Banner Corp (BANR) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Banner Corporation first-quarter 2011 results conference call. During today's presentation, all parties will be in a listen-only mode, and following the presentation the conference will be open for questions. (Operator Instructions) As a reminder this conference is being recorded today, Thursday, April 28, 2011.

I would now like to turn the conference over to Mr. Grescovich, President and CEO of Banner Corporation. Please go ahead, sir.

Thank you, Jeremy, and good morning, everyone. I would also like to welcome you to the first-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. 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 a recently filed Form 10-K for the year ended December 31, 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, Al. As announced, Banner Corporation reported a net loss to common shareholders of $9.8 million or $0.09 per share for the first quarter ended March 31, 2011. This compared to a net loss of $14.6 million or $0.13 per share for the fourth quarter of 2010, and $3.5 million or $0.16 per share in the first quarter ended March 31, 2010.

The first-quarter provided further evidence that through the hard work of our employees throughout the entire Company, we are making very good progress at strengthening our franchise and positioning Banner for sustainable improved performance by effectively executing on our strategic turnaround plan.

Our core operating performance continued to show improvement when compared to a year ago. While we experienced the expected seasonal decline in core revenue when compared to the fourth quarter of 2010, our core revenue increased 4% when compared to the first quarter of 2010.

Our net interest margin expanded to 3.94% in the first quarter of 2011, compared to 3.61% in the first quarter of 2010. And our cost of deposits decreased to 89 basis points in the most recent quarter compared to 169 basis points in the same quarter of 2010.

These improvements are reflective of our super-community bank strategy, reducing our funding cost by remixing our deposits away from high-priced CDs, growing new client relationships, and improving our core funding position.

To that point, our core deposits grew again this quarter compared to the linked quarter, and have increased 7% from the first quarter of 2010. It's important to note that this is organic growth from our existing branch network. 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 first quarter of 2011, we recorded a $17 million provision for loan losses, again providing more than net charge-offs.

Also for the quarter, we recorded a $3 million valuation adjustment on real estate owned. In a moment, Rick Barton, our Chief Credit and Lending Officer will discuss the credit metrics of the Company and provide some context around the loan portfolio, along with our emphasis in aggressively managing our problem assets, as our nonperforming loans have reduced 33% compared to the first quarter of 2010. And our 1 to 4 family residential construction lot and land portfolio has reduced $171 million from the first quarter of 2010. That portfolio now stands at just 9% of total loans.

Banners reserve levels are substantial, and our capital position in liquidity remains strong. In the first quarter our ratio of allowance for loan and lease losses to total loans improved to 2.94%. Our total capital to risk-weighted assets ratio improved to 17.14%. Our tangible common equity ratio improved to 8.79%, and our loan to deposit ratio stood at 94%. Also, our primary equity ratio for on balance sheet liquidity is 13%.

Finally, in the quarter we added additional executive talent to our company. We are pleased that Brad Williamson, the most recent director of banks for the State of Washington Department of Financial Institutions which regulates all Washington State chartered banks, joined our subsidiary bank, Islanders Bank, as President and Chief Executive Officer.

Also, Ms. Anne Wuesthoff, former senior vice president of human resources and talent and organizational capability for Washington Mutual, joined Banner Bank as Head of Human Resources and Organizational Development. These executives who both have significant experience outside of banking as well provide additional executive depth and leadership to our company.

I will now turn the call over to Rick Barton to discuss the trends in our loan portfolio and our credit metrics. Rick.

Thanks, Mark. During the first quarter of 2011, Banner continued to make progress in returning its credit metrics to more normal levels. Specific indicators of this progress are net charge-offs for the quarter were $16.8 million, down 12% from the fourth quarter of last year.

After these charge-offs that were more than covered by our provision of $17 million, the reserve for loan losses again strengthened quarter-over-quarter and year-over-year. To put this in context, let me compare the first quarter of 2011 to the first quarter of 2010.

In absolute numbers, the reserve over the past year grew by $1.9 million. Further, as a percentage of total loans, the reserve increased to 2.94% from 2.6%. The coverage of nonperforming loans was 74% versus 49%, and the unallocated portion of the reserve was $15.1 million versus $9.7 million. Individually and collectively, these measures reflect the substantial nature of our loan loss reserve.

