Banner Corporation (BANR) Q3 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Banner Corporation Third Quarter 2012 Results Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, October 25, 2012. I would now like to turn the call over to Mr. Mark Grescovich, President and CEO of Banner Corporation. Go ahead, sir.

Thank you, Jo, and good morning, everyone. I would also like to welcome you to the third 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.

Surely. 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, forecast 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, 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 operating performance again in the third quarter, reporting a net profit available to common shareholders of $15.2 million or $0.79 per share for the period ended 9/30/2012. This compared to a net profit to common shareholders of $23.4 million or $1.27 per share for the second quarter of 2012 and a net profit of $4.1 million or $0.24 per share in the third quarter 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 $0.93 per share for the third quarter of 2012 compared to $0.68 in the second quarter of 2012 and $0.24 per share in the third quarter of 2011. The third quarter 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 6 quarters further demonstrates that our strategic plan is effective and we are 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 third quarter core revenue increased 8% when compared to 2011. Our net interest margin was 4.22% in the third quarter of 2012 compared to 4.10% in the third quarter of 2011. And our cost of deposits, again, decreased in the most recent quarter to 41 basis points compared to 70 basis points in the same quarter of 2011. These improvements are reflective of the execution on our super community bank strategy that is reducing our funding cost 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 8% compared to September 30, 2011. Also, our non-interest bearing deposits increased 20% from one year ago. It’s important to note that this is all organic growth from existing branch network. In a moment, Lloyd Baker 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 continue in making excellent progress on positioning Banner with a moderate risk profile. Our non-performing assets have been reduced another 19% compared to the second quarter of 2012, and 61% compared to September 30, 2011. The most problematic part of the portfolio are non-performing loans, has reduced 18% from the second quarter of 2012 and 53% from September 30, 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. Although we have made excellent progress in reducing these troubled assets, we recorded a $3 million provision for loan losses in the quarter. This raised the coverage of our allowance to non-performing loans to 204% at September 30, 2012, up substantially from 104% in the third quarter of 2011. While credit cost remain elevated in the third quarter and 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 2.45%. Our total capital to risk-weighted assets ratio was 19%. Our tangible common equity ratio improved to nearly 11.5% and our loan-to-deposit ratio was 92%. In the quarter and throughout the preceding 30 months, we continued to invest in our franchise. We have added additional commercial and retail banking talent to our company in all our markets and we have invested in new sales and credit training programs to further train develop our bankers and integrate Banner’s new and credit and sales culture. These efforts are yielding very positive results as evidenced by our strong customer acquisition and our 12 consecutive quarter of year-over-year increases in revenues from core operations. And we’ve received marketplace recognition of our progress as J.D. Power and Associates ranked us number one in customer satisfaction in the Pacific Northwest and 5th in the United States. Finally, our persistent focus on improving the risk profile of Banner and our successful execution of our strategic turnaround plan has now resulted in 6 consecutive quarters of profitability. Although further improvement in core performance is a primary focus for our company, our confidence in the sustainability of our future profitability has convinced us to repurchase approximately 40% of our perpetual preferred stock in private transactions at an average price of approximately 96% of par value. These transactions are consistent with our commitment to appropriate capital management. I’ll now turn the call over to Rick Barton to discuss the trends in our loan portfolio and our improving credit metrics. Rick?

