Banner Corp (BANR) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen; thank you for standing by. Welcome to Banner Corporation's third-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). This conference is being recorded today, October 20, 2011. I would now like to turn the conference over to Mr. Mark Grescovich, President and CEO. Please go ahead, sir.

Thank you, Douglas, and good morning, everyone. I would also like to welcome you to the third-quarter earnings call for Banner Corporation. Joining me on the call today is Rick Barton, our Chief Credit and Lending Officer; Lloyd Baker, our Chief Financial Officer; and Albert Marshall, the Secretary of the Corporation. Albert would you please read our forward-looking Safe Harbor statement?

Yes, thank you and 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, forecast 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 June 30, 2011. 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 continued our return to profitability in the third quarter, reporting a net profit available to common shareholders of $4.1 million or $0.24 per share for the period ended 9-30-2011. This compared to a net profit to common shareholders of $224,000 or $0.01 per share for the second quarter of 2011, and a net loss of $44.7 million or a loss of $2.83 per share in the third quarter of 2010.

For the nine months ended September 30, 2011 Banner reported a loss available to common shareholders of $0.33 per share compared to a loss of $7.31 per share for the first nine months of 2010. Looking at earnings before preferred stock dividends and discount accretion, Banner had net income of $0.02 per share year to date compared to a net loss of $6.54 for the same period of 2010.

The third-quarter performance provided further evidence and confirmed that through the hard work of our employees throughout the entire Company we are successfully executing on our strategies and priorities to strengthen our franchise and deliver sustainable profitability to Banner. And further, that our strategic turnaround plan is effective and we are building shareholder value.

Our operating performance again showed improvement on every metric when compared to the linked-quarter and compared to a year ago. Our year-to-date core revenue increased nearly 4% when compared to 2010. Our net interest margin expanded to 4.1% in the third quarter of 2011 compared to 3.63% in the third quarter of 2010, and our cost of deposits decreased to 70 basis points in the most recent quarter compared to 129 basis points in the same quarter of 2010.

These improvements are reflective of our super community bank strategy, reducing our funding costs 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 increased 7.5% compared to the linked-quarter and increased 7% from the third quarter of 2010.

It's important to note that this is organic growth from our existing branch network. In a moment Lloyd Baker, our Chief Financial Officer, will discuss our operating performance in more detail.

Clearly improving the risk profile of Banner and aggressively managing our troubled assets has been and will remain the primary focus of the Company. We continue to show very good progress here as well. Our non-performing assets have been reduced nearly 20% compared to the second quarter of 2011 and 45% compared to September 30, 2010.

Further, the most problematic part of the portfolio, our one-to-four family residential construction lot and land portfolio, has reduced $122 million from the third quarter of 2010 and $919 million from the peak outstandings. That portfolio now stands at just 7.5% of total loans.

In a few moments Rick Barton, our Chief Credit and Lending Officer, will discuss the credit metrics of the Company and provide some context around our loan portfolio along with our continued successful emphasis in aggressively managing our problem assets.

Although we are making good progress reducing troubled assets, we recorded a still large $5 million provision for loan losses in the quarter. As a result the coverage for our allowance to non-performing loans increased to 104% at September 30, 2011 from 80% in the second quarter and 57% in the third quarter of 2010. Also for the quarter we recorded $4.6 million of valuation adjustments on real estate owned.

While credit costs remained elevated in the third quarter, Banner's reserve levels are substantial and our capital position and liquidity remain strong. At the end of the quarter our ratio of allowance for loan and lease losses to total loans was 2.67%, our total capital to risk weighted assets ratio improved to 17.94%, our tangible common equity ratio improved to 9.2%, and our loan-to-deposit ratio was 91%.

Also of note, our primary liquidity ratio for on balance sheet liquidity increased to 16.5%. Finally, in the quarter we continued to invest in our franchise. We've added additional commercial banking talent to our Company in all of our markets and added senior banking leadership in the important Portland market. I will now turn the call over to Rick Barton to discuss the trends in our loan portfolio and our credit metrics. Rich?

Thanks, Mark. As you have already read in our third-quarter press release and heard in Mark's introductory comments this morning, Banner Corporation's credit metrics showed significant improvement during the third quarter.

Before discussing these metrics in more detail I again have two say that while we are delighted at the progress made during the past year, we still have much work to do before our non-performing assets and credit costs return to acceptable levels. Now let me turn to Banner's credit metrics at the end of the third quarter.