Nonperforming loans continued to decline, down $20 million or 13% at year-end and $64 million or 33% over the past 12 months. In the construction and land portfolio, the decline in nonperforming loans was $71 million or 51% since March 31, 2010.

A different perspective on nonperforming loans is their relationship to total loans. Over the past 12 months, that ratio has decreased from 5.3% to 3.9%, even in light of the contraction of loans outstanding.

The trend in past due loans also was positive. Total past-due loans, including nonperforming loans since year-end, decreased $32 million or 18% to $148 million. The decrease since the first quarter of 2010 was $99 million or 40%. At quarter-end, the delinquency percentage was 4.46% of total loans, down from 5.3% at year-end and 6.71% one year ago. And importantly, loans 30 to 89 days past due and on accrual were only $16.6 million or 0.5% of total loans outstanding.

And as Mark already mentioned, the reduction of residential construction and land loans continued. Those loans now total $299 million, down from $321 million at year-end. This further decline is after new loan production during the quarter of $51 million, all of which was underwritten using current appraisals and underlying market conditions.

Importantly, the nonperforming component of this portfolio declined over the past year $48 million, falling from $111 million to $63 million, a drop of 43%. Charge-offs as already noted were down quarter-over-quarter.

Losses were again centered in the construction and land portfolio. Those losses, while lower, totaled $10.5 million or 62% of our total charges. Charges in other land categories were down modestly for the quarter.

When looking at the spread of our loan losses, it is important to note that the highest risk component of our loan portfolio, land, continues to decrease and is intensely managed and regularly revalued.

Our sizable REO portfolio is being actively administered and receives daily executive management oversight. During the quarter, total REO assets decreased by nearly 6% to $94.9 million. New additions to REO during the quarter were $14.9 million, the lowest quarterly total over the last five quarters, and down nearly $2 million from the fourth quarter of last year.

Other significant REO statistics for the quarter are dispositions of REO totaled $18.9 million. For these sales, net proceeds were 97.2% of book value. Dispositions were from throughout the portfolio, both by product type and geography, with no outsized transactions included. REO valuation adjustments were $3 million, down from $5.2 million last quarter and $8.6 million two quarters ago.

The consistent success we have had in selling REO assets is a reassuring sign that our disposition strategies are appropriate. Liquidation of the balance of the REO portfolio in a recent manner is a key credit objective as management of those assets -- as is management of those assets that may be headed into foreclosure.

The greatest challenge facing us lies in residential land, whether it is REO or nonperforming loans. These two buckets totaled $92 million at quarter-end, $43 million in REO, and $49 million in nonperforming loans. Our efforts to dispose of these land assets will continue to be challenged by less than robust market fundamentals and increased evidence of dumping by other lenders in the FDIC in all of our markets.

A final point that I would like to again reiterate this quarter is that we have much work left to do, and to that end continue to aggressively collect and value our problem assets, and have a disciplined strategy in place that includes direct executive management involvement.

With that, I will turn the mic over to Lloyd for his comments.

Thank you, Rick, and good morning, everyone. Every quarter as we draft our earnings release and prepare for this conference call, I go back and look what we said in prior periods, including what we said just 90 days earlier. Of course, part of the reason I do that is to confirm that we did not say something that with the passage of time might need some clarification or adjustment.

However, another reason that I do that is to try to avoid sounding boring and redundant. Fortunately, as I have done this, I have not found anything that with the benefit of hindsight needs correction or that we regret having said.

On the other hand, I have found a couple of consistent themes that while they are important to note could be considered a bit boring and redundant described. However, as Mark has reminded me, it's okay to be boring if we are talking about making progress as intended.

The first theme that we have been repeating for a number of quarters is that while it is never as fast as we would like to see it happen, our credit metrics are improving. Rick has already provided a great deal of detail on this subject, so I will not add any comments now other than to note the continuing strengthening of our reserve coverage ratios.

