WaFd Inc (WAFD) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the First Mutual Bank Shares Third Quarter 2003 Earnings Conference Call. [operators instructions]

As a reminder, this call is being recorded today, Wednesday, October 22nd, 2003. I would now like to turn the conference over to Mr. John Valaas, President and Chief Executive Officer. Please go ahead sir.

Good morning everybody. Also joining me today are Roger Mandery, our Chief Financial Officer, and Scott Harlan, the head of our Residential and Consumer Lending Areas. I'll start by reading our forward looking statements disclaimer. This presentation may include some statements regarding the company's trends, objectives, anticipated growth and other expectations, which will be forward-looking statements, refers to the Safe Harbor Provisions of the Private Securities Litigation and Reform Act, 1995.

Such forward looking statements are subject to numerous risks and uncertainties that could cause actual results to differ material from those expressed or implied in this presentation. Additional information concerning the risks and uncertainties are discussed from time to time in filings made by the company with the SEC. These risks and uncertainties should be considered in evaluating forward looking statements and undue reliance should not be placed on such statements. The company does not have any obligation to update any such forward-looking statements.

I just would like to make a few introductory comments about the quarter. We were very, very pleased. It was a solid quarter. Our core businesses are doing extremely well. Just now in the press release, the 44th consecutive quarter of record year-over-year earnings. Asset quality was strong, non-performing assets down to 5 basis points, which is really quite low, 18.7% return on equity, and most importantly, if you look at year-over-year loan growth, our net loans have grown 19%. We are just experiencing good solid loan growth, and have consistently over the last four quarters.

I'll conclude by just making a few observations in what we view as the interest rate environment. We're looking, we thing, at a cyclical upturn in rates over the next year and a half to two years, and feel that we are positioned for that type of environment. We have not relied on mortgage banking for -- as a key source of earnings over the past year and a half, not really participated in the RE-FI boom, and secondly, I would note that we have a very small securities portfolio, relative to most of our peers, which we actually feel good about in the rate environment that we anticipate. I think our securities are less than 10% of our assets. So just a couple of observations there, and I'll now open it up for questions.

Thank you, sir. [operator instructions]

Our first question comes from Jim Bradshaw. Please state your company name followed by your question.

Good morning, DA. Davidson. Couple of questions guys. First off on the reserve, could you talk a little bit about what your intentions are? I'm a bit confused about whether you're going to build reserves here, given the change in the sales finance mix towards more insured product, and just wondered if you are going to build reserves, or match reserves to charge-off, or what your intention is there, and then secondly, could you talk about where you're steering the company to -- what are you are steering the company to deliver over the next three or four years? Thanks a lot.

Good morning, Jim. I am John Valaas. Let me respond to the latter part of the question first, and just say that we have focused on consistency of earnings and quality of earnings, and that's our focus over the next -- certainly our focus over the next three or four years. What we are looking at strategically is a portfolio mix that -- I'll just give you approximations. The targets would be roughly 25% business banking, 25% consumer, 25% residential, 25% income property. We're never going to quite hit those ratios. There will always be differences in the mix, but we want four good strong business lines that will -- any three of which or two of which will perform well when others are having cyclical issues due to interest rate cycles or market cycles, or whatever, so the goal is to see business banking become a greater part of the portfolio, and to continue to develop our consumer lending presence, as well. So do you want to respond to the one off reserve, Roger?

Right Jim. It is Roger. I don't have a real fast-line answer for you on that. Because the accounting treatments reserved for loan losses is a real sensitive subject these days, because it's probably the largest estimate that the bank makes at the end of each quarter. Frankly, we never exactly know what that estimate is going to be until we get through the end of the quarter, then we should go through the process of looking at all our loans, and how much are performing or not performing, and what types, that sort of thing, and how we feel about the economic climate at that point in time, both local and national and all of that sort of gets wound up in about a one week, or a week and a half period at the very end of the quarter, and we just figure out how much we should have in the total reserve, then we look at how much we currently have and subtract the difference, and that's what our provision is. So we have a general idea of what we think it may turn out, but the actual numbers can vary even from our current estimate, but we don't target anything such as a ratio or anything of that nature, because, again, we have to wait till the end of the quarter just to see how it shakes out.

Jim, this is John. Just a follow-up, also, going back to strategy. You know, I mentioned that residential can be a significant, maybe up to 25% piece of the portfolio, and some may wonder, as somebody is trying to escape the level of a thrift, why would we even have a target like that, but, you know, when we speak of residential, we're speaking of -- primarily of non-conforming loans. The conforming loan business is not something we're interested in. We're not interested, particularly, in mortgage banking, in the performing loan arena. The residential focus that we have is extremely profitable, very high ROE, primarily focused on custom construction, not SPEC instruction, but custom construction, (inaudible) who found our (inaudlble) want to build their dream house. And then, certain portfolio products that are non-conforming. So just a little bit of elaboration there on the strategy there.

