Banner Corp (BANR) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to Banner's fourth-quarter 2012 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, Thursday, January 24, 2013. I would now like to turn the conference over to Mr. Mark Grescovich, President and Chief Executive Officer. Please go ahead.

Thank you, Copiah, and good morning, everyone. I would also like to welcome you to the fourth-quarter earnings call for Banner Corporation. Joining me on the call today is Rick Barton, our Chief Credit Officer; Lloyd Baker, our Chief Financial Officer; and Albert Marshall, the Secretary of the Corporation. Albert would you please read our forward-looking Safe Harbor statement?

Certainly. 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 September 30, 2012.

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

Thank you, Al. As announced Banner Corporation improved its core performance again in the fourth quarter, reporting a net profit available to common shareholders of $13.3 million or $0.69 per share for the period ended 12-31-2012. This compared to a net profit to common shareholders of $15.2 million or $0.79 per share for the third quarter 2012 and a net profit of $3.1 million or $0.18 per share in the fourth quarter of 2011.

For the full year ended December 31, 2012, Banner reported net income available to common shareholders of $3.16 per share compared to a loss of $0.15 per share for the full year of 2011.

Looking at earnings before tax, preferred stock dividends, discount accretion and repurchase gains and changes in fair value, Banner's income improved to $0.98 per share for the fourth quarter of 2012 compared to $0.93 in the third quarter of 2012 and $0.40 per share in the fourth quarter of 2011. Again, demonstrated continued improvement in our core operations.

The fourth-quarter and full-year performance provided unmistakable evidence and confirmed that through the hard work of our employees throughout the Company we are successfully executing on our strategies and priorities to deliver sustainable profitability to Banner. And our return to profitability for the last seven quarters further demonstrates that our strategic plan is effective and we continue building shareholder value.

Our operating performance showed improvement on every core key metric again this quarter when compared to the same quarter a year ago. Our fourth-quarter core revenue increased 8% when compared to 2011. Our net interest margin was 4.09% in the fourth quarter of 2012 compared to 4.07% in the fourth quarter of 2011. And our constant deposits again decreased in the most recent quarter to 35 basis points compared to 59 basis points in the same quarter of 2011.

These improvements are reflective of the execution of our super community bank strategy, that is -- reducing our funding costs by remixing our deposits away from high-priced CDs; growing new client relationships; and improving our core funding position.

To that point, our core deposits again increased in the most recent quarter and increased 14% compared to December 31, 2011. Also, our non-interest-bearing deposits increased 26% from one year ago. It's important to note that this is all organic growth from our existing branch network. In a moment Lloyd Baker, our Chief Financial Officer, will discuss our operating performance in more detail.

Clearly improving the risk profile of Banner and aggressively managing our troubled assets has been a primary focus of the Company. Again this quarter we continued our excellent progress on positioning Banner with a moderate risk profile. Our non-performing assets have been reduced another 15% compared to the third quarter of 2012 and 58% compared to December 31, 2011.

The most problematic part of the portfolio, our non-performing loans, has reduced 11% from the third quarter of 2012 and 54% from December 31, 2011. In a few moments, Rick Barton, our Chief Credit Officer, will discuss the credit metrics of the Company and provide some context around the loan portfolio and our success in aggressively managing our problem assets.

In the fourth quarter of 2012 we recorded a $1 million provision for loan losses. This modest provision and the significant improvement in managing our troubled assets raised the coverage of our allowance to non-performing loans to 225% at December 31, 2012, up substantially from the 110% in the fourth quarter of 2011.

While credit costs in the fourth quarter were above our long-term goal, Banner's reserve levels are substantial and our capital position and liquidity remain extremely strong.

At the end of the quarter our ratio of allowance for loan and lease losses to total loans was 2.39%; our total capital to risk weighted assets ratio was just under 17%; our tangible common equity ratio improved to nearly 12%; and our loan to deposit ratio was 91%. As a result our balance sheet is one of the strongest in the banking industry.

In the quarter and throughout the preceding 33 months we continued to invest in our franchise. We continue to add talented commercial, retail and mortgage banking personnel to our company and all our markets. And we continue to invest in further developing and integrating all our bankers into Banner's new credit and sales culture.

