WaFd Inc (WAFDP) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the First Mutual Bancshares’ First Quarter 2004 Conference Call. At this time, all participants are in a listen-only mode. Following today’s presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference, please press the * followed by the 0. As a reminder, today’s conference is being recorded, Wednesday, January 26th 2005.

I would now like to turn the conference over to Mr. John Valaas, President and CEO. Please go ahead, sir.

Thank you, Jeff. And by the way, Jeff, my comments will be very brief. I’m going to start by reading a 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, for the purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those expressed or implied in this presentation.

Additional information concerning the risks and uncertainties are discussed from time-to-time in the 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 obligations to update any such forward-looking statements.

Thank you, and welcome everybody, to our quarterly earnings conference call. We had an excellent quarter and an excellent year. I’m very pleased with our results. It was our 49th consecutive quarter of year-over-year earnings growth. I’m just going to hit a few highlights and then open it up to questions.

Credit quality remains very strong. Our NCAs at the end of the year and the end of the quarter were 10 basis points. Loan growth 12 percent year-over-year. We continue to be very pleased with the progress we’re making in the liability structure of the bank.

Year-over-year, our business checking balances increased 52 percent. Our consumer checking balances increased 46 percent year-over-year. Since year-end 2003, our time deposits have dropped from 66 percent of deposits to 61 percent of deposits. So we think we’re making just terrific progress on our liability structure on the deposit side, and continue very strong growth on the asset side -- on the loan side.

I’ve already talked to one [org] reader, and I’d just point out that there is a transmission error in the press release. There’s a paragraph that begins at the top of Page 13. That should actually be the paragraph at the bottom of page 12. The portion of the paragraph that’s at the bottom of Page 12 should be the completion of the paragraph that begins at the top of Page 13. If you’re all thoroughly confused by now, I’m not surprised. But I did want to point that out. I’m going to stop there.

Joining me today is Roger Mandery, our CFO. We’re glad to have Roger back after his recovery from his surgery. Also joining us is [Scott Eiland], the head of our residential and consumer-lending area, including sales and finance. I’m going to stop here and open it for questions.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. If you have a question, please press the * followed by the 1 on your pushbutton phone. If you’d like to decline from the polling process, please press the * followed by the 2. You will hear a 3-tone prompt, acknowledging your selection. Your questions will be polled in the order they are received.

If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment for our first question.

Our first question comes from Louis Feldman. Please go ahead, sir.

Good morning! Welcome back, Roger. We missed you.

Thanks, Louis.

To what extent did the FHLB dividends impact the quarter? Can you quantify that a little bit more?

I don’t have the figures at hand here, as to how much it quantified in terms of degrading the net interest margin. But it certainly…

Can you comment on what it did in terms of revenue?

Yes. We were accumulating revenue, I believe, at probably a 3.5 percent range. I think that’s common knowledge what the [inaudible] bank has been paying out at. Some of the stock that we hold is about $13 million, there. So we lost the dividends on $13 million for the entire quarter -- on what they would have paid. It probably should have varied from quarter-to-quarter, but I think they’ve been paying, like I say, somewhere in that 3.5 to 4.5 percent range.

Okay. Then can you comment on the… Can you give us some more guidance on what you consider infrastructure costs, and what your goals will be in 2005 to work on the efficiency ratio? Over the last 4 or 5 years, this has perked up from the 55 into the 60s, now, as you’ve grown.

Any plans to start working on bringing this back down? And can you discuss those?

Louis, this is John. Well, we certainly commented in the press release that we’re focusing on the efficiency ratio. I’ll be very frank and candid and I’ll say we are top line driven. We continue to make the investments that we believe are necessary to see the bank continue to grow over the next 5-10 years.

In the last several years, that’s included considerable investment in building infrastructure to support business. Not only support business banking, but loan officers in the business banking field, which if you go back a few years ago, was a relatively small portion of the portfolio. We were pleased to see that increase to about 13 percent of the portfolio at the end of this quarter. But it’ll be a while before that business line starts to reach the returns that we like.

