Banner Corporation (BANR) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Banner’s Fourth Quarter 2012 Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, January 24, 2013. I would now like to turn the conference over to M. Mark Grescovich, President and Chief Executive Officer. Please go ahead.

Thank you, Cathia, 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 and 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, 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 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 1 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 cost of 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 cost by remixing our deposits away from high price 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 1 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 nonperforming 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 nonperforming loans, has reduced 11% from the third quarter of 2012 and 54% from December 31, 2011. In a few moments, Rich 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 nonperforming 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 continue to invest in our franchise. We continue to add talented commercial, retail and mortgage banking personnel to our company in 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’ve received marketplace recognition of our progress as J.D. Power and Associates ranked us #1 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 in 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 1 year earlier. This is a decrease of 63%. And net charge-offs has now declined for 9 consecutive quarters. Total nonperforming assets declined from $119 million to $50 million, a reduction of 58%. Stated as a percentage of total assets, nonperforming assets went from 2.79% to 1.18%. Nonperforming loans decreased from $75 million to $34 million during the year, an improvement of 54%. This puts nonperforming 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 nonperforming loans totaled only $3.6 million or 1.5%. At year-end 2011, nonperforming 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 nonperforming loans, decreased 47%, falling from $85 million to $45 million. As a percentage of total loans, delinquencies were 1.40% versus 2.59% 1 year ago, and loans 30 days to 89 days past due and on accrual were only $12 million or 0.37% of total loans. And now for 2 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 1 to 4 family homes. We continue to expect that 1 to 4 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. The coverage of nonperforming loans, a grand increase 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. Disposition of strength has been maintained even though our provision expense has been less than net charge-offs for 7 consecutive quarters and our 8 Triple-L strength puts us in a position to both 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 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 vote more and more of their energies to help and 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 2.5 years. As we have continued 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 evidenced in these results. Exceptionally low interest rates have pushed our funding costs to near 0, 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 rights 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, that excludes fair value and other than temporary impairment adjustments, increased to $54.5 million, to slightly more than the immediately preceding quarter, but again a new quarterly record and nearly $4 million or 8% greater than the fourth quarter 1 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 cost, our net income was $14.7 million for the fourth quarter compared to $5.1 million for the same quarter 1 year ago. For the full year ended December 31, 2012, record revenues and substantially reduced credit cost resulted in a significantly increased before-tax net income, which was further augmented by a net tax benefit of $24.8 million, as a result of the full recovery of our net deferred tax assets. 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 2 substantial, although largely offsetting adjustments to the significant accounting estimates which were reflected in our year-to-date financial results. Specifically, the reversal devaluation 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 1 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 nonperforming loans and net charge-offs that we’ve 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’s 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 1 year ago. The year-over-year margin improvement again reflects a meaningful reduction in our funding cost, as well as a reduction in the adverse effect of nonperforming 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 immediately preceding quarter and $41.6 million in the fourth quarter 1 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 cost decreased by another 6 basis points during the fourth quarter and were 24 basis points lower than 1 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 1 year ago, as a result of the repayment in March 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 cost, 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 1 year ago, our net interest margin further benefited from decreased levels of non-accruing loans and 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 1 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 1 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 non-accruing loans, for the full year 2012, loan yields decreased by 18 basis points compared to 1 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 was somewhat lower than 1 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 re-financing activities continue to result in elevated loan pre-payments. And reflecting the continued economic uncertainty, demand for both business and consumer loans and credit line utilizations remained 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 1 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 1 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 1 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 to 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 the 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 1 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, the 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 1 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 remained 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’ll turn the call back to Mark. As always, I look forward to your questions.

Thank you, Lloyd and Rick. That concludes our prepared remarks and [Cathia] we will now open the call and welcome your questions.

[Operator Instructions] Our first question comes from the line of Jeff Rulis with D.A. Davidson.

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 kind of what the levels you’re maybe anticipating.

Sure, Jeff. Unfortunately though, (inaudible) and the other governors haven’t included me in their deliberation. 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’re actually expanding our capacity as well. So we’re 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’s certainly our expectation in our plan. It is refinancing declines, the purchase business will remain strong and because of increased capacity that will make up some of the difference there. Obviously, as well as refinancing activity, I’ve 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.

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 re-invest 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’s the overarching business strategy.

