Banner Corp (BANR) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Banner Corporation's fourth-quarter 2007 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded today, Wednesday, January 23, 2008.

And now I would like to turn the conference over to Mr. Mike Jones. Please go ahead, sir.

Thank you, Nicole, and thank all of you for joining us at this early time. We appreciate the earliness of the meeting. There are some things we needed to do individually, so we had to have the call a little bit earlier in the day.

Sitting in here with me today is Lloyd Baker, our Chief Financial Officer, and Al Marshall, the Secretary of the Corporation. We'd like to start off first with our disclaimer statement, so Al, would you please read that?

Yes. 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 yesterday and our recently filed Form 10-Q for the quarter ended September 30, 2007. Forward-looking statements are effective only as of the date they are made, and Banner assumes no obligation to update information concerning its expectations.

Thanks, Al. Now I would like to have Lloyd kind of give a narrative overview of the year 2007 and the fourth quarter. So, Lloyd?

Thank you, Mike, and good morning, everyone. Like Mike, I would like to thank you all for being here with us, especially those in the Pacific Time Zone, where it's only 6AM.

I think it would be fair to say that the fourth quarter was pretty difficult and pretty disappointing to us. However, before I focus too much on the quarter's results and challenges, I want to acknowledge just a few of the fairly impressive accomplishments that Banner achieved this past year.

At 12/31/07, the Company had grown to $4.5 billion in total assets. That reflects a $1 billion increase year over year. We increased net loans by $832 million or 28% to nearly $3.8 billion, and matched that growth with deposit growth of $826 million, a 30% increase.

We added 26 locations to better serve our customers and to create additional revenue-generating capacity. We also completed a very successful data processing conversion and integration project with the former F&M Bank in Spokane, Washington, and we are very far along the way in looking forward with similar success with respect to the integration of North Central Washington Bank in Wenatchee.

We grew our annual revenues by 20%, reflecting the increased size in the Company, and while net income growth did not reflect the same level of success, I think it's fair to congratulate our employees on their efforts for creating this much-expanded franchise.

We are calling you a little earlier than normal this morning because Mike and I are on Mountain Time here in Boise today, where, while it is very cold, contrary to what the Federal Reserve might think, the sky is not falling. In fact, people were getting up and going to work here in record numbers this morning, as they are in Portland, Oregon, and Puget Sound region and other Pacific Northwest markets where Banner Corporation has offices.

I bring this to your attention because in addition to noting some of our accomplishments for 2007, I want to remind you and ourselves how fortunate we feel to be located in this corner of the country, where the economy is still relatively good.

So back to the disappointments of the fourth quarter -- what happened? We had more contraction in our net interest margin than we had anticipated, as declining interest rates were particularly hard on our asset yields, while intense competition for deposits kept the cost of funds elevated.

We also experienced increased delinquencies in nonaccrual loans, which added pressure to the margin and required that we provide for loan losses at a slightly higher level than we have in prior periods.

And we had a higher level of operating expense than we expected, as our efforts to integrate our three acquisitions and de novo expansion were more costly and a little slower than we had hoped.

But again, I don't think that -- I don't want to dwell only on the disappointments. There were a number of very positive things during the year. So what I think I would like to do, though, is turn to the income statement, the financial statements, which begin on page 5 in this morning's press release, and just highlight a few of the numbers that bring some of those trends that I mentioned to light.

So again, looking at the income statement, obviously the effects of lower interest rates were obvious in the fourth quarter. As you look at interest income on earning assets, particularly on loans, loan interest was $3 million less than it was the prior quarter, but for the entire year was about $53 million higher than a year earlier.

Deposit costs, while also declining in the fourth quarter, were elevated. As I mentioned, competition was particularly challenging in a number of our markets on deposit pricing and, as you all know, deposits tend to lag in a declining interest rate environment.

That pressure on pricing resulted in a margin contraction for the quarter to 3.82% and an actual reduction in net interest income of about $2 million, but again, looking at the year-over-year numbers, an 18% increase in net interest income.

Other revenues were actually fairly encouraging. Deposit revenues continue to reflect the expanded number of accounts and size of the distribution network, and that's particularly evident if you look at deposit fees that were up 45% over the prior year. They did level out some in the fourth quarter. I think that was primarily a seasonal issue, as was the decline in our mortgage banking revenue in the fourth quarter.

