Banner Corp (BANR) 2014 Q1 法說會逐字稿

Good day ladies and gentlemen and thank you for standing by. Welcome to the Banner Corporation first-quarter 2014 conference call and webcast.

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

Thank you, George, and good morning, everyone. I would also like to welcome you to the first-quarter 2014 earnings call for Banner Corporation.

As is customary, joining me on the call today is Rick Barton, our Chief Credit 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?

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 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 the recently filed Form 10-K for the year ended December 31, 2013. Forward-looking statements are effective only as of the date they are made. Banner assumes no obligation to update information concerning this expectation.

Thank you, Al. As announced Banner Corporation had another strong quarter of performance which reflected a good start for 2014, reporting a net profit available to common shareholders of $10.6 billion, or $0.54 per share for the period ended March 31, 2014. This compared to a net profit to common shareholders of $0.60 per share for the first quarter of 2013 and $0.60 per share in the fourth quarter of 2013.

As you know, earnings in the fourth quarter of 2013 included a $3 million fee related to the termination of a proposed acquisition, which net of related expenses, added $0.08 per share to earnings in that quarter. The first-quarter performance continued our positive momentum and further demonstrated that through the hard work of our employees throughout the Company we continue the successful execution of our strategies and priorities to deliver sustainable profitability to Banner and expand our balance sheet with strong organic loan and deposit growth.

Our return to profitability for the last 12 quarters further demonstrates that our strategic plan is effective and we continue building shareholder value. Our operating performance again this quarter was very solid when analyzing our core key metrics. Our first quarter of 2014 core revenue was a strong $51.4 million despite slowing mortgage banking revenue due to a reduction in refinancing activity.

Supported by an improved earning asset mix, our net interest margin remained above 4% and was 4.07% in the first quarter of 2014 and our costs of deposits again decreased in the most recent quarter to 22 basis points compared to 31 basis points in the first quarter of 2013. This performance resulted in a solid return on average assets of 0.97% in the quarter.

This quarter's strength is reflective of the continued execution on our super community bank strategy. That is 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 9% compared to March 31, 2013. Also, are non-interest-bearing deposits increased 14% from one year ago.

The predominant portion of this balance growth is from the generation of new client relationships. Our net client growth in these product categories is 56% since December 31 of 2009.

It is important to note that this is organic growth from our existing branch network. Further, our loan portfolio expanded 9% from one year ago. In a few moments Lloyd Baker will discuss our operating performance in more detail.

While we have been effectively executing on our strategies to protect our net interest margin, grow client relationships and deliver sustainable profitability, improving the risk profile of Banner and aggressively managing our troubled assets also has been a primary focus of the Company. Again this quarter our credit quality metrics reflect our moderate risk profile and our non-performing assets have been reduced another 9% compared to the fourth quarter of 2013 and 41% compared to March 31, 2013.

In a moment Rick Barton, our Chief Credit Officer, will discuss the credit metrics of the Company and provide some context around the loan portfolio and our success in aggressively managing our problem assets. Given our successful credit management, our reduction in non-performing loans and our moderate risk profile, we did not record a provision for loan losses in the quarter despite our strong loan growth. Nonetheless, Banner's coverage of the allowance for loan losses to non-performing loans is a strong 325% at March 31, 2014, up significantly from the 231% in the first quarter of 2013.

Banner's reserve levels are substantial and our capital position and liquidity remain extremely strong. At the end of the quarter our ratio of allowance for loan and lease losses to total loans was 2.1%; our total capital to risk-weighted assets ratio was nearly 17%; our tangible common equity ratio was a strong 12.2%.

In the quarter and throughout the preceding 48 months we have continued to invest in our franchise. We continue to add talented commercial and retail banking personnel to our Company in all of our markets and we continue to invest in further developing and integrating all of our bankers into Banner's proven credit and sales culture.

