Banner Corporation (BANR) Q4 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Banner Corporation’s fourth quarter 2011 and year-end results conference call. [Operator Instructions] This conference is being recorded today, January 26, 2012. And I would now like to turn the conference over to Mark Grescovich, President and CEO of Banner Corporation. Please go ahead, sir.

Thank you, Douglas, and good morning everyone. I would also like to welcome you to the fourth quarter and full year earnings call for Banner Corporation. Joining me on the call today is Rick Barton, our 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.

Certainly. 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 performing 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 September 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, Albert. As announced, Banner Corporation sustained our return to profitability again in the fourth quarter reporting a net profit available to common shareholders of $3.1 million or $0.18 per share for the period ended 12/31/2011. This compared to a net profit to common shareholders of $4.1 million or $0.24 per share for the third quarter of 2011. And a net loss of $14.6 million or a loss of $0.91 per share in the fourth quarter of 2010. For the full year ended December 31, 2011, Banner reported a loss available to common shareholders of $0.15 per share, compared to a loss of $7.21 per share for the full year of 2010. Looking at earnings before preferred stock dividends and discount accretion, Banner had a net income of $0.33 per share for the full year of 2011 compared to a net loss of $6.40 per share the same period of 2010. The fourth quarter performance provided consistent evidence and confirmed that through the hard work of our employees throughout the 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 link quarter and compared to a year ago. Our 12 month core revenue increased 4% when compared to 2010. Our net interest margin expanded to 4.07% in the fourth quarter of 2011 compared to 3.75% in the fourth quarter of 2010. And our cost-to-deposits decreased to 59 basis points in the most recent quarter compared to 103 basis points in the same quarter of 2010. These improvements are reflective of our super-community bank strategy that is reducing our funding costs by…

Thanks Mark. I would like to break my comments this morning into two parts. First, a recap of year-over-year credit metrics is in order, to highlight the progress made during 2011, and then, a look will be taken at some significant fourth quarter accomplishments. But before turning to these remarks, it would be remiss, not to again recognize the hard work and creativeness of our workout officers who have driven our success. Now let me turn to the year-over-year comparison of Banner’s credit metrics. Net charge-offs were down $20 million to $49 million and decreased each quarter during the year. Non-performing assets declined from $254 million to $119 million or 53%. Looked at differently, non-performing assets went from 5.77% to 2.79% of total assets. Non-performing loans decreased from $151 million to $75 million at December 31, 2011. This was a decrease of just over 50% during the year. This puts non-performing loans at 2.3% of total loans at the end of 2010, this ratio was 4.5%. REO also declined significantly during the year falling from a $101 million to $43 million, a decline of over 57%. REO sales for all of 2011 were $99 million, and at the time of sales our average net proceeds were 97.7% of book value. This performance again demonstrates our ability to not only liquidate REO assets, but also accurately value them. It should be noted here that accurately valuing REO comes at a cost, as our 2011 valuation adjustments were $15 million. During the year all categories of residential land loans decreased meaningfully and were $97 million at year-end versus $168 million at year-end 2010. This was a decrease of 42%. Residential construction loans also declined modestly during 2011, following $9 million to $144 million even though performing new loan commitments in this category…

Thank you Rick, and good morning everyone. As reported in our press release, Banner Corporation’s improved operating results for the fourth quarter and the year ended December 31, 2012 capped the year of significant progress, highlighted by much improved credit quality, strong revenue generation, and importantly net income. This is the progress that our employees should be proud of, our shareholders should appreciate and that we believe it should result sustained profitability going forward. Rick has already addressed the improved credit quality metrics thoroughly, so I will just note the obvious. The significant reduction in non-performing loans in real estate owned are having a very positive impact on reported earnings For Banner this trend of improving credit quality, which has been consistently unfolding over the course of the past two years has not only resulted in lower levels of loan loss provisioning and expenses related to real estate owned. But has also significantly contributed to our improved net interest margin is the drag from these non-accruing assets has been substantially reduced. The provision for loan loss for the fourth quarter matched the $5 million we reported in the third quarter, but it was well below the amounts reported earlier this year and in the fourth quarter a year ago. More importantly reflecting the reduction in problem loans, our provision for loan losses for the full year ended December 31, 2011, was half the level recorded in 2010. In addition, our expenses related to real estate owned, although still high, were materially reduced in the fourth quarter and on a year-to-date basis. While these credit costs remained above long-term acceptable levels we expect this trend of improved asset quality will continue and will result further reductions in credit cost in future periods. On our last call I noted that the third…

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

[Operator Instructions] Our first question comes from the line of Jeff Rulis with DA Davidson. Please go ahead.