But again, I think importantly, year-over-year mortgage banking revenues, notwithstanding a very difficult housing market, were higher by about 8%, as we seems to be capturing a little more market share in what was clearly a softer market.

So as a result, revenues, as I mentioned, up 20% -- I think I mentioned it; if I didn't, it's in the press release -- were up 20% on a year-over-year basis, but reasonably flat compared to the third quarter.

On the expense side, interestingly, in the third quarter, while, as we've noted, we were somewhat disappointed that we didn't have better performance on the expense side, it's important to remember that we did bring the North Central Washington Bank group on very early in the fourth quarter. That added about $800,000 to total expenses during the quarter.

Excluding the effect of that acquisition, expenses were down. Personnel costs in particular were down. But as we noted in the press release, we had hoped that that would be a little more so than it was.

For the entire quarter, then, we reported earnings of $12 million. Now, that obviously includes the fair value adjustments, which were about $6 million during the quarter, certainly more than we had anticipated when we decided to put ourselves on the fair value accounting treatment earlier in the year. But at least they are going in the right direction.

Looking, though, at recurring income, which is the measure that we're really more focused on, we did in fact have a decline in recurring income during the quarter, for the reasons that I noted.

I guess the one that I skipped over here in looking at the income statement was the provision for loan loss, which was higher than prior quarters, but probably not anywhere near as high as some might have expected, as we continue to feel pretty good about the condition of the portfolio.

If we flip over to the balance sheet, just a couple of items. I've already mentioned the growth in loans, that up 28% year-over-year growth in loans. In the fourth quarter, loans were up about $187 million over the third quarter. About half of that, a little less than half of that came in from the acquisition of North Central Washington Bank in Wenatchee.

But I think what's important and what was really quite encouraging to us in the fourth quarter was growth in some of the nonconstruction lending categories of loans. We saw nice growth in commercial real estate, and particularly good growth in business loans, which were up $65 million, and ag and one-to-four family were also up.

So while construction has leveled out at this point in time, other areas of loan production seem to be kicking in. The growth in business loans, interestingly and encouragingly, significantly occurred in the month of December and is not really a reflection of the acquisition of NCW, but it is a reflection of a pickup in activity that we saw from a number of different locations throughout our network.

On the deposit side of the balance sheet, in the fourth quarter, I mentioned intense competition. That certainly was a factor in what was slower than we have normally experienced growth in deposits. We also, as we noted in the press release, allowed about $55 million of brokered CDs to run off as we found there were more attractive ways to replace that financing during the quarter.

The other significant event, I guess, well, the significant change in the balance sheet during the quarter is we did show an increase in federal home loan bank borrowings as we had, as I mentioned earlier, some fairly strong loan growth, as well as a few investment opportunities that caused our securities portfolio to increase. At the same time, we chose to price our deposits down just a little bit, and so that did result in the need to borrow just a little. But year-over-year growth in the deposit portfolio of 30%.

If you flip over to page 7, there's a few additional statistics that I would point out. I have actually talked about the loan growth in the nonconstruction area in particular. If we look at year-over-year commercial business loans, up 49%, and total loan growth at 28%, while construction lending slowed down significantly.

We did, as you can see also on page 7, we did experience a pickup or an increase in nonperforming assets, which increased by about $21 million during the quarter. As we've noted in our press release, that increase was largely centered in the construction and land development area.

While we are never happy to see an increase in nonperforming assets, I think that in light of the challenges and the slowness in certain housing markets, to see a $21 million increase on a $1.1 billion portfolio of construction and development is really not nearly as concerning a number as some might suggest.

Provision for loan loss we have touched on, and again, I would make the point that the provision at $2 million was in excess of net charge-offs of $1.7 million for the quarter.

In the deposit area, just a couple things to point out on the year-over-year statistics. I think it's important to note, non-interest-bearing accounts up 46%, total transaction accounts up 43%, and as I've mentioned, year-over-year totals 20% higher than normal -- or higher than a year ago, excuse me.