While these investments have increased our operating expenses they should result in positive operating leverage in future periods as evidenced by our strong customer acquisition, 16% year-over-year growth in the C&I portfolio, improving cross-sell ratios resulting in deposit fee income growth of 5% and strong core revenue. Recently, we also announced our further expansion into Oregon with a financially attractive acquisition that will provide us $226 million in new deposits and a 27% market share in Coos County. Further, we've received marketplace recognition of our progress and our value proposition as JD Power and Associates ranked as number one in customer satisfaction in the Pacific Northwest for the second consecutive year and the Small Business Administration named Banner Bank community lender of the year for the Seattle and Spokane District.

Finally, the successful execution of our organic growth plan and our persistent focus on improving the risk profile of Banner has now resulted in 12 consecutive quarters of profitability and our tangible book value increased nearly 6% to $27.87 per share when compared to March 31, 2013. Our earnings power coupled with our capital strength allowed us to increase our quarterly dividend by 20% to $0.18 per share in the first quarter and we authorized the repurchase of up to 5% of Banner's common stock.

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

Thanks, Mark. Moderate risk profile. This term was used in our press release and by Mark this morning to characterize Banner's asset quality and loan portfolio.

Our obvious goal will be to maintain this profile as we grow our portfolio and manage through future economic cycles. The strength of our current position is highlighted by quickly reviewing several key portfolio metrics. Recoveries on previously charged-off loans more than offset first-quarter losses leaving us with a net recovery of $113,000.

The losses taken were granular and not concentrated in any portfolio segment. Total non-performing assets declined another 9% from the linked quarter and are now 0.59% of total assets. This improvement was driven by reductions of REO and one- to four-family final loans more than 90 days past due and on accrual.

Non-performing loans decreased $600,000, or 3% during the quarter. Classified loans in Banner's portfolio were $80 million versus $91 million at yearend 2013. This is a decrease of 12%.

Classified loans now represent only 2.3% of total loans. Delinquent loans, including non-performing loans, were 0.7%. This is a small increase from the linked quarter statistic of 0.64%.

This type of fluctuation is normal when delinquencies are at this level. The provision for loan loss continues as a source of strength for the Company even with another quarter of no provision.

Coverage of non-performing loans is a strong 325%. The reserve to total loans also is strong at 2.11% even after five consecutive quarters of no (technical difficulties) from loss provision and the meaningful loan growth we have recorded over that same period of time.

As I said at the close of my remarks last quarter, we are excited to have achieved a moderate risk profile for the Banner loan portfolio. This position, along with the Company's strong capital ratio, will allow us to continue executing our strategic plans which include further growth of the Company. With that I will turn the mic over to Lloyd for his comments.

Thank you, Rick, and good morning, everyone. As Mark has already indicated in his report and in our press release, our first-quarter operating results reflect solid performance and a good start to 2014.

This solid performance follows on the heels of two very successful years in 2012 and 2013 and continues to demonstrate the strength of our balance sheet, consistent earnings momentum and the value of the Banner franchise. As reported, our net income available to common shareholders was $10.6 million, or $0.54 per diluted share in the quarter ended March 31, 2014, compared to $11.6 million, or $0.60 per share in both the immediately preceding quarter and the same quarter a year ago.

As noted, the immediately preceding quarter results were augmented by the one-time termination fee for a proposed acquisition which added $0.08 per share to earnings. Adjusting for that fee and the related costs, we actually experienced a $0.02 per share improvement in core earnings in the current quarter compared to the fourth quarter.

Recognizing that the first quarter is always subject to pressures on revenues as a result of seasonal factors and a shorter day count, this improvement compared to the fourth quarter is encouraging. However, as I've noted on recent calls, our past success is making comparison to prior periods more challenging and our first-quarter results, encouraging as they were, continue to reflect the difficult reality presented by the prolonged period of very low interest rates, which again pressured asset yields in our net interest margin.

