Good morning ladies and gentlemen, thank you for standing by. Welcome to the Banner Corporation first quarter 2013 earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened or questions. (Operator Instructions) This conference is being recorded today, April 23, 2013. I would now like to turn conference over Mr. Mark Grescovich President and Chief Executive Officer. Please go ahead sir.

Thank you, Josh. And good morning everyone. I would also like to welcome you to the first quarter earnings call for Banner cooperation. 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 Corporation, Albert, would you please read our forward looking statement safe harbor statement.

Thank you. Good morning. Our presentation today discusses Banner's business outlook and will include forward looking statements. Those statement include descriptions of management's plans, objectives or goals for future operations products or services. Forecasts of financial and other performance measures and statements about Banner's general outlook for economic in other condition. 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-Ks for the ended December 31, 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, Al. As announced Banner Corporation had very solid first quarter performance. Reporting a net profit available the common shareholders of $11.6 million or $0.60 per share for the period ended March 31, 2013. This compared to a net profit the common shareholders of $7.2 or $0.40 per share for the first quarter of 2012. Looking at earnings before tax, preferred stock dividends discount accretion and changes in fair value. Banner's income improved to $0.87 per share for the first quarter of 2013 compared to $0.42 in the first quarter of 2012. The first quarter performance continued our positive momentum and confirmed that through the hard work of our employees throughout the company, we continue the successful execution of our strategies and priorities to deliver sustainable profitability to Banner. And our return to profitability for the last eight quarters further demonstrates that are 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. The first quarter of 2013 marked the 14th consecutive quarters that we achieved a year-over-year increase in revenues from core operation. Our net interest margin held strong at 4.16% in the first quarter of 2013 compared to 4.15% in the first quarter of 2012. In our cost of deposits again decreased in the most recent quarter to 31 basis points compared to 52 basis points in the same quarter of 2012. Also operating expenses for the quarter decrease 10% from the first quarter of 2012. Our improved performance resulted in a return on average assets of 1.11% in the quarter compared to 0 88% from the first quarter of 2012. All of these improvements are reflective of the execution on our super community bank…

Thanks Mark. My comments this morning can be very brief as Mark has already outlined, the company's credit quality again improved in the first quarter of 2013. Well, all of our key credit metrics improved, the pace of improvement did decelerate in some measures, which was expected after the last eight quarters of strong progress. Before discussing several of our metrics, let me emphasize that the momentum underlying our credit quality improvement remains strong and positive. Delinquent loans continued to decrease as documented in our press release, and the level of both watched and classified loans showed double-digit percentage declines during the first quarter. Now for some specific comments; our provision for loan losses in the first quarter was zero. Net charge offs for the quarter were only $363,000, so even with no provision, the allowance to total loans decreased by only 1 basis point to 2.38% and the coverage of non-performing loans actually increased from 225% to 231%, obviously the reserve continues to be a source of significant strength for the company. A further release of reserves through a negative provision for loan losses was not considered appropriate because of the overall growth of the loan portfolio, continuing level of the economic uncertainty and our continued believe that the upcoming change to an expected loss allowance methodology will require higher reserve levels. Total non-performing assets declined from $50.2 million to $44.9 million a reduction of 10.6% dated as a percentage of total assets non-performing assets went from 1.18% to 1.06%. Non-performing loans decreased only $900,000 from the linked quarter. The driver behind this low net reduction in non-performing loans was one to four family permanent loans migrating into the foreclosure process that were placed on non-accrual. This was not unexpected to us as we have commented it in previous…