Thanks, Mark. I am quite pleased to be able to, again, echo Mark’s comments on the company’s improved credit quality. The third quarter showed solid progress in all key metrics. So my comments this morning can be brief. Net charge offs decline for the eighth consecutive quarter when compared to the link quarter, they were down $900,000 or 17% to $4.4 million. Total non-performing assets declined to 1.38% of total assets, a reduction of 35 basis points when compared to the second quarter and 215 basis points from a year ago. The quarter-to-quarter dollar reduction was $14.1 million or 19%. Non-performing loans fell $8.5 million during the quarter with every major loan category showing improvement. New non-performing loans during the quarter totaled $5.1 million, down from $6.4 million in the link quarter and, again, where are at the lowest quarterly totals since early 2008. The in-migration was principally made up of consumer real-estate loans. The portfolio of home rush loans did not drive this migration as that portfolio continues to perform well with a delinquency rate of just over 1%. REO decreased by $5.5 million or 21% during the quarter. REO dispositions during the quarter were $10.4 million. The gain on sale of REO of $3 million for the quarter came partially from these current sales but was supplemented by the recognition of a deferred gain on a previous period sale of nearly $2 million. Residential construction and land remaining in our REO are only $90,000 and $9.9 million respectively with both categories declining during the quarter. One-to-four family real estate now makes up 33% of the REO buck and we expect that one-to-four family residential real-estate properties will be a larger proportionate share of our REO over the next several quarters as consumers continue to deal with their underwater mortgages. Classified loans decreased $21.4 million during the quarter to $145.9 million, a reduction of 13%. Total delinquent loans decreased to 1.45% of total loans from 1.65% in the link quarter. 12 months ago the delinquency rate was 2.82%. The allowance for loan losses continues as a source strength for the company. Our portfolio of residential land now is only $80 million. Coverage of non-performing continue to increase during the quarter and stands at 204%, up from 169% last quarter. The reserve to total loans dropped by 5 basis points to 2.45% 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 6 consecutive quarters. And the strength of our reserve puts us in a position to deal with the economic uncertainties we continue to face. The third quarter was yet another positive step in returning our credit metrics to acceptable levels. Our focus on this task remains strong and will continue to be so until the job is completed. With that, I’ll turn the mike over to Lloyd for his comments.

