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3rd Quarter 2005 Earnings Call

October 21, 2005, 8:00 a.m. CDT

Operator

Good morning, ladies and gentlemen, and welcome to the Gold Banc quarterly earnings 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 star followed by the zero.

I would now like to turn the conference over to Linda Seefeldt, Director of Marketing. Please go ahead.

Linda Seefeldt

Good morning. This is Linda Seefeldt and you're on the Gold Banc Analysts Conference Call.

Thank you for joining us today.

With me are Mick Aslin, the President and CEO of Gold Banc; Rick Tremblay, our Chief Financial Officer; and Ben Clouse, our Controller. In a moment Mick will discuss our third quarter earnings and results of operations and comment on some of our plans for the future, then he and Rick will be available to take questions.

Before that, let me cover a few necessary items, then I will give you information about how to access a transcript of this conference call. Today's call may include information and forward- looking statements, which relate to matters that are not historical facts. These statements are subject to significant risk, assumptions and uncertainties, including but not limited to those described in the periodic reports we filed under the Securities Exchange Act of 1934 under the caption, "forward-looking statements and factors that may affect the future results of operations, financial conditions or business." Because of these and other uncertainties, our actual results may be materially different from those indicated by these forward-looking statements. You should not place any undue reliance on these statements, and we will not update them even though our situation may change in the future unless we're obligated to do so under federal securities laws.

You may view a transcript of this conference call by visiting the Gold Banc website at www.goldbanc.com and clicking on the presentation link that you will find there after 5:00 o'clock Central Time on Thursday, October 27th. After Mick has completed his remarks, we will give you the protocol that you will need to ask questions.

Now I would like to introduce Mick Aslin, CEO of Gold Banc. Mick.

3Q Results

Mick Aslin

Good morning, everyone. I regret this quarter was not free of extraordinary items as we had hoped, and as appeared to be the case until the middle of September when discussions with the IRS began.

I am pleased, however, that another issue is behind us. The fact that the expense and a substantial part of the recovery overlapped two reporting periods was regrettable, but unavoidable. Bottom line, we experienced an after tax reduction in earnings of 8 cents per share in the third quarter and expect a 3 cent per share addition to earnings in the fourth quarter as a result of the settlement and recoveries recorded to date.

This relatively complicated situation is described in great detail in the 8-K filed on October 18, 2005. If there are questions on this topic, we will be happy to address them at the end of the call.

As reported in last night's earnings release, GAAP net earnings for the third quarter were $5 million, or 13 cents per share. GAAP net earnings for the nine months ended September 30, 2005 were $38.4 million, or $1.00 per share. Core earnings for the quarter were $8.1 million, or 21 cents per share. Core earnings for the nine-month period were $24.2 million, or 63 cents per share.

Our target for core EPS for the quarter was 24 cents per share. We missed our target largely because of an $800,000 provision for loan losses that was higher than in our plan, and an approximately $200,000 shortfall in net interest income, along with a negative variance of approximately $300,000 for our subsidiary, Gold Capital Management.

Net interest income fell short because of higher cost of funds than budgeted, and because loans and a significant part of the loan growth came later in the quarter than we had expected. The provision for loan losses during the quarter exceeded net charge offs by $600,000. It was $1.6 million higher than the same period a year ago, and exceeded plan by the $800,000 I just mentioned. This came notwithstanding the $4.1 million improvement in non-performing loans, and the essentially flat level of other real estate owned.

The increased provision came as a result of a recently completed, and what I would describe as very extensive, internal loan review and the downgrading of approximately $25 million in credits from the past category to special mention.

We continue to feel good about our loan portfolio. Net charge offs to average loans year-to- date is .13%. Non-performing loans to total loans remain below 3/4 of 1% at .72%, which was down slightly from a year ago. Other real estate owned at $4 million is down nearly $7.5 million from September of last year.