So right now in the classic cliché, we are investing for the future. We’re not particularly wringing our hands over the efficiency ratio.

Okay. I’ll step back.

Thank you. Our next question comes from Jim Bradshaw. Please state your company name followed by your question.

Good morning. DA Davidson. I just have a couple questions. It’s hard to have a lot of questions after you see the press release detail. Just one housekeeping item. Roger, do you include the federal home loan bank’s asset in earning asset base going forward, now? Or is it sort of a non-earning asset? Or is it like a non-accrual loan? I guess I’m not sure where to put it, any more.

That’s a good question, Jim. Yes. We’re still including it as part of our earnings assets. We’re hoping that it will become an earnings asset sometime here in the near future. I think [inaudible] the CEO of the Federal Home Loan Bank has been going around throughout the Northwest here, speaking with all the member banks, explaining the actions that he’s taken. They’ve improved the results, there -- and hopefully develop a situation where we can begin to receive dividends, here.

And John maybe has some…

Yes, Jim. They have said they expect to declare dividends. I thought they expected to declare it this week. We’d not be paid until the end of March. So we just simply did not accrue anything for the fourth quarter. But the dividend they would be declaring shortly would be a course in respective the fourth quarter.

Thanks. The other question I have -- any activity on the leasing of your headquarters building?

We’re in the process of what we call restacking. We have First Mutual staff scattered throughout the building. It’s kind of a legacy of when we were a tenant, here. We expect within the next two months to have all our employees restacked on 3 out of the 7 floors -- a little bit of an additional floor. But essentially, we’ll be occupying 3 full floors out of the 7 floors.

We have tenants on the other floors, but that will leave us in a couple of cases with floor plates that are clean, and eminently leasable, once we consolidate our staff. That combined with the very dramatic decrease in vacancies in Bellevue office space with Class A vacancies have dropped from about 30 percent, if you go back a year or so ago, to around 10 percent today, with the move of [Symmetra] the Safeco spin-off, into downtown Bellevue. That’ll occur in July.

Now, we’re not Class A space, but the trickle-down is good, and we’re starting to see increased demand. So we’re reasonably optimistic that the building will start to look very attractive to potential tenants here over the next quarter or two.

Then the last question I had is one of those crystal ball things. As you look out at ’05, what’s your thought about where your capital ratios are likely to creep to? Are there any issues, I guess, with selling some of the sales finance credits that keeps the balance sheet growth down.

But what are your thoughts on where capital ratios may creep to over the next few months?

Over the next few months or over the year?

I’ll take the whole year, if you’ll give it to me. If you’ll look that far out.

Maybe John can answer that. I’m really reticent, Jim, just because we haven’t shared that information in anything we’ve put out in a press release.

Jim, I would just say that we always have and we’ve always said we manage our capital very intensively. We don’t like to carry excess capital. So I think I’ll just leave it at that.

Jim Bradshaw. Got it. Thanks a lot guys, I appreciate it.

Thanks, Jim.

Thank you. Our next question comes from [Ross Habermann]. Please state your company name, followed by your question.

Good morning, gentlemen. [Ross Habermann], [Habermann Fund]. Welcome back, Roger!

Thank you, [Ross].

I just want to ask a first question regarding the contracting loans. Are you losing any sleep about the delinquencies there, and the charge offs? Is it continuing -- I guess the delinquent rates -- and the charge offs? Continuing into the new year in the rates that they were in December? If you can tell us that.

Hi. This is John. With regard to the delinquency rates, yes. The delinquency rate was on the insured portfolio, 258 basis points at the end of December. But that portfolio is…it’s just a portion of the entire portfolio. The entire portfolio delinquency has actually held fairly steady here over the last several months.

So while we are actively managing the delinquency -- especially in the insured portfolio -- with a lot of attention with the folks that do the collecting -- where additional resources, additional collector resources are needed, the bank’s been excellent about providing those for the collections area.

So I believe that’s really kind of a function of the continued seasoning of the portfolio. As time goes by, more of the loans in the portfolio are older than newer, as opposed to the case when it was growing fairly rapidly.

