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Article Excerpt
OPERATOR: 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.
MIKE JONES, CEO, BANNER CORP: 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?
AL MARSHALL, SECRETARY, BANNER CORP: 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.
MIKE JONES: 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.
LLOYD BAKER, CFO, BANNER CORP: 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...
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