Banner Corporation Q3 2008 Earnings Call Transcript

Nov.11.08 | About: Banner Corporation (BANR)

Banner Corporation (NASDAQ:BANR)

Q3 2008 Earnings Call Transcript

October 30, 2008, 11:00 am ET

Executives

Mike Jones – President and CEO

Albert Marshall – Secretary

Lloyd Baker – EVP and CFO

Analysts

Matthew Clark – Keefe, Bruyette & Woods

Jeff Rulis – D.A. Davidson & Company

Sara Hasan – McAdams Wright Ragen

Tim Coffey – Fig Partners

Kipling Peterson – Columbia Ventures Corporation

Ross Haberman – Haberman Funds

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Banner Corporation third quarter 2008 conference call. (Operator instructions) This conference is recorded today Thursday, October 30, 2008. I would now like to turn the conference over to Mr. Mike Jones, Chief Executive Officer. Please go ahead sir.

Mike Jones

Thank you, Mitch, thank you all for joining us this morning. Sitting here with me in Walla Walla I have Lloyd Baker, the Chief Financial Officer of the company and Albert Marshall who is the Secretary of the Corporation. We need to start off with the paragraph that Albert is just dying to read to all of you. Albert?

Albert Marshall

Our presentation today discusses Banner’s business outlook and will include forward-looking statements. These 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 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 recently filed Form 10-Q for the quarter ended June 30, 2008. Forward-looking statements are effective only as of the date they are made and Banner assumes no obligation to update information concerning its expectations.

Mike Jones

Thanks Al. What I would like to ask next is Lloyd to kind of just overview the financial results for the third quarter and for the nine months. Lloyd, go ahead.

Lloyd Baker

Okay Mike and good morning everyone. The third quarter 2008 proved to be another difficult quarter. I think the second quarter was fun, the third quarter just continued the fun. Obviously the dominant theme for Banner during the quarter was asset quality and the effect of non-performing assets which increased again by about $28 million and the effect that that had on earnings the resulting net charge-offs and the resulting need to provision for loan loss for the quarter at $8 million, while that is down from the $15 million that we provided in the second quarter, it still is a large number and had a very significant effect on earnings for the quarter. And to sort of add insult to injury the activity surrounding the Fannie Mae and Freddie Mac preferred stock that we announced earlier resulted in an additional charge of $6 million which decreased earnings for the quarter.

NPAs, of course non-performing assets not only affected us through the provision for loan loss but the continuing factor in the margin pressure which – we had a decline in the margin of only 5 basis points compared to the prior linked quarter, it still is the other big part of the story for 2008 in terms of earnings. Deposit costs and funding costs declined nicely as we had anticipated they would but as I indicated the drag of non-performing loans brought asset yields down a similar amount and so the margin contracted by 5 basis points.

On a more positive note, we continued to have really nice growth in non-interest income, more specifically in deposit fees and payment processing revenues which were up 5% on a linked quarter basis, they are up 21% on a year-over-year basis and that is really an increase of nearly $4.5 million in deposit fees and payment revenues for the first nine months of this year compared to last year. This increase reflects continuing growth in customers and growth in activity in our electronic banking, ATM, debit card interchange revenues, merchant processing and the like and it is really one of the most positive things that we can say about 2008 and reflects the efforts that were made in prior years to grow the footprint and size of the franchise.

The other piece of good news if you will during the quarter is that despite higher legal and collection costs, operating expenses were very well behaved and were actually down compared to the prior quarter, down compared to the same quarter a year ago. Operating expenses ran at a level of 291 basis points on average assets that is compared to 308 basis points in the prior quarter and 323 a year ago. So, we are benefitting from efficiencies that we have achieved through the integration of last year’s acquisition. We are benefitting through the slower pace of growth in terms of locations this year and again it is one of the more positive stories for 2008. The net result of all of that was a loss of $1 million for the quarter but as we have pointed out for some period of time, we really think it is more important to focus on what we refer to as net operating income or income from recurring sources, for the third quarter that was a net operating income of $2.9 million. We exclude the fair value adjustments from that calculation as you all know and in the quarter just ended that primarily means that we excluded the charge for the Fannie Mae and Freddie Mac now. Unlike most quarters that is a fair value charge that we don’t think will reverse itself but nonetheless in looking at how the operations are going, the $2.9 million is clearly an improvement from the prior quarter largely as a result of lower levels of provisioning.