A couple housekeeping items, Lloyd, I’m sorry I have to ask. I guess on the, just a follow-up on the capital surplus comment you made, I guess that $148 million surplus above the 10% level, that’s just within the holding company, correct?

That’s correct. That’s a consolidated number.

Okay. And then any update on the size of the net benefit of the DTA recovery potential? I think you had, you’ve couch it as $11 million to $13 million last quarter, but…

Yes, it hasn’t changed. A great deal of depth is the profitability in the current quarter I think the DTA at the end of September was about $37 million of the allowance but the profitability in the current quarter reduces that by a couple million dollars, so there is $35 million there, and you’re right. I’ve been consistent in cautioning people to recall that the fair value adjustment on the junior subordinated debentures that will likely to occur at the same time, as the DTA recovery will offset in meaningful portion of that. I think the net of all that right now and my best guess would be $12 million to $15 million, positive when those adjustments occur. And I guess the other point that I would make is obviously, that we get closer and closer to that date as we continue to report profitability and improved asset quality on numbers.

Okay, that’s helpful. And Mark, I guess you kind of touched on, kind of loan growth expectations or maybe you alluded to them, I guess with Q4 being an inflection point and maybe inconsistent going forward perhaps, I guess any further color on your expectations for maybe net loan growth for 2012?

Obviously, we’re not giving guidance on net loan growth for the full year, but I think the more important way to look at it for us is the fourth quarter was an inflection point for us. Our pipelines continue to be strong. Our commercial loan production was up 33% in 2011 versus 2010. So I would expect a modest growth in the loan book and again it will be a little lumpy, as Lloyd pointed out, because there is some seasonality clearly in our portfolio with the agricultural portfolio.

Our next question comes from the line of Tim Coffey with FIG Partners.

I got a couple of questions on credit costs, first on the provision. How much of that was allocated for the new loan growth in the quarter?

Tim, I think your question was how much was allocated for new loan growth during the quarter?

Yes, and the provision...

Is that correct?

Yes.

I think a minor portion of it was-- could be considered allocated to new loan growth as that did occur.

It’s a very nominal number, Tim.

Okay, okay. And then Rick, taking your comments in aggregate, what is your feeling about the valuation adjustments going forward on REO, is it’s a new run rate?

I think we have to look at how long some of the stuff has been subject to reappraisal both in the loan and the REO state and consider that the $2.7 million that we took in the fourth quarter probably as a high point, I don’t know exactly how to phrase that, but you take a look at the relative size of the REO portfolio to what it has been and it’s significantly decreased. And the land portion of the REO portfolio was now less than half of what remains in REO portfolio. So the remaining valuation risk there I believe has decreased.

Okay, okay that’s helpful. And then, Mark, where were some of the yields on the investor commercial real estate loans that you book? What were the yields on those?

Well, clearly the yields on that have come in because it is a much more competitive environment. So our loan, overall loan yield at 553 has come in on new production. So you would see new loan production anywhere in between 4.25 and 5.

Okay. And Lloyd, can you give me some details on the fair valuation adjustment? What types of securities those were on? And how the fair value transpired?

Sure, well the fair value adjustment for the quarter was, as you know, was about $1.8 million and about $1.1 million, $1.2 million of that related to the valuation of our subordinated debt, which increased by that amount primarily as a result of the increase in three month LIBOR rates. We didn’t adjust the spreads in our discounting process, but LIBOR moved up. So that combined with the small effect of getting to, 90 days closer to final maturity, both impacted that. There was a little bit of offset to that in the asset side on as a result of the trust preferred securities that we have that have similar characteristic, but they are far fewer of those as you know. And the balance of it just related to interest rate impact on non-subordinated type of securities.

Okay, but again...

Primarily two thirds of that adjustment for the quarter reflects the change in the value of the debt.

Okay. But when you talk about the value of the debt, you didn’t adjust the discount rate.

We did not, other than the impact of three month LIBOR, we didn’t adjust the spread. Three months LIBOR was up about 25, 30 basis points for the quarter.

Okay. And in terms of recognizing the valuation loss from the DTA, are you still thinking four quarters of profitability is appropriate?

Well I think I’ve been pretty consistent in hedging that question consistently with the idea that it is a function of profitability, asset quality, the nature of the profit, sustainability, all of that stuff. Having said that, I will be very disappointed if it doesn’t occur sometime in 2012, that’s as narrow as I’m going-- that’s as for out on the limb as I will go right now, Tim.

[Operator Instructions] Our next question comes from the line of Joe Stieven with Stieven Capital Advisors.