These efforts are yielding very positive results as evidenced by our strong customer acquisition, record mortgage banking revenue and cross sell ratios and our 13th consecutive quarter of year-over-year increases in revenue from core operations.

Further, we have received marketplace recognition of our progress as JD Power & Associates ranked us number one in customer satisfaction in the Pacific Northwest and fifth in the United States. And Bankrate.com awarded Banner Bank their highest rating for safety and soundness.

Finally, our persistent focus on improving the risk profile of Banner and our successful execution of our strategic turnaround plan has now resulted in seven consecutive quarters of profitability.

Although further improvement in core performance is a primary focus for Banner, our confidence in the sustainability of our future profitability, along with our commitment to prudently manage our capital, has convinced us to repurchase all of our perpetual preferred stock in private transactions along with a final redemption in the fourth quarter. The total average repurchase and redemption price was 98% of par value.

These transactions were consistent with our public commitment to our stakeholders as our performance improved. I will now turn the call over to Rick Barton to discuss the trends in our loan portfolio and our significantly improved credit metrics. Rick.

Thanks, Mark. As I did in our fourth-quarter call for 2011, I would like to focus my remarks this morning on the year-over-year improvement of Banner's credit metrics and make note of important fourth-quarter 2012 accomplishments. As you listen to our 2012 results, please remember the watershed year Banner had in 2011 in terms of improving its credit metrics. Now let's recap 2012.

Net charge-offs were $18 million, down from $49 million a year earlier. This is a decrease of 63%. And net charge-offs have now declined for nine consecutive quarters. Total non-performing assets declined from $119 million to $50 million, a reduction of 58%. Stated as a percentage of total assets, non-performing assets went from 2.79% to 1.18%.

Non-performing loans decreased from $75 million to $34 million during the year, an improvement of 54%. This puts non-performing loans at 1.05% of total loans compared to 2.3% and 4.5% at year end 2011 and 2010 respectively.

REO fell from $43 million to $16 million during 2012, this was a decline of 63%. REO dispositions during the year were $41 million on which we realized a net gain of $4.8 million. New foreclosures were $14 million compared to $53 million in 2011. This year's REO valuation adjustments were $5 million, a decrease of 66% from the preceding year.

Healing of our residential construction and land portfolio continued during 2012. Total loans outstanding at year end were $238 million while non-performing loans totaled only $3.6 million or 1.5%. At year-end 2011 non-performing loans were $26 million in a portfolio of like size.

Classified loans in Banner's portfolio were $131 million versus $202 million at year end 2011. This is a decrease of 35%. During 2012 delinquent loans, including non-performing loans, decreased 47% falling from $85 million to $45 million. As a percentage of total loans, delinquencies were 1.40% versus 2.59% one year ago. And loans 30 to 89 days past due and on accrual were only $12 million or 0.37% of total loans.

And now for two quick points on the fourth quarter. Total REO decreased by 22% during the quarter with the last significant commercial land asset being among the dispositions. Our REO book is now primarily residential land assets and one-to-four family homes. We continue to expect that one-to-four family properties will make up an increasing share of our REO over the next several quarters as many consumers continue to be burdened with underwater mortgages.

The allowance for loan loss continues to be a source of strength for the Company. Coverage of non-performing loans again increased during the quarter and stands at 225%, up from 204% last quarter. Despite a fourth-quarter provision of only $1 million, the reserve to total loans dropped by only 6 basis points to 2.39% and is still very strong from a historical perspective.

This position of strength has been maintained even though our provision expense has been less than net charge-offs for seven consecutive quarters. And our [ALLL] strength puts us in a position both to deal with the economic uncertainties we continue to face and the impending change in reserve methodology from an incurred loss model to an expected loss model.

We are excited to be able to report to the continued improvements in our credit metrics. As I have said before, there is still work to be done, but it is quite refreshing to all of our credit staff to be able to devote more and more of their energies to helping grow the Company's loan assets. With that I will turn the stage over to Lloyd for his comments.

Thank you, Rick, and good morning, everyone. As Mark and Rick have already indicated and as reported in our press release, our operating results for the fourth quarter capped a very good year for Banner Corporation.

