Banner Corp (BANR) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. (Technical difficulty) Banner Corporation's 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.

Thanks, Mitch. And 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 Al Marshall who is the Secretary of the Corporation. And we need to start off with the paragraph that Albert is just dying to read to all of you. So, Albert?

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 a 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.

Thanks, Al. What I'd like to happen next is for Lloyd to just kind of just over view the financial results for the third quarter and for the nine months. So, Lloyd, go ahead.

Okay, thank you, Mike. And good morning, everyone. The third quarter 2008 proved to be another difficult quarter. In case we thought 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's 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/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 were a continuing factor in the margin pressure, which while 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 a nice growth in non-interest income. More specifically in deposit fees, in payment processing revenues, which were up 5% on a linked quarter basis. They're up 21% on a year-over-year basis. And it's nearly -- 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.

That 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's 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 we're actually down compared to the prior quarter, down to the same -- compared to the same quarter a year ago. Operating expenses ran at a level of 291 basis points on average assets. That's compared to 308 basis points in the prior quarter and 323 basis points a year ago. So, we are benefiting from efficiencies that we've achieved through the integration of last year's acquisitions. We're benefiting through the slower pace of growth in terms of locations this year. And again, it's 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 pointed out for some period of time, we really think it's more important to focus on what we refer to as net operating income or recurring 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 Freddie Mac and Fannie Mae.

Now unlike most quarters, that's 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 level of provisioning.

Balance sheet changes during the quarter were fairly minimal. We had modest loan growth. We were up about $26 million in loans 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's an area that we're 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's actually down now $172 million from the high point of one to four family loans. We anticipate that that -- those totals will continue to decline some. But we also anticipate that we'll 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 to 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 deposit, so we're 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 -- to more favorable rates for us.

That opportunity sort of turned in to 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 single -- area of single biggest concern during the quarter for us was what was going on with deposits. Fortunately, we're 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 insurance and also reflecting reaction to pricing both internally and externally.

So, again going forward, we're much more optimistic that some of the concern that was out there in the financial -- or 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, now withstanding all of that, the (technical difficulty) piece of information on the balance sheet. And the new piece of information we've added to the press release is information on the capital ratios of both Banner Corporation and the subsidiary banks, Banner Bank and Islanders Bank.

We're pleased that as the quarter progressed, we were able to modestly improve the capital ratios of all three institutions and -- excuse me -- two institutions. Islanders Bank by design was -- their capital ratio came down a little bit. But Banner Bank, the larger subsidiary had nice improvement in our capital ratio. And we look forward to moving in to another challenging quarter as the fourth quarter has certainly started out that way.

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

Well, a couple of things that I'd like to say. First, let's focus a little bit on the asset quality issue. In fact, I think Lloyd indicated non performing loans were up about $28 million, and if you look at the schedule in the back of the press release, you'll see that that's evenly split -- roughly evenly split between -- growth and non performance in the Portland, Oregon marketplace, in the end in the greater Puget Sound area, which for those of you not familiar with Puget Sound, the area around Seattle, Washington.

And first, I'd have to say that the -- my view of Portland today versus when I talk to you in the July timeframe is that clearly has not gotten better in the Portland marketplace during this period of time. And it's become a little bit more difficult as some of the builders in that marketplace have begun to run out of resources to support their collateral 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 slog as we move forward.

The increase that took place in Puget Sound frankly is not unexpected. The -- we're very heartened by the fact that the -- appears that the Boeing strike will be settled this weekend with a vote by the Machinists Union, which has been a very, very important thing in Puget Sound.

It had a big impact as they ran up to the strike in business activity in August. And then of course from September on they've been out of work and that has real impact. Not just to the machinists themselves, but 25,000 workers in that area. Because they have some strike benefits, but Boeing is very, very reliant on lots of subcontractors domiciled throughout the Puget Sound region. And as they have nothing going on in their work for Boeing and they're just in time deliver system that means that none of that is being delivered by the subcontractors.

And as a result, their space is filled up and they've had to slow down and lay 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're a bit more optimistic about Puget Sound than we have previously been.

You'll notice there was very little change in the absolute number relative to the Idaho marketplace. That doesn't mean to say that more came in and more went out, but it's further along in the process with us 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 anymore build up to be taking place in terms of non performing assets in the Idaho marketplace than currently is on the books.

And so, as a result of all that, we're 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's going to go the other way for a period of time in Portland.

Having said all that, because we haven't made any new one to four construction loans in a long period of time to any borrowers or anything on new projects, we are getting close to the end of projects that will turn into 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 isn't a great deal of more than can be coming in to that area on a go forward basis.

