Banner Corporation (parent company) (BANR-NASDAQ)
Banner Bank (the bank)
Islanders Bank (the bank)

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March 9, 2012 Issue

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With New CEO Mark J. Grescovich, in place Since 2010, Banner Corporation has Managed to Successfully Complete a Turnaround While Instilling and Implementing a Super Community Bank Model for Their Multi-State Franchise

Mark J. Grescovich, President and CEO

Mark J. Grescovich is President and Chief Executive Officer, and a director, of Banner Corporation and Banner Bank. Mr. Grescovich joined the Bank in April 2010 and became Chief Executive Officer in August 2010 following an extensive banking career specializing in finance, credit administration and risk management. Prior to joining the Bank, Mr. Grescovich was the Executive Vice President and Chief Corporate Banking Officer for Akron, Ohio-based FirstMerit Corporation and FirstMerit Bank N.A., a commercial bank with $14.5 billion in assets and over 200 branch offices in three states. He assumed the role and responsibility for FirstMeritís commercial and regional line of business in 2007, having served since 1994 in various commercial and corporate banking positions, including that of Chief Credit Officer. Prior to joining FirstMerit, Mr. Grescovich was a Managing Partner in corporate finance with Sequoia Financial Group, Inc. of Akron, Ohio and a commercial and corporate lending officer and credit analyst with Society National Bank of Cleveland, Ohio. He has a Bachelor of Business Administration degree in finance from Miami University and a Master of Business Administration degree, also in finance, from The University of Akron.
 

Company Profile:

Banner Corporation is a $4.26 billion bank holding company operating two commercial banks in Washington, Oregon and Idaho. Banner serves the Pacific Northwest region with a full range of deposit services and business, commercial real estate, construction, residential, agricultural and consumer loans. Visit Banner Bank on the Web at www.bannerbank.com.


Financial
Pacific Northwest Banks
(BANR-NASDAQ)


Banner Corporation (parent company)
Banner Bank (the bank)
Islanders Bank (the bank)

10 South First Avenue
Walla Walla, WA 99362
Phone: 509-527-3636
www.banrbank.com

 

Interview conducted by: Bud Wayne, Editorial Executive, CEOCFO Magazine, Published Ė March 9, 2012


CEOCFO:
Mr. Grescovich, what is your relationship with Banner Corporation, how long have you been with Banner and what was it that precipitated you becoming CEO?

Mr. Grescovich: I have twenty-five years of banking background. I have held several positions inside of commercial banking including CCO of a large regional financial institution, and head of corporate banking for a large regional multi-state franchise banking organization that was and still is very profitable and was profitable through the economic cycle. I joined Banner as president of the company in April of 2010 and took over as CEO shortly thereafter. The reason I joined Banner Corporation was basically to turn the company around. I saw in Banner a large multi-state franchise in a very attractive market, specifically the Pacific Northwest, and Banner was at the time a $4.5 billion institution that covered three states including Washington, Oregon, and Idaho. Quite frankly, it was a company that needed to be in transition. We have 89 offices inside of that footprint, but like many banking organizations on the west coast it really struggled with construction and development in its loan portfolio. These loans actually comprised 34% of the overall loan portfolio, so when the economy, specifically the housing market, got into trouble, obviously Banner became stressed. So the board of directors basically recruited me to come in to turn the company around and recapitalize the organization and get it on solid footing. The reason it was attractive to me was it was something I had done before in terms of turning a company around and instilling and implementing what is a super community bank model for a multi-state community bank franchise, and implementing that and growing it.

 

CEOCFO: Given your background and all that has taken place over the last year or so with the government regulations and the economy in the housing crisis, what is now the vision for the bank and where are you in the turnaround process?
Mr. Grescovich: That is an excellent question! When I joined the company in April we embarked on a strategic turnaround plan and that strategic turnaround plan was actually quite basic in nature, but would last from nine to twelve months. In that turnaround plan, the first accomplishment was improved capitalization and liquidity. The second area of work was to address the substantial troubled assets that were in the bankís portfolio, improve the overall risk profile of the company and migrate to a moderate risk profile. The third thing we needed to do in that process was to improve the core earnings power of the corporation, which we addressed by improving our funding cost and our core deposit mix. The bank itself was stagnant in core deposits, which were running just under 50% of the overall deposit mix. We had a high-priced old CD business model much like the savings and loan business model, so we had to remake the balance sheet, remix the balance sheet and improve our funding cost. That in and of itself would help the core earnings power of the company. So those have been the three primary items under the strategic turnaround.