I've touched on the margin. Obviously, margin compression is pointed out on page 8 at about 28 basis points' worth of compression during the quarter, and about 12 of that came as a result of the effects of nonaccruals, and then again, the effect of lower asset yields and deposit costs declining at a slightly slower pace.

So with that, as I said, I think that the quarter was challenging, and the quarterly results somewhat disappointing, but year over year, some fairly major accomplishments at Banner, and certainly laying the foundation for a much more successful company as we move forward.

With that, Mike?

Thanks, Lloyd. Thanks for the overview that you gave everyone relative to the fourth-quarter results and the year's results.

A few more comments I'd like to make in the area of our nonperforming assets and so forth, so that we get some background to where we are. First of all, almost entirely the buildup that took place in nonperforming loans was in the area of one-to-four construction and A&D loans. The rest of the portfolio remained about at the same level of nonaccruals as it was in the past. We had some credits that moved into those areas and some that moved out during the course of the quarter, which is the normal course that we have.

Of the $1.7 million, in round numbers, of charge-offs we have in the fourth quarter, about half of that related to credits that were in the one-to-four construction and A&D area. We have, during the course of the last five or six months, looked at every real estate project we have in the bank. We have looked at them personally. We have seen the property, we have worked with the borrowers and we understand where they are in this whole process very well.

With very, very few exceptions, the borrowers we have inside that do business with Banner Bank have been doing business with Banner Bank for a lot of years. We know the people very well. We know the integrity of the people that are there. We do not do business through mortgage brokers. That has been very helpful to us in this process.

The second part of what we have done in this process of going through this is to review our approach to the approval and management of credits. We feel pretty good about a couple of things that we do, unlike some others.

We tend to limit significantly exposures to any one borrower to a much lower level than some other financial institutions our size would do. We tend to be very careful about not getting large concentrations in individual markets that can have cyclical nature to their economies, and we have been very careful about not having those kinds of concentrations take place.

We come from a background of my being in the -- for five years, when I was -- before I came here, I was in what's called the hard money real estate lending business. So you have kind of a different idea of what you're trying to do when you do real estate loans from that point of view than you do -- that some bankers currently have. I think it sets a tone in the organization that causes us to not have some of the exposures some others may have.

Secondly, our senior credit officer at the bank has been involved in real estate lending and credit approval on the West Coast of the United States. Prior to him joining our organization, he was a senior real estate credit approval officer at Bank of America for the Western United States. He has a very long and deep experience as it relates to these various builders.

Therefore, as we go through these credits, it confirmed what I thought was going to be the case when we started, that while some of our borrower-builders were going to run out of liquidity in terms of carrying these credits during the time from completion or construction of the project completion until sale, therefore we would have to put some of these credits on nonaccrual. The actual value of the properties that are there are well-secured by the collateral that supports them. So therefore, we do not expect to have losses of principal in these particular credits.

Moreover, as we've gone through this portfolio over the last several months, we have seen significant movement in sales of properties that are taking place. We are particularly pleased, as yesterday afternoon we went back through again our Portland portfolio, to see the pickup in activity that is taking place in the Portland marketplace, and we expect to move through that very nicely.

Some of you will be interested as to where geographically the nonaccruals are, and I'm going to tell you of the round numbers, $34 million of nonaccrual one-to-four and A&D loans, approximately 25% of those nonperforming credits are in the greater Boise, Idaho, marketplace; approximately 25% of those credits are in the greater Portland marketplace; approximately 40% is in the greater area of Puget Sound, which I think of, and for those people on the East Coast, the Seattle, Washington, area; and the remainder is scattered throughout our system. We feel pretty good about where we are in those particular areas.

Many of you have heard me talk about the difference in the economies of Puget Sound and Portland from the rest of the national economy, and that they are extraordinarily tied to the activities that are taking place on the Pacific Rim. As you are well aware, the Pacific Rim in Asia continues to do very, very well. That is extremely important to the economies of Seattle and Portland. And therefore, we've had good job growth in those particular marketplaces, continued good in-migration into those markets, and we therefore think the housing market's outlook is considerably better than some people in other parts of the United States are facing.

So all in all, as it relates to not having large charge-offs in our loan portfolio, after having gone through every single project in our portfolio, we feel very good about it.