That isn't to say, and 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're 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 Portland and the Puget Sound area, we think we'll come to resolution on a lot of these projects much faster on a go forward basis.

So, we're optimistic about where we are relative to the growth in non performing assets, although we do not think it will down in the fourth quarter. We just think it'll be up modestly as we go forward during that period of time.

The other comment I would make to you is the -- 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 bank and opening an account. And frankly we're doing that at a record rate.

The absolute growth, however is being masked by what's 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 actioning and also in some cases 1031 facilitators in these particular markets. Those deposit levels have declined rather dramatically during this period of time and have masked the growth that's taking place in the real area that's important, which is core retail deposits. But we believe that also is beginning to come to an end, because they're getting close to zero in some of those title company accounts, and as a result of that I think we'll begin to show good growth in our retail deposits going forward.

Lloyd mentioned it and we think the fourth quarter's going to have another compression of our net interest margin if for no other reason than the fact that the fed has moved the prime rate down, or their rate down by 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've had in the past. And frankly we have a number of loans that are sitting on floors and won't move down as much. But nevertheless, it will have some impact on our margin in the fourth quarter as we get into price down deposits.

He was very kind in his comment about something. Irrationalization's 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 as a -- and it cost all of us 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.

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

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. (OPERATOR INSTRUCTIONS) And our first question comes from Matthew Clark with KBW. Go ahead please.

Yeah, good morning, guys.

How do?

Can you give -- would you happen to have the -- I saw a -- I think a 30 plus day delinquency figure. Those figures in your press release, but those were the ones that were on non-accrual. Do you happen to have that 30 to 89 day bucket that we might see shortly that is not on non-accrual? I guess this quarter relative to last.

Well, Matthew, I don't have it precisely, but as you note on the press release, there's about $138 million of loans past due 30 days. And $119 million I believe the number is of non-accrual. So, I guess that means the difference is about $20 million.

Oh, I'm sorry. I thought that whole thing was -- you're right. Okay. Thank you. And then in terms of the non performers, the construction related non performers by region. I guess can we just get an update? I think you have -- had grouped it into an other bucket, but do you happen to have the detail on Spokane like you did last quarter, and the Columbia Basin by any chance?

We haven't broken it out. Spokane is certainly better than the other -- the three major markets that we've noted for us. If for no other reason, we have fewer loans there. But the market there also didn't mean, as we've mentioned a number of times, didn't get overheated to the same degree. And so the number of problem loans there is not nearly as severe either.

Okay.

It's pretty immaterial.

Okay, and then the -- your reserves this quarter. How steady, at least on a top down perspective? But I guess when you look 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 to 3.3% of overlay to loans, for example.

Well, it -- Matthew 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 that the effect is going to be -- show up some in the C&I portfolio. That said we have not identified much of any in the way of spillover 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 here a little bit, it's likely that provisioning is going to be at these elevated levels for a few more quarters.

Okay, and then lastly we didn'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 or not you'd -- whether you've had any of those types of conversations with the regulars and what your appetite might be?

Yeah, we've had the conversations with the regulators and we are frankly working on it right now. And to be honest with you, to us that program available to banks is pretty compelling. We think that that gives banks that are -- who qualify for it such as ourselves a real opportunity to really do something in terms of jumpstarting some lending that can be done on 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 with that kind of capital infusion.

And to be honest with you, we've got three or four smaller banks that have been talking with us that would like to merge with us and frankly are not going to be eligible for that program. So, that would also be helpful in that regard.

And can you -- is there a timeframe where you think we might -- should we expect to see or hear something in conjunction with when the application process is up on the 14th? Is it -- is there an expectation in general that we should start to hear, if we haven't already obviously? Some announcements at or just shortly thereafter that date?

Matthew, I don't know how that process is going to work. It looks to me like it's -- they started with the very largest banks and they're working their way down somewhat by asset size in terms of their approval process. But pretty soon there gets to be a whole bunch of them, because there's a lot of people our size. So, I don't know how much longer that would take as 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.

And what's your level of confidence and access into TARP would you say at this stage?

We're confident we can access it, we're just not certain at this time whether or not that's the appropriate thing for us to do.

Okay, thank you.

Okay, thank you. Next question comes from Jeff Rules with (technical difficulty). Go ahead please.

Good morning.

Hi Jeff.

On the construction segment, that's been declining roughly $30 million to $60 million per quarter for really the bulk of this year. Is that pace expected going forward? Ballpark?