The downgrades I mentioned earlier reflected our views of increased risks in the credits, in light of current macro risks in the economy. Those risks include rising rates, increased energy prices and increasing inflationary pressures associated with construction materials cost. Notable, and I believe reflective, of our efforts to address issues early, was the fact no credits were downgraded to special mention, doubtful or loss. It will continue to be our great endeavor to identify issues in credits early to ensure that we have an opportunity to address them before they become critical.

Gold Capital Management continues to find this a difficult environment for fixed income sales due to their largely loaned up, smaller community banks in the Midwest. On the positive side, we expect a good fourth quarter from its public finance advisory business with several refinances expected to close during this period.

We are pleased with the improvement in operating efficiency for the company with the efficiency ratio coming in at 58.6% for the quarter, and 65.4% year-to-date. The gains we have experienced so far are largely attributable to reduced expenses. Much of our future opportunities will come from revenue enhancements.

We are also pleased with the slight margin expansion to 3.10% for the quarter. This is about 11 basis points better than one year ago. The improvement from last quarter was in the range of 4 to 5 basis points less than we had hoped for, but increased cost of deposits came into play, particularly during August and early September.

Our loan growth remains on plan with $83 million in growth for the quarter, or 2.9%, and $306 million, or 11.4% year-to-date. However, nearly $30 million of this growth this quarter was booked in the last 15 days of the quarter.

More than 57% of our loans, or about $1.8 billion are variable rate and currently have an average yield of approximately 7.1%. Approximately $1.2 billion are fixed rate and have average yields currently of 6.3%, and, on average, the years to the next re-pricing is 3.

Real estate related loans totaled 74.4% of the portfolio, and commercial loans currently account for 21% of the portfolio. 67% of the portfolio is in the Kansas City metropolitan area, 25% of the portfolio is in Florida, and 8% remains in Oklahoma, largely with our three branches in Tulsa.

Deposits grew $109 million, or 3.7% during this quarter, and we are up $235 million, or 8.4% for the year, despite a reduction in broker deposits of $160 million during this period. This includes a $30 million reduction in brokered CDs during the third quarter.

I might add that FHLB advances are down about $160 million year-to-date. About $75 million of that came in the third quarter. This combined reduction in wholesale funding of $320 million so far this year has been a significant part of our plan and, to some extent, has exacerbated a faster rise in cost of funds than we might otherwise have experienced, but something we intend to continue.

The growth in deposits is nearly all in interest bearing transaction accounts and in certificates of deposit, most of which are in the 18- month maturity range.

The Kansas City metropolitan area accounts for 63% of the deposits, or about $1.9 billion.

Florida is 29% of the deposits, or about $866 million, and Oklahoma is about 7%, or $225 million of the deposits.

On the litigation front, both the class action lawsuits in Oklahoma, as you know and as we've talked about multiple times, are on appeal. They were sent to the Supreme Court in Oklahoma. The Supreme Court has, at first, sent that back to Oklahoma City, and now the cases have been assigned to an appeals panel in Tulsa. One of the cases had been dismissed and is under appeal by the plaintiffs. The other class had been certified and is under appeal by us based on that certification, and also under the no private right of action concept that the other case was dismissed under.

We have a case in Federal District Court that we brought against the U.S., and against the Secretary of Agriculture in his official capacity, to try to bring clarity to what we believe are unconstitutionally vague regulations that exist. In that case, the government has filed a Motion to Dismiss. We have responded to that Motion in brief. The government has a period of time now to respond to our brief.

I can't give you any timeframes that decisions might come down. Nothing has changed in our view with respect to the merits of the case, and we feel good about the legal aspects of all these cases.

The goal of visibility remains very dear to us. That is increasingly difficult in the world today, the world of accounting today, particularly, and some degree of lumpiness is likely to be the norm. We will continue to address issues as they arise, like we did with the loan portfolio and the increased provision.

I can't say enough that I'm very comfortable with the quality of the portfolio. We have policies on the percentages that we will reserve for various classifications that we identify in our portfolio, and we will stay true to that.

With that I'll open it up to questions.