And while our operating results for the quarter and year ended December 31, 2012 reflect further progress during the quarter, they also are the result of the cumulative impact of the significant progress that has been occurring over the past two and a half years as we've continue to execute on strategic initiatives designed to strengthen our franchise and build shareholder value.

That progress has resulted in much improved credit quality and lower credit costs, strong revenue generation, significant growth in client relationships, particularly for core deposits, and increasing core profitability.

In fact, as noted in the release, this marks the 13th consecutive quarter that we have realized year-over-year increase in core revenues. However, I think it is also important to note the clear impact, both positive and negative, of the very low interest rate environment that is also evident in these results.

Exceptionally low interest rates have pushed our funding cost to near zero and produced record volumes in profitability for mortgage banking. But exceptionally low interest rates have also meant declining asset yields and pressure on the net interest margin, as well as an impairment charge for mortgage servicing writes in the current quarter. Further, low interest rates continue to reflect a sluggish economy which makes revenue growth particularly challenging looking forward.

Nonetheless, for the quarter ended December 31, 2012 our revenues from core operations, which includes net interest income before provision for loan losses plus other non-interest operating income, but excludes fair value and other than temporary impairment adjustments, increased to $54.5 million, which is slightly more than immediately preceding quarter, but again, a new quarterly record and nearly $4 million or 8% greater than the quarter a year ago.

Revenues from core operations for the full year of 2012 increased to $211.4 million, also a record and also an 8% increase compared to the prior year. Reflecting this revenue growth, as well as further reductions in credit costs, our net income was $14.7 million for the fourth quarter compared to $5.1 million for the same quarter a year ago.

For the full year ended December 31, 2012 record revenues and substantially reduced credit costs resulted in a significantly increased before tax net income, which was further augmented by a net tax benefit of 2. -- or excuse me $24.8 million as a result of the full recovery of our net deferred tax asset. As a result our net income for the year ended December 31, 2012 was $64.9 million compared to $5.5 million for the prior year.

As a reminder, you will recall that in the second quarter our confidence in the sustainability of our earnings, coupled with our improved risk profile, led us to two substantial although largely offsetting adjustments to the significant accounting estimates which were reflected in our year-to-date financial results. Specifically, the reversal of the valuation allowance for our net deferred tax asset and the large fair value charges associated with revaluing our junior subordinated debentures.

As Rick noted, our provision for loan losses for the fourth quarter was reduced to $1 million compared to $3 million in the preceding quarter and $5 million in the fourth quarter year ago. As a result our provision for all of 2012 was $13 million, substantially less than the $35 million for the full year 2011.

Of course these decreases in the provision for loan losses, which reflect the significant reductions in non-performing loans and net charge-offs that we have been reporting for a number of quarters, had a substantial positive effect on our net income for both periods.

As has been the case throughout the extended period for which we have been reporting improving revenues, the year-over-year increase in core revenues is reflective of improvement in our net interest margin, as well as strong deposit fee revenues fueled by growth in core deposits, and for the current quarter and year a substantial increase in revenues from mortgage banking operations.

However, it is clear that the trend of year-over-year improvement in the net interest margin is not sustainable in the current interest-rate environment. Our net interest margin was 4.09% for the fourth quarter of 2012, a 13 basis point decrease from the preceding quarter, but 2 basis points stronger than the same quarter a year ago.

The year-over-year margin improvement again reflects a meaningful reduction in our funding costs as well as a reduction in the adverse effect of non-performing assets which were partially offset by declining yields on other assets. As a result, for the fourth quarter of 2012 Banner Corporation's net interest income was $41.5 million compared to $42.7 million in the preceding -- immediately preceding quarter and $41.6 million in the fourth quarter a year ago.

For the full year 2012 our net interest margin was 4.17%, a 12 basis point improvement compared to 2011. And despite the adverse impact of low market interest rates and weak loan demand on asset yields, for the year ended December 31, 2012 our net interest income was $167.6 million, an increase of $3.1 million compared to the prior year.

Deposit costs decrease by another 6 basis points during the fourth quarter and were 24 basis points lower than a year ago, reflecting further changes to the deposit mix including significant growth for non-interest-bearing balances as well as additional downward pricing on interest-bearing accounts.

