Banner Corp (BANR) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Banner Corporation third quarter 2005 conference. (Operator instructions) I would now like to turn the conference over to Mr. Mike Jones, the Chief Executive Officer for Banner Corporation. Please go ahead, sir.

Thank you all for joining us this morning for the third quarter conference call for Banner Bank and Banner Corporation. I have here with me Al Marshall, the Secretary of the Corporation, and Mr. Lloyd Baker, who is the Chief Financial Officer of the Company. We would like to start off with our proverbial paragraph that we have to read at each call. Mr. Marshall, would you please read that?

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, 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 today and a recently filed Form 10-Q for the quarter ended June 30, 2005.

Forward-looking statements are effective only as of the date they are made and Banner assumes no obligation to update information concerning those expectations.

Thank you, Al. Now I would like to have Lloyd Baker give you a verbal review of the press release and some other comments, and then I will have some comments at the end of that. Lloyd.

Thank you, Mike. Good morning, everyone. Thank you again for joining us. As usual, I am going to assume you have the press release, have read it, my comments will be fairly brief as a result.

The third quarter results for Banner Corporation reflect what we have been talking to you about for a number of quarters now. Specifically, we are working hard at building and growing our branch network, our delivery systems and our capabilities. In the process, we are adding staff and incurring expenses, but we are also adding significantly to our customer base, growing loan and deposit totals, substantially increasing top line revenues and producing solid and improving net income.

As the press release notes, net income for the quarter was $5.7 million or $0.47 a share, which represents a 10% increase over the same quarter a year earlier, and actually a 13% increase over the June quarter previous, on a linked quarter basis. This brings our year-to-date results to $15.4 million or $1.29 a share compared to $14.1 million a year earlier.

Of course, driving this earnings improvement was loan and deposit growth. Both loans and deposits increased 19% compared to a year earlier, and importantly deposit growth continues to be centered in transaction account categories, which as we note have increased by 33% over the past year, that is $280 million worth of transaction account growth in the past year. And importantly in the quarter just ended, transaction account growth was $102 million.

Loan growth slowed a little bit in the quarter compared to the pace it was running in previous quarters, we were up $50 million for the quarter in loans, but as I noted, that is a 19% increase over where we were a year earlier. Loan growth continues to be centered significantly in the construction, land development area for one to four family loans, but on a year-over-year basis, growth in all areas is meaningful. As I noted, growth is driving earnings.

This growth has been combined with a relatively stable net interest margin to produce just over $28 million in net interest income for the quarter. That is an increase of $3 million compared to the same period a year earlier, and net interest income on a nine-month year-to-date basis is now up by $8.8 million over where it was a year earlier.

As I mentioned, the margin has been stable, remains very stable. We had a margin of $3.77 in the quarter just ended, that is up two basis points from the previous quarter, down two basis points from the quarter a year earlier. However, I think that stability in the margin masks some very meaningful progress we are achieving in changing the balance sheet mix, particularly on the funding side where as I mentioned, transaction accounts, including non-interest bearing accounts, continue to show significant growth.

The masking factor, of course, is that as interest rates in the market have been moving up, that does put pressure on our wholesale funding sources. While we are growing our transaction accounts and core deposits at a steady base and paying down those wholesale funding sources, still there is interest rate pressure on those, in some of the wholesale asset positions that were funded by those have not been as sensitive to rising rates.

The other factor that is affecting the margin stability a little bit here, or masking the progress we are making, of course, is the federal [inaudible] stock dividend that we have mentioned for a number of quarters. On a year-over-year basis, the fact that we are not accruing the dividend this year has taken about five basis points out of the margin by comparison to a year earlier.

So as I said, the margin is stable, but underlying that margin the core business segments are actually improving and reflect the balance sheet growth and changes in the mix that I mentioned.

On the other sources of revenue for the quarter, we continue to have increasing deposit fees, reflecting growth in deposit totals and also reflecting continuing improvement and success with our merchant services programs and also some stronger ATM debit card interchange fee income.

We also had a solid quarter for mortgage banking profits, in line with where we have been most of the year, ahead of where we were a year ago. Offsetting those revenue gains was a slight decline in loan servicing which, on a year-over-year basis anyhow, compared to the quarter in September a year ago where we had some exceptionally strong prepayment fee revenue in that period of time, but loan servicing revenues continue to be in line with our expectations and have improved over the June quarter.