Balance sheet changes during the quarter were fairly minimal. We had modest loan growth. We were up about $26 million a month for the quarter but that really masks some pretty good growth in certain areas of the portfolio with significant declines in one-to-four family residential construction loans and of course as you all know that is an area that we are focused on at the moment and during the quarter we had a $58 million decrease in one-to-four family loans that brings that total down by $131 million for the year and it is actually down now $172 million from the high point of one-to-four family loans. We anticipate that those totals will continue to decline some but we also anticipate that we will see growth in other areas of loans.

Deposit activity was probably the area of the most concern during the quarter just ended. We started the quarter with a great deal of optimism with the potential that was in front of us to lower the cost of deposits and as I noted earlier, they did decline by about 18 basis points during the quarter. We knew that we had a lot of maturing deposits, certificates of deposits that were fairly high priced and that that would likely result in some run off as we brought the prices of those deposits more in line with more favorable rates for us. That opportunity sort of turned into a challenge as the quarter progressed as concerns about the banking system and concerns about some of our large competitors resulted in very competitive landscape for deposit pricing and that caused us to as I said, that was probably the area of single biggest concern during the quarter for us was what was going on with deposits. Fortunately we are feeling much better now with some of the actions that have come out of the FDIC and the Treasury with respect to deposit insurance with the resolution of some of the more notable stresses in the banking system and going forward, we continue to be optimistic that deposit growth will be solid.

Within the deposit or on the deposit side of the ledger, we really had a fair amount of movement that occurred. We had very good growth in non-interest bearing accounts again reflecting the growth in the footprint of the franchise and the customer base. On the other hand, certain interest bearing transaction account balances declined reflecting concerns about the insurance and also reflecting reaction to pricing both internally and externally. So again, going forward we are much more optimistic that with some of the concern that was out there in the financial in the public’s eye concerning deposit safety has been alleviated and we go back to more of a banking and normal business environment.

So, notwithstanding all of that the final piece of information on the balance sheet and the new piece of information we have added to the press release is information on the capital ratios of both Banner Corporation and their subsidiary banks, Banner Bank and Islanders Bank, we are pleased that as the quarter progressed we were able to modestly improve the capital ratios of all two institutions. Islanders Bank by design their capital ratio came down a little bit but Banner Bank, the largest subsidiary, had nice improvement in our capital ratio and we look forward to moving into another challenging quarter, the fourth quarter has certainly started out that way.

So with that I think that will be my prepared comments Mike and I am sure that before you open it up for questions, you would like to say something.

Mike Jones

A couple of things that I would like to say, first, let’s focus a little bit on the asset quality issue. As I think Lloyd indicated, non-performing loans were up about $28 million and if you look at the schedule at the back of the press release, you will see that that is evenly split, roughly evenly split between growth and non-performing in the Portland, Oregon marketplace in the end in the greater Puget Sound area, which for those who are not familiar with, Puget Sound the area around Seattle, Washington. First, I will have to say that my view of Portland today versus when I talked to you in the July timeframe is that clearly has not gotten better from the Portland marketplace during this period of time and it is to become a little bit more difficult as some of the builders in that marketplace began to run out of resources to support their collaterals that banks are using most of which we do not have relationships with the borrowers the builders have gone bankrupt but we do know that will impact the values in that marketplace and it already has. So that will become a bit more of a tough slot as we move forward.

The increase that took place in Puget Sound frankly is not unexpected. We are very heartened by the fact that it appears that the Boeing strike will be settled this weekend with a vote by the Machinists Union which is a very, very important thing in Puget Sound. It had a big impact as it ran up to the strike in business activity in August and of course from September on they have been out working that has real impact not just through the Machinists themselves, the 25,000 workers in that area. They have some strike benefits but Boeing is very, very reliant on lots of subcontractors domicile throughout the Puget Sound region and as they have nothing going on in the work for Boeing and that does just in time delivery system that means if none of that is being delivered by subcontractors and as a result their space is filled up and they have got to slow down and they are off workers in that marketplace also. So, the resolution of that strike will have a very big impact on the improvement of economic activity in the Puget Sound area. So we are a bit more optimistic about Puget Sound than we have previously been.