Right, okay. And maybe, Mark, one for you on the -- I guess as you look out, you’ve cleared the decks a little bit with the preferred gone and some things that are kind of in the rear view. As you look forward on sort of M&A opportunities, could you catch us up on kind of the dialog 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 dialog 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 in the Northwest is very receptive to this business model. That has allowed us the opportunity to review potential M&A from a strategic standpoint in 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’re seeing rebounds in economic activity. We'll 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.

Our next question comes from the line of Jackie Chimera with 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’s probably close to the average for the whole year. It may have been just slightly stronger than that in the fourth quarter. I think I had indicated about 2.25% in the third quarter. And as I noted before, those are exceptional numbers for a business that didn’t historically generate those kinds of margin.

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 purchase for the volume in the quarter?

That's been running pretty consistently 65%, 70% refi for an extended period of time now, which I think is very consistent with what you're 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 volumes just overall pickup?

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

[Operator Instructions] Our next question comes from the line of Tim Coffey with FIG Partners.

Mark, a couple of question about your forward earnings growth strategy here. I’m assuming that a big part of that includes growing a loan portfolio. To what extent does the forward earnings growth 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've been able to advance our C&I and Ag portfolio 3%. I think it’s pretty clear that we’ve gone through the churn of troubled assets in our company. So we believe that we’ve plateaued in terms of a contraction in the 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’ve been able to advance our market share gains as evidenced by the significant account growth that we've had. So that is the primary focus. Securities are not -- I'll let Lloyd comment additionally, but are not a very attractive vehicle to us. We want to keep our duration low given we don't have a crystal ball. Our 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're not getting paid for credit risk out there as well. So to the extent that we find ourselves with an excessive amount of cash, we’ll continue to be buying securities from time to time. But we’re not looking to add leverage in that area, if that’s what you’re suggesting, Tim.

It is, it is. You, across my coverage, have one of the lowest percentages of securities to average earning assets. Just by looking at those numbers it would seem that you would have opportunities there. But it's clear that’s not what you’re 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. The average rate probably is really driven by the type of loan that we’re talking about. There is quite a wide disparity between the rates we’re 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. C&I loans are in the 4% range or is that 5.5%?

C&I in the 4% range.

Okay. All right. And then any plans, Mark, Lloyd to reduce non-credit operating expenses in ’13?

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 footprints for a couple of years now. We’ll 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.

Great call, Tim, this is Mark. Our strategy here is to make sure that we’re growing into our balance sheet once we've fixed and healed the balance sheet. So to the extent that we’re going to see additional organic growth along with revenue generation, we will manage and we’ve 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 sharp refined 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.

Sure. So this is a matter of leveraging your existing infrastructure then. _

Correct.

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

I think the competitive environment 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 the 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’ve 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 market share game and we had to execute effectively to take market share and not rely on significant rebound in the economy.

Our next question comes from the line of Don Worthington with Raymond James.

In terms of the -- given the strong reserve coverage and reduction in nonperformers, 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 West the net charge offs as Rich indicated for about 7 quarters and I don’t think it’s inconceivable that we get to some quarters where there’s no provisioning.

[Operator Instructions] Our next question comes from the line of Joe Stevens with Stevens Capital.

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 ballpark about where we’re going to be on a go forward basis on the tax rate?.

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%, 33% effective tax rate, that’s we kind of -- we have a statutory rate of about 36% when you throw the state taxes in. And then we have some tax exempt income from the municipal bond portfolio and a few tax credits and stuff that make us pretty consistently in that 32%, 33% effective range.

We have a follow up question from the line of Jackie Chimera with KBW.

I have 2 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’m not sure who had said it, but someone said that credit costs were about your long-term goal. Was that in reference to the current quarter or was that more broadly speaking?

Jackie, this is Mark. That’s more broadly speaking in terms of 2012 charge-offs. 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’ve 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 #1 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 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, the spreads in the SBA business right now are quite high as well and higher than I’ve 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’s something you might look to portfolio for some loan growth in the future?

Correct.

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

Thank you, Cathia. We’re very pleased with our fourth quarter and full year 2012 performance, and our improvement demonstrated that we’re 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 market share, our deposit franchise, and improving our core operating performance. I would personally like to thank all my colleagues who are driving the substantial improvement and 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. Goodbye everyone.

Ladies and gentlemen, this concludes the Banner Fourth Quarter 2012 Conference Call. If you would like to listen to a reply of today’s conference, please dial 303-590-3030 or 1-800-406-7325 with the access code 4583551#. ATC would like to thank you for your participation, you may now disconnect.