Operator

Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star followed by the one on your touchtone phone. If you'd like to decline from the polling process, press the star followed by the two. You'll hear a three tone prompt acknowledging your selection and your questions will be polled in the order they are received. If you are using a speakerphone, you will need to lift the handset before pressing the numbers. One moment please, for the first question.

Charlie Ernst with Sandler O'Neill Asset Management, please go ahead with your question.

Question 1

Charlie Ernst

Good morning. Can you go through and say the deposit numbers again? I think you said $1.9 billion in Kansas City but can you break that out between Kansas and Missouri and then also give the amount of brokered deposits at quarter end?

Mick Aslin

I think we have remaining brokered deposits of about $377 million. The deposits in Kansas are 27% of the total, about $823 million. In Missouri, $430 million, or 14%. So 27% of the deposits in Kansas, and 14% in Missouri.

Charlie Ernst

I've got $823 in Kansas, $430 in Missouri. Florida you said was $866, I think.

Mick Aslin

Correct.

Charlie Ernst

Oklahoma is $225 and then the brokered is $377?

Mick Aslin

Correct.

Charlie Ernst

That all adds up to $2.7 billion and I've got ...

Rick Tremblay

Charley, there's a couple hundred million dollars in public funds that we don't show at the state level, we show it within our treasury department.

Charlie Ernst

Great. Could you talk about the salary line this quarter, why it was down so much?

Mick Aslin

We sold branches in Oklahoma. That would account for some of it, but we continued to try to drive efficiencies through. We've had consolidation of a lot of functional areas. We've moved into our Services Center early in the quarter. Some benefit comes out of that. So you're starting to see some of the fruits of the consolidations of the charters, along with the reduction of five branches in Oklahoma at the end of June.

Charlie Ernst

Then lastly on the tax rate, what do you consider a normalized tax rate now?

Mick Aslin

We consider a normalized tax rate 35%. We do expect a lower tax rate in the fourth quarter than that. As we talk about our expectations of 24 or 25 cent core numbers in the fourth quarter, that would include about 2 cents benefit of adjusting taxes to actual returns and reclaiming some amounts that have been over accrued.

Charlie Ernst

Great. Thanks a lot.

Mick Aslin

Thank you.

Operator

Steve Scinicariello with Black Rock, please go ahead with your question.

Question 2

Steve Scinicariello

Hi. My main question is as we continue to see disappointing fundamental results here, doesn't this steer you and the Board towards more aggressively looking at selling the company as a more efficient means of unlocking shareholder value here?

Mick Aslin

I'm not at all disappointed in the quarter. We will continue to look at options as they're presented, as we always have.

Steve Scinicariello

These results, you're not disappointed? You don't think you can do better than this and it doesn't make you look at other options a little more aggressively?

Mick Aslin

Not disappointed and not thinking we can do better are two different things. We certainly think we can do better and expect to.

We're running the company and Herb Kelleher expressed it very well when he said all hands on deck, they're shelling the ship. We're of that mind. We're going to run this company in a way that it is a very good earner on its own. If something presents itself on an acquisition, we certainly are ready, willing and able to discuss it.

Steve Scinicariello

We're a large shareholder. We want you to run the company, but with the results that we've seen lately, it seems like a more efficient way to unlock the significant value that your franchise has might be to look at this more aggressively here. That's all I'm saying.

Mick Aslin

We certainly respect your opinion and we'll continue to look at options.

Steve Scinicariello

Alright.

Mick Aslin

Thank you.

Operator

Herb Bookbinder with Wachovia Securities, please go ahead with your question.

Question 3

Herb Bookbinder

Mick, it's Herb Bookbinder. Just a quick question. What's your attitude towards acquisitions right now in Florida versus Kansas City versus opening up new branches?

Mick Aslin

We believe … proceed at current multiples, and based on what our future opportunities look like, we're more inclined to acquire our stock back than other people's stock. That's why we did announce the additional $20 million in buyback. We'll certainly consider opportunities, but that's not a priority of ours.

Herb Bookbinder

In these new branches you've announced, what locations are they?