You will notice there was little change in the absolute number relative to the Idaho marketplace, that does not mean to say that more came in and more went out but it is further along in the process with that because we frankly stopped lending earlier in that particular marketplace than we did in the others and as a result those are reaching resolution faster. So, we don’t expect any more build-up to be taking place in terms of non-performing assets in the Idaho marketplace than currently is on the books. So, as a result of all that, we are pretty optimistic about where we are relative to Boise, Idaho marketplace and we think things will get better in the Puget Sound marketplace over the near term while on the other hand it is going to go the other way for a period of time in Portland.

Having said all that, because we have not made any new one-to-four construction loans in a long period of time to getting borrowers or anything on our new projects so we are getting close to the end of projects that will turn into to be problems and become non-performing assets. You can see it if you look at our past dues, except for non-performings past dues are under 1% and as a result there is not a great deal more that is going to be coming into that area on a go-forward basis. That is to say that we expect that non-performing assets will move up a bit, not a lot, a bit in the fourth quarter and maybe into the first quarter but we think we are getting close to the top in terms of where we are in non-performings and frankly as we get our hands on some of these properties as they work through the foreclosure process in (inaudible) and the Puget Sound area we think will come to resolution a lot of these projects much faster on a go-forward basis. So, we are optimistic about where we are relative to the growth of non-performing assets although we do not think it will be down in the fourth quarter we just think it will be up modestly as we go forward during that period of time.

The other comment I would make to you is on the deposit side and this is just to reaffirm what Lloyd said, we continue to have very good growth at the retail and small business level area of people coming into the banks and opening accounts and frankly we are doing that at a record rate. The absolute growth however is being masked by what is taking place by some of our larger depositors that were related to the real estate industry in terms of title companies in terms of some developers that were out there in terms of (inaudible) and also in some cases 1031 facilitators in this particular market. Those deposit levels have declined rather dramatically during this period of time and has masked the growth that is taking place in the real area that is important which is core retail deposits. We believe that also is beginning to come to an end because they are getting close to zero some of those title company accounts and as a result of that I think we will begin to show good growth in our retail deposits going forward.

Lloyd mentioned it and we think the fourth quarter is going to have another compression of our net interest margin if for no other reason than the fact that the fed has used the primary down or their rate down by a 100 basis points during the month of October and inevitably that will affect our fourth quarter a bit, perhaps not as much as in the past. We don’t have quite as many prime floating rate loans as we have had in the past and frankly we have a number of loans that are sitting on floors and won’t go down as much. But nevertheless it will have some impact on our margin in the fourth quarter as we begin to price down deposits. He was very kind in his comment about some irrationlizations taking place in our market area on deposit pricing and to be very blunt about it, towards the end with our friends at Washington Mutual, they were pricing deposits at levels that were very difficult to compete with and in account all of this in this marketplace to have to raise deposit pricing up to a level of we expect will not be the case on a go-forward basis as that company now has got more stable ownership.

Having said all that, we will turn it over to Mitch at this time to questions from the listeners please.

Question-and-Answer Session

Operator

Thank you sir. We will now begin the question-and-answer session. (Operator instructions) Our first question comes from Matthew Clark with Keefe, Bruyette & Woods. Go ahead please.

Matthew Clark – Keefe, Bruyette & Woods

Hi good morning.

Mike Jones

Hi Mathew.

Matthew Clark – Keefe, Bruyette & Woods

Would you happen to have the – I saw I think a 30 plus day delinquency in figures, those figures in your press release but those were the ones that were on non-accrual, do you happen to have that 30 or 89-day bucket that we might see shortly that is not on non-accrual I guess this quarter relative to last?