While we have significantly reduced our exposure to construction and development loans and our level of nonperforming loans has declined, we have continued to match charge-offs with additional loan loss provisioning, causing the ratio of our allowance for loan losses to increase.

The second theme that has been evident for some time is the stability and growth in our revenues from core operations as a result of the maturing and strengthening of our commercial banking franchise. Mark spoke to this briefly in his opening comments, but I want to expand that a little more as we discuss the first-quarter's results.

As we have addressed this theme in our press releases, we are challenged not to overuse the words further and continued. But because this trend has been in place for a number of quarters now, it's hard to describe it any other way.

As Mark noted, our revenues from core operations for the quarter ended March 31, 2011, at $47 million were 4% greater than the first quarter of 2010. But taking a little longer view at that trend, for all of last year we experienced consistent year-over-year increases in these core revenues. And as a result of the most recent quarter's core revenues also represent a 10% increase over the same period two years earlier.

That consistent increase in core revenues has been driven by continued -- and there's that word again -- continued improvement in our net interest margin and net interest income. For the first quarter of 2011, Banner Corporation's net interest income was $40.1 million, which as expected showed a seasonal decline compared to the immediately preceding fourth quarter, but was 5% greater than the first quarter of 2010.

Again, looking at that longer trend was 15% more than the $35 million recorded in the same period two years earlier. The solid trend of year-over-year increases in net interest income that we have been reporting has been at the heart of our improved revenues from core operations, and continues to encourage us looking forward.

Our net interest margin was 3.94% for the first quarter of 2011, an increase of 13 basis points compared to the fourth quarter of 2010, and 33 basis points stronger than the first quarter a year ago. This margin improvement resulted from continuing reductions in our funding costs and more specifically in our deposit costs.

Deposit costs decreased by another 14 basis points during the first quarter and were 80 basis points lower than a year ago, reflecting further changes to the deposit mix and additional downward pricing on maturing certificates of deposit and on transaction and savings accounts.

As Mark has noted, the deposit mix changes reflect the focused efforts of our retail staff implementing a number of strategic initiatives designed to strengthen the foundation of the Company, and those initiatives are producing results.

As I noted in last quarter's call for Banner Corporation, this growth of core deposits and reduced deposit costs has been a very important success story that has been very evident in our improving operating trends. Both non-interest-bearing and interest-bearing transaction savings accounts had linked-quarter and year-over-year increases, resulting in core deposit growth of nearly 7% compared to a year ago.

As a result of the growth in these transaction savings accounts and planned reductions in high-cost certificates of deposit, core deposits now represent 59% of total deposits compared to 51% a year earlier and just 44% two years earlier.

Importantly, we are not just adding balances but instead continue to see solid growth in the number of accounts and customer relationships. Improvement in our net interest margin again occurred despite further pressure on asset yields, as a result of the very low interest rate environment, and while we continue to maintain high levels of on balance sheet liquidity.

Loan yields decreased to 5.66% for the first quarter, just 1 basis point lower than the preceding quarter and still only 8 basis points lower than the same quarter a year earlier. While I continue to be pleasantly surprised by how well loan yields have held up, as I have noted for the last 2, 3, 4 quarters, I'm sticking with that forecast until it's right. Pressure on loan yields is building and likely will become more evident in future periods.

Also I need to note that the annualization process for calculating yields and the net interest margin tends to overstate both of those numbers in the first quarter of each year because of the short day count. While the day count effect does not impact the year-over-year comparison, ignoring all other factors it does tend to make the first quarter's loan yields and net interest margin seem stronger in comparison to the fourth quarter than is actually the case.

Of course, the other side of that story is that the short quarter also means there are fewer days to earn interest income as well as fees, which largely explains the expected seasonal decrease in revenues that we've noted.

Loan balances declined further in the first quarter as we expressed relatively modest demand for new loans, line utilizations remained low, we had a normal seasonal paydown on agricultural loans, and we continued planned reductions in construction and land loans, as well as other nonperforming loans.

While total balances declined, our production levels for targeted loans were encouraging. And as we noted in the press release, the aggressive calling efforts of our bankers are resulting in a stronger pipeline of lending opportunities. While we expect further reductions in land loan balances, we believe these efforts coupled with an improving economic condition will allow us to stabilize and then grow the loan portfolio over the remainder of the year.