Expense growth pretty much speaks for itself. As I mentioned, we are adding locations, we are adding staff, we are adding capability. That is all reflected in the expense growth as is our continuing commitment to marketing and advertising, all designed to grow the core franchise and ultimately improve the bottom line through a much improved net interest margin.

The other significant piece of news in the press release, of course, is asset quality. The asset quality numbers continue to improve by comparison certainly to a year ago, but even by comparison significantly to just 90 days earlier. As a result of that improvement, non-performing assets were down to 44 basis points, the ratio to total assets, net charge offs were just slightly over $500,000 that allowed us to hold our loan loss provisioning at $1.3 million for the quarter, and certainly the asset quality sections of this report are ones that we are now pointing to and feeling very good about.

So the results for the quarter were solid, they continue to show progress, they reflect what we have talked about for some period of time, and I think with that I will look forward to questions. Before we open it up for questions, I believe Mike has a few things he wants to say.

Thanks, Lloyd. We are pleased with the progress that is being made inside the Company. I think we feel good about the direction of where we are changing the deposit mix in the portfolio and becoming much less reliant on wholesale funding for parts of our operation. At the end of the day, that is extremely important for us to get our performance metrics into what I would call a normal performance for a commercial bank. We will get there, we are in the process of changing and I can see it happening day by day in the organization.

Just by way of refreshers, since we last talked to you at the time of the third quarter of ’04, we have opened 11 commercial bank branches throughout our territory, and those branches have done a nice job of contributing to the growth of our deposit portfolio, changing the mix of that deposit portfolio, and at the end of the day providing the prospect of some very stable funding for our deposits that we need to make this a good, commercial bank.

Just by way of refresher, because we have been opening branches over the last couple of years, three years, all of the branches that were fully opened in 2004, 2003 and 2002 are now profitable, without exception. The branches that were opened in 2005, fully opened in 2005, there are eight of those that are not profitable, one has turned profitable since it has opened up. That is important for us, because for this to work we need to make those branches not be a continual drag on earnings, because we have additional branches that we would like to open over the next several quarters and into 2006 and 2007.

So we are enthused about the reception we have received throughout the communities that we are serving. We are feeling good about our asset quality. The growth mode that we are in, the charge-off levels and the past due levels, which is less than one-half of 1%, are probably as good as it is going to get. Our level of non-performing debt, they can come down a little bit more as we go forward.

So again, we feel good about where we are going, we recognize we have a long ways to go, but we think we are on the path towards getting there. So with that, I would like to open it up to questions, Don, if we could please.

Absolutely, sir. (Operator instructions) Our first question is from the line of Louis Feldman with Hoefer and Arnett. Please go ahead, sir.

Good morning, good morning, gentlemen.

Hi, Louis.

A couple of questions. Can you touch on the rates you are paying for money market, I saw an advertisement here in the Argonian where you were offering a 4% money market yield. My assumption is that those costs are significantly lower than what you are finding from wholesale. Is that a true statement?

They are lower, I don’t know that I would go as far as to say significantly lower at this point, Louis, but I think that it is important to understand and I believe we have made this point on previous calls, we are using some premium pricing at new locations only to get customers in the door, and we are linking those premium accounts with checking accounts that are priced at standard levels.

It is a strategy we have employed on a number of new branch openings to date, and we are finding that it is more successful than using premium pricing on a certificate of deposit, for instance. We are finding that if we get customers in the door and activity building around those branches we are able to move that cost of funds down over time, and move those branches to profitability at a quicker pace.

It takes time for that strategy to prove out, obviously. So the rate is acceptable, it is not significantly less than wholesale.

Okay. Second off, your cash is up, is that a reflection of the trust preferred that you issued?

Not really a reflection of the trust preferred, Louis, it is a reflection of timing on some deposits late in the month, because all else being equal, we would use that trust preferred to either fund assets other than cash – that actually being Fed funds at month end, or pay down some of our other wholesale funding sources. So it is just a timing thing there on the cash balance.

You mention in the press release the possibility of a share buyback with those funds from the trust preferred also. How likely is that?

I think it is one of several things we mentioned as a possibility. Whether we do – the board has authorized us to buy back up to 100,000 shares of our stock if we would like to do that, and we certainly have the cash and the capability of doing it. It has a lot to do with other opportunities that we have.

I think the point we would like to make about the trust issuance is that it does provide us with a lot of flexibility with respect to a number of strategic alternatives.

Okay, thank you.

Thank you, Mr. Feldman. Our next question is from the line of Jim Bradshaw with DA Davidson. Please go ahead.

Good morning.

Hi, Jim.