Net charge-offs for the quarter were $10.9 million, down 20% from the preceding quarter. Non-performing loans declined 28% to $83 million during the quarter. The ratio of non-performing loans to total loans is now 2.6%, down from 3.5% at 6-30-2011. At September 30, 2010 NPLs were $170 million or 4.9% of total loans.

Additionally, new non-performing loans identified during the quarter again declined and totaled $11.8 million. This is 37% less than last quarter and 71% less than the quarter ended September 30, 2010.

Past-due loan measures also improved during the quarter. Total past-due loans, including non-performing loans, decreased $36 million or 28.2% and are now 2.82% of total loans. And importantly, loans 30 to 89 days past due and on accrual were only $7.9 million or 0.24% of total loans outstanding.

Performing TDRs also fell during the quarter, going from $55.7 million to $52 million. These improved metrics drove our decision to again not match net charge-offs with provision expense. Banner's reserve continues to be appropriate for our portfolio and is a source of strength for the Corporation and is better positioned than it was at the end of the second quarter of 2011. The following metrics support this statement.

Our riskiest portfolio, residential construction and land, shrank another 10% to $243 million and the non-performing portion of this portfolio shrank from $49 million to $33.5 million. The composition of this portfolio also shifted during the quarter. One-to-four family construction loans actually increased by $5 million reflecting new construction financing in our stronger markets while the land segment shrank $32 million or 25%.

While our reserve to total loans did contract 11 basis points in the quarter, our coverage of non-performing loans continued to increase and now stands at 104%, up from 80% at the end of the second quarter. At 2.67% our reserve to total loans is still high by historical standards and the unallocated portion of the reserve remains substantial at $15.2 million.

During the quarter REO assets decreased by 6.6% from $71.2 million to $66.5 million. This net decrease was after new foreclosures of $18.9 million during the quarter. While new foreclosures during the third quarter exceeded linked-quarter foreclosures by $11.9 million, the increase reflects culmination of workout negotiations and/or the completion of foreclosure proceedings, not portfolio deterioration.

Total REO dispositions were $19.4 million during the quarter, returning to our normal run rate. Second-quarter dispositions were well above our normal run rate as we moved two large REO assets with a combined balance of nearly $13.5 million. Third-quarter dispositions followed our normal pattern and were made up of numerous transactions throughout our geographical footprint.

On REO sales during the quarter we realized 96.3% of our carrying value. REO valuation adjustments of $4.6 million taken during the quarter reflect continued weakness in land and lot values in the Pacific Northwest. As a result of improved non-performing loans and REO totals, at quarter end non-performing assets decreased $36.8 million or just over 19.5% and now stand at $151.6 million or 3.53% of total assets.

As I noted at the beginning of my comments this morning, we are gratified by the trend of improvement in asset quality. However, the work that remains to be done is still challenging and continues to be impacted by a weak unsettled economic environment and more evidence that residential land assets are being dumped by other banks and the FDIC throughout our operating footprint. With that I will turn the stage over to Lloyd for his comments.

Thank you, Rick, and good morning, everyone. As reported in our press release, Banner's operating results for the third quarter and the first nine months of 2011 reflect significant progress on three key objectives of the strategies and priorities we laid out more than a year and a half ago to return the Company to profitability. Specifically to reduce the adverse affect of non-performing assets, reduce our cost of funds and increase client relationships.

Results of that progress have been a continuing trend of strong revenue generation, particularly improvement in net interest income, deposit fees and payment processing revenues, as well as a reduction in credit costs, more specifically in provision for loan losses and, importantly, the expected return to profitability which we believe should be sustainable going forward.

As I noted on last quarter's call, it's been a long and difficult period and we certainly have much more work to do to reach the level of profitability that we expect long-term. But the consistent and focused efforts of all the dedicated employees at Banner Corporation have clearly produced notable improvement which is very evident in this quarter's press release.

Interestingly the comparison of the current quarter with the nine months result -- the current quarter and nine months results with those we reported a year ago provides both stark contrast with respect to credit costs we were experiencing and significant confirmation of the improving revenue trends we were discussing at that time. The reduction in credit costs compared to a year ago as well as compared to the more recent quarters has of course been critical to our return to profitability.

Rick has already discussed the improving credit metrics behind those cost reductions, but I want to reiterate what I stated last quarter, that as a result of the reductions in delinquencies, non-performing loans and real estate owned the prospects for Banner to return to more normal credit costs are improving and the time frame for that to occur is getting shorter.

Further, as Mark noted, our reserves and capital levels are substantial and provide significant ability to absorb expected and unexpected credit losses.