Lloyd Baker

Mathew I don’t have it precisely but as you note on the press release there is about $138 million of loans past due 30 days and a $119 million of non-accruals. So, I guess that means that the difference is about $20 million.

Matthew Clark – Keefe, Bruyette & Woods

I am sorry, I thought that whole thing was on – no, you are right, thank you. Then in terms of the non-performers, construction related non-performers by region, can we just get an update I think you had grouped it into another bucket but you happen to have the details on Spokane like you did last quarter in the Columbia basin by any chance.

Lloyd Baker

We haven’t broken it out. Spokane is certainly better than the three major markets that we have noted throughout for no other reason we have fewer loans there but the market there also did not use, we have mentioned a number of times, didn’t get over heated to the same degree and so the number of problem loans there is not nearly as severe either.

Mike Jones

It is pretty immaterial.

Matthew Clark – Keefe, Bruyette & Woods

Okay and your reserves this quarter helped steady at least on a top down perspective but I guess when you look it into the loan detail it looks like your reserves bumped up a little bit in construction and commercial business, can you give us a sense for how we should be thinking about reserving going forward and I guess maybe the reason why the commercial piece has increased as quickly as it has 3.3% of relative loans for example.

Albert Marshall

Well, Mathew as Mike pointed out, we don’t think that the increase in delinquencies and problems is entirely behind us and certainly as the economy slows down you have to believe the effect is going to show up some in the C&I portfolio. That said, we have not identified much of any in the way of spill over from residential lending into our C&I portfolio so it kind of depends on the course of the economy here. I think with our expectation that non-performers are probably going to continue to increase a little bit. It is likely that provisioning is going to be at these elevated levels for a few more quarters.

Matthew Clark – Keefe, Bruyette & Woods

Okay and then lastly we don’t see any mention of the TARP program in your release, can you update us on your appetite for the capital purchase program and whether you have had any of those types of conversations with the regulators and what your appetite might be?

Mike Jones

We have had conversations with regulators and we are frankly working on it right now. And to be honest with you that program available at the banks is pretty compelling. We think that that gives banks that are good to qualify for such as ourselves. They have real opportunity to really do something in terms of just starting some lending that can be done in this particular marketplace because some of our other competitors are not doing that very well right now. So we think we can really do some things and increase lending to win that kind of capital infusion. To be honest with you, we have three or four other smaller banks that have been talking to us that would like to merge with us and frankly we are not going to be eligible for that program, so that would also be helpful on that regard.

Matthew Clark – Keefe, Bruyette & Woods

Is there a timeframe where you think we might – shall we expect to see or hear something in conjunction with when the application process is up on the 14th, is there an expectation in general that we should start to hear if we have not already obviously some announcements at or shortly thereafter that date.

Mike Jones

I admit to you how that process is going to work. It looks to me like if they started with the very largest banks and they are working their way down somewhat by asset size in terms of their frugal process but pretty soon there will get to be a whole bunch of them because of a lot of people our size. So I don’t know how much longer that would take if they get all those individual applications in there but it seems like the process is pretty rapid. So sometime after the 14th we should all know very well where everything is.

Matthew Clark – Keefe, Bruyette & Woods

What is your level of confidence in accessing the top would you say at this stage?

Mike Jones

We are confident we could access it. We are just not certain this time whether or not that is the appropriate thing for us to do.

Matthew Clark – Keefe, Bruyette & Woods

Okay thank you.

Operator

Thank you. Your next question comes from Jeff Rulis with D.A. Davidson & Co.

Lloyd Baker

Hi Jeff.

Jeff Rulis – D.A. Davidson & Company

On the construction side when that has been declining roughly $30 million to $60 million per quarter for really the bulk of this year, is that pace expected going forward ballpark?

Mike Jones

It will be a little bit in the fourth quarter. I think things will particularly pick up in Puget Sound assuming the machine is slow yet from the strike on Saturday but I am going to get it to slow down in the first quarter of next year as it is just not a great time for home buying in the North West. Although and Lloyd correct me if I am wrong, the first quarter of last year was pretty strong of ’07.

