continue to see improvement in funding costs in the first quarter. I do think that there's -- as I've noted, there's a significant risk that asset yield pressures will become more evident.

Right.

So I don't want you to leave with the impression that the margin's going to go out by another 18 basis points.

I hear your warnings on the asset yield side, yes. Okay, good enough there. And then I just wanted to kind of get an update on the potential recovery of the DTA. I guess if you could remind us what the size of that is and I guess you're budgeted -- if you do have budgeted plans for any partial recovery of that in the next year or shortly thereafter?

Well, the valuation allowance to be put up against the DTA in the third quarter was about $24 million. For us to reverse any of the allowance, we first have to generate some profits. As we initially do that, they will offset taxes, but there would not be a recovery until sustainable profitability was established, Jeff, and I'm not going to give you a timeline on that.

Right. So it's not just the first, say, breakeven quarter that you would see any partial benefit? It would have to be several quarters of profitability to get any benefit?

Well, no. We'll get the benefit in the quarter that we're profitable to the extent we would have normally reported taxes in that quarter, but we won't get the recovery of the balance of the allowance until we've established a trend.

Got you, okay, okay. And then my last question relates to the REO costs. Lloyd, I don't know if you mentioned something in there in terms of your expectation for costs in 2000 (sic) versus 2011, if you had any comment on what your expectations for that level, given your REO balance -- as it sort of bounces around 100 million here.

Sure. And Rick and Mark may want to comment on this as well. I did imply that over time, we expect those costs to go down, and obviously, that's predicated on further liquidation and reduction in the balances. A bit of the wild card there is that property values continue to be a concern, as you're aware. And so that one is hard to project, other than if we're successful reducing the totals, the carrying costs will be down meaningfully.

Jeff, this is Mark. Clearly, at $100 million, it's still too high, so until we see meaningful reduction there, the costs will remain elevated for a couple of quarters.

Okay, thanks.

Thank you. And our next question comes from the line of Tim Coffey with FIG Partners. Please go ahead.

Hey, good morning, gentlemen.

Hi, Tim.

Hi. Mark, with the realignment of the mortgage business under the branches, can we expect a similar level of mortgage activity in a normalized quarter to what we saw in 4Q, or was some of that additional spillover from the activity in Q3?

Yes, I think what's interesting is the actual fourth quarter was a great production quarter for the Company, and we saw an 8% increase in overall mortgage production compared to the third quarter, so if that -- in a situation where we all know there was rising rates.

So what that's telling us obviously is the integration with the branch (inaudible) system is working. I will say though that interest rates are -- with the increase in interest rates, we're seeing a falloff in some of the refi activity and you'll have obviously a seasonal component with the first quarter. So I wouldn't suggest that the first quarter is going to be as strong as the fourth quarter, but I do think that that integration is working well, and I would expect us to see some continued improvement in our mortgage operation.

Are you presently adding mortgage bankers?

We are, we are.

About how long do you think it'll take to be fully staffed?

Probably another quarter before we're fully staffed. We've added approximately five new mortgage bankers and we want to be at eight.

Okay. Thank you. And Rick, can you give me kind of a breakdown on what new NPAs you saw in the quarter, those dollar amounts, and also the type?

Sure. The inflows into the non-performing loan category were just short of $35 million for the quarter. About 48% of that amount still came out of the residential construction and land portfolios, and about 24% out of the commercial real estate portfolios. The balance was spread through the other product types.

Okay. Okay. And those are all my questions. Thank you very much.

Thanks, Tim.

Thank you.

Thank you. (Operator Instructions). And we do have a follow-up question from the line of Jeff Rulis with D.A. Davidson & Company. Please go ahead.

Hey, guys, just one other one. On the loan runoff case, any expectations there in terms of as you run down this residential construction portfolio, would it -- I guess if you could outline some of your expectations for the coming year, if the pace is supposed to perhaps decline in 2011.

Yes, I think the pace of the contraction in the commercial book will begin to stop. I will tell you that I think we're going to see some continued contraction here through the first quarter and potentially into the second quarter, and then you will see rebounding in the latter half of the year. Obviously, with the residential construction, lot and land portfolio right now at 9%, our target was around 10%, so any further contraction in that portfolio that we have is obviously going to be centered in the non-performing asset category that we'll want to get those off the books.

But we're not going to be in a position to contract that portfolio significantly, but we do want to get rid of some of the land assets, but we really haven't seen a meaningful rebound in commercial loan activity. Just now are our pipelines starting to fill and are up quarter-over-quarter, so the activity is beginning, but as you know, Jeff, that doesn't really take root until a couple of quarters out.

Okay. Thank you.

And I'm showing no further audio questions at this time. I'll now turn the call back over to management for any closing remarks you may have.

Great. Thanks, Christina. I appreciate everybody's attention today. Again, while we know that we've got quite a bit of work to do, we're making excellent progress and our employees are all focused on our disciplined strategic plan to strengthen Banner and aggressively manage our problem assets, while at the same time executing on our Super-Community Bank model and improving our core operating performance.

So with that, thank you for your interest in our Company and for joining us on the call today, and we look forward to reporting our results to you again in the near future. Thanks, everyone.

Ladies and gentlemen, this does conclude our conference for today. If you'd like to listen to a replay of today's conference, please dial 1-800-406-7325, entering in the access code 4399064. We'd like to thank you for your participation today. You may now disconnect.