When we reported our results a year ago I noted that the third quarter of 2010 represented a record quarter for Banner with respect to generating revenues from core operations. The trend of strong revenue generation that I noted at that time and that we have commented on earlier this year continued in the current quarter and as a result the third quarter of 2011 again reflects a new record level of revenues from core operations.

For the quarter ended September 30, 2011 our revenues from core operations, which include net interest income before provision for loan losses plus other non-interest operating revenues, but excludes fair value and OTTI adjustments, those revenues from core operations were $50 million, an increase of $1.6 million over the immediately preceding quarter, and $892,000 or nearly 2% greater than the third quarter a year ago.

For the first nine months of 2011 our revenues from core operations were $145.7 million, which is approximately a 4% increase compared to the first nine months of 2010. As I've noted on previous calls, the continuing trend of year-over-year increases in core revenues that we've been reporting has been driven by significant improvement in our net interest margin and resulting net interest income, as well as solid deposit fee revenues resulting from growth in core deposit accounts.

For the third quarter of 2011 Banner Corporation's net interest income was $41.7 million which, as expected, showed a seasonal increase compared to the immediately preceding quarter and was also 5% greater than the third quarter of 2010. Our net interest margin was 4.10% for the third quarter of 2011, essentially unchanged from the preceding quarter, but 47 basis points stronger than the third quarter a year ago.

For the first nine months of 2011 our net interest margin increased to 4.04%, an increase of 41 basis points compared to the first nine months of 2010. This margin improvement largely reflects continuing reductions in our cost of funding, more specifically in deposit costs.

Deposit costs decreased by another 10 basis points during the third quarter and were 59 basis points lower than a year ago reflecting further changes in the deposit mix as well as additional downward pricing on maturing certificates of deposit and on transaction and savings accounts.

As we have noted repeatedly on previous calls, Banner Corporation's growth of core deposits and reduced deposit costs have been fundamental to our improving operating trends and these trends continued in the most recent quarter. As a result of growth in these transactions and savings accounts and planned reductions in certificates of deposit core deposits now represent 63% of total deposits.

Importantly, we're not just adding balances, but instead continue to see solid growth in the number of accounts and customer relationships. However, for the third quarter of 2011 we did have exceptional growth in non-interest-bearing accounts which, in addition to the growth in accounts, reflected significant average balance increases for many of our business customers.

This is a trend which we're paying close attention, but seems to be consistent with strengthening balance sheets that many businesses are reporting on a national basis and that we are observing in our ongoing credit reviews.

It should come as no surprise that the very low interest-rate environment has continued to put downward pressure on asset yields, loan yields decreased to 5.53% for the quarter, 11 basis points lower than the preceding quarter and 16 basis -- I should really say just 16 basis points lower than the same quarter a year ago.

This is another trend that seems likely to continue though as pressure on loan yields remains intense and alternative investment deals have been driven exceptionally low by further federal reserve policy actions. Fortunately our net interest margin continued to benefit from the declining level of non-accruing loans that has offset some of this pricing pressure.

As noted in the press release, the adverse impact of non-accruing loans decreased to 21 basis points for the current quarter compared to 23 basis points in the preceding quarter and 33 basis points in the third quarter a year ago. Going forward further reductions in the drag from non-accruing loans and other non-earning assets will be critical for us to maintain our improved net interest margin as yields on performing assets should continue to decline.

As expected, loan balances declined further in the third quarter as we continued planned reductions in land loans as well as other non-performing loans. In addition, demand for new loans again was relatively modest and line utilizations remained low, although our commercial and agricultural business loans did increase modestly during the quarter, in part reflecting normal seasonal increase.

While title loan balances declined slightly, our production levels for targeted loans remained encouraging and the calling efforts and execution of our bankers are resulting in a consistent pipeline of lending opportunities. While we expect further reductions in land loan balances, we continue to believe that these well focused calling efforts will allow us to capitalize on additional lending opportunities over the remainder of the year despite the still challenging economic environment.

In addition to the positive effect on our net interest margin, the other important aspect of continuing growth in core deposit accounts has been the impact on deposit fees. As we've discussed before, for the first half of 2011 the positive impact of that growth was somewhat masked by the decline in OD NSF fees subsequent to 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 three quarters of 2011 deposit fees and service charges increased by approximately 3.5% compared to the same period a year ago despite a reduction of roughly $680,000 in overdraft revenues. For the third quarter of 2011, which is the first quarter with comparable OD NSF regulations, deposit fees and service charges were nearly 7% greater than the third quarter a year ago.