Mick Aslin

We will open two branches in January in Hillsboro County, Florida, the Tampa Bay area. We expect to open a third in Sarasota County in the early second quarter of '06. That is probably all we'll open in '06. It's conceivable a fourth branch could be opened in the late fourth quarter of '06 in Sarasota or Manatee County. We expect to open one branch in the Kansas City metro area by the end of '06.

Herb Bookbinder

Thank you very much.

Operator

Bain Slack with KBW, please go ahead with your question.

Question 4

Bain Slack

Hi. Good morning. I wanted to ask if you could give us a breakdown of the deposits among the types. Also if you could discuss with the deposit growth you're seeing how the rates are in the markets you're in and where you all sit within that. Has there been any cannibalization going on within your own product base of customers migrating to higher cost products over the last quarter? Thanks.

Mick Aslin

Well first, consolidated non-interest bearing deposits are about $305 million. Transactional deposit accounts are in the $1.0 billion range, broken down from regular NOW accounts to a product that we call our Treasury Checking Account, which has been one of our largest growth areas. That product has cannibalized some other lower deposit transactional accounts, but we feel that is a product that is clearly designed to compete with the money market mutual funds as rates have increased. Time deposits of $1.8 billion.

So yes, we are seeing some cannibalization. We intend to maintain our relationships and we are intending, and are in fact becoming, significantly better at cross-selling products to people who are brought in by some of these higher paying accounts. We are intentionally focusing on being among the top five rate payers in our markets.

Bain Slack

In the press release you had mentioned you do expect to see the margin up slightly in the fourth quarter. Does that take into consideration these trends that you've seen and specifically if there's a rate hike that there may be a little bit more movement from free funds into some higher cost accounts that you can still get some margin expansion?

Mick Aslin

Yes and with our 57% variable rate, we think we can still capture two or three basis points of a 25 basis point increase in rates.

Bain Slack

Great. Appreciate it, thanks.

Mick Aslin

You bet.

Operator

Brett Buckley with Dolphin Partners, please go ahead with your question.

Question 5

Brett Buckley

Hi, guys. With respect to the payments you received from the trustee, they entered into a settlement agreement with you and so they've been released from liability. Is that correct?

Mick Aslin

Largely.

Brett Buckley

Where I'm going is, are there either from they or other parties, the potential to receive subsequent further payments?

Mick Aslin

Yes. We are continuing to review all of the records, money in and out from various of the trustees. We're looking at all options that we can, and are hopeful there can be additional amounts, but we have made no other formal demands at this time.

Brett Buckley

The $16.60 transaction from last year, that may or may not have a breakup fee attached to it, is it safe to say at this point that that's no longer potentially due given the theoretical scenario where there is a proposal made for the company?

Mick Aslin

The contract with Silver was set to expire October 11, 2004, so on October 11, 2005 it would have been one year, and I believe that would eliminate any question that there is an additional breakup fee out there.

Brett Buckley

Thank you.

Operator

Jon Arfstrom with RBC Capital Markets, please go ahead with your question.

Question 6

Jon Arfstrom

Good morning, guys. A question for you on the loan review. Can you talk about what prompted that? Was there anything that ... ?

Mick Aslin

Nothing prompted it other than we have our loan review. We do reviews throughout the year, but we try to, at least annually, do a comprehensive review of 60% or 70% of the total portfolio at one time, and a very thorough concentrated look in light of current conditions. That's it. It was not an unscheduled review.

Jon Arfstrom

Can you say again what exactly happened in terms of the downgrades? They went from where to where?

Mick Aslin

Went from a ranking of past 3 to a ranking of 5, a special mention. In our case, a special mention has a 3% reserve set aside.

Jon Arfstrom

Is there any particular geography where you had more downgrade activity?

Mick Aslin

More of it was in the Kansas and Oklahoma markets, virtually all of it was in Kansas, Missouri and Oklahoma, so the Midwest.