If I may ask, when does that insurance contract come up for renewal? And do you have any expectations that they might raise the premiums and/or alter it to its advantage?

The policy is renewed on October 1st of each year. We just went through our renewal. They did not adjust the premiums, at that point. I wouldn’t try to predict what they would do in the next October -- next October 1st.

In regard to your question on charge offs, I just want to clarify. The actual charge offs have been -- on the bank’s owned portfolio have been -- very modest and manageable. And we give that detail in the press release on Page 12, as I think you know.

Right.

The claims page, which I think is what you’re talking about -- which went up significantly in the fourth quarter -- is certainly a number higher than we would like. In light of the delinquency, we are actively managing it.

In that particular case, we do spend quite a few analytical hours continually looking at the portfolio, looking at the originations that we do, to see if there are trends in delinquency, trends in our underwriting, where we could potentially tighten, where it would be necessary.

We’ve made a couple of those moves in the this past year. I don’t have anything eminent right now that I’m looking at, but it is something we do spend a lot of time looking at.

Just one question for Roger. The margins, when you sell those finance loans… Has there been any trend? Or those have been pretty steady?

This is John -- I’ll take that one. The trend on that has actually been increasing throughout the year. I can’t give you the exact numbers, because I don’t have them off the top of my head. But I do know that the spread between what the average note rate is on the loans in the sale and the pass-through rates of the investors have been increasing through the year, as interest rates have increased in the overall market. The interest rates on the loans has increased, by the pass-through to the investors has stayed relatively flat over the last year.

Thank you.

Ross, [inaudible], this is Roger. I was just going to add one more item. Of the 48 million that’s currently insured, the contract on that 48 million remains unchanged. So that doesn’t come up for renewal, every year.

Okay.

That’s a switched agreement throughout the life of those loans, which happens to be -- currently, right now -- a maximum of 270 basis points.

I see. Okay. Thank you.

Thank you. Our next question comes from Bill Dezellem. Please state your company name followed by your question.

Thank you. It’s Davidson Investment Advisors. I apologize. I had trouble getting on the call to start with, so if you covered this early on, and I’ll come back one-on-one. But on Page 13, the last sentence in the first paragraph -- was there some additional commentary that you all were looking to put into that?

[inaudible] We chose to withhold it at the last minute. [inaudible] Bill? This is John. I mentioned at the beginning that that paragraph at the top of Page 13 -- the continuation of that paragraph is the last three lines at the bottom of Page 12. So if you read it, the last line at the top of Page 13 -- it says, “The comparable figures for the 2003 pool loans insured between…” And then go over to the bottom of Page 12. “October 2003 to September 2004 are $35 million…”

Well, that ties a few things together. All right. Thank you.

We have no idea how that happened. It was a transmission error. It was not the way we sent it out, here.

Okay. Not a problem. And then, second question is -- relative to the net interest margin -- the slight expansion that you’re looking at in Q1 relative to Q4. Is that a function of the yield going up or the costs going down? What is it that’s behind that dynamic, this quarter?

I think a little bit of that is we’re adding more loans in the first quarter of 2005, as opposed to securities. I think that would bump it a little bit. The relationship between the repricing of our loans has been pretty steady. That is. In some categories, we’re making some progress in the categories. It’s dropped a little bit. But the big difference has been the change in securities, there -- which is what held the year pretty steady for us, at around 4 percent. Because I think we had about 50 percent increase in our securities, which are short-term and [inaudible] low rates on it. So with the loans improving a little bit in the first quarter, we’re seeing a little bump up in the margin.

So are you looking to essentially replace securities with loans? Or are you just looking to keep the securities flat, but as loans increase, the securities become a smaller percentage of the portfolio?

We’re adding securities in the [first] quarter. We’re anticipating that. But I think the relationship between that and the loan portfolio is such that we’re getting a little bump up in the margin.

That’s helpful. And then would you please review 2004 real estate activity from the perspective of remodels, new branches and maybe properties that were purchased for future branches?