Revenues from mortgage banking activities picked up in the third quarter increasing to $1.4 million compared to $855,000 in the second quarter. Although they were significantly decreased compared to the third quarter of 2010 which was particularly strong. However, the very low mortgage rates currently available in the market have resulted in a significant increase in application activity which likely will positively impact the fourth quarter.

Similar to recent periods, for the second quarter of 2011 controllable operating expenses in aggregate were only modestly changed from both the preceding quarter and the same quarter last year. The increases in compensation expense, professional services and payment processing costs were partially offset by decreased advertising and marketing expenditures and lower deposit insurance expense.

However, expenses related to real estate owned remained high primarily as a result of valuation adjustments reflecting further declines in property values. Although we expect these real estate owned expenses and other credit-related costs to remain elevated for a few more quarters, we do expect they will decrease substantially over time as additional asset resolution occurs.

Also of note, in the income statement for the current quarter is the $3 million recovery of an other than temporary impairment charge as a result of the full cash repayment of a security that coincidently had been written off in the third quarter a year ago. Obviously this was a welcome event that we did not anticipate 12 months earlier.

Partially offsetting that recovery was a net $1 million -- valuation charges for financial instruments carried at fair value. By contrast in the preceding quarter we recorded $1.9 million net fair value gains and in the third quarter of last year we also reported gains of $1.4 million on fair value adjustments.

Finally, as Mark noted, the capital base of the Company and the subsidiary banks remain substantial. At September 30, 2011 Banner Corporation's ratio of tangible common equity to tangible assets increased to 9.20%, its total risk-based ratio was 17.94% and its Tier 1 leverage ratio was 13.19%.

Further, although we made no capital contributions to Banner Bank for the quarter or during the year -- past year in fact -- its capital ratios also increased from the prior quarter. As a result at September 30, 2011 Banner Bank's total risk-based capital ratio was 15.83% and its Tier 1 leverage ratio was 11.61%, which of course continues to be well in excess of the level targeted in our agreement with the FDIC.

While this strong capital position is prudent in the current uncertain economic environment, it is significantly above the current regulatory guidelines and also well above the level that most observers expect will be reflected in future guidelines. If -- if current regulatory guidelines for leverage capital ratio necessary to be considered well-capitalized were to double to 10%, Banner Corporation would currently exceed this required amount by approximately $135 million.

Obviously this strong capital position will present significant capital management flexibility for Banner as we move forward. So what that final thought, I'll turn the call back to Mark. As always, I look forward to your questions.

Thank you, Lloyd and Rick, for your comments. That concludes our prepared remarks. And Douglas, we will now open the call and welcome all of their questions.

(Operator Instructions). Jeff Rulis, D.A. Davidson.

Trying to get some confidence on the real estate operations expense line. It doesn't seem to correlate as well as the provision does with the direction of NPAs. I guess assuming NPAs continue to shrink is it safe to assume that line item will also decline or not the case? I know that you had a, what -- $4.6 million valuation adjustment this quarter, but any kind of color on that line item?

Well, as I said during my remarks, Jeff, land and lot prices in the Pacific Northwest continue to be weak. And as the volume of assets that we have under management go down I would expect the level of that total expense to go down, but the wildcard is what happens with the underlying land values as we go forward? As far as the pure operating expenses, they will continue to decrease in proportion to the amount of REO that we have outstanding.

Okay, fair enough. And, Lloyd, I know that we sort of beat up the DTA recovery before, but I wanted to try to get to the potential benefit there. I think you've mentioned in the past there's some offsets to that potential recovery maybe trust preferred issue. Is there a way you could break out the mechanics in dollar terms of any potential recovery there?

You know, Jeff, I'm not going to give you as much guidance there as it you'd like. But the DTA is about $39 million at the end of June; I can't remember now what it is at the end of September, I haven't seen that number yet. We would expect that at some point in time we will -- and our accountants will agree, that the future utilization of that is certain enough that we should be able to bring that allowance back in in a fairly large lump sum adjustment.

Prior to that occurring it will be, similar to this quarter, reflected in a favorite tax provision against earnings. Not you touched on the second issue though that is exactly correct. We also have a significant mark to fair value adjustments in our issued junior subordinated debentures trust preferred securities, if you will. And part of that mark reflects the credit condition of the general market and another part of that mark reflects the perceived credit condition of Banner Corporation.

As Banner's prospects get better, and as I noted, we believe that we have turned the corner to sustainable profitability. As those prospects become ever clearer they will be a point where we'll need to adjust that credit mark against Banner Corporation and that will create a fairly substantial adjustment to that line.