While our net interest margin increased by 6 basis points compared to the fourth quarter, as a result of strong loan growth and improvement in the yield on our securities portfolio, loan yields continued to decline and despite further reduction in our funding costs our net interest margin was 9 basis points below the first quarter a year ago. Although our successful client acquisition strategies have resulted in significant core deposit and loan growth, which has offset much of this yield pressure, it is clear that the low interest rate environment will continue to adversely impact the margin going forward.

Ironically, at the same time, the modest increase in mortgage rates that occurred in the second half of last year has resulted in a reduction in mortgage banking activity compared to the exceptionally strong level a year ago. Nonetheless, as a result of significant loan growth our net interest income increased by $1.3 million compared to the first quarter a year ago and coupled with a $300,000 increase in deposit fees, allowed revenues from core operations to increase to $51.4 million for the quarter ended March 31, 2014 compared to $50.9 million for the same quarter in 2013 and despite a $1 million decrease in mortgage banking revenues.

As Mark noted, our net interest margin was 4.07% for the first quarter of 2014 compared to 4.01% in the fourth quarter of 2013 and 4.16% in the first quarter of 2013. Importantly, in none of these periods has Banner's margin or net interest income been augmented by any acquisition accounting yield adjustments. In addition, for the fifth consecutive quarter we did not identify a need to reduce net interest income for the provision for loan losses, as nearly all of our credit quality indicators continue to improve.

Although down slightly from the preceding quarter primarily the result of seasonal factors deposit fees and service charges remain strong at $6.6 million in the first quarter, a 5% increase compared to $6.3 million in the first quarter of 2013. As I have noted before, continuing increases in these fees and service charges is a direct result of the success of our client acquisition strategies and resulting growth in core deposits.

As noted in the press release, we had an outstanding quarter for loan growth particularly with respect to targeted loan categories. Despite further reductions in residential mortgage loans, total loans increased 3% compared to the prior quarter and 9% compared to a year ago. These increases reflect solid growth in commercial business, commercial real estate and construction and development loans.

Although non-interest-bearing deposit accounts experienced an expected seasonal decline, total non-certificate core deposits increased by 1% during the quarter and by nearly 9% compared to a year ago. As a result, at March 31 core deposits represented 75% of deposits and despite the modest decline compared to the always strong yearend balances, non-interest-bearing account balances increased 14% compared to a year earlier.

Of course growth usually does not come without a cost and that was again true for Banner as our operating expenses also increased compared to a year earlier. Although the first quarter's operating expenses were lower than in the fourth quarter. The increase in expenses compared to a year earlier is principally due to additional compensation as we continue to invest in our human capital while the reduction in expense is compared to the preceding quarter was largely a result of validated advertising expenditures in the fourth quarter as well as expenses related to the terminated acquisition.

So I will conclude these prepared remarks with my opening statement. Our first-quarter operating results reflect solid performance and a good start for 2014. That said, it remains clear that continued success in the current interest rate environment will demand that we continue to excel at client acquisition and market share growth.

Fortunately, as I've noted before the evidence suggests that we can do just that. So with that I will turn the call back to Mark. As always, I look forward to your questions.

Thank you, Lloyd. Thank you, Rick for your comments.

That concludes our prepared remarks. And, George, we will now open the call and welcome your questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions). Jeff Rulis, DA Davidson.

Thanks, good morning guys. Question on the loan growth. It's been pretty robust.

I guess any sense that there's an increase in demand happening in the region relative to -- I guess it seems more than just beating out peer banks. The environment had been more about sort of market share stealing. Do you get the sense that there is sort of an underpinning of real demand coming back?

Well, Jeff this is Rick. I'd make a couple of comments here.

First of all I think that we can give credit to our bankers who have worked extremely hard to begin to drive this loan growth. Secondly, as we have talked consistently over the last three or four years we have been making investment in our human capital and bankers through various sales and credit training activities as well as selectively adding product offerings to their menu and adding strategically additional bankers when it made sense. Along with that we have seen an improving economy in the Northwest and that combination of factors, I think, is driving the loan growth that you are seeing.