One more, if I may, while I have the floor. You had pretty nice year-over-year growth in money market and checking accounts, and I presume some of that may be escrow related, but if you looked out another year, would you assume that the mix shift that has been going on in your deposit portfolio would continue? And by that I mean less time deposits, more transaction oriented accounts?

That is certainly the goal, and as an aside, the growth in transaction account is not really escrow related. It's good solid business accounts. We have an extremely strong focus both in the banking centers, and the business banking department on generating transaction accounts, and everybody in the banking center is under a compensation system that has been implemented starting earlier this year. From the tellers on up, our incentives among other things for both loan and deposits, and particularly transaction deposits, and we are trying to seethe truth of that, and our focus on-we locally may visit businesses that tend to read those. help our fairly idle transaction balances with us.

Thanks a lot. We all enjoyed reading your press release.

Our next question comes from Bill Dezellem, please state your company name followed by your question.

Thank you. It's Davidson Investment Advisors. A couple of questions for you. First of all, as you noted in the release, you have shifted your direction a bit with the portfolioing versus the retention versus the sale of your specialty finance loans. Walk us through the thought process that you have going on there, and then, secondarily, charge-offs seem to be rising a bit, and granted I realize we're talking about thousands of dollars, not millions of dollars, still directionally be interested in your perspective.

We issue a portfolioing sales financials that were out. We have some internal porfolios in it on how much we're going to place into our own portfolio. The business has just been extremely successful. We're nationwide, We're in approximately 40 states now. The number is growing. We've developed some very good contractor relationships, and so part of the sales division - a major part of the sales division is driven by portfolio balance considerations. On charge-offs, and please feel free to follow-up the question, if that didn't answer your question. on charge-offs, yes, they have gone up somewhat.

I think in this third quarter it was a combination of some small business loans, as well as sales finance loans, and in that sense, I think you will see a slight change in the risk profile of the bank. We don't expect it to affect credit quality, as far as MPAs go, but it's the nature of the consumer lending business, in particular, in small business lending. Having said that, I would emphasize, as I said in earlier conference calls, we are not focused on sub-prime lending.

and then I will circle back around to the portfolioing of the sales finance loans. Assuming that you continue to have strong growth there, and the growth, even with the current level of sales that you anticipate, does that growth continue to outpace the growth of the balance sheet, would it be reasonable to assume, as time progresses, that you will be selling an increasing dollar amount of those loans so you don't continue to increase or increase at an increasing rate, the sales finance loans on the balance sheet?

Yes.

All right. And then one completely different question. You have a new asset on the balance sheet this time, deferred servicing rights. Talk to us about the deferred servicing rights, versus the regular, and what you're doing there?

Hello, Bill, this is Roger. It is interesting you noticed that. The difference is just kind of one of semantics. The mortgage servicing rights are - which normally goes on is related to mortgages, but because we sold in this case, our consumer loan, then they get a different title, and they're called deferred servicing rights. So they're the one and the same as selling loans, and they get treated the same for accounting purposes, we just give them another name and another bucket on the balance sheet.

Thank you both.

Our next question comes from Jessica Jones. Please state your company name followed by your question.

Hello, this is Jessica from Andycot (ph). Good morning. A couple of questions for you guys. First of all, we have a couple of questions about the home improvement loans. As I think you noted before, you had 60 basis points of net charge-offs in those, and we're wondering on to what extent you would be able to recoup those charge-offs from insurers.

I'm sorry, this is Scott Harlen talking. The 60 basis points is related to the loans that were not insured. The loans that are insured when we make a claim to the insurance company, they essentially pass right through -- they don't go through the charge-off bucket. We make a claim in the insurance company, they pay us off for the loan in full, and the loan goes off our book

So those are from the higher focussed scored money then.

It is partially, and then more likely from part of the first below that existed since we started doing this program in 1997, where locally we got a different strategy in that we put loans on the books across the credit spectrum, as opposed to just insuring or not insuring.

So you're saying these are older loans that were charged off, or are you still insuring and (inaudible) anyone?

(inaudible) most likely probably two or three years old. I don't know specifically loan by loan, but that would be typical for this type of loan.

Great. And you said that you foresaw the insured portion of that, of the home improvement loans increasing over time, I was just wondering if you could talk about that position and why you see that happening.

Right now, about 50% of all the new loans that we are booking are being insured. So, internally, that will lead to 35% of the portfolio that is insured. So, just as the time progresses and some of the older loans pay off, then the newer loans go on, that percentage should increase from 35% towards 50%, if we continue to insure at the existing rate.