Secondly, some banks have started to run into some issues relative to their second mortgage loans in their consumer portfolios. Again, we have gone through all of those within our bank and we only have one credit, a small credit, that exceeds on a total mortgage debt loan-to-value in excess of 90%, and the vast majority of those are below 80%. So we are not too concerned about our second mortgage portfolio. Frankly, as we sit here today, the passed-through level of that portfolio is very low.

So with that, I would like to make an additional comment, because I'm sure some people will be interested in this. During the course of 2007, we acquired three institutions to join forces with us. The first was a bank called F&M Bank in the Spokane area, and that bank, as we look at it and the allocated capital paid for it, was not dilutive to the earnings performance of our bank in the year 2007.

Secondly, we acquired a bank in the North Puget Sound area, a bank called Islanders Bank, at about the same date. That bank also was not dilutive to our earnings performance during the year 2007. We have not captured all of the expense savings that relate to those two institutions as we put the three of them, ourselves and them, together.

The last bank we acquired was a bank over in the middle part of the state of Washington in a market called Wenatchee, where we had two branches. We, at this point in time, have not captured the savings into it, and it's too early to tell whether or not that was dilutive to us in the fourth quarter.

My big disappointment was we have a goal of having our operating expenses in the fourth quarter, including NCW Community Bank, which was in there for about $800,000 in the fourth quarter, to be less than they were in the third quarter. That goal was not quite accomplished, but we are going to make real progress on that as we go forward.

So, at this point in the call, why don't we open it up to questions and talk about the issues that are on the people's minds?

(OPERATOR INSTRUCTIONS). Matthew Clark, KBW.

Can you first touch on the reserve and give us a sense as to why just the simple migration of the delinquencies into nonaccrual doesn't drive, I guess, an increase in a specific or unallocated reserve?

I think as I just mentioned a little bit earlier, Matthew, we have looked at all of the projects that we have. Because of the way we approach construction lending compared to some other people, we believe the collateral value is more -- is there enough that we will not have principal losses in those portfolios.

And I guess with those that are moving in -- that have gone, I guess, delinquent, and again are moving into nonaccrual, have you guys received updated appraisals on those projects yet? How might that impact your assessment of the reserve, maybe in the next few months?

In almost all the properties that are in nonaccrual and those that show any signs of going into a past-due mode -- I don't want to say all of those, but all the ones that have gone into nonaccrual, we have received updated appraisals on the projects and we are pretty comfortable where we are.

Moreover, we personally have physically inspected those properties and are pretty comfortable looking at what is happening in the particular areas those projects are as to whether or not we will have a loss, which we do not believe we will have.

Can you give us a sense for what your assumptions are in terms of rates for the year and how you see --

We just called that one yesterday morning, right? We had that right in our --

I know you did. And you've got 50 on your mind for next week, right?

I hope not, Matthew. Why don't you answer that?

And I guess as a part of that question, can you also just give us a sense for -- it doesn't sound like you guys are assuming even a modest recession in the Northwest, but it might be helpful to just lay out your assumptions.

Let me take that last part first, and then let Lloyd talk about the rates and so forth. The only area that we think is at risk for a recession in the Pacific Northwest is our presence in the Boise, Idaho, market. We believe the rest of our service area will have a very good year in the year 2008.

Having said that, Boise today still continues to have the lowest unemployment rate of any of the markets that we serve. I don't know that we would want to make a call on where we think rates are going from here, especially after yesterday. I think that at the heart of your question is whether lower interest rates are going to continue to be challenging for us, and the obvious answer to that is yes.

We'll just have to see how that plays out. But as we've mentioned a number of times, and as our 10-Qs have pointed out for some period of time, declining rates is not particularly helpful for us. The one exception to that, obviously, is, to the extent that it stimulates the economy, to the extent that it is helpful for housing, it has a positive impact there. But in terms of net interest margin, declining rates will be challenging for us.

Then finally, obviously, you're disappointed with the expense base. How meaningful, or what types of efficiencies might we expect to see as we progress through the year?

The goal for 2008 is to have expenses be -- with the exception of the -- and now having F&M and Islanders Bank in here for a year versus having been in here for eight months, the goal is to have no increase in operating expenses next year.

Jim Bradshaw, D.A. Davidson.