Lloyd Baker

Yes, I think that’s true. I think our best guess today is that that pace of reduction will continue as we have indicated. The overhang of inventory and the number of markets is completed, unsold new construction loans is paying down. There is obviously concern going forward as to what might the pace of foreclosure activity might bring to them in terms of pressure on the market but we are still optimistic about clearing that inventory of vertical construction.

Mike Jones

Okay then some new houses will get –

Lloyd Baker

Yes, at a certain point, Mike is right, at a certain point it is going to make sense to begin financing new. In fact, we very much look forward to that because that is the process that will clear the inventory of developed plots.

Mike Jones

Jeff you can really see that as you look at the Tri-Cities in the middle of the State of Washington that market really dramatically slowed down about two years ago and we actually stopped making loans from that market about two and a half years ago and now that market has a lot of construction going on, a lot of home sales going on in that market and things are very strong in the Tri-Cities there right now. I think the same thing is going to be true in Boise here in another six months. I don’t think they will build in this dead of winter but I am going to bet next spring there is going to be a lot of sticks coming out of the ground because they are blowing through their inventory.

Jeff Rulis – D.A. Davidson & Company

End of the year based on your comments, if you were to characterize (inaudible) with Portland, you would put Seattle behind Boise as a recovery and then Portland last?

Mike Jones

You got it. That would be reverse to where I was at the end of June because in my mind Portland has not improved the way I thought it would in the third quarter and there is a very specific reason why things were happening in the third quarter in Puget Sound that bringing the Boeing is right and the impact it has on everybody else.

Jeff Rulis – D.A. Davidson & Company

Okay and then separately and you guys touched on the deposit fees and service charge it has really been on a tear this year in terms of growth on the income out of that line item, any other color beyond, is this just a maturation of the footprint that you have grown, is that a sustainable growth rate in other words?

Mike Jones

Yes. That branch system should be generating deposit growth at the level of that in terms of numbers of accounts and so forth because we have never had a branch system this large for a full year like we have had in 2008 versus prior year just simply because we opened a lot of branches in ’06 and ’07. We think that branch system is now at a size that it ought to very easily support good solid loan growth of this organization through the growth of core deposits. That however has been a little disrupted this year with some of the flows that have taken place of WaMu and frankly because of concerns on the FDIC insurance and the slowdown of the real estate market and we did bank a lot of that of those types of customers with deposits. We are pretty optimistic that that growth can be sustained on a go-forward basis in terms of numbers of accounts.

Jeff Rulis – D.A. Davidson & Company

Okay, thank you.

Operator

Thank you. Your next question comes from Sara Hasan from McAdams Wright Ragen, Go ahead please.

Sara Hasan – McAdams Wright Ragen

Hi guys.

Mike Jones

Hi Sara.

Sara Hasan – McAdams Wright Ragen

The fair value adjustment, it looks like there was something else in that bucket besides just the GSCs?

Lloyd Baker

Sara this is Lloyd. There was as you all probably remember we share value investment securities including the GSC preferred and we also share value our term Federal Home Loan Bank debt and our trust preferred of junior subordinates debentures. However in the current quarter we did not make an adjustment as we indicated. We did not make an adjustment in the value of the trust preferred. We have trust preferreds that we have issued as well as trust preferreds that we have purchased and market information was so unreliable that there was really not a good basis to make an adjustment in the third quarter. As we noted, had we because we have more of the liabilities than we have of the assets and since we have used information that indicated the value of those should have been down further it would have added to our net income but we didn’t think that it was a reliable source of information to base that adjustment on.

Sara Hasan – McAdams Wright Ragen

Alright and on the operating expense side, the salaries and benefits in particular looks to be a pretty sizeable decline from quarter to quarter and again year over year and I am just wondering is that driven by staff reductions or is it a reversal of accruals or what is driving that?

Mike Jones

Two things. One, we are down staff wages of about 5% year-over-year from where we were and that process will continue on a go-forward basis as we kind of right size the number of employees in the organization because of the acquisitions we have had and so forth. And on the other side there are not going to be a whole lot of incentives paid in this place this year for a lack of performance this year and there were some smaller amount of bonuses that were paid in ’07. So, that’s true.