Thank you, Rick, and good morning, everyone. Well, as Mark and Rick have already indicated, and is reported in our press release, Banner Corporation had a very good third quarter; and candidly somewhat better than we would have expected when we talked with you 90 days ago. Our operating results for the quarter and 9 months ended September 30, 2012 reflect further progress during the quarter and as important the cumulative impact of the significant progress that has been occurring over the past 2 years. That progress has resulted in much improved credit quality and lower credit cost, strong revenue generation, significant growth in client relationships, particularly for core deposits, and increasing core operating profitability. In fact, as noted in the release, this marks the 12th consecutive quarter that we have realized year-over-year increase in core revenues. For the quarter ended September 30, 2012, our core revenues or our revenues from core operations - excuse me - 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, so core revenues increased to $54.3 million compared to $52.3 million in the immediately preceding quarter, again, a new quarterly record and $4.2 million or 8% greater than the third quarter a year ago. Revenues from core operations for the first 9 months of 2012 increased to $157 million, also an 8% increase compared to the same 9-month period in 2011. Reflecting this growth and augmented by a further reduction in credit cost, our net income was $15.6 million for the third quarter compared to $6 million in the same quarter a year ago. And as a result, for the first 9-months of 2012, we recorded net income of $50.2 million. You will recall that last quarter, our confidence in the sustainability of our earnings, coupled with our improved risk profile, led us to 2 significant, although largely offsetting adjustments to the significant accounting estimates which are reflected in our year-to-date financial results. Specifically, the reversal of most of the valuation allowance for our net deferred tax asset and a large fair value charge associated with revaluing our junior subordinated debentures. So why am I noting that this quarter’s performance was a bit better than we might have expected at the start of the quarter? First, while the fact that we had another good quarter from mortgage banking operations is not a surprise as we believe we have been gaining market share for some time now and our pipelines have been robust. The level of profitability in those operations has been exceptional. I think I can confidently state that the margins in mortgage banking are wider than any time in the last 25 to 30 years. Of course, that has much to do with the Federal Reserve’s quantitative easing efforts which have stimulated refinancing activity beyond the market’s capacity to originate and close loans with a level of efficiency necessary to foster more aggressive price competition. Unfortunately, the other consequence of the fed’s efforts is exceptionally low yields on mortgage-backed securities and other investments which will continue to result in pressure on all bank’s net interest margins, including Banners. However, for at least the near-term, mortgage banking spread should remain wide and continue to make a significant contribution to our net income. In addition, our results in the third quarter were helped by nearly $3 million of gains on the sale of REO although those gains were partially offset by a $1.3 million evaluation adjustment. Again, the fact that we had additional success dealing with troubled assets is not a surprise. However, the size and timing of some of those gains was somewhat ahead of our expectations. Of course, those are good variances that we are happy to report but not likely to recur on a regular basis. In fact, as Rick has noted, our inventory of REO has continued to decline. While that will result in lower holding cost going forward, it also means that recurring gains from sales are less likely. Further, although we did anticipate continuing growth in core deposits and a further decrease in our cost of funds, I think it’s fair to indicate that the increase in many of our commercial clients cash balances has reflected in a strong growth in our non-interest bearing account balances during the quarter was beyond our expectations. That growth in non-interest bearing accounts clearly contributed to the solid net interest margin for the quarter and positioned us well for further decrease in funding cost in the current quarter. Finally, while the decrease in non-performing assets and further reduction in the adverse impact of non-accrual loans on our net margin was not at all surprisingly, for the second quarter in a row, our income was augmented by the collection of previously unrecognized interest income on certain non-accrual loans, it was also somewhat ahead of our expectations. So all of these positive variances combined with the consistent progress that we have been reporting for quite some time now, led to quarterly results that were very good and were stronger than may have been anticipated. Few additional comments on the quarter, our provision for loan lives for the third quarter was reduced to $3 million compared to $4 million in the preceding quarter and $5million provision in the third quarter a year ago. As a result, our provision for the first 9 months of 2012 was $12 million substantially less than the $30 million for the first 9 months of 2011. Of course, as a result of the reduction in non-performing loans, that we have been reporting for a number of quarters, this further decrease and provision should not come as a surprise to anyone. Also, as noted in the press release, the third quarter of 2012 was highlighted by the continuing trend of increase revenue generation that we have been commenting on for more than 2 years, as has been the case for all of these periods. The year-over-year increase in core revenues is reflective of significant improvement in the net interest margin and resulting net interest income as well as solid deposit fee revenues fueled by growth and core deposits and as I noted, a substantial increase in revenues for mortgage banking operations. Our net interest margin was 4.22% for the third quarter of 2012. A 4 basis points decrease from the preceding quarter, but 12 basis points stronger than the third quarter a year ago. The year-over-year margin improvement, again, reflects a meaningful reduction in our funding cost as well as further reduction in the adverse effect of non-performing asset. For the first 9 months of the year, our net interest margin was 4.2%, a 16 basis points expansion compared to the same period last year. As a result for the third quarter of 2012, Banner Corporation’s net interest income was $42.7 million compared to $42.3 million in the immediately preceding quarter and $41.7 million in the third quarter a year ago. Despite the adverse impact of very low market interest rates and weak on demand on asset yields, for the first 9 months of 2012, our net interest income was $126.1 million, a 2.5% increase compared to the first 9 months of 2011. Deposit cost decreased by another 7 basis points during the third quarter and were 29 basis points lower than a year ago reflecting further changes to the deposit mix as well as additional downward pricing. In addition, our funding cost were significantly reduced compared to the same quarter a year ago as a result of the repayment in March of this year of the $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 cost, our average cost to funds decrease by 7 basis points compared to the preceding quarter and was 34 basis points lower than the third quarter of 2011. Similarly, for the first 9 months of 2012, our funding costs were 36 basis points lower than the same period in 2011. As I noted, the low interest rate environment continue to put downward with pressure on asset yields. However, a net interest margin further benefited from the significantly decreased level of non-accruing loans in REO compared to prior periods which offsets some of this pricing pressure. The yield on average-earning assets at 4.66% decreased by 10 basis points compared to the preceding quarter and was 23 basis points lower than the third quarter of 2011. The yield on loans was 5.45% for the third quarter which was a decrease of only 3 basis points compared to the preceding quarter and 8 basis points compared to the third quarter a year ago. The adverse margin impact from non-accruing loans decreased to 5 basis points in the current quarter compared to 8 basis points in the preceding quarter and 21 basis points for the third quarter a year ago. In addition, the collection of previously unrecognized interest on certain non-accrual loans that had been acquired at a deep discount, added 9 basis points to the margin in the current quarter. The same factors positively impacted loan yields for the year-to-date period, however, reflecting the low rate environment for the first 9 months of 2012, loan yields decrease by 15 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 on our net interest income will be much more dependent on growth and earning assets in the future periods. Unfortunately, as noted in our press release for the quarter, loan balances were little changed compared to the preceding quarter. Seasonal increases in construction and agricultural loan balances were generally offset by a further reduction in residential real estate as refinancing activities spurred loan prepayment. And we experienced further planned reductions in land development loans. Reflecting continued economic uncertainty, demand for commercial business and consumer loans and credit line utilizations remained disappointing. By contrast, total deposits increased $60 million compared to the prior quarter in. And as I noted before, non-interest bearing deposits increased a substantial of $114 million during the quarter and have increased 20% compared to a year earlier. As a result of growth in transactions and savings accounts, and planned reductions in high cost certificates of deposits, core deposits now represents 69% of total deposits. And as I have noted before, we continue to see solid growth in the number of accounts and customer relationships which is significantly contributed to deposit fee revenues. This was very evident in the current quarter and 9 months results as total deposit fees and service charges were 10% greater than for both the same quarter in 9-month period a year ago. As I noted before, revenues from mortgage banking activity continued to be very strong with mortgage banking revenues increasing to $3.4 million for the third quarter of 2012 compared to $2.9 million in the second quarter and $1.4 million for the third quarter of 2011. Year-to-date mortgage banking revenues were $8.9 million compared to $3.2 million a year ago. And, of course, the very low mortgage rates currently available in the market have cost the application activity to remain high which will likely to continue positively impact our revenues for at least a few more quarters. Similar to recent periods for the second quarter and year-to-date, 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 increase health insurance cost. Offset a portion of the decrease in REO expense and FDIC deposit insurance cost. Our occupancy expense was somewhat increased in the current quarter, primarily as a result of our decision to close two of our branches at the end of this year. Both of those branches are in lease facilities and as a result of the pending closures, we wrote-off approximately $450,000 of undepreciated tenant improvements for those locations. Returning to the accounting adjustments, we reversed an additional $4 million of the deferred tax valuation allowance in the third quarter which offset most but not all of our provision for income taxes. The provision for income taxes was $2.4 million for the third quarter. We also made a further 25 basis point adjustment to the discount rate used to estimate the fair value of our junior subordinated debentures, resulting in a $2.5 million charge for the increase in the fair value of that debt, which was partially offset by similar adjustments to the estimated fair value of certain investment securities that we own. We also recorded a small OTTI charge to write off the remaining balances in Freddie Mac and Fannie Mae preferred stock. Finally, as Mark noted, we repurchased 40% of our preferred stock during the quarter at a price somewhat below its net book value, which produced a modest gain net of the accelerated discount accretion. And it added to earnings available to common shareholders. These repurchases also reduced the preferred stock dividend accrual for the quarter. Nonetheless, following these repurchased transactions, the capital base of the company and the subsidiary banks remain substantial. And this capital strength should continue to allow Banner considerable flexibility with regard to capital management as we move forward. So with that final thought, I’ll turn the call back to Mark. As always, I look forward to your questions.