Got you. Not to discredit the work you have done. I guess just from a industry perspective, and I'm talking more about the last couple of quarters, has there been a notable change in demand pickup?

Jeff, this is Mark. I think we have been saying for several quarters now that the economy in the Pacific Northwest, the economic drivers of the industries in the Northwest, have fared much better through this economic cycle coming out than other parts of the country and I think that's evidence as well in our loan book. So there is a pickup in demand on the business front.

Fair enough. And maybe, Lloyd, could you comment on the mortgage banking line item.

Is that approaching a trough or really could that approach zero? Just kind of the feel for what that line item may look like going forward.

I hope and certainly believe that it is approaching the trough, Jeff. Actually, our purchase activity was stronger in terms of balances and number of transactions in the first quarter of this year than it was in the first quarter of last year.

Obviously the refinance activity has changed. But we are about 70% now purchase activity and as I noted more loan closings on purchase transactions than a year ago.

Compared to the immediately preceding quarter if you adjust for the $300,000 mortgage servicing rights valuation we were only off $100,000 in mortgage banking revenues for the quarter. So we have been investing in additional production capacity there as well and I am reasonably optimistic we will see stronger results throughout the balance of the year.

And then maybe one last one on the branch acquisition. Is that still set for a June close?

It is. Late June, Jeff. Everything is lining up very well for that.

Okay. And I don't know if you could just touch on the general overhead and fees you expect to bring on board and perhaps any sort of margin impact at least initially from that transaction.

Well, in terms of fee revenue, what's that it's going to add 2% or 3% to total fee revenue based on the size of the branches acquired. Margin will probably be pretty negligible impact.

Their funding cost is low, it's a very attractive deposit franchise. And so their funding cost for those branches was slightly lower than ours for 2013.

But I don't think you will see a marginal impact -- a meaningful impact on the margin there. What you will see is that it will help support continued growth as we are bringing on about $125 million, $130 million of deposits in excess of loans.

And then the expense profile?

Well, obviously it is going to add some expense. Nothing unusual there, just consistent proportionate with the size of the operation there relative to our entire operation. So again, 2%, 3%, 4% impact on expense base, probably.

Okay. That's it for me, thanks.

A comment that I suppose I should make on that, Jeff, is that you will see, and I don't know the exact magnitude of it yet, but you will see a onetime bargain purchase gain, the result of that transaction in June quarter, as well.

Jacque Chimera, KBW Financial.

Hi, good morning, everyone. Mark, I wondered if you could touch a little bit on the loan portfolio, specifically on construction.

I know that it had really solid growth in the quarter. Was any of that -- was there any sort of a mitigating impact by construction loans flowing into other loan books during the quarter?

Thank you for the question, Jacque. I will ask Rick to respond to that.

Well, we did have solid loan growth. Part of that was driven by the continued funding of some multi-family commitments that we made during 2013 along with continued activity in the residential construction portfolio.

In terms of what has been happening with those loans as the construction phase is completed, obviously the res construction has been sold to consumers and that inventory is aging out very very well. And with respect to the larger commercial commitments we are seeing most of those, or a good chunk of those flow into the institutional markets rather than into our permanent loan portfolio.

Okay, so most construction is kind of building up and moving out?

Yes.

Yes, the velocity in the construction, this is Mark again, the velocity in the construction portfolio is still very very strong. And the competition for permanent financing is very strong as well, which is why most of it is going to institutions rather than us booking it.

Were you surprised by the strength of the loan generation in 1Q? Just given seasonal factors and everything else.