Hi, Joe.

Mr. Stieven, your line is open for questions. Our next question comes from the line of Sara Hasan with McAdams Wright Ragen.

I’m wondering if you could talk about your TARP repayment plan and your thoughts on that.

Yes Sara, this is Mark. I think we’ve been pretty clear and quite frankly consistent in our approach here. What we outlined 18 months ago was that we were going to improve the capitalization and liquidity of the company. We are going to reduce the risk, dramatically reduce the risk in our balance sheet. We needed to improve our core earnings power of the company, and finally then get the MOU terminated. Clearly, we’ve made great progress in all those areas. And as you progress as an organization being successful with that approach that should allow us as an organization to repay TARP overtime through earnings generation and capital accretion in the company. So we still believe that’s to be the case. We’re exploring various alternatives, and if something presents itself that is beneficial of the shareholders, we will look to do that. But right now our interpretation is that we still believe our original plan of repayment of TARP overtime is still effective.

Our next question comes from the line of Jim Simmons with ICM Asset Management.

As you evolve from essentially a perspective for investors in looking mostly at balance sheet quality and strength of the company, to one where you put that, it almost and totally past context, now the questions are shifting over to future growth directions. Can you give us and you did a pretty good job of commercial loan generation in the last quarter from what I heard, but could you give us a little more sense of how you see the read of the growth potential at this point? What’s bottoming out in terms of real estate? And just kind of a general backdrop in terms of what you hope to see in your banking region as we go forward in terms of how it’s going to bear on our future earnings growth?

Jim, this is Mark. I think, first of all, I thank you for the questions, it’s an excellent one. And obviously with the conditions that are occurring and with the general economy, the reduced confidence in the business environment in terms of clarity of where the economy is going, it has provided a cloud. So that being the backdrop, more importantly for our region, which is the Pacific Northwest, I think we need to take into consideration a couple of different things. First and foremost, if you look obviously at the drivers of our economy, you have Boeing, which is doing very well and has significant backorder, should take it out over seven years. They’ve renegotiated the labor contract. So there is employment add there along with stability in their performance. We have the agricultural belt, which has done very well through this cycle and is continuing to do well, and has added for significant improvement in shipments coming out of the port, which is a very big business for the Pacific Northwest, so the ports are doing well. You have the technology companies, Microsoft and Amazon that are doing well also and if just Microsoft, the Merit increase that they push through, through their entire organization. The latest statistic I heard from the economic development area was that should add somewhere around $400 million to the local economies. So there is a number of positive factors of our geography here that are doing well versus other parts of the United States. So I would tend to think that as the economy continues to mend and there becomes more clarity as to the political policy going forward, that our economy will do very well in terms of growth. So I view this area as very positive, we’re still outstripping the national numbers in terms of per capita income. And while the housing market is still strained, and we’re seeing pockets of valuation diminution in various areas, the pace of that valuation diminution is just reducing dramatically. So, I view the next slow growth economy for our area, but we have some things that are a little bit more positive in the other parts of the country.

Your next question is a follow-up from the line of Joe Stieven.

I don’t know if you answered this or not, but I got a couple of questions. Number one, when you look at your other expenses, the real estate, “real estate operations” at $4.4 million? I am assuming that’s mainly, is that mainly foreclosed real estate expenses or is there, or am I miss construing that number?

No, that’s all related to foreclosed real estate, Joe.

So in theory as you guys keep doing better and better those numbers got to come down. Okay, that’s question number one. Question number two is, we’re watching banks especially more and more bringing their DTAs back on pretty after four quarters give or take, and I would, because obviously you guys paid no taxes, so I am assuming sometime soon you’d be paying taxes, but you should have the DTA back on relatively soon, it’s probably a fair way. So I don’t know if you’ve commented about that, but that’s sort of my question.

Yes Joe, this is Lloyd. I tap danced around that one quite a bit, but summing it up, we think that sometime in 2012 that event will occur and it’s a function of profitability in asset quality and all the things that will allow you to get to the conclusion that you have an reasonable expectation of realizing that.

Thank you. And now there are no further questions in queue. I would like to turn the call back over to Mr. Grescovich for closing remarks.

Great. Thanks, Douglas. For the full year 2011, our performance demonstrated that we are making substantial and sustainable 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. While we’re pleased with our results for 2011, we still have quite a bit of work to do and we remain focused at delivering improved results in 2012. 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, that does conclude our conference for today. If you like to listen to our replay of today’s conference, please dial (303) 590-3030 or (800) 406-7325 and enter the access code 4503316. We would like to thank you for your participation and you may now disconnect.