Lloyd, that miscellaneous expense item, $10 million and change, can you talk a little bit about what's in there and why it grew so much over Q3, even?

Be my guest, Mr. Baker. It's the area where we failed.

Yes, it's obviously everything that's not in the lines above it, which is compensation and occupancy and information systems. It's everything from telephone charges to supplies to advertising, and it was kind of just across the board.

There was -- we did -- one thing I didn't point out is we did liquidate one piece of real estate owned, and there was about a $175,000 loss on that that shows up in that line. It's everything.

And advertising, would you say -- I know that number has been really lumpy over the last several quarters. Was it a high lump or a low lump this quarter?

High. And that's one of the areas we're going to see a significant reduction in expenses in the year 2008.

Okay, good. Thanks. Mike, could you talk about delinquency trends and your watchlist, how it changed over the course of the quarter?

Yes, I can. The delinquency rate in our loan portfolio is up and has been up. I need to break that apart. Except for the one-to-four construction area and the A&D area, the delinquency rates are about level with where they were in the past.

It still is extraordinarily low as it relates to our ag credits and our consumer loan portfolio and so forth, and we are about the same in our C&I loan portfolios. But we are up in the one-to-four construction and A&D area, which is a harbinger to credits that could go to nonaccrual in the future. But they are up.

Our watchlist, I have to be honest with you -- there isn't a real estate credit in this bank that isn't on a loan watchlist or another within our bank. In terms of classified assets, we are up modestly.

Mike, in the increase in NPAs, what's your best guess at this point, the duration of the workout plan on those?

As it relates to the one-to-four residential, we actually -- and you live in an area we are pretty optimistic about, in the Portland marketplace, and we are kind of looking at activity level through houses and so forth. We pay a lot of attention to that kind of stuff.

We are pretty comfortable that we're going to be able to work our way down through those and some in the Puget Sound area reasonably rapidly. On the other hand, I think it's going to be a bit more protracted in the Boise, Idaho, market, because some of the credits that are in there are more in the A&D area than they are in the vertical construction.

And the homes, Mike, those are middle-priced homes? You guys didn't do a lot of high-end stuff, right?

No, although -- the answer to your question is we did not. We tend to stay in the affordable housing arena for what we are doing. I would be remiss to not tell you that we have two houses that were in the Street of Dreams in the Portland marketplace that are more high-priced that are still in the portfolio, but only two.

Okay, good. The last for me was, Lloyd, what do you think the share issuance is going to be like in this Q1? I know that's also been a lumpy number, or at least for me it has been. What's your expectation of that? I know people have to preannounce to some degree what their expectation or what their plan is on purchasing shares under your new programs.

Under the DRIP program that you're getting at, I wouldn't expect the issuance to run much different than it did in the fourth quarter on the DRIP. But the other obvious question is will we or won't we be participating in a share repurchase program. I would just remind you that while we do have authorization to do that, we are, like everybody else, being cautious with respect to capital management. So we will see how that plays out.

Perfect. You anticipated my last question. Thanks, guys. Appreciate it.

Jim, I think I need to point out to you and others that inside the holding company, we are sitting on about $40 million of cash that we can use to do a repurchase if we would like to do that on a go-forward basis. To be very candid with you, it was very actively discussed yesterday at our Board meeting.

I'll bet. Appreciate it.

[Louis Feldman], Wells Fargo Capital Management.

Last quarter, you talked about the fact that one of your goals for the -- words escape me; I know that's rare -- for the next 12 months was to lower your overall deposit costs. Where are you on that, and where do you see the lower rates helping you on that? Are you going to be able to be more sticky over this next interest rate cycle, or what do you feel is going to change?

Well, I need to set a little framework for it, and I think you're well aware of this. We have a couple of competitors in this marketplace that need liquidity desperately. Therefore, they have tended to keep deposit costs fairly high. That has been a little bit more difficult to deal with as we have been lowering our costs.

We have started to move from being pricing in the top third or quarter of our competitors in the various markets down towards the middle of our peers. That has been going on during the fourth quarter, and it took a gigantic step forward again yesterday morning with some repricing that we did after the announcement from the Fed.

We believe we will move, relatively speaking, our deposit costs down considerably more. The problem I have is we have a large institution here that is advertising some rates, and they have branches in every market we are in that are very high.