Thank you, Lloyd. That concludes our prepared remarks. And Jo [ph], we will now open the call and welcome questions.

[Operator Instructions] And our first question comes from the line of Jeff Rulis with D.A. Davidson and Company.

A question Lloyd on the - well, the preferred - I guess the combined, preferred and discount accretion payment total. Would it be safe to assume borrowing any other repayments that, that was 2 million a quarter, that level would be 60% of that going forward or 1.2 million?

60% - good morning, Jeff by the way. 60% of the number that was in the third - or excuse me, the second quarter would be the right way to look at that Jeff. You’re right. The dividend and the discount accretion both will be reduced as a result of those repurchases.

And on that topic, I guess, what can you share on thoughts of future repayments or redemptions at this point. And if it can’t be specific, I guess, what would guide that decision? Is it more investors willing to sell or I guess managing the bank’s capital levels?

Jeff, this is Mark. As we’ve stated historically and we’ll continue to emphasize, we’ve said, if we continue to execute effectively on our business plan which we have, that we would be in a position to repay the perpetual preferred securities over time. We started that process this quarter. So we will continue to do - continue to evaluate our capital position in the light of what is still a fragile and volatile economy and evaluate what is the best and appropriate use of that capital. Clearly, given our current positions, we have a tremendous amount of flexibility.

Okay. And maybe a question for Rick. I guess, given the credit trends, any thoughts on the accelerating the release of reserves or would you have taken another way if you look at kind of growth outlook, maybe grow in to those reserves. How would you kind of gage that?

Well, Jeff, the first thing that I would say is we have been recognizing credit quality improvement as we have not been matching charge-offs with provision expense now for 6 quarters. But we still have a higher level of classified assets than I’m personally comfortable with. And we still have a high degree of uncertainty in the economy both domestically and internationally. So we’re going to be very prudent on how we manage the reserve going forward and as the classified assets continue to come down and we have better certainty on the economic outlook, we’ll manage the reserve accordingly. And of course, as a loan portfolio would begin to expand, that would absorb some of the reserve that we have as well.