In addition, our funding costs were significantly reduced compared to the same quarter a year ago as a result of the repayment in March of 2012 of $50 million of senior notes that we had issued under the FDIC's temporary liquidity guarantee program.

As a result of the lower deposit and borrowing costs, our average cost of funds decreased by 5 basis points compared to the preceding quarter and was 29 basis points below the fourth quarter of 2011. Similarly, for the full year 2012 our funding costs were 34 basis points lower than for the same period in 2011.

As I noted, the low interest-rate environment continued to put downward pressure on assets. However, compared to a year ago our net interest margin further benefited from decreased levels of non-accruing loans in REO which offset some of this pricing pressure. Still the yield on average earning assets at 4.49% decreased by 17 basis points compared to the preceding quarter and was 25 basis points lower than the fourth quarter of 2011.

The yield on loans was 5.26% for the fourth quarter of 2012 which was a decrease of 19 basis points compared to the preceding quarter and 27 basis points compared to the fourth quarter a year ago. The adverse margin impact from non-accruing loans was 6 basis points in the current quarter compared to 5 basis points in the preceding quarter and 14 basis points in the fourth quarter a year ago.

In addition, for the third consecutive quarter we collected previously unrecognized interest on certain non-accrual loans that had been acquired at a deep discount which augmented our net interest income. However, this unique collection activity added just 3 basis points to the margin in the current quarter compared to 9 basis points in the immediately preceding quarter. Looking forward we do not anticipate a material amount of additional interest collection on these loans.

Reflecting the low rate environment, and despite the reduced drag from not accruing loans, for the full year 2012 loan yields decreased by 18 basis points compared to a year ago. And as I previously indicated, pressure on asset yields will clearly be an issue going forward. As a result, further improvement in our net interest income will be dependent on growth of earning assets in future periods.

Loan balances increased modestly compared to the preceding quarter but were somewhat lower than a year earlier. Increases in commercial and agricultural business loan balances, as well as owner occupied commercial real estate loans, were generally offset by further reductions in residential and investor owned real estate loans as refinancing activity continued to result in elevated loan prepayments.

And reflecting the continued economic uncertainty, demand for both business and consumer loans and credit line utilizations remain disappointingly low. By contrast, total deposits increased by $71 million compared to the prior quarter end. Non-interest-bearing deposits increased $62 million during the quarter and have increased a remarkable 26% compared to a year earlier.

As a result of growth in transaction and savings accounts and further reductions in high cost certificates of deposit, core deposits now represent 71% of total deposits. And as I have noted before, the continued growth in the number of accounts and customer relationships has significantly contributed to increased deposit fee revenues.

This was again evident in the current quarter and year-to-date results as total deposit fees and service charges were 9% greater for the fourth quarter than a year ago and increased by 10% for the full year ended December 31, 2012.

Revenues from mortgage banking activity continued to be very strong with mortgage banking revenues increasing to $4.4 million for the fourth quarter of 2012 compared to $3.3 million in the third quarter and $1.9 million in the fourth quarter of 2011. For the full year mortgage banking revenues were $12.9 million compared to $5.1 million a year ago.

And as you would expect, the very low mortgage rates currently available in the market have caused application activity to remain high, which will likely continue to positively impact our revenues for at least a few more quarters.

Another item that we have not recently highlighted but that was particularly strong in the fourth quarter was gain on sale of SBA guaranteed loans, which totaled $558,000 for the quarter and $876,000 for the full year.

Expanding production and sale of SBA loans has been an area of emphasis for us this year, which is producing meaningful results. This income item was partially offset by a reduction in loan servicing revenues as a result of a $400,000 impairment charge related to the valuation of our mortgage servicing rights.

Similar to recent periods, for the quarter and year ended December 31, 2012 other operating expenses in aggregate were reasonably well behaved. Although compared to a year ago, increases in compensation expense, in part reflecting the increase in mortgage banking activity, as well as increased incentive compensation accruals and increased health insurance costs, offset a portion of the decrease in REO expense and FDIC deposit insurance costs.

While increased revenue generation has been an important aspect of Banner's return to profitability, for the quarter and year ended December 31, 2012 a substantial decrease in the costs associated with REO has been second only to the decrease in our provision for loan losses in adding to net income compared to a year ago.