In the next phase of the turnaround, over the next twelve to thirty-six months, we began optimizing the value of the franchise. What we are attempting there is grow market share so we take advantage of the super community bank model and begin to take market share from other institutions in the communities in which we operate. We also improved our operating leverage by making our 89 branches more efficient and improving our client acquisitions. We would then also expand into additional sales channels and product delivery, new product offerings, and cater to small and medium sized businesses, thereby expanding our product base and really reinventing the company around the super community bank model. Therefore, we are in the position of transitioning from that initial nine to twelve months, which has served to strengthen the foundation of the company and substantially complete its turnaround into optimizing the franchise value. Let me be specific about what we accomplished as part of that turnaround strategy. We identified four primary strategic priorities and several performance initiatives that we would implement within that initial period of time. Achieving a moderate risk profile was the first priority; building sustainable revenue, growth and profitability was the second priority; remaining core funded as a company, meaning having our deposit base fund our earning and asset base, was the third priority; and then finally improving the operating leverage of the company was the fourth priority.

 

Let me give you a couple of quick examples of how we are doing on each of those. Clearly, in June of 2010 in terms of achieving a moderate risk profile and getting back to improving the capitalization and liquidity of the company, we had a public offering of stock which raised roughly $162 million in fresh capital for the company and also improved liquidity. While that was the hallmark event, we have also been very successful on other fronts in terms of achieving a moderate risk profile. Specifically, at 12/31/2011 our total capital to risk-weighted assets now is a significant 18%. That is up from 12.5% roughly at 12/31/2009. Our tangible common ratio was 9.5% at 12/31/2011, up from 5.8% at 12/31/2009. Also, at the same time we have been able to bolster our reserves and now our allowance for loan losses to non-performing loans is 110%, which is up from 45% at 12/31/2009. So the risk profile of the company in terms of its balance sheet and capitalization is significantly improved. Also, one of the objectives in achieving a moderate risk profile was to improve our earning asset mix. Our residential construction and development portfolio, which was the most difficult part of the portfolio and the primary cause of the stress in the company, has declined substantially at 12/31/2011 to represent just 7% of the overall loan portfolio and 6% of the earning asset mix. That is down from a peak of over $1 billion, or 32% of the overall loan portfolio. That has also helped to improve the risk profile of the company. Also, non-performing loans have been decreased from the peak of $243 million, or 6.2% of the portfolio down to $75 million, or 2.3% of the portfolio at 12/31/2011. That reduction represents a substantial improvement in non-performing loan totals and in reducing the drag on net interest income.

The second priority that we had outlined is building sustainable revenue and profitability growth. We define core revenue as net interest income, plus fee income, less any valuation adjustments that occur in the P&L, so basically the core earnings engine of the company. In 2011 we were able to grow that core revenue by 4% year over year. We were actually in a position where we were growing revenue for the company at the same time we were healing the drag of problem assets and remixing the balance sheet. How did we do that? We were able to improve our net interest margin, which expanded to 4.07% in the fourth quarter of 2011, up from 3.49% in the fourth quarter of 2009. We were able to reduce our deposit costs as we remixed our balance sheet from the deposit side, so that in the fourth quarter of 2011 deposit costs were 59 basis points, down from 1.83 basis points at in the fourth quarter of 2009. Our core deposits have been remixed, so now they represent 64% of the overall funding in the company. That is up from 50%, so again substantial improvement in terms of remixing the deposit side of our balance sheet. Also, what is important here in terms of building sustainable profitability clearly is account acquisition or client acquisition. As part of our reengineered sales process and execution of our super community bank model, we were able to grow our non-interest-bearing checking accounts by 27% in 2011. That is a substantial accomplishment and shows that our model is successful and that our value proposition in differentiation of high-touch, personal service delivery is in tune with market needs. Our client acquisition strategies are really improving franchise value for the company. In summary, the organization has been able to begin to heal itself from the credit perspective and improve the risk profile of the company and at the same time we are growing core earnings for the organization. As a matter of fact, our revenue in 2011 was a company record.

 

With regard to our strategic priority of remaining core funded, our loan to deposit ratio, which is a measure of how much we are lending out versus our overall deposit base, stood at 95% at 12/31/2011. That is down from a peak of 108%. Again, the company has begun to remake itself. We repositioned the balance sheet, remixed the balance sheet, improved core earnings, and significantly reduced the risk profile of the company.

 

CEOCFO: As far as your geographic footprint, what will your strategy be going forward; are you looking at growing the bank, is it going to be organic, de novo or are you going to be involved with acquisitions?