Hey, Lloyd, when did you get the [Trupp] proceeds in the bank? How long were they impacting the margin this quarter?

You are testing my memory, Jim. It was about mid-September, I believe.

Sometime mid to early September.

Mid to early September.

Okay, so it didn’t have much of a margin impact in the quarter I guess?

No.

What is the first call date on the other [Trupps] you have out there?

Two years, isn’t it?

Two years from now.

Okay, okay. Mike, you mentioned 11 new offices in the year. How much has head count changed on a year-over-year basis, and are you expecting much more in the way of new hires in the fourth quarter?

We have two new branches that we are going to open in the fourth quarter, Jim. One is in Burlington, Washington, one is in Pascoe. The Pascoe staff is already on board and frankly, most of the Burlington staff is also on board at this point in time. Those are the only two branches we will be opening in the fourth quarter. The fourth quarter will not have much growth at all in head count.

Okay, good. On the commercial real estate and multi-family categories, both were sort of flat to down this quarter. Is that a function of normal production, but accelerated pay offs? Maybe you can give me some color in those areas.

We have has some fairly large pay-offs in those areas, but it is also a conscious effort on our part not to be doing a lot of term financing.

And last for me then is in the ag area. Anything that you would say would be unusual in the fourth quarter, or should we see that ag number drop, like normal?

The ag number will drop in the fourth quarter. It better drop in the fourth quarter, they are supposed to pay us back when they sell their crops. But in general, as you know, with the way crops are now in the market, it doesn’t drop like it used to 15 years ago. So it will be a period of time, and actually well into the first quarter before you see an appreciable drop on those totals. And then, soon thereafter they start borrowing money for their next year’s crop.

One of your competitors talked about some potential problem loans in their potato crop area. Are you noticing anything like that, or do you have much in the way of potatoes?

We have some potatoes, but the growers we have, we are very comfortable with them and they have had a good year. Not all of that is in, as you know, at this point. But it is close. The ones that would be more of concern to me right now is the price of wheat is not very good. I think our wheat farmers are going to suffer.

Great, thanks very much, I appreciate it guys.

We now go to the line of Joy-Ann Feld with Sandler O’Neill for her question. Please go ahead.

Good morning.

Good morning.

If you expect to open two more branches in the fourth quarter, how many do you expect to open in the first quarter and throughout 2006?

In the first quarter of 2006?

Yes, for the first quarter and throughout.

Well in the first quarter we would be hopeful of opening a branch in Twin Falls, Idaho. Actually it is a relocation of a staff that is from a different location, but into a full standalone service branch operation. And I believe that will be the only branch we will open in the first quarter.

In the second quarter, we have two additional branches that could open in the Boise area and I think that is the only ones there. In the third quarter we would be hopeful of opening one additional branch in the Boise marketplace, and if we are fortunate, maybe one in the Federal Way area, so that would be a total of five next year.

Okay. And then also, could you give us a little more color on what you expect the provision and NCOs to be in the fourth quarter?

Well, the provision is at a point where it is going to depend a little bit on loan growth, because we are not really wanting to decrease the reserve as a percentage of outstanding loans in our portfolio. The non-performing, we actually have a very good chance to have it drop significantly in the fourth quarter again, but that requires a couple of transactions that are in the queue that they need to get executed for that to take place.

So probably on a conservative basis, I am going to guess that non-performing are going to be down a couple million dollars in the fourth quarter.

All right, thank you.

You bet.

We now have a question from the line of James Abbot with Friedman, Billings, Ramsey. Please go ahead.

Good morning. A quick question on two things; pipeline, any color that you can provide on the pipeline would be helpful here, as far as loan pipeline. The second question is on the expense outlook, to try and get a handle on whether you are expecting expenses to be up in 2006. I mean, I am sure they will be up a little bit, but should we be looking at something in the single-digit levels or the double digit levels, as you go through these expansion plans?

Well, first the pipeline. I just had a meeting with a number of our senior lending people yesterday, and the pipeline is full and we could see some significant growth take place in our loan portfolio over the next few months. Frankly, the economy here in the Pacific Northwest and it looks like it is going to get stronger as we go forward over the next several quarters, so I am pretty optimistic about what is going to happen in the loan growth area on a go-forward basis.

As it relates to expenses, I am guessing that we want to try to keep our number below a double-digit number for an increase next year, and I think we will be fairly successful in doing that.

It’s fair to assume it would be on the higher end though, because of health care benefits and things like that?

It will not be significantly below the double digit.

No.