That makes sense. And then one last one, I guess, maybe for Lloyd. Just looking at the share count creep given the announcements you’ve made on the drip, would you expect that drip to creep to slow in future quarters?

We expected it to stop. We announced the termination of the purchase portion of that plan back in August. Unfortunately, we didn’t get it done quite in time to stop all the inflow this quarter. But going forward, we don’t expect any additional purchases there and share issuance.

And our next question comes from the line of Tim Coffey with FIG Partners.

I might have missed this. So what was the reason for the growth in the miscellaneous line items that non-interest account?

This is Lloyd, Tim. We had some good success with interest rates swap activity there. We had a little more [indiscernible] income than normal in that line. So were few other miscellaneous fee items but I think the interest rates swaps was probably the biggest contributor.

If you recall Tim - this is Mark, we announced a program to add to our product line which is the swap program help also manage the interest rate risk of the company. So as commercial real estate production has picked up, so has our swap income.

So there’s nothing we could anticipate a similar run rate going forward?

I think based on the current production and backlog numbers we have for real estate, that’s probably a consistent number, yes.

Okay.

Tim, this is Lloyd. That number will be lumpy, okay. That line item.

Yes, yes. I saw that it’s got other stuff in it. Lloyd sort of cut me on the line, what was kind of average lone sale margin on the mortgage products?

It was in excess of 225 basis points which is I indicated is considerably higher than historical levels.

And then on the backs of your promise earlier, do you expect that margin to stay at this level or potentially to increase?

I don’t expect it to increase certainly. I think it will stay elevated for some period of time but again, competitive pressures - those might build as the refinancing pipeline changes a little bit. I’d be surprised to see the margin stay as wide as they are. I think everybody in the industry is observing this right now.

Absolutely. And Rick, talking about some of the OREO valuations in the portfolio right now. The OREO seems a pretty strong rebound in real estate prices in the last 12 months. Could it be possible to see more gains on the sale of OREO going forward?

Well, that’s certainly, possible Tim. But we have to look at the absolute level of OREO and it’s going down very quickly. And the opportunities for those kinds of recoveries will be fewer and farther in between.

Okay. Then Mark, I have a question for you. When you first joined the company, you laid out a number of initiatives you wanted to do. Primarily centering around, lowering credit cost making company more efficient, and especially helping revenues. Given where we are today, how far along are you in that plan and what needs to be done to complete it.

Well, I think we’re substantially complete with what we wanted to accomplish in terms of moving the company to moderate risk profile as evidenced by the performance of our special assets teams and our portfolio managers in working through our problem asset. From the second component was improving the core earning power of the company. And as we’ve indicated in our prepared remarks, the quarter earnings power of the company is up substantially. And we have been able to grow revenue for the company throughout this process that we were healing the balance sheet. There is still room on the deposit mix side of the company to continue to grow our core deposit base which will help continue to lower our funding cost to protect the margin compression that we will be experiencing and have experienced on the asset yield side. So there is still some work to do there. The sales process and how we’ve reorganized the company, added additional talent to the organization including realignment of our mortgage operation to our retail delivery platform has added substantially to the revenue of the company as well. So we’re substantially complete with that. However, our sales process and continuing to grow the balance sheet to take market share as Lloyd indicated to grow our earning assets is still - while it’s taking effect and we are taking market share, not just on the commercial banking side but on retail banking by growing our accounts at 16.5% year over year. We still have to get better at doing that and taking market shares. So the balance sheet is essentially been flat based on economic conditions. We are taking market share. But by and large, the roadmap that we had placed out in terms of the turnaround plan is substantially complete and now it become how do we expand the organization going forward.

Okay. Just also on the last slide, do you feel like you have the strongest infrastructure to go out there and take market or do you need that branches or offices?

I think we’ve got by and large the appropriate infrastructure to do what we wanted to do from a market share expansion standpoint. As Lloyd indicated, we did make a decision to close 2 branches. We also open an additional branch in our Seattle market place. So we’re constantly refining our delivery model and infrastructure to make sure that we’re in a proper place to expand that market share.

[Operator Instructions] And our next question is from the line of Jacque Chimera with KBW.

Talking again, on the 2 branches that you closed in the quarter, was there any separation expense associated with that?