In addition to the effect on our net interest margin, the other important aspect of the continuing growth in core deposits has been the impact on deposit fees. For the first quarter, the positive impact of that growth was somewhat masked by the decline in OD and NSF charges subsequent to the regulatory -- the changes in the regulatory environment last summer.

Those changes which had not been implemented in the first or second quarter of last year had a dampening effect on deposit fees, which is reflected in the year-over-year comparison. However, for Banner the reduction in this source of revenue has been offset by an increase in the number of accounts as well as increased interchange revenues from higher customer usage of debit and credit cards.

As a result, for the first quarter total deposit fees and service charges were modestly increased from the same period a year ago. Although there was a great deal of uncertainty about how the final rules implementing last year's financial reform legislation might impact this interchange revenue, it is clear that the continuing growth in accounts and customer relationships that Banner has achieved will support recurring revenue generating opportunities going forward.

As we noted in the press release, revenues from mortgage banking activities decreased significantly in the first quarter compared to the preceding quarter, which is a common seasonal pattern but which we believe is also indicative of fewer refinancing opportunities as rates have remained at current levels for an extended period of time.

Nonetheless, by comparison of the same quarter a year earlier, our revenues from mortgage banking were essentially unchanged. And despite the decline in refinancing activity, we believe our residential mortgage origination activity will show further success from its recent integration into our retail delivery system.

Similar to recent periods, for the first quarter of 2011, operating expenses were only modestly changed from both the preceding quarter and the same quarter last year. Our expenses related to 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. Although we expect these credit-related 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 of Banner Bank remains strong at the end of the quarter, and both entities have consistently exceeded the regulatory guidelines to be considered well-capitalized.

At March 31, 2011, Banner Corporation's total risk-based capital ratio was 17.14%, its Tier 1 leverage capital was 12.5%, and the ratio of tangible common equity and tangible assets was 8.79%.

Further, although we made no capital contributions in the first quarter, Banner Bank's capital ratios all increased modestly from the prior quarter. As a result, at March 31, Banner Bank's total risk-based capital ratio was 15.24% and its Tier 1 leverage capital ratio was 11.03%, which is well in excess of the level targeted in our agreement with the FDIC.

So as redundant as it might sound, our results for the first quarter of 2011 reflected further continued improvement, and I look forward to describing it the same way next quarter.

With that overview, I will return the call back to Mark.

Thank you, Lloyd. That concludes our prepared remarks. Jeremy, we will now open the call and welcome your questions.

Thank you, sir. (Operator Instructions) Jeff Rulis, D.A. Davidson.

Good morning, guys. As you guys approach 3% reserve to loans, are we getting any closer to releasing some reserves as in allowing net charge- offs to outstrip the provision going forward?

As we have indicated in the past, Jeff, we constantly evaluate our allowance as it relates to the overall loan portfolio in particular, our nonperforming loans and all of our nonperforming assets. So as we continue to see asset resolution, troubled asset resolution, and our nonperforming assets decrease, if we stay on this trajectory we will evaluate that at that time. We are looking for the trend to continue, though.

Okay. Lloyd, as you ran through the capital ratios there, what is -- the Tier 1 leverage of 12.5%, that represents a surplus over 10% of -- what is the dollar figure there? You know, maybe while you are searching --.

I'm sorry, Jeff, I am stumbling here for just a minute. 2.5% of $4 billion -- about $100 million.

Got you.

And just additional clarification there, that 10% number while it's interesting was in the bank -- at the bank rather than at the holding company.

Right. I guess as that relates to potential, maybe just revisiting the thoughts on TARP repayment and/or going a different route, the small-business lending fund, any updated thoughts on that?

Well, we continue to evaluate the small-business lending fund and are giving it very strong consideration. The repayment of TARP to us is still an issue that we think is best considered when we have the earnings of the Company where we would like them to be. It still looks to us to be an important piece of our capital base for the near-term.