Sure. We have remodeled or are in the process of remodeling 4 of our older banking centers. We’ve completed one of those in what we call Bellevue West -- just 4 blocks to the west of our headquarters building. Doing some remodeling work on the head office building. We’ll be relocating the banking center in that building, as well, in the next few months -- and restacking the floors to consolidate all the First Mutual employees in that building. And make some floor plates available for what we think will be more-effective leasing opportunities.

Another banking center in Bellevue -- the Crossroads banking center is currently under construction. There, rather than remodeling, we’re building a completely new building to replace the existing facility. It’s a very large lot. So the existing facility is there, and will be torn down after the new building is completed.

Then we expect to be starting a remodel as soon as we get through the permitting process in the City of Redmond, for an existing banking center, then. So that’s existing banking centers and remodels.

We’ve acquired a site in what’s called Canyon Park up at Bothell, just near the King County and [Homage] County border. On the Bothell-Everett Highway in an outstanding location. That would be a new banking center, and we expect to have that done by the end of 2005, permitting processes permitting.

Then we’ve acquired a site in West Seattle, to construct a new banking center. We hope to have that open also by the end of 2005. We currently have a banking center in West Seattle, and a storefront presence that’s been there for about 7 or 8 years, and we would close that once the new construction is finished. So then we’ll have a stand-alone banking facility in West Seattle -- which has been a very successful site for us.

So that is the summary of known projects. We continue to look for other locations. Again, we’re staying focused on an arc around the East side of Lake Washington, from what I’m calling the Canyon Park or Bothell location on the North, which is right by the intersection of the Bothell-Everett Highway on 405 -- to Renton or Kent on the South. Haven’t found any other sites in that area, but we continue to look.

John, that leads to two additional questions. The first one is, the West Seattle -- that doesn’t quite fit the arc of what I would think of being on the East side of Lake Washington. So walk us through here now just how you’re philosophically thinking about West Seattle. And then, secondarily, how many branches were newly opened in 2004?

Let’s see. We had no branches that were newly opened in 2004. Both West Seattle and Ballard, which are not on the East side of Lake Washington, are banking centers that we’ve had for probably 8 years or so. We’ve identified those markets as extremely attractive deposit markets. They have proven to be so over that 8-year period.

Ballard, in particular, is also the home of many, many small businesses and mid-sized businesses. That has also proven to be extremely lucrative for us over the last 2-3 years, in particular, in our drive to secure business banking relationships. West Seattle, a little less so. But it’s a fast-growing community, which has been relatively sleepy for quite some time.

Ultimately, to better serve our East side customers, we anticipate that we would need to have a location in downtown Seattle, as well. That location would also provide support to the West Seattle and Ballard locations. But the primary focus, again, remains East of Lake Washington.

In all forms of household demographics -- whether you’re looking at household net income or household net worth, the East side far outstrips the Seattle marketplace. If you look at population growth rates, the East side far outstrips the Seattle marketplace. Population on the East side is somewhat less than Seattle itself, but nonetheless, the growth in the economics are far more attractive on the East side. Hence, our greater focus on that East side of Lake Washington marketplace.

That’s helpful. Thank you.

Thank you. Our next question comes from Joe Gladue. Please state your company name, followed by your question.

Cohen Brothers. I just had a question about the Sarbanes-Oxley expenses. Just wondering. Is there still some of the sort of more just project-oriented expenses left? And how much there might be, just sort of ongoing, as sort of just raised expenses?

Joe, this is Roger. We didn’t spend a whole lot on consultants. In fact, we didn’t spend anything on consultants. Most of our costs were directly to our independent auditors. And that will be on an ongoing basis, and perhaps even increase a little bit as years go by.

Having said all of that, we find that we’re going to need a little extra help around here next year to point us in the right direction -- maybe speed up some of our processes with the Sarbanes certification, here to move a little smoother to the bank, here. So in fact, our costs will probably go up a little bit next year.

We spent about $75,000 the fourth quarter, and I think about $125,000 or 130,000 -- somewhere in that range, for the year -- which is pretty modest, compared to what we could have spent, had we had more help during the year on a project basis.

Thanks.