With the shift, for example, from Countrywide, does that benefit you, since they were lowering their costs? Because they have been a major competitor in most of the markets you operate in.

Their acquisition by B of A was very helpful to us.

Kipling Peterson, Columbia Ventures Corporation.

I first of all would like to commend you and thank you for actually getting your hands dirty and looking at the individual loans within the portfolio. That is different from what I've been hearing from some of your competitors, so I appreciate that.

Secondly, it looked like the jump in the FHLB piece was about $140 million. I know on most prior calls, you have emphasized how one of the major goals of the expansion was to pay that off, and it looked like you got it down to about $27 million and now it's back up, and I'm just wondering what you're thinking there.

I'm not real happy. But let me tell you what happened here. That's a flippant answer, and I apologize for that. The goal that we have as an institution is to not borrow money from the Federal Home Loan Bank. However, when August 9 occurred and the markets locked up, interest rates in the deposit portfolios offered across the United States stayed pretty high relative to alternatives. The cost to us of using the Federal Home Loan Bank borrowings was significantly better than we could have done in the CD market during that period of time. So we chose to do that.

Secondly, we saw an opportunity -- and Lloyd referred to this -- in our investment portfolio to add about $50 million in that particular portfolio of some very high-yielding trust preferreds that were caught in the -- shall we say in the vault of some of the investment banks across the United States. So we were able to buy those, and I was perfectly comfortable to use Federal Home Loan Bank borrowings to do that particular type of transaction. But the goal remains to not use the Federal Home Loan Bank as a source of funding for us in the organization.

So it sounds like that was opportunistic.

It was, and frankly, because of the national CD markets when the liquidity crunch hit in the September/October/November timeframe, it was just cheaper for us to use them.

Great. And one other, just re-emphasizing what you had mentioned about your conversations yesterday. When you released your earnings on October 25, the Company was valued at a 21% premium to book and a 67% premium to tangible book. As of this morning, before trading started and the Company traded down 5%, it was at a 22% discount to book and a 14% premium to tangible. So it looks like that might be one of your best investments to make.

We agree.

Ross Haberman, Haberman Fund.

Could you talk a little bit more about Boise and what you're seeing there, both on the commercial and the residential side, and give us a sense of how is that faring vis-a-vis your other markets, one, in terms of loan demand, and then loan quality?

What's happened to us in this particular market is we became concerned about Boise about this time -- actually, it may be a little bit earlier -- in 2007, and began to back away from the Boise market. We felt it was overbuilt, and we felt it was way ahead of itself.

We peaked in terms of outstandings in the one-to-four and the A&D category at about $123 million in our real estate lending division early in the first quarter of 2007. That portion of our bank now is in approximately the mid-$50 million level, in terms of outstandings from the real estate division of our operation.

So we clearly have backed away from this market. We have not approved a new project in the Boise market in a number of months. That isn't to say there aren't new projects going on, because there are; we're just not financing them. I think your comment also related a bit to the commercial real estate construction market, and we do not have very much activity, if any, in that particular area as we speak here at Boise.

What's your expectations for that market -- getting worse, stable? What's your prognosis over the coming year?

I think the vertical construction will clear itself out over the next year pretty easily. I think the issue is going to be and the loss exposure is going to be in the A&D and land area for people in this particular marketplace.

As versus the one-to-fours?

Yes.

And other markets outside of Seattle and Portland, Western Washington, how do you see that today?

We actually are pretty bullish about our group of builders and what's happening in the Portland marketplace. We haven't taken on any new builders in the Portland marketplace in a long time, because we had about as much concentration in that market as we wanted. We think we're working our way through that portion of our portfolio fairly well.

I will have to say -- and I've been very bullish on the economy in Puget Sound because of my view of how tied it is to the Pacific Rim -- is that there are portions of the Puget Sound area that have begun to crack in terms of values and slowdowns taking place out there, and they tend to be in what's called the Pierce County area, which is south of Seattle. There's a town down there called Tacoma, in that general area. That one is starting to show some problems down in that particular area.

