BANR

Banner Corporation (BANR)

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Banner Corporation (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

Presentation

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.

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