Finally, as Mark noted, we repurchased or redeemed the remaining shares of our preferred stock during the quarter at an average price slightly below net book value, which produced a modest gain that partially offset the accelerated discount accretion when determining earnings available for common shareholders. These repurchases also reduced the preferred stock dividend accrual for the quarter and more importantly eliminated that dividend going forward.

Of course following these repurchase transactions the capital base of the Company and the subsidiary banks remain very strong. And this capital strength, along with our substantial reserve position, should continue to allow Banner considerable flexibility with regard to capital management as we move forward. So with those comments I will turn the call back to Mark. As always, I look forward to your questions.

Thank you, Lloyd and Rick. That concludes are prepared remarks and, Copiah, we will now open the call and welcome your questions.

(Operator Instructions). Jeff Rulis, D.A. Davidson.

A question on the mortgage banking revenue. Lloyd, you mentioned expecting maybe a few more quarters of pretty good volume there. I guess I'm having a tough time forecasting it. I guess in terms of your budgeting purposes, would you expect I guess 2013 a fraction of 2012 levels? Or any sort of additional color on what the levels you are maybe anticipating.

Sure, Jeff. Unfortunately though Mr. Bernanke and the other governors haven't included me in their deliberations, so I'm not sure how long rates are going to stay down this low. Clearly the first half of the year is looking very strong. And we are actually expanding our capacity as well. So we are optimistic looking at 2013 for the mortgage business. But at some point in time you have to believe that the refinancing activity is going to slow down to some degree.

So in that -- possibly if activity falls off a bit you may be able to make up some as you expand a portion?

Well, that is certainly our expectation and our plan. It is refinancing declines that the purchase business will remain strong and because of the increased capacity that we'll make up some of the difference there. Obviously as well as refinancing activity I made the comment before that margins are exceptionally wide in that business right now. So you have to believe that if there is any sort of a slowdown in activity that the margins are going to come in a little bit as well.

Got you, okay.

Jeff, this is Mark. Recall we made a fortuitous business decision some 30 months ago when we decided to add a substantial number of mortgage bankers to realign that business with our branch delivery system. That has worked out very well for us as interest rates have stayed low and volume of cross sell has increased for our Company.

So that type of volume and investment was very well received and very timely. At the same time now we have been investing and will continue to reinvest in additional mortgage bankers in anticipation of the purchase business starting to take over much more versus the refinance business as the housing market in the Northwest rebounds. So that is the overarching business strategy.

Okay. And, maybe, Mark, one for you on the -- I guess as you look out you have cleared the decks a little bit with the preferred gone and some things that kind of are in the rear view. As you look forward on sort of M&A opportunities, could you catch us up on kind of the dialogue out there and what fits best with kind of what your expansion plans are at this point?

Yes, I may expand on that question just a little bit. Recall that our capital management philosophy was to repurchase and redeem the remaining perpetual preferred securities as a primary use of our excess capital and then we would look for the waterfall of dividend increases and potential buybacks along with reinvestment in the Company.

We have -- certainly the dialogue for M&A has improved, most importantly because of the progress of the Company and the successful execution of our business model and that our client base and the Northwest is very receptive to this business model. That has allowed us the opportunity to review potential M&A from a strategic standpoint and fill in markets for us.

We will remain extremely disciplined in our approach to that. Should an opportunity present itself in our core markets or our expanded markets where we are seeing rebounds in economic activity we will certainly take advantage of that. As you know, our capital base, our reserve levels and our balance sheet are in a position to absorb a reasonable sized M&A transaction.

Okay, thanks.

Jacque Chimera, KBW.

I was wondering, just touching back on the mortgage a little bit, if you have the average gain on sale margin for the quarter. And where that was in regards to the third quarter.

Jackie, this is Lloyd. The average margin was about 2.5%, which is up a little bit -- actually that is probably close to the average for the whole year. It was -- may have been just slightly stronger than that in the fourth quarter. I think I had indicated about 2.25% in the third quarter.

Okay.

And as I noted before, those are exceptional numbers for a business that didn't historically generate those kinds of margins.