Sara Hasan – McAdams Wright Ragen

And as far as the overall expense bucket goes, is that a sustainable level or you have taken a number of expenses out and we should build from there?

Mike Jones

I think there are a couple of things that are going to happen next year and I don’t know if that number is, Lloyd may, add color to this but it is very clear to us yes the insurance premiums are going up next year. So, that is going to be an increase in expenses. And secondly on a go-forward basis I don’t know what ’09 brings, if it brings more robust business activity and the banks begins to perform at levels of earnings of $30 million to $45 million which I think is unlikely but if it was to do that then of course there would be incentive compensations that would be added to this if not their current – as it relates to the rest of the expenses we are going to be elevated on legal fees as we go through the process of collecting that one-to-four family construction portfolio I don’t know that that would be higher next year than it is this year because frankly I think that we have spent a whole bunch of money this year and there are not a lot more behind us coming. So it is probably there. And then lastly, my best guess is that we can sustain next year in fact the budgeting has been done for next year for no growth in non-interest expenses ’09 over ’08.

Sara Hasan – McAdams Wright Ragen

Okay. On the commercial real estate side, how are you guys feeling about credit there, I noticed your allowance as a percentage of the total commercial real estate portfolio has declined for several quarters now, so I am just wondering have you seen something better?

Lloyd Baker

I think just like a lot of people we have concerns about valuations in commercial real estate and the potential. On the other hand what you are seeing is that within our own portfolio our analytics are not disclosing a need to provide at a high level there. So I think we feel pretty good about our commercial real estate portfolio. We have some concerns about commercial real estate in general. Mike has made the point for a number of quarters about his concerns over cap rates but it is not showing up in the performance numbers and metrics that we have around that portfolio.

Sara Hasan – McAdams Wright Ragen

Thanks. Just one more, what were risk rated assets at the end of the quarter?

Lloyd Baker

About $4.1 billion.

Sara Hasan – McAdams Wright Ragen

Thank you.

Mike Jones

Actually Lloyd showed restraint and did not tell you the exact number.

Lloyd Baker

Not that we are sensitive to that number.

Sara Hasan – McAdams Wright Ragen

Of course not.

Operator

Okay thank you. (Operator instructions) Your next question comes from Tim Coffey with Fig Partners. Go ahead please.

Tim Coffey – Fig Partners

Good morning gentlemen.

Lloyd Baker

Hi Tim.

Tim Coffey – Fig Partners

Just a couple of quick questions, do you have any color on the breakdown in net charge-offs for the quarter, what buckets they are in and what loan types there are?

Mike Jones

They are almost all in one-to-four construction. I think you are wrong but help me to be (inaudible) it is not but it almost all in one-to-four and related lots.

Tim Coffey – Fig Partners

Then the other question was what percentage of your loans right now have floors?

Lloyd Baker

About half of the portfolio is tied to prime and about half of that has floors and then the question is what is the level of the floors and how will they work and there is a lot of issues there. I think Mike alluded to it earlier, the decline in prime is not going to help us any but it may have less impact on asset yields this time than it did back in January, February time frame.

Tim Coffey – Fig Partners

Sure. Okay and do you have any idea just off your head with when these loans of floors originated, what time frame they were originated?

Lloyd Baker

The loans with floors?

Tim Coffey – Fig Partners

Yes.

Lloyd Baker

I think they are probably pretty evenly spread throughout the last 24 months.

Tim Coffey – Fig Partners

Okay, those are all my questions, thanks a lot.

Mike Jones

Thank you.

Operator

Okay thank you. Your next question comes from Kipling Peterson with Columbia Ventures Corporation. Go ahead please.

Kipling Peterson – Columbia Ventures Corporation

Good morning, just a question as to the FDIC increase in the insurance limits, have you anecdotally have been able to see that folks now say they are willing to have $250,000 in your bank rather than $100 here and a $100 there and $50 somewhere else and the same with the unlimited for the business accounts?

