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Q1 2008 Banner Corporation Earnings Conference Call - Final.

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Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning ladies and gentlemen. Thank you for standing by. Welcome to Banner Corporation's First Quarter 2008 Conference Call. [OPERATOR INSTRUCTIONS] This conference is being recorded Thursday, May 1st, 2008. I would now like to turn the conference over to Mr. Mike Jones, President and Chief Executive Officer. Please go ahead sir.

MIKE JONES, PRESIDENT AND CEO, BANNER CORPORATION: Thank you Kristen. This is Mike Jones. And thank you all for listening this morning to our first quarter conference call relative to our earnings performance in the first quarter. Sitting here today with me is Lloyd Baker, our Chief Financial Officer; Albert Marshall, the Secretary of the Corporation; and Rick Barton, who is the Chief Credit Officer of the company also.

Before we get started, I think we need to have Albert read the first paragraph.

ALBERT MARSHALL, SECRETARY, BANNER CORPORATION: 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-K for the year ended December 31, 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. Thank you.

MIKE JONES: Thanks Albert. I'm going to start this conversation off with relative performance in the first quarter because I suspect the two primary areas of interest are in the level of the provisioning for possible loan losses that was in the first quarter at $6.5 million, and secondly the net interest margin compression that took place in the first quarter. And then a little later in the presentation Lloyd Baker will be talking about that part of it.

As it relates to the asset quality issue, first of all I need to apologize to you all. I frankly was wrong in the first quarter when I said I thought we had peaked in terms of the growth in our non-performing assets. It's very clear that did not happen. We grew an additional $18 million in the first quarter of this year. We had great expectations on some of our projects for resolution during the quarter and frankly some of those just didn't take place. And in addition to that, a couple of them that we thought were going to do okay turned out to not do as well as we thought.

As you're well aware, the one-to-four residential area is the concentrated area relative to our non-performing assets. It represents about 31% of our loan portfolio and 80% of the problem assets are coming from that particular area. Before we get more deeply into that, I need to say that as it relates to deterioration of credit in the other parts of the portfolio, we do not see that. We in fact see a very strong performance in our consumer portfolio and our C&I loan portfolio. And of course most of you are aware this part of the world has agriculture. And agriculture last year had an absolutely barn burning year and we fully expect they're going to have a similar year in 2008. So those areas of our portfolio are not subject to deterioration.

In the one-to-four area, however, we need to kind of size this and place it for you so that you understand where this portfolio is. As you're mostly aware, 80% of what we do in this particular area is in the Seattle area. And I'm going to phrase it as Seattle/Puget Sound. I say Seattle to you because many of you on the east coast know that better than just the Puget Sound area. But I do have to say the Puget Sound area stretches for about 60 miles south of Seattle and probably for about 90 miles north of Seattle. So when we talk about that, it's a larger area than just the city limits of Seattle. But 80% of our portfolio is done there or in the greater Portland marketplace. And when I speak of Portland, I'm also including a suburb across the border in the state of Washington called Vancouver, Washington, not BC.

The split of the portfolio is roughly about even, 50/50 between those two marketplaces. 9% of what we do in the one-to-four construction and A&D area is located in the greater Boise, Idaho marketplace. And the rest of it is scattered across our system from Spokane, Washington, to the smaller cities in eastern Washington and so forth. And in general, those particular areas are doing very well. Housing is doing just fine. And it's largely driven off of the agricultural economy of those areas.

Now as it relates to the 80% of the non-performing assets in the one-to-four construction area and the A&D area, we need to place them for you. $22 million of that total is in the greater Portland area, which represents 42% of our non-performing assets. $16 million is in the Seattle/Puget Sound area which represents 30% of the non-performing assets. And $12 million is in the Boise, Idaho marketplace, which represents 24% of the portfolio.

I think you can see that we are reasonably diversified across several communities. Those communities are performing differently than and they don't all perform the same. And...

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