Because you have to remember, all of the additions that we have made this year have not been there all year long, and so next year they will have a full impact on the expense plus any new locations.

That is a good point, let me clarify maybe. If I looked in the third quarter of ’05 to the third quarter of ’06, that is kind of the level that I am looking at and saying double digit or single digit, because I know that you have built a lot out during the first three quarters of this year. When you say single digits, high single digits, is that full year over full year?

Yes.

Okay, so the third quarter to third quarter of ’06 might be mid-single digits, then?

Well we do have those two branches that are going to open in the third quarter of next year, if the construction goes as we think it will. Are we going to be at 5-6%? No. Are we going to be at 7, 8, or 9%? Yes.

I appreciate the insights there. And also, just a follow up on the pipeline. How much of that is construction oriented at this time? Is it over 50%?

Yes. But, that is not to say that our C&I loan portfolio, the prospect list that I looked at yesterday and the probability of closure on those particular loans is also fairly large for us at this point in time.

Now, I need to tell you, there is a lot of distance between the cup and the lip on getting those closed, and there is competition for all of those credits and frankly, we are not willing to do some things that some other banks currently are doing. So we will see how well we do on closing all of that.

Just a little bit – I don’t know if you have seen the housing data from today, but it looked like nationally that the inventory levels have built to a fairly significant rate – apparently it is at an all-time high for 40 years, but on a relative basis about five months worth of supply nationally.

How should we be thinking about your exposure to that sector? Perhaps you are more insulated because of the growth in the Seattle area or whatever. Can you give us some insight into that?

Well the two markets we do the preponderance of our construction lending are in Puget Sound, which is the Seattle area, and in the Portland marketplace. We believe both of those markets are going to have robust economies through the next year. Frankly, we are not totally convinced that interest rates are headed up a whole lot further, and are going to stay up there even if they go.

We tend to build in what we call, or finance building in the affordable home price range. Now that number is a lot larger than I used to think of it being, but we aren’t building in the high end area very much at all, particularly in the [inaudible] they are in. So I think we are going to have an excellent year in home construction next year. Not good, excellent.

Okay, thank you very much for your insight.

We now have a question from the line of Ross Haberman with Haberman Funds. Please go ahead.

Good morning, gentlemen, how are you today? Nice quarter.

Thanks, Ross.

Could you give us, sort of a scenario, because numerous of your competitors have been echoing this, as you say your premium deposit pricing strategy as you say, in selected markets. Could you just give us a scenario, Lloyd, what you are seeing as the effects of that and what the cycle is in terms of pricing and when do you sort of lower the prices? At what kind of deposit levels do you look to sort of begin to lower those premium prices?

Well the premium pricing that we have put in place on those money market accounts have been with a one-year cycle in mind. Now, in the timeframe that we have been using that strategy, we have seen market interest rates increase, and so moving – the expectation is that we move those down in line with a higher level of market interest rates when we do it.

I think I have made this comment before, if not today in previous conferences, but it is about an 18 month strategy before you know how really successful it has been. That said, one of our very most successful openings was an office in Hillsboro, Oregon where we employed exactly this strategy and it is down in the middle to lower half of our branches in terms of deposit costs today.

So it is an 18 month cycle, it is a 12 month commitment on the premium pricing. It is influenced a lot by what is going on in the market. And it totals, I guess is the other part of your question, in what we are seeing in these locations is we are driving these to $25-30 million branches fairly rapidly.

And in the case of [Tamar] it is a classic example of what we have done. That branch opened in March of ’04, it currently sites at about $49 million in deposits and it broke into a profit in 11 months and now it is amongst our more profitable branches in the system. I am glad to see that our competitors are paying attention to what we are doing and I like that, but the fact of the matter is, when we have the level of wholesale funding we have in this balance sheet, that kind of pricing is still cheaper than can be financed at wholesale.

I am assuming you are doing similar types of deposit strategies in Idaho as well?

We are and we have.

And is it as effective in terms of bringing in the deposits there as well?

A prime example of that is we opened a branch, the first branch we opened in Boise Idaho was at the first of September of this year, which is now 45 days ago and that branch just went by $28 million in deposits. That branch has a chance to break into a profit some time in the six to eight month timeframe.

Now, you can do it the other way, but you are going to have an unprofitable branch. Usually somewhere between 20-36 months, and we just feel that this is an exceptionally good way for us to do it. It particularly works well in a rising rate environment.

Looking at the spreads and the yields in your press release, it does look like you are applying that high price strategy on the loan side. Could you tell us a little about your pricing strategy there?