No, definitely understood. And then, do you have the breakdown -- and I'm sorry if you already gave this and I just missed it -- on what was refi versus what was purchased for the volume in the quarter?

You know, that has been running pretty consistently 65% to 70% refi for an extended period of time now, which I think is very consistent with what you are seeing out of the industry in general.

So just knowing what we know now and the drive towards that -- the Pacific Northwest economy continuing to improve as it is, do you think that we could see purchase volume just overall pick up?

Absolutely. It has picked up and looking forward we would expect that it will expand further. And as we have noted, we think that we'll be taking a bigger part of the market -- more market share in that process as well.

Okay.

(Operator Instructions). Tim Coffey, FIG Partners.

Mark, you know I have a couple of questions about your forward earnings growth strategy here. And assuming that big part of that includes growing the loan portfolio, to what extent does the forward earnings strategy include additional securities purchases?

Well, obviously we want to first grow the loan portfolio and we've stated our target of maintaining our loan to deposit ratio between 90% and 95%. We have been able to advance our C&I and ag portfolio 3%. I think it is pretty clear that we have gone through the churn of troubled assets in our Company, so we believe that we have plateau'd in terms of a contraction in other parts of the portfolio.

And as the housing market rebounds and the Company has capacity for additional real estate based on our risk profile and our capital allocation, we are in a position I think to advance the loan book and that is -- organically, and that is our first priority. We have been able to advance our market share gains as evidenced by the significant account growth that we have had, so that is the primary focus.

Securities are not -- I will let Lloyd comment additionally, but are not a very attractive vehicle to us. We want to keep our duration low given we are not -- we don't have a crystal ball -- on where interest rates are going to go. But primarily the fact that there is not enough yield in the securities arena for us to make that attractive to grow that book. Lloyd, if you have additional comments.

Actually, I think Mark covered it pretty well. I mean the yield opportunity in securities is very, very minimal without taking additional duration risk and you are not getting paid for credit risk out there as well. So we will -- to the extent that we find ourselves with an excessive amount of cash, we will continue to be buying securities from time to time. But we are not looking to add leverage in that area, if that is what you are suggesting, Tim.

It is, it is. You across my coverage have one of the lowest percentage of securities to average earning assets. So just by looking at those numbers it would seem you would have opportunities there. But clearly that is not what you are looking at. And then the loans that you added this quarter, what was kind of the average -- the blended rate of those new loans entering the portfolio?

Tim, this is Rick Barton. You know, the average rate probably is really driven by the type of loan that we are talking about. There is quite a wide disparity between the rates we are able to get on some of the real estate construction loans particularly in the residential arena which are north of 5.5%. If you look at some of the very competitive aspects of the C&I business in the Northwest, the rates are significantly less than that, more in the 4% range.

Okay, clear that up for me. C&I loans are in the 4% range or 5.5%?

C&I in the 4% range.

Okay, all right. And then any plans, Mark, Lloyd, to reduce non-credit operating expenses in 2013?

Tim, this is Lloyd. As we noted last quarter, we did make a decision to close a couple branches and you can see some of the impact of that in our occupancy line. We've been really quite disciplined in managing expenses across the footprint for a couple of years now.

We will continue to look at areas where there may be opportunity. But it's not going to be a dramatic wholesale across the board slashing of expenses. There's not that kind of opportunity really in this operation right at the moment.

Recall, Tim -- this is Mark -- that our strategy here is to make sure that we are growing into our balance sheet once we fixed and healed the balance sheet. So to the extent that we are going to see additional organic growth along with revenue generation we will manage and we have done a very good job of managing our expenses effectively.

To the extent that that does not occur, does not present itself in the Northwest, then we will look to do a sharper fine point on the expense structure. But we will constantly rationalize our branch distribution accordingly to make sure that we are in a position to take care of all opportunities. I think it is important to look and note that our overall expenses -- operating expenses are down 10% year over year.

Oh, sure, sure. So it is just a matter of leveraging your existing infrastructure then?

Correct.

Okay. Has the competitive environment then changed? Has it improved in the last quarter, last half year or so?

I think the competitive informant is still quite fierce. There is not enough economic growth to present itself for the banks to be expanding their margins at this point with a low interest rate environment. So it's a very competitive posture. And you have to have a very well refined value proposition in the markets in which you do business in order to take market share.