Mr. Grescovich: I do not know how familiar you are with the Pacific Northwest, but we look at the Pacific Northwest as five core markets. A lot of people paint a picture of the Pacific Northwest as one big geographic market. In actuality, it has several submarkets. The five submarkets that we identify include the Columbia Basin, which is central Washington, southeast Washington, and northeast Oregon; Eastern Washington, which is primarily Spokane; Puget Sound, which is Seattle north to the border; Portland, Oregon and Boise, Idaho. Those are our five markets. Bannerís history is in the Columbia Basin, as an agriculturally based institution in eastern Washington. Those markets of the Columbia Basin and eastern Washington are stable markets and we have substantial market share thereóthe number-one market share in the Columbia Basin actually, representing 54% of our deposits and roughly 43% of our loans. We are also well positioned in the higher growth markets of Puget Sound and Portland, and 43% of our branch distribution system is in those two markets. We plan to focus our growth in the Puget Sound and Portland markets.

 

CEOCFO: Do you operate more as a traditional bank, taking locally and loaning locally is that correct?

Mr. Grescovich: The value proposition is a super community bank model, which means we have the broad product depth for middle market and small business as well as the consumer base, but we deliver in a responsive local fashion. Therefore, within each of our five submarkets we have regional executives that are empowered to make decisions in each of those markets.

 

CEOCFO: What about new banking products such as remote deposit capture and new technologies?

Mr. Grescovich: We have invested heavily in treasury management products including remote deposit capture, and also in our bank-at-work program, which addresses the needs of businesses where we are their primary financial institution. We have products not only for the business owners and their families, but their employees as well, so we have invested heavily there along with mobile banking on the consumer side. We have continued to reinvest in the franchise.

 

CEOCFO: Would you tell us about Bannerís involvement in the community?

Mr. Grescovich: The good news is that community involvement was a hallmark of Banner prior to my joining the organization, so not only do we have an appropriate allocation of budget to reinvesting in the community, but over 80% of our employee base contribute back into their communities in terms of time and dollars or serving on boards of local charities. That is a significant number and we promote that as a company as part of our value proposition, as a community based organization. In addition, our executives in each of those regions have lived in those communities for a significant period of time and understand the communities very well.

 

CEOCFO: Do you have a lot of turnover or are you able to hold on to your people in this environment?

Mr. Grescovich: We reorganized the company in 2010, when I first joined. We repositioned our talented executive officers to their highest and best use of capabilities to execute the business model. Therefore, we have been successful at retaining a significant number of our senior officers in the company, but also we have been able to augment our company with very good executive talent from outside the organization. An example of that would be Brad Williamson joining our company to manage our Islanders Bank affiliate as president and CEO. Brad was the previous Director of Financial Institutions for the State of Washington, the bankís primary regulator. He recognized the value of this organization and what we are trying to do, so he decided to join our company as president and CEO of our affiliate bank.

 

CEOCFO: Are you focused at attracting investors, do you do road shows, and is your website set up to provide information?

Mr. Grescovich: Yes to both! I do a significant number of road shows and investor presentations. We have six analysts that cover us, so I spend quite a bit of time this way. Clearly, the capital raise we had in 2010 was very unique in that it was a public offering in which we raised 4 times of market cap for the organization, without a change in control, and no individual owner having more than 10% of the company. That is a significant number of institutional holders and I do spend a lot of time with the investment community.

 

CEOCFO: In closing, why should potential investors consider Banner Bank?

Mr. Grescovich: First and foremost, Banner has a scalable franchise and a very long history in the stable markets that I identified in the Pacific Northwest. We are also very well positioned as a company for robust growth and organic market share growth in the more vibrant markets of the Puget Sound and Portland. We have been able clearly to improve our performance and build shareholder value by executing effectively on our strategic priorities. We have been very transparent about what we are trying to accomplish. We are executing very well on that which I think adds credibility to the investor community, which is to say what you are going to do and show what you have been able to do.

 

Finally, the super community bank model is a differentiated value proposition. It is responsiveness, it is delivery, but more importantly its execution is a differentiated business model in our marketplace and we are seeing that with market share growth and improved core earnings power of the company. So, those are the primary reasons you would look to invest in Banner. The other important aspect is our geographic footprint. We are in the right market, the Pacific Northwest, which has a per capita income growth that is projected to outpace the national average, along with population growth that is projected to outpace the national average as well. Therefore, we are in the right markets in the United States and we have been able to execute on the business model. The final aspect I would say is we are trading at roughly 80%-85% of book value, so we are an attractive investment as well. 

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The organization has been able to begin to heal itself from the credit perspective and improve the risk profile of the company and at the same time we are growing core earnings for the organization. As a matter of fact, our revenue in 2011 was a company record. With regard to our strategic priority of remaining core funded, our loan to deposit ratio, which is a measure of how much we are lending out versus our overall deposit base, stood at 95% at 12/31/2011. That is down from a peak of 108%. Again, the company has begun to remake itself. We repositioned the balance sheet, remixed the balance sheet, improved core earnings, and significantly reduced the risk profile of the company. - Mark J. Grescovich

 

 

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