Well the level of our loan yields in our portfolio, which has a lot to do with what is the mix of the portfolio is, there is only one of what we think as our peers in the Pacific Northwest that has higher loan yields than we do, but that has a lot to do with the mix of what we do versus some others that are more pure, C&I lenders.

Who is that, if I may ask?

The C&I lender?

The other one who has as robust yields as you do?

Frontier.

Okay. And just one final question, Lloyd, could you give us the level of interest rate only loans you have in the portfolio, and what are your thoughts about that category of loan at the moment?

Well aside from construction and C&I loans, but if you are looking at residential real estate, we have none.

None, okay.

We don’t like the product.

Thank you, that is what I was hoping for.

Nor do we have the hybrid arm loan, with interest-only for five years.

Okay, thanks guys. Nice quarter.

(Operator instructions) We now have a follow-up from the line of Louis Feldman with Hoefer and Arnett. Please go ahead, sir.

Yes, Lloyd or Mike, can you comment in terms of what you are seeing in C&I line usage, your existing lines?

Well sure. We have a lot of commitments out there that aren’t being drawn on, and I don’t know whether it is that some of our customers have been very profitable and don’t need our money – there is some of that – but there is also, we just have not seen the usage that we would normally expect to see on existing lines that have been in place.

Okay, so that remains low.

Well lower than I would expect it to be, I’ll tell you.

Lower than our expectation. We have seen a little bit of that in the ag lending as well where farmers seem to be pretty well-heeled. I was thinking about that when Mike was talking about the pay downs in ag. Because the ag balances didn’t grow quite as much as we expected, they may not pay down quite as much as we expect, either.

Well we also, Louis, just to show you how it has been here lately for these people, this has been the best of times for a lot of people. We have got homebuilders that we have financed for 30 years that take one draw to take the lot and the next time we talk to them, they are paying off the loan because they have built the house and sold it. Their balance sheets are flush right now, and they have got lots of liquidity.

Which is why they are not drawing on their lines.

Exactly.

Okay, thank you.

We now have a follow-up from the line of Jim Bradshaw with DA Davidson. Please go ahead, Mr. Bradshaw.

Mike or Lloyd, with the older 40 branches, are there things that you are doing or you have learned from the new branches that you are going back and redoing at those older offices, to supercharge some of the growth there too?

We are, Jim, as much as we can do. Some of the branches that are in this system that have been there for a long time were not designed to be transaction branches. We have, in many of the cases, limited drive up capabilities, virtually no ATMs and sometimes scarce parking. So we have moved a few of those. You will notice every now and then we comment on moving a branch from one location to another.

We have improved as much as we can, put ATMs in them and fuse drive-ins wherever we can get them in. We have upgraded the branch internally inside so it looks better, it is more inviting. We have turned them more into a sales oriented type of branch with the type of things in the branches from flat screens to sales materials that appear throughout the branch. They look a lot better than they did three or four years ago, and I think we have better people in there. We are spending a tremendous amount of time in incenting employees to sell within those branches, and it is increasingly standing us in good stead, and we have changed some of the people that we have had in those branches. Instead of having maybe the traditional people that are looking to just give you a CD, we actually have people who want to sell product.

So we are making progress, but we have a long ways to go with probably 20 of those branches to get them up to where they should be, but that is going to take a long, long time to do that.

I appreciate it, thanks again.

Our next question is also a follow-up from the line of Ross Haberman with Haberman Funds.

Thanks. Gentlemen, Lloyd, could you just go over finally numbers of branches planned to be opened over the next 12 months?

Over the next 12 months, I think we touched on that a minute ago but I believe it is three in the coming quarter, two or three in the coming quarter; two in this quarter.

We think one in the first quarter, Twin Falls; two in the second quarter, which will be in the Boise area; two in the third quarter we think, one is a little iffy – one in Federal Way, Washington and the other one in the Boise area. At this point, we don’t have a fourth quarter branch.

Okay.

But at the pace we have been finding locations, working to find locations, it would not surprise me.

Any plans to shut down any of your less optimal branches or relocate them?

There are plans to relocate some of them. We don’t have very many, what I call small branches. I don’t think we have more than five – exclusive of the new start-up branches, I don’t think we have five branches in our system that have less than $30 million in deposits, and they are all profitable and at varying levels, to your point. But we would move some of those because we think we could take some – we have an $80 million branch in Bellevue, Washington; with a better location that would be $125 million branch. It is just not very convenient for our customers.