We have said for the last several quarters and prepared our business plans based on 2012 and forward into 2013 that this was going to be a marketshare game and we had to execute effectively to take marketshare and not rely on significant rebound in the economy.

Okay. Well thank you, gentlemen. Those were all my questions.

Don Worthington, Raymond James.

In terms of the -- given the strong reserve coverage and reduction in non-performers, would you consider being more aggressive in terms of releasing reserves, perhaps even a negative provision?

Don, this is Lloyd. I think we would be hard-pressed as a management group to get to a negative reserve position. But clearly, as the credit metrics continue to improve, we have been providing at less the net charge-offs, as Rick indicated, for about seven quarters. And I don't think it is inconceivable that we get to some quarters where there is no provisioning.

Okay, thanks.

(Operator Instructions). Joe Stieven, Stieven Capital.

First of all, congrats, on another great quarter. My question is actually pretty simple; most of my other questions were already answered. But on the tax side on a go-forward basis, can you give us sort of just a better ball park spot where we're going to be at on a go-forward basis on the tax rate? Thanks, Lloyd. Thanks, guys.

You bet, Joe. I wish taxes was a simple question. But actually it is looking forward. This year was a little complex, as you can see, for this year and for the fourth quarter. But on a go-forward basis, as we've indicated, our normal run rate is around 32% to 33% effective tax rate.

We have a statutory rate of about 36% when you throw the state taxes in and then we have some tax exempt income from a municipal bond portfolio and a few tax credits and stuff that make us pretty consistent within that 32% to 33% range -- effective rate.

Okay. Guys, thank you again.

Jacque Chimera, KBW.

I have two quick follow-up questions. The first one, I just want to make sure that I understood something that I wrote down from your prepared remarks. I am not sure who had said it, but someone said that credit costs were above your long-term goal. Was that in reference to the current quarter or was that more broadly speaking?

Jacque, this is Mark. That is more broadly speaking in terms of 2012 charge-offs.

Oh, okay.

We want that charge-off rate to be down, along -- coupled with clearly the additional credit costs in the Company for the full year are still a little high.

Okay. That makes much more sense given how low credit costs were in the current quarter. And then also, I wondered maybe, Mark, if you could just give some color on your outlook for SBA sales and if you think that could be meaningful going forward as it was in the quarter?

Yes. I think that for 2013 we have started the year off very well with the pipeline. If you do recall, we made a sizable investment in our SBA capabilities some 30 months ago by bringing in a team of experts that were in a position to make us a preferred lender for the SBA across our footprint. That has been rewarded very well.

We've hit the ground running and we are actually the number 7(a) program lender in the Seattle/Spokane marketplace. And our pipelines are very strong. So we are being recognized as one of the premier SBA lenders in terms of community banks in our footprint. So I would expect that to continue.

I think very similar to what Lloyd outlined with the spreads in the mortgage business in terms of sale to spreads in the SBA business right now are quite high as well and higher than I have seen them in a long time. So to the extent that those spreads stay advantageous to us we will continue to sell those into the market.

And then in the event that those spreads narrow a bit, that is something you might look to portfolio for some loan growth in the future?

Correct, correct.

Okay, great. Thank you. A really nice end to a really nice year.

There are no further questions at this time. I would now like to turn the call over to Mr. Grescovich for closing remarks. Please go ahead.

Thank you, Copiah. We are very pleased with our fourth-quarter and full-year 2012 performance and our improvement demonstrated that we are making substantial and sustainable progress on our disciplined strategic plan to strengthen Banner by achieving a moderate risk profile and at the same time executing on our super community bank model by growing marketshare, our deposit franchise and improving our core operating performance.

I would personally like to thank all of my colleagues who are driving the substantial improvement and performance for our Company. Thank you for your interest in Banner and for joining the call today. We look forward to reporting our results to you again in the future. Good-bye, everyone.

Ladies and gentlemen, this concludes the Banner fourth-quarter 2012 conference call. If you would like to listen to a replay of today's conference please dial 303-590-3030 or 1-800-406-7325 with the access code 4583551 pound. AT&T would like to thank you for your participation. You may now disconnect.