This is Mark, no. I think we have been telegraphing for several quarters now that our pipeline had been building, that our sales process along with our product offering additions and the additional bankers we added, we felt confident that the turn was going to come. And we saw it solidly in the fourth quarter and the latter half of 2013, but more solidly in the fourth quarter and it carried that momentum into the first quarter. So I'm not surprised by it and we have been telegraphing that.

Okay. And would you say that it is fair to say that the momentum will continue over the next couple of quarters?

I would tell you that we are optimistic about our loan pipeline but the growth factor that we have is extremely solid and we will be very reliant now on the economy of whether this pace continues. So I don't know that it's going to be as robust as it was in the first quarter but right now every indicator suggests that our pipelines are still strong and we are very optimistic about loan growth.

Okay, and just turning quickly to the loan-to-deposit ratio. I know you like that 95% level. What sort of things do you have in place just to track deposit growth alongside loan growth?

The first thing is we just bought $225 million in new deposit, fresh deposits for the Company in a very attractive acquisition. So that's one thing, that's why that acquisition outside of being financially attractive made sense for the Company. That's number one.

Number two is we still maintain our goal of having a loan-to-deposit ratio of between 90% and 95%. So we've continued to augment and grow our core deposit base as evidenced by this quarter's improvement and our client acquisition has been very strong and continues to be strong.

So we are going to just right now continue most of our organic growth strategies. We're going to augment them a little bit with some activity in the markets that have much more disruption in them such as the Idaho market. And we obviously will try to fill in with deposit franchises where appropriate very similar to what we did in Coos County.

Okay, great. Thanks for the color, Mark; I appreciate it.

(Operator Instructions). Don Worthington, Raymond James.

Good morning, everyone. Couple of things.

One, you mentioned in the press release the broker deposit increase was primarily to support loan growth. It looked like there was a small increase in FHLB advances also. Could those be just characterized as short term and could we expect to see maybe those pay down when you get the deposits on board?

Good morning, Don, this is Lloyd. That certainly is our expectation at the moment.

I think I made the point, and if I didn't I should have, that we do have a very definite seasonal pattern in our deposit activity in the first quarter. And it was very evident in the fact that non-interest-bearing accounts, well they were down just slightly during the quarter.

So there was some temporary borrowing going on to fund that strong loan demand. At the same time, as we noted, those total accounts year over year are up 14%.

So if that seasonal pattern plays out and it has started to as we are partway through the second quarter now, we would expect that the need for broker deposits will diminish some. And yes we did take those down with rather short maturities.

Okay. Great. And then is the gain on the branch purchase subject to any adjustment?

Well, we will need to go through all sorts of fair value adjustments and expense recognition on that transaction before we get to the final amount of that gain. So I don't expect to be the full $7 million, how's that?

Okay, All right, thanks. And then I guess lastly, any update just in terms of M&A activity in the region and kind of what you are seeing in terms of bid-ask spreads versus last quarter?

Yes, Don, this is Mark. I don't think that it has changed dramatically from quarter to quarter. What I do think is happening is most of the organizations are advancing their tangible book value upward just as Banner is, so the values I think for those franchises are actually going up.

But I would characterize the bid-ask is still pretty wide. And I don't think it's changed much.

Okay, great. Thank you.

Thank you, and I am showing no further questions. I will turn the call back to Mr. Grescovich for closing comments.

Thank you, George. As I stated, we are very pleased with our strong first-quarter performance and the reinforcing evidence that we are making substantial and sustainable progress on our disciplined strategic plan to build shareholder value by executing on our super community bank model by growing market share as evidenced by our expanded balance sheet, strengthening our deposit franchise, improving our core operating performance and maintaining a moderate risk profile.

I would like to thank all my colleagues who are driving this solid performance for our Company. Thank you for your interest in Banner and for joining our call today. We look forward to reporting our results to you again in the future.

Have a great day, everyone. Thank you.

Ladies and gentlemen, if you would like to listen to a replay of today's conference it will be available on bannerbank.com. We appreciate your participation. You may now disconnect.