No, Jacque. Hi, this is Lloyd. There was no separation expense. We expected those people will move across to some open positions we had in nearby locations. We do think that going forward there is probably about $600,000 annual cost savings out of that however.

All in the occupancies line item or does that move over a few different line items?

No, no. Part of that will be - a meaningful part of it actually will be in compensation and other related expenses. As I said, there is always open positions in the end.

Okay. So not quite -

So we use that staff to fill those positions.

Okay. That makes sense. And then also probably, another one for you Lloyd, do you know what the accelerated portion of the discount accretion was on the preferred redemption?

Roughly 800,000. You can see that in comparison to the prior quarter where the $450,000 of scheduled amortization was occurring.

Okay. That’s about what I was calculating. I just wanted to double check on that. And then as I’m looking at the operations, the press release and you have said in the prepared remarks, I think that the DTA recaptured portion was about $4 million. So if I extract that out, I’m calculating taxes of about $6.4 million which almost seems like a more normalized tax rate. Am I looking at that correctly?

Yes. You can look at the pre-tax number which was $18 million and you’re going to have roughly a 33% effective tax rate against that. Once we’ve utilized all of the-- recapture the deferred tax asset the valuation allowance. So as we indicated, there’s $3 million of additional valuation allowance left that will all be brought in the fourth quarter of this year. And then you will see us reporting taxes at a normal effective rate of around 33%.

So was the better performance in 3Q, is that part of what resulted in some tax payments in the quarter?

Exactly. You’ll get me going here just a little bit because we had to - under the accounting rules, keep the $7 million of valuation allowance on the book based on sort of an estimate of where we thought income would be for the second half of the year. We had a fairly conservative estimate there compared to our actual results.

Okay. That makes sense. And then to the extent that you’re able to comment on the preferred sale that happened during the quarter. I know that you said it was private transactions. Was that with just one large holder or was it with multiple holders?

Jacque, this is Mark. We were approached by a couple of different holders that were interested in making – in doing a private transaction to sell and we accommodated accordingly. So -

So any future redemption of the shares would likely happen in a similar circumstance or is there the possibility for an open market purchase and then subsequent redemption?

As I’ve said, the purchases that occurred, we were approached by those particular parties wanting to take a gain. And we were in a position to accommodate by repurchasing and it provided economic value to our company. As I’ve indicated in my earlier remarks, given the strength of our capital position, given our liquidity positions and giving our substantial reserves, our capital management tactics remain very flexible at this point.

Okay. So I guess my question was less about timing and more about you could - rather than being approached and reacting, you do also have the ability to be proactive about this based on everything you’ve discussed.

All options are on the table for us.

Okay. Great. That’s the majority of my questions. I’ll step back now. Thank you.

And we have a follow-up question from the line of Jeff Rulis.

Just a follow-up on the - any sort of suggestion on the salaries line while we kind of gage and watch the mortgage banking activity being better than historical. Is there a correlation - I mean, obviously, a correlation but any kind of gage you could assign to that salaries line of 19.6 quarter going forward, I guess, Lloyd or anyone.

Well the 19.6 for the quarter was pretty consistent with the previous quarter if you’ll take a look at it. And both quarters had very strong mortgage banking activity. One thing I’d point your attention to is we also have in our financial statements a line called capitalized loan origination cost, which is a credit in the expense section of the income statement. And you’ll note that that’s up as well and that also is reflective of the increased mortgage banking activity there. So there is somewhat of a netting effect there.

Okay. I guess the run rate - that seems fairly core relative to as long as we some decent activity as you suggested for a couple more quarters, that seems like a decent level going forward.

Yes.

And there are no further questions at this time. So I will turn it back to Mr. Mark Grescovich. Go ahead, sir.

Thanks, Jo. For the third quarter of 2012, out performance continued to demonstrate that we are making substantial and sustainable progress on our discipline 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 market share and improving our core operating performance. I would like to thank all my colleagues who are driving this substantial improvement in performance for our company. Thank you for your interest in Banner and for joining our call today. We look forward to reporting our results to you again in the future. Have a good day, everyone.

Ladies and gentlemen, this does conclude the Banner Corporation third quarter 2012 results conference call. If you would like to listen to a replay of today’s call, you can do so by dialing 1-303-590-3030 or 1-(800)-406-7325, with the access code 4565884. ACT would like to thank you for your participation. You may now disconnect.