As you probably know, Jeff, through the application of the small-business lending fund, even though you apply, you don't have to accept it. And there is a lot of evaluation that is going on on our behalf, both in terms of amount, financial and economic, but also administrative as we review whether that's an appropriate program for Banner.

Then lastly, what is the size of the -- updated size of the DTA allowance currently?

The allowance is at $40 million, Jeff, in round numbers. Again, it's largely driven by the provisioning in excess of charge-offs for tax purposes.

Okay, thanks.

(Operator Instructions) Tim Coffey, FIG Partners.

Good morning, gentlemen. Mark, as we look at the deposit growth this past quarter, is that a good measuring stick or are the branches getting their fair economic share of their markets?

I think it is. I think the other thing that is a fair assessment on why the branches are continuing to get their economics fair share, as Lloyd mentioned, is the deposit piece. So as we have garnered deposit accounts, the fee income that we have seen which was 2% year-over-year in deposit fees is indicative of a more wholesome relationship, in the fact that we are getting closer to our economic fair share in our branch distribution system.

Is the next step of that then loan growth?

That is a safe bet. And I think as Lloyd already alluded to, we would anticipate that piece kicking in later in the year.

Okay, great. Yes, I heard that. What are your thoughts -- and I heard Rick's comments and he felt that the disposition strategy was working. So what are your thoughts on just doing both note sales, and just wholesale drop some of the levels of NPAs?

Well, like I said, the economic component for us is when we are receiving $0.97 on the dollar, I think if you were to try to bulk some of this out, just the brokers' fees alone in bulking some of our parcels out would result in an economic return that is substantially less than that, number one.

Number two, recall that as Rick said when $19 million -- roughly $19 million in disposition that we had this quarter, it was all pretty small stuff. So it was a lot of things that really aren't conducive to a large bulk sale. So there are small parcels and small pieces of property in various developments throughout our footprint.

So from (inaudible) you said -- can I infer that you are not comfortable, but you will tolerate higher levels of problem assets and higher capital?

That's a safe bet. We are going to continue -- well, I'm not going to continue tolerate it. We are still going to aggressively manage the number down. But for a period of time, we want to make sure that we are doing it methodically.

Okay, okay.

And that is why we have said, and as Lloyd alluded to in his remarks, that the asset collection cost, the disposition cost, and the expense structure should remain elevated for a couple of quarters.

Sure, sure, understood. Then, Rick, when you see the recent appraisals coming in, are they trending lower or are you seeing some stability in the real estate prices in your markets?

That's a really tough question to answer simply, Tim. It really is dependent upon the market that we are talking about. If there was an overall bias, I think you would still see appraised values coming down.

But it's the pace of decline is moderating overall, and in some of the markets around Puget Sound in particular, I would say that we are seeing some stabilization in appraised values.

Okay. The reason I ask that, in the last several quarters we've seen charge-offs levels relative to growth in NPAs, that ratio is starting to uptick at lot, in terms of you're charging off a similar amount but NPAs continue to decline. Is that something that you think we will continue to see?

Well, I think we are going to have to go through quarter by quarter to really get the answer to that question. I just don't have a good barometer by which to give you a crisp, quantitative answer.

Okay, I appreciate it. Those are all my questions. Thank you very much.

(Operator Instructions) Thank you, Ladies and gentlemen, as a reminder this conference is available for replay later on today. You can access that replay by dialing 1-800-406-7325. And for callers calling in from international countries, you can dial 1-303-590-3030, and then enter the access code 4429150, and that replay will be available until May 4, 2011.

Mr. Grescovich, there are no further questions at this time.

Great. Well, thank you, everyone. Again, while we have a lot of work to do, we are making very good progress on our disciplined strategic plan to strengthen Banner by aggressively managing our problem assets. And at the same time, we are executing well on our super-community bank model and improving our core operating performance.

Thank you all very much for your time, for your interest in Banner and for joining us on our call today, even though as Lloyd said some of this may sound boring, redundant, but we are continuing progress. And we look forward to reporting our results to you again in the future. Have a great day.

Ladies and gentlemen, this concludes the Banner Corporation first-quarter 2011 results conference call. You may now disconnect, and thank you for using AT&T Conferencing.