So we are looking to do things like that, but we at this present time do not have unprofitable, older branches that we would be looking just to purely close down.

And just Lloyd, your expectation on the margin, given the rising flat yield curve?

On the margin? I continue to be optimistic, first of all, that we are not exposed significantly to changes in the yield curve but that we will have improvement driven by primarily the funding mix. But that will take a little time, and it also – my standard caveat is it depends on what the competition does on pricing as well, because that seems to be a significant issue out there always, on both sides of the balance sheet. But I am optimistic on the margins improving modestly, driven by mix, not a lot driven by the level of interest rates.

The slope of the curve doesn’t help, your point is right on there.

Okay. Again, thanks again. Nice numbers.

We now have a question from the line of Louis Feldman with Hoefer and Arnett. Please go ahead, sir.

The tongue in cheek question, what would you do with Point Roberts?

The fee income from Point Roberts covers the entire overhead of the branch.

There is not much you could do to improve it or relocate it.

Actually, we are expanding it.

You are expanding it? Okay, that I can see.

I am sure [inaudible] would shoot me for that, but –

It has about $18 million in deposits and the fees off that deposit portfolio cover the entire overhead of that branch.

Well it seemed, when I visited it it seemed shoe-horned into the corner of that building.

It is.

And when you say expand it, I think you are talking about a fairly minimal amount of square footage.

400 square feet.

400 more square feet, yes.

Okay. The serious question is, given all of these branch expansion plans, how easy, how difficult are you finding it to attract lenders to build these branches around, to help them get profitable?

The lending teams are in place, they don’t necessarily go with the branches. You will notice that most of these branches, almost all of these branches, are in metropolitan marketplaces where we have lending teams.

So essentially you are spinning off or splitting off people that are already in one branch to another branch?

No, we are not putting senior, serious lenders in these branches. What we are putting in is deposit gatherers.

Okay, so you are not looking at the – your profitability metric is different in terms of the fact that you are not specifically looking to grow loans from these new branches, you are looking to grow deposits to fund the loans in the other locations?

That is correct, but also to provide distribution for our customers that are both borrowers and depositors throughout those metropolitan marketplaces. Now there are exceptions to that and I would be remiss, Louis, to mislead you in that regard. We have two in the Puget Sound area. We have a lending team in Kent simply because the existing lending team that was closest to them was in Bellevue. Well, it is 40 minutes from Bellevue to Kent to do anything, so we do have a lending team there and we have done the same thing up in the Linwood area, which is about a 40 minute drive from Bellevue also.

But in general, Mercer Island, and Evergreen Way and Edmonds and all of those kind of locations are deposit gatherers and distribution points for customers.

So the same would be true for Hillsboro or at Tanisborn?

No, that one actually has some lenders in it, but we started off and built it based purely on building the deposit base, and now we have begun to take advantage of, frankly, some real estate lending opportunities that are out in that market. That market, Washington County, is just on fire.

So the question remains, how easy or hard are you finding it to attract commercial lenders?

Easy, lots of people like to work for us, and that is a turnaround from three years ago.

Okay, thank you.

We now have a follow-up question from the line of James Abbot with Friedman, Billings, Ramsey.

I apologize for the follow-up question, but did you give us the construction payoff levels during the quarter? What I am trying to do is build a sensitivity analysis, I guess. If construction loans were to slow down as far as their payoff rates, how would that affect your margins?

I don’t think I can answer that question, we can get back to you on that one but I can’t answer that question right off the top of my head.

The effect on the margin, first of all we do have a lot of payoffs in the construction loan arena, as Mike pointed out, houses continue to sell at a rapid pace. For the effect on the margin, I don’t know whether it would be positive or negative, because you move both the denominator and the numerator in that equation.

We will give you the payoff number, we will call you back with that number.

Okay, thanks again.

(Operator instructions) Gentlemen, at this time I show no additional questions. I would like to turn it back over to you, Mr. Jones, for any closing remarks.

Well again, we appreciate you all taking the time from your busy schedules to listen to the third quarter results in the Banner Corporation and Banner Bank. We feel better about where we are, we recognize we have a long ways to go to be a very good bank, and we are going to work hard at it. I love the fact that some of our competitors are actually starting to pay a little bit of attention to us. So with that, we will look forward to talking to you in the future. Thank you very much.

Ladies and gentlemen, this concludes the Banner Banking Corporation third quarter 2005 conference call. If you would like to listen to a replay of today’s conference, please dial 303-590-3000 and enter the access code 11040901 and the pound sign.