Jon Arfstrom

Then, Rick, I don't know if this is you or Mick, but on the guidance that you had last quarter, I think you were saying core numbers of 91 to 95. What I'm trying to reconcile is we had the 3 cent differential between your expectations and what the core number was of 21 cents this quarter. Is there something else in there that I'm missing or are some of the nonrecurring items from this quarter that caused that range to come down?

Mick Aslin

No, I think we're 3 short this quarter and we believe we will be 1 cent short of where we expected to be next quarter.

Jon Arfstrom

Is it anything specifically that you can point to that's causing it? I know that you talked about average loans being tougher than the period end numbers but it seems like that's a bit better. Is there anything else that you see right now that's changed relative to three to six months ago?

Mick Aslin

No, the biggest change is really the provisioning.

Jon Arfstrom

That's all I had. Thanks.

Operator

Wayne Archambo with Black Rock, please go ahead with your question.

Question 7

Wayne Archambo

I'm just following up on an earlier comment about you stating that this was not a disappointment. I look at the numbers ...

Mick Aslin

I didn't state that it wasn't a disappointment. I said that it was a disappointment.

Wayne Archambo

I guess the prior question was the fact that it was disappointing. The return on assets, ROE 7% versus mid-teens to the peers; the efficiency ratio is significantly higher than the peers. I'd just follow up on an earlier comment that was made that I just think management and the Board should seriously consider what's in shareholders' best interests, which is to obviously with these poor results that I just stated, I think you have an obligation to shareholders to maximize shareholder value and obviously if it can't be done through this management team, then you've got to do what's best for shareholders and find an outside entity that could enhance these values.

Mick Aslin

I think we tried to say we agreed with that. We'll continue to look at all options to enhance shareholder value. I don't know what more to say on that front.

Wayne Archambo

Thank you.

Operator

Ron Peterson with Moors and Cabot, please go ahead with your question.

Question 8

Ron Peterson

Good morning. A follow up to the credit review process. Could that have any impact on your loan growth expectations going forward given the tougher environment? Also with the credits that have been downgraded, are those things you might work out internally or are those loans that you might try to work out of the bank and might that also have an effect on loan balances going forward?

Mick Aslin

Remember we're talking about loans considered special mention. Many of those ... loans from time to time will move from past to special mention and you still want to continue to keep the relationship. We'll work with them to improve it. There will be some that we will work to move out of the bank. Our loan production pipeline continues to look good through the fourth quarter. It's difficult to see much beyond that, but we continue to feel good about opportunities for loan growth.

Ron Peterson

Thank you.

Operator

Jon Ashe with Wellington Management Group, please go ahead with your question.

Question 9

Jon Ashe

Hi. First I wanted to say I think you're doing the right thing and we appreciate the efforts of you and all your employees. I wanted to ask about the securities portfolio. If you anticipated higher loan growth this quarter and you were drawing down the securities portfolio, that would have led to the net interest income decline. With loan growth looking better this quarter, will you continue to bring down the securities portfolio? Thank you.

Mick Aslin

We do not view the securities market as a particularly good place to be in this flat or nearly inverted yield curve. We'll continue to try to put all of our assets that we can into loans. We have some continued regularly scheduled run off; we're not looking to sell any of the loans.

Anything else?

Operator

At this time I am showing no further questions. Please continue.

Mick Aslin

I thank all of you for joining us. I don't want to go off this phone without making sure that everyone is very aware of the disappointment in the raw EPS numbers. Neither do I want you to go away with any misimpression of how pleased we are with some of the underlying fundamentals of the organization. We realize fully that we have to turn those fundamentals into the EPS and EPS growth. We're committed to doing that, and we, at the same time, will have and will always look at all options to increase shareholder value.

Thank you for joining us and we'll look forward to a good fourth quarter. Goodbye.

Operator

Ladies and gentlemen, this does conclude Gold Banc Quarterly Earnings conference call. You may now disconnect and thank you for using ACT Teleconferencing.

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Source: Gold Banc Corporation Q3 2005 Earnings Conference Call Transcript (GLDB)
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