Well, it will be a little bit in the fourth quarter. I think things will particularly pick up in Puget Sound, assuming the machinists vote yes on this strike on Saturday. But I'm going to guess it would slow down in the first quarter of next year. That's -- it's not a great time for home buying in the Northwest.

Although -- and Lloyd correct me if I'm wrong, the first quarter of last year was pretty strong. Of '07.

Yeah, I think that's true. I think our best guess today is that that pace of reduction will continue. As we've indicated, the overhang of inventory in a number of markets is -- of completed unsold new construction loans is paying down. There's obviously concern going forward as to what the pace of foreclosure activity might bring to the -- in terms of pressure on the market. But we're still optimistic about clearing that inventory of vertical construction.

Okay, then some new houses will get (inaudible).

Yeah, at a certain point, yeah, Mike's right. At a certain point it's going to make sense to begin financing new. In fact we very much look forward to that because that's the process that will clear the inventory of developed lots.

You can actually -- 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 in that market about two-and-a-half years ago. And now that market has a lot of construction going on and a lot of home sales going on in that market. And things are very strong in the Tri-Cities area right now.

And I think the same thing's going to be true in Boise here in another six months. I don't think they'll build in the dead of winter, but I'm going to bet next spring there's going to be a lot of sticks coming out of the ground because they're blowing through their inventory.

Okay, and in your view based on your comments, if you were to characterize Seattle with Portland, you'd put Seattle behind Boise as a recovery and then Portland last?

Yeah, and that would be reversed of 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. So, that being the Boeing strike and the impact it has on everybody else.

Okay, and then separately I know you guys touched on the deposit fess and service charge really been on a tear this year in terms of growth on that income or that line item. Any other color beyond -- is this just a maturation of the footprint that you've grown? Or if you could -- is that a sustainable growth rate in other words?

Yes, I mean that branch system is -- should be generating deposit growth at the level it's at in terms of numbers of accounts and so forth. Because we've never had a branch system this large for a full year like we've had in 2008 versus prior years. Just simply because we opened a lot of branches in '06 and '07.

And we think that branch system is now at a size that it ought to very easily support good solid long 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 because WAMU and frankly because of some concerns on the FDIC insurance, and the slowdown of the real estate market. And we did bank a lot of that -- of those kinds of customers from a deposit standpoint.

But yeah, we're pretty optimistic that that growth can be sustained on a go forward basis.

Okay.

In terms of numbers of accounts.

Okay, thank you.

Thank you. And our next question comes Sara Hasan with McAdams Wright Ragen. Go ahead please.

Hey guys.

Hi Sara.

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

Yeah, Sara this is Lloyd. There was. As you all probably remember, we fair value investment securities including the GSE preferred. And we also fair value our term federal home loan bank debt and our trust preferred or junior subordinated debentures.

However in the current quarter we did not make an adjustment in the -- as we indicated we did not make an adjustment in the value of the trust preferred. These are -- and we have trust preferreds that we've issued as well as trust preferreds that we have purchased. The 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 the -- and we had 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.

All right. And on the operating expense side, the salaries and benefits in particular looks -- it looks to be a pretty sizeable decline from quarter-to-quarter and again year-over-year. And I'm just wondering is it driven by staff reductions or have you -- is it a reversal of accruals? Or -- what is driving that?

Two things. One, we are down staff-wise 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've had and so forth. And then -- and on the other side there aren't going to be a whole lot of incentives paid in this place this year for our lack of performance this year. And there were some smaller amount of bonuses that were paid in '07, so that's true.

Okay, and as far as the overall expense bucket goes, is that a sustainable level or is this -- you've taken a number of expenses out and we should build from there?

Well, I think there's a couple of things are going happen next year, and I don't know what this number is. Lloyd may add color to this. But it's very clear to us the FDIC insurance premiums are going up next year. So, that's going to be an increase in expenses.

And secondly, and on a go forward basis, I don't know what '09 brings. If it brings more robust business activity and the bank 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 some incentive compensation would be added to this. It's not there currently.

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 construction portfolio. I don't know that that will be higher next year than it is this year because frankly I think that we've spent a whole bunch of money this year and there aren't a lot more behind it coming. So, it's probably there.

And then lastly, my best guess is that we can sustain next year -- in fact the budgeting's being done for next year for no growth and non-interest expenses '09 over '08.

Okay, and 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'm just wondering are you seeing something better?

Well, I think that like a lot of people, we have concerns about valuations in commercial real estate and the potential. On the other hand, what you're 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 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's not showing up in the performance numbers in metrics that we have around that portfolio.

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

About $4.1 billion.

Thank you.

I'm glad he showed restraint and didn't tell you the exact number.