Great. And just one more question. This might be one for Roger. I was wondering if you could talk about your asset sensitivity. I know you go through in the release, and you were also mentioning of floors on a number of your loans? I was wondering if floors should find or fetch your asset sensitivity if rates would go up?

Hello, Jessica. This is Roger. Yeah, you're right. Those floors are about 7.5%, so as rates go up, they're not going to react to that until we get above 7.5%, you know, rate for our loans, so, you know, you're correct about that. The relative amount of those loans is about, what, $140 million, somewhere in that range, and that compares to -- I think our loan balance of about $706 million, or something, so, you know, it certainly will affect that. Those loans are paying off at about the same rate as our other loans, which is about 16% payoff rate for those loans.

15, you said?

Pardon?

15%?

About 16%. So the balances go down on a regular basis on that, so it's sort of a mixed blessing there. We're losing a loan that, you know, has a nice return for us in this environment. On the other hand, as those loans pay off, the relative impact they have on our sensitivity changes, too.

All right. Thank you very much.

Our next question comes from Ross Haberman. Please state your company name followed by your question.

How are you, gentlemen, Ross Haberman, Haberman Brothers. I thought it a very nice quarter. I got on a little late, excuse me, but could you address, I think you touched upon your positive GAAP, or positive sensitivity to rising rates. Could you elaborate a little bit on that? And just a second question, besides the gain on and sale of investments for the quarter, were there any less recurring or non-recurring gains and/or expenses?

I'll take the first question, Ross. The sensitivity, just looking at the GAAP is about flat now. We're just under 6%, at 5.7%. When we run our simulation model, and assuming a 200 basis point rise, we don't get much movement in the net interest income. There's a change, I think, of less than 1%, so if you sort of count the statistical anomalies of modeling, it's about flat, so at this point in time, we're not unduly concerned about rising rates. As we sort of look at how the mix works out forward.

Is that the way you want to keep it, or what's your leaning at this point?

Yeah. A personal view is that anytime we can, you know, not be affected by rising or falling rates, other than on a pretty diminutive basis, that's going to be an ideal position for us

OK. And the non-recurring items, if there were any besides a lesser recurring gain on the investments that we will continue to see those for the next couple of quarters, if rates stay flat?

Good question. The gain on sale of securities is probably -- well was about 190,000, in that range?

Yeah.

That's probably going to come to a halt here with rising rates. We don't have much of a loan for consumer securities portfolio, about 80 million, so it's not very big to start with, and I think that jump in rates in July will probably put us out of the running as far as selling -- trying to take advantage of any gains in that. The gain that occurred in the sales finance loans, consumer loans, we're looking for that to be repeated, you know, in the fourth quarter, and probably out to the next year. Our intent is to sell some of those loans so -

Just one final question -- and any other non recurring items?

None that I can thing off.

And you touched upon, I guess you are in the process or working on leasing out the building you bought. I think I read somewhere you're 67% leased up?

Yeah.

How does it look for the rest of the -- of the 33% to lease that.? Do you think you'll make the debt narrow in the next quarter too?

I just talked to the lady that handles all of that for us, and I don't look for that to change in the fourth quarter. The lease rate will be about the same as it is right now.

and how about the prices you're getting for the space? Is it going up, down, or flat?

It's my understanding it's about flat.

It is? OK. That was all of my questions. Very nice quarter. Thank you.

Ladies and gentlemen, if there are any additional questions, please press "*" followed by "1" at this time. As a reminder, if you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment for our next question. Our next question comes from Bill Dezelem. Please go ahead with your question.

Thank you. The accounts payable and other liabilities category on the balance sheet declined roughly $10 million. Given the magnitude of that, would you walk us through what was behind that change?

Let's see. You're looking at accounts payable and other liabilities that changed from year-end from $8 million down to $4 million?

No, looking at the $4 million at the end of September versus the end of June, where that number was about $14.6 million.

I don't know off the top of my head. That number bounces around depending on loan payoffs, you know, all of the activities going through there. Oh, I see. Oh, I don't know, no. Scot was suggesting something, but again, off the top of my head, I don't know what accounts to that change.

Bill, there is nothing unusual or odd in that. Course of business.

All right. Thanks. And we can follow-up later.

At this time, there are no additional questions. Please continue.

Well, if there are no additional questions, we'll wrap up. Again, thank you all for taking the time to listen in. Again, we were very pleased with the quarter, and look forward to talking to you again in three month's time. Good-bye.

Ladies and gentlemen, this concludes today's First Mutual Bancshares Third Quarter 2003 Earnings Conference. If you would like to listen to a replay of today's conference, please dial 303-590-3000 followed by access number 554404. Once again, if you would like to listen to a replay of today's conference, please dial 303-590-3000 followed by access number 554404.