It won't take it all the way back to the -- from the currently reported fair value back to the face value because the market is significantly different than when those were issued and part of it will -- the remaining part will come in over an extended period of time. But there will be a significant adjustment. So a meaningful portion of that DTA allowance recovery will be offset in the same quarter with a fair value adjustment.

Okay. I guess levels of meaningful past the $39 million or of 75 -- I mean any ball park?

I think it's more than half.

More than half, okay.

Yes.

Fair enough, okay. And then, Lloyd, I missed your comment on the capital exceeding -- you through a $135 million number. Again, that was relative to what again?

That's relative to a hypothetical future leverage ratio requirement that would be 10%, which is double the current leverage ratio requirement in the regulatory guidelines. (Multiple speakers), excuse me -- that went to 10%, which I'm not suggesting that that will, but if it did, many people have -- we were $135 million in excess of that number.

And I guess it maybe begs the question if the SBLF window has closed on the TARP repayment, $124 million, given what -- your discussion with the regulators, how comfortable are they to use of that surplus against -- to repay TARP or is -- any comment you can make on that discussion?

Sure, Jeff, this is Mark. As you know, we review our capital plans constantly and all options as it relates to our capital -- use of capital. And one of those options was application of the SBLF and we indicated that on the last call. That was an option for us to take a look at.

One of the requirements under the SBLF fund was that there are no restrictions on dividends either from the Bank or your holding company by the regulators. We in fact, through our MOU, have that restriction. And our regulators were not inclined to release that. So therefore the process of application for the SBLF basically stopped. So that option has been taken off the table for us.

However, as Lloyd pointed out, we do have excess capital in the Company. We will have a regularly scheduled exam here coming shortly. As we get to that exam we will discuss with our regulators what our options are.

Okay, I appreciate the commentary. That's it for me, thanks.

I think, Jeff, the other thing I'd like to point out again is even though there is a restriction on that dividend, as you know we have had to apply for the dividend every quarter for the past several quarters. And the regulators have allowed us to continue to pay that dividend.

Sure, great. Okay, thanks.

(Operator Instructions). Tim Coffey, FIG Partners.

Mark or Rick, as you talk about collateral values in the real estate portfolio, recent land sales by a regional peer with operations in Oregon and Boise, did that have any impact on your collateral values?

Tim, I'm sorry, I missed your reference there.

Sure. There was significant property sales this past quarter by a regional peer with operations in say Boise. Did that have any impact on the collateral values in your real estate portfolio?

We haven't seen any meaningful impact on our collateral values. So the answer is no. I would also indicate, Tim, that our exposure in Boise is very small.

Certainly it is. Have you got any and indication that competitors or rather peers or the FDIC putting property back onto the market at discounted prices is starting to abate or has it been a rather steady process?

It's a rather steady phenomenon, Tim. It's continuing quarter to quarter.

Now if we look at --

And I thank, Tim -- this is Mark. I think when you look at why we said our REO expense, real estate operation expense in terms of valuation adjustments will remain elevated, we said that the last several quarters and we said it and it will be elevated in the near-term, is reflective of that. However, it is important to note that we just got $0.96 on the dollar to our mark in the most recent disposition. So we're getting what we expect.

Right, yes (inaudible). As we look at kind of what we see in the classified portfolio, are we -- are you reaching an inflection point with the level of classified assets where we could see a significant downturn or rather improvement in that area? Or is it going to be kind of this steady decline?

Well, I think that we have been showing a steady decline in total classified assets, total classified loans over the last several quarters. Last quarter that number was down by nearly 13% in aggregate. And quarter to quarter we're seeing a much reduced in flow of new classified assets into the total bucket of classified assets.

Okay, great. Those were my questions. Great quarter.

Thank you. There are no further questions in queue. I'd like to turn the call back over to Mr. Grescovich for closing remarks.

Again, this quarter's performance demonstrated that we are making good progress on our disciplined strategic plan to strengthen Banner by achieving a moderate risk profile and at the same time executing on our super community bank model by growing market share and improving our core operating performance. Thank you for your interest in our Company and for joining our call today. We look forward to reporting our results to you again in the future. Thank you and have a great day, everyone.

Thank you. Ladies and gentlemen, that does conclude our conference for today. If you'd like to listen to a replay of today's conference, please dial 303-590-3030. Again that's 303-590-3030 or 1-800-406-7325 and enter the access code 447-4508. We'd like to thank you for your participation and you may now disconnect.