Not that we're sensitive to that number.

Of course not.

Okay, thank you. (OPERATOR INSTRUCTIONS) And our next question comes form Tim Coffey with FIG Partners. Go ahead please.

Good morning, gentlemen.

Hi Tim.

How are you?

Good. So, I just have a couple of quick questions. Do you have any color on the breakdown in net charge offs for the quarter? What buckets they were in? What loan types rather?

They're almost all in one to four construction. I think that's in here, isn't it? Yeah, I think -- I may be wrong, Tim, but I don't mean to be flippant about it. But I thought we --

No, it is in both that. It's not.

It's not in here? But it's almost all in one to four.

And related (inaudible).

Yeah. Excuse me.

Yeah.

The whole area.

Okay, good. And then the other question was what percentage of your loans right now have floors?

We -- about half of the portfolio is tied to prime and about half of that has floors. And then the question is what's the level of the floors and how will they work? And there's 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 or February timeframe.

Sure, okay. And I'll add do have any idea off the top of your head with the -- when these loans with floors originated? What timeframe they were originated in?

The loans with floors?

Yeah.

No, I think it's probably pretty evenly spread throughout the last 24 months.

Okay, great. Those are all my questions. Thanks a lot.

Thank you.

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

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

Yeah, I think a lot of people, particularly in our area because of the demise of WAMU were very very sensitive to FDIC insurance limits and the issues and so forth. And frankly the IndyMac thing with its -- they had a lot of operations up in our particular neck of the woods. And so people were very sensitive about it. And so the move to $250,000 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 account and thereby getting $500,000 worth of insurance. Or some other things similar to that has helped people calm down and realize that they're comfortable.

And then lastly, because there's a lot of movement -- we've seen a lot of movement of people in opening accounts in our bank that are trying to make sure that they can stay under the $250,000 or $500,000 that they have amongst the various banks. And to be perfectly honest with you, I'm very confident that people have taken money out of our bank and put it in other banks because they also wanted that FDIC insurance on the overage they had with us.

Thank you.

Okay, thank you. (OPERATOR INSTRUCTIONS) Our next question comes from Ross Haberman with Haberman Funds. Go ahead please.

Morning, Mike. Mike, how are you?

Good, Ross, how are you?

You talked about oh possibly doing some small deals. Would you really do anything without any sort of government equity in some form?

Not at the tangible price of our book value -- tangible book. No.

Well, to be honest with you, it's unlikely. That's the showstopper for us. Even though -- we're still giving up our stock and half of its tangible book (inaudible).

Right, I mean that's a huge solution. I mean --

Exactly.

-- even though it's only 15% I guess of what you take down. But is that basically the showstopper you might say for you?

It is, but some of these banks, if you really stop back and think about the shareholders in some of these other banks, they don't have to worry about protecting capital gains. That isn't going to be helpful to them. They just need to sell the stock into another security. So the need to do tax free 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 doesn't in itself dilute our common shareholders that much is a way to pay for that. That it's not as diluted to our common shareholders.

I mean the people on the other side would be just as happy with cash as they would shares.

Today, right. So --

They don't have any gains to protect.

So, you would of course prefer to pay them in cash whether they want cash or they want stock. Stock's another story.

Well, that's the beauty of that TARP plan to me. That and the ability to open up the loan bucket a little bit even more aggressively.

I got you, okay. I'm sorry, I got on late. Just one final question. The state of the market in Boise. How is loan demand there and how is -- how soft is residential compared to some of your other spends in Portland per se?

Well, Boise -- and 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 -- I mean we still have $16.5 million in non performing there, but it's not that big of an issue to us.

Having also said that, as you look at people in neighborhoods in that marketplace, there are homes being bought in Boise. And as a result of that, they're reducing their vertical inventory. So, I think it'll be among the very first markets to recover.

They didn't however, get helped a whole bunch by Micron's layoff of an additional 3,000 people. And even in a city with an SMSA of 500,000, they'll feel that for a period of time.

Got it, okay. Thanks. The best of luck.

Um-hmm.

Thank you. And 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 statement.

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 pretty 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're not at the peak of non performing assets, but we're 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're optimistic that we're on top of where we think we need to be to resolve the issues and go forward. And we really think there's some terrific opportunities in the Pacific Northwest for expansion of our banking franchise. If for no other reason just to going out and being able to bank some customers some other people 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.

Ladies and gentlemen, this concludes the Banner Corporation Third Quarter 2008 Conference Call. If you'd like to listen to a replay of today's conference, please dial 303-590-3000, passcode 11119693. We would like to thank you for your participation and you may now disconnect.