Then secondly, as you go north from Seattle, above Everett, which is where Boeing is building their airplanes, there's an area of Arlington/Marysville/Mount Vernon area which also has some difficulties in it. It's the old classic case of real estate lending, and a lot of people forget this if they haven't been in the business very long, that when the puddle dries, it dries from the edge. That's exactly what's happening in Puget Sound. The problems are on the edges.

Thank you guys. The best of luck.

Jason Warner, Howe Barnes.

Most of my questions have been answered. Just a couple of things to clarify. In Lloyd's comments, I think you said that on the margin side, I think you said 12 basis points of pressure came from the nonaccruals, but in the press release you said 17. I just wanted to make sure that -- what's the correct number there?

They're both correct, but I didn't make it very clear; I apologize. The overall effect of nonaccruals on the fourth quarter was about 17 basis points. That's about 12 basis points more than it was in the third quarter.

Then the other thing I wanted to get clarified, on page 7, you've got a line, total delinquent loans, $69 million. Is that the category 30 to 89 days past due?

Yes.

Matthew Clark, KBW.

I just want to clarify, actually, that comment. Mike, I think the -- aren't the NPAs embedded in that delinquency number?

Yes.

It's not an additional? It's not additive?

Hopefully not. They're in there.

Great. Can you give us a sense for, again, your expectations for when problems might peak? I know everybody's trying to figure this out, but what's your sense for where problems might peak and where losses may peak as well? I guess I just maybe want to home in on that land book, that $500 million of land. Obviously not a ton of demand for land these days, and just want to get your sense for your borrowers' ability to carry that land for, say, 12 to 18 months.

Actually, I think that varies a little bit by market. We actually have -- I'm very aware of some -- in the Portland and Puget Sound marketplace, you and I have talked about these urban growth problems that are there and the scarcity value of land that is in those particular market. We have active buyers in those markets as we sit here today looking to buy that land.

You have watched these national homebuilders kind of jettison property across the United States. We actually are aware of two discussions with a couple of these companies that we've done business with on the side a little bit that are actually in the process of buying land in those markets as we speak.

So we are pretty comfortable as it relates to those. The risk to exposure in the land and A&D area is in the Boise marketplace for us and for others. That is way ahead of itself.

And then I guess any sense for peaks in --

Oh, excuse me. As it relates to where we are today, my best bet is that our NPAs have probably peaked at the level that they are at. By that, I mean there will be others that are going to come in. But during the course of that, we will also be taking and getting -- disposing properties out of it.

Unlike some other banks, we still have a very experienced special assets department that is very good at working their way through these particular credits. These people have been with us for a long time. Actually, the head of our special assets group has worked for me at about three different banks and is as good as it gets at doing this kind of stuff. So we feel pretty good about that.

Secondly, we have a good relationship with many of these borrowers, and so we feel that we are going to be able to work our way through with them a little bit better than some of the adversarial relationships that have begun to crop up between some banks and their customers in this particular area.

We think that we have peaked at where we are in terms of NPAs. That isn't to say more won't come in, because they are, but we think we will offset that by those that are going to go out through selling the product. As it relates to past-dues, we also think we have peaked.

There are no further questions. I would like to turn it back over to management for closing remarks.

Again, we want to thank all of you for taking the time to listen to the Banner story. We would not be honest with you if we said we were not disappointed in the fourth-quarter results. We are, and we expect to make significant progress during the course of next year to improve that. Though we look forward to a significant slowdown taking place in our de novo branching, we actually think we are at a size now, in terms of numbers of branches, that we can support through core deposit growth, the loan growth that we see over the next several years. So we ought to be able to slow that down to a very slow level, which will have a dramatic impact on the expense levels of the institution.

Secondly, over the last three years, we have opened up approximately 21 new branches. Those branches continue to mature, and as they mature, even though we only currently have six of them that are not profitable, they continue to get more profitable as they grow and get a larger size. So we think that will also help the performance metrics of the Company on a go-forward basis.

So we are pretty enthused about the economies we serve, our customer base. We think we're going to have a good year in 2008, in terms of the overall economy of our area, and we're looking forward to reporting better results in 2008. So thanks again for listening.

Thank you. Ladies and gentlemen, this concludes the Banner Corporation fourth-quarter 2007 conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 and enter the passcode number 11104221#. (OPERATOR INSTRUCTIONS). ACT would like to thank you for your participation. You may now disconnect.