Thank you. Our next question is a follow-up question from Louis Feldman. Please go ahead.

Yes. Roger, can you provide some additional color and information -- the paragraphs confused me. Perhaps it was just due to sleep deprivation. But on Page 7, you talk about the multifamily yields, and the decline from 5.56 down to 5.01 over the year. Can you talk about why yields on the multifamilies are going down in a rising interest rate environment versus the repricings increasing? Can you give us some additional color on that?

Yes. We were trying to comment on why we didn’t see a bigger bump in our yield in our loan portfolio, with rising rates and re-indexing. One of the things that occurred here in the bank is that in our commercial real estate area, we had had a practice in prior years of having a little longer-term loans there.

For example, you might have a 5.1 or a 3.1 hybrid loan.

Yes.

So the yield on a 3.1 or a 5.1, for example, to start with, is much higher than it would be if you had a 1.1 where you readjusted it every year, annually. The trend in prior years was for the longer term. So we’re getting a little boost there, up front.

Then the last year, the trend has been in commercial real estate and in our business banking area. It’s been backed by commercial real estate collateral, to go to the shorter term. So we’re getting that little boost. It’s kind of an anomaly. In a rising rate environment, of course, long-term strategically, that would be to our advantage -- not to tie something up into 5-year increments to begin with. So that practice -- it seems kind of strange -- offset some of the benefits that we received in the loans that were indexing and had already reached their annual indexing process. So one kind of offset the other. And the result was that we didn’t get the boost in the year that perhaps some of the other banks might have seen.

So in other words, what you were trying to say is that you lowered the rates because you’re taking a shorter-term loan. So instead of a 3.1, it’s more like a 2.1 or a 1.1. Where you can adjust on a yearly basis, you’re paying the lower upfront rate. But it’s becoming more of a floating and variable-rate loan, which will give you more flexibility, going forward.

There was just enough of that going on that [inaudible] that it made a difference in our yield.

But theoretically then, going forward into ’05, if rates continue to increase, you’ll be able to reprice your portfolio at a significantly faster rate?

That’s true. That’s true.

Which also led to the increase in the asset sensitivity? The GAPP?

Yes. That’s true. And we also noticed it in the duration that we’ve run -- that our position is such that in a rising rate environment, we don’t expect our margin to change much, if at all, to be honest.

In the mini MDNA, you touched on deposits and your ability to gain deposits versus the success you had in reducing your cost of funds. Are you starting to see some irrational pricing in the area on the deposit side?

John?

Lou, I wouldn’t say we’re seeing irrational pricing, but there are some very aggressive deposit rates being offered. But if you look at the news in the wholesale money markets, certainly virtually all banks are still starting to pay [inaudible] sales rates. But banks are still well under the wholesale yield curve, across the curve. So I wouldn’t yet qualify it as irrational.

One origination was at 122 for the third and the fourth quarter. Can you touch on what your pipeline is looking like?

Not other than what we put in the outlook for the first quarter at the end of the press release -- which is, we expect loan growth in the range of $10-15 million.

That being net, Joe?

Yes. Okay. Thank you.

We’re going to receive $200 million of loans and 190 payoffs.

Thank you, sir. Ladies and gentlemen, if you have an additional question, please press the * followed by the 1. If you’re using speaker equipment, you will need to lift the handset before pressing the numbers. One moment for our next question.

Gentlemen, at this time I show no further questions. I’d like to turn the conference back over to you for any concluding comments.

All right. Thank you all very much for taking the time to listen in. We appreciate your interest. Again, we were very pleased with the quarter and the year. And I think you can tell from our outlook for the first quarter that certainly our expectations for the first quarter are also consistent with the performance you saw in 2004. So again, thanks and enjoy your day.

Bye.

Thank you. Ladies and gentlemen, this concludes the First Mutual Bancshares’ Fourth Quarter 2004 Conference Call. If you’d like to listen to the replay of today’s conference, please dial 303.590.3000 or 1.800.405.2236 and please enter the access code of 11019514, followed by the # sign.

Once again, thank you for participating in today’s conference. At this time, you may now disconnect.