Mike Jones

I think a lot of people particularly in our area because of the demise of WaMu, we are very, very sensitive to FDIC insurance limits and the issues and so forth and frankly the IndyMac thing, they had a lot of operations up on our particular (inaudible) and so people were very sensitive about it. So the move to $250 calmed a number of people down. Also rationalizing their deposit accounts by using in the case of a husband and wife both names on the accounts and thereby getting $500,000 worth of insurance or some other thing similar to that has helped people calmed down and realize that they are comfortable. Then lastly, because there is a lot of movement, we have seen in a lot of movement of people opening accounts in our bank that are trying to make sure that they can stay under the $250 or $500 that they have amongst the various banks. To be perfectly honest with you, I am very confident that people have taken money at our bank and put it in other banks because they also wanted that FDIC insurance and the overage they had with us.

Kipling Peterson – Columbia Ventures Corporation

Okay, thank you.

Operator

Okay thank you. (Operator instructions) Your next question comes from Ross Haberman with Haberman Funds. Go ahead please.

Ross Haberman – Haberman Funds

Good morning Mike, how are you?

Mike Jones

Good Ross, how are you?

Ross Haberman – Haberman Funds

You talked about doing some small deals, would you really do anything without any sort of government equity in some form?

Mike Jones

Not as a tangible for our price – well, to be honest with you, it is unlikely, that is the show stopper for us. Even though we have still giving up our stock and half of it is tangible –

Ross Haberman – Haberman Funds

That’s a huge solution even though it is only 50% I guess of what you take down but is that basically the show stopper you might say for you?

Mike Jones

It is. Some of these banks, if you can really stop back and think about the shareholders in some of these other banks, they do not have to worry about protecting capital gains, that is not going to be helpful to them. They just need to sell the stock into another security. So, the need to do tax re-exchanges and thereby use our common stock is not nearly as necessary but the funds from the TARP fund which is really a preferred stock and does not in itself dilute our common shareholders that much is the way to favor that, it is not as dilutive to our common shareholders. I mean if people on the other side would be just as happy with cash as they with shares, they don’t really gain to protect.

Ross Haberman – Haberman Funds

So you would of course prefer to pay them in cash whether they want cash or they want stocks and other stories.

Mike Jones

That’s the beauty that TARP plan to me, that is a facility to open up the loan bucket a little bit and come even more aggressively.

Ross Haberman – Haberman Funds

I got you, okay. I am sorry I got only just one final question, the state of the market in Boise, how is loan demand there and how soft is residential compared to some of your spends and Portland per se?

Mike Jones

The Boise for us is different perhaps than some others and the reason I say that to you Ross is we stopped doing lending there considerably sooner than some of the others did. So our portfolio is further along in the collection process than some others. So for us at this point Boise has become – we still have $16.5 million of non-performing there but it is not that big of an issue to us. Having also said that, as you look at people and neighborhoods in that marketplace there are homes we (inaudible) Boise and as a result of that they are reducing their vertical inventory. So I think it will be among the very first markets to recover. They didn’t however get (inaudible) of additional 3000 people and even in a city with an SMSA of 500,000 they will feel that for a period of time.

Ross Haberman – Haberman Funds

Got it. Okay thanks, best of luck.

Operator

Thank you. Gentlemen, we have no further audio questions at this time. I would like to turn the conference back over to Mr. Jones for any closing statements.

Mike Jones

Mitch, thank you very much and thank you all for taking the time to listen to kind of a not very good story. We are optimistic that things are getting better and will get better. We try to give you both sides of it as we see it in the various markets we serve and we believe as again I want to reaffirm we think that we are not at the peak of non-performing assets but we are not that far away from where it will be and we expect that to take place in the fourth quarter and or early in the first quarter of next year. So we are optimistic that we are on top of where we think we need to be to resolve the issues and go forward and we really think there are some terrific opportunities in the Pacific North West for expansion of our banking franchise if for no other reason just to going out and be able to bank some customers some other people who at this point are choosing not to. So we look forward to talking to you at the end of the fourth quarter and again thank you very much for listening.

Operator

Ladies and gentlemen, this concludes the Banner Corporation third quarter 2008 conference call. If you would like to listen to a replay of today’s conference, please dial 03590 3000, pass code 11119693. We would like to thank you for your participation and you may now disconnect.

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