Thank you, Rich and good morning everybody. As Mark has indicated in his reported in our press release our operating results for the first quarter were very solid in position Banner Corporation well for continued good performance in the future. In particular continuation year-over-year increases in revenues from core operations further improvement in asset quality in addition of client acquisition account growth all given evidence to the positive momentum resolving from the successful execution of our strategic initiatives and the strength to the Banner franchise. It's important to recognize the year-over-year improvement because certain seasonal factors, which may comparison the first quarter to the immediately preceding fourth quarter difficult, can it times lead to under appreciation of value improvement. Those seasonal factors which include the effect of the natural production cycle uncertain agricultural clients, loan and deposit balances. The adverse impact of the holiday season on mortgage banking activity and quite simply the reality the first quarter has two fewer days than the fourth quarter. All combined to marginally reduce revenue generation in first quarter then compared to the fourth quarter. However, as we have known that compared to the first quarter a year ago Banner's performance in the quarter ended March 31, 2013 was good was very good now withstanding the continued challenging economic environment. What's our operating results for the first quarter of 2013 reflect further progress during the quarter and the cumulative impact the significant progress that has been occurring over the past three years. As we continue to execute on strategies design the strength in our franchise and build shareholder value. That progress is 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 is noted in the…

Thank you Rich and Lloyd for your comments that concludes our prepare remarks. So Josh we will now open the call and welcome your question.

Thank you. Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions). Our first question comes from the line of Jacque Chimera from KBW. Please go ahead.

Hi, good morning everyone.

Good morning, Jackie.

This is probably a question for Lloyd, and I apologize if I missed this in your prepared remarks, but was there a small classification that happened between net interest and common mortgage banking revenue in the quarter?

Yes, good morning, Jackie. And yes there was, smallest, it's right, it was about $365,000. We decided that a couple of accounts that we had historically reflected as mortgage servicing incomes, specifically some prepayment penalties and some late charges on portfolio loans where appropriately it should have been reflected as interest income, so well, we switched those in the presentation of the financials this quarter and in the historical financials as well for the prior quarters.

Okay, so then going forward, will loan servicing fees be captured through the mortgage banking operation line?

Right, with that reclassification, we felt that that probably didn't merit of what is a a separate line item in the financial presentation.

Okay, just a housekeeping question from me, and then also did you -- I know in the last quarter there was a nice gain on an SBA loan sale, did anything like that happen in the quarter -- the current quarter?

No, actually the current quarter was pretty quiet with respect to SBA activity, originations were continuing but we didn't have any sales.

How do you think about your options between portfolio that and then selling it?

We generally think about selling it, I think we may have had this conversation a little bit at the last call, but the level of gain is available on those sales, the pricing is so exceptional that decision usually falls on the side of making the sale.

Okay. That makes sense.

Yeah, Jackie, this is Mark, as long as the spread stays wide as they are, we would continue selling them into the market because it enhances the overall yield dramatically.

Okay. Now definately understood. And then just one last one, so the roughly 31% tax rate, is that a good way to think about it going forward?

I think that -- this is Lloyd, and I think I've indicated in the past that I thought 32% to 33%, what's happening in the current economic environment is tax exempt income is proportionately growing relative to total income, and it's bringing that tax rate down a little bit. I would say, I would probably encourage you to think about 32% rather than 31%, but clearly the benefit of tax-exempt securities, tax credits, (Inaudible) income and those things has shown up a little bit more as other revenues have dropped off because of the low rate environment.

Makes sense. Okay, great, thank you very much for taking my questions.

Thank you, Jackie.

Our next question comes from the line of Jeff Rulis with D.A. Davidson, please go ahead.

Thanks, good morning, guys.

Good morning, Jeff.

Lloyd, I -- a question on the mortgage banking, kind of outlook and then I guess I’d heed the advice on the sequential -- don't try to trend that on the mortgage banking revenue, but I guess expectations at least what you've seen so far in April for that mortgage banking line item, do you expect it to flatten out versus the sequential drop or kind of which - what have you seen so far this quarter?

The pipeline is very good, Jeff, so we're pretty optimistic looking forward for a period of time here. As I noted in my comments, just the fact there were fewer days to complete the sales means that you're going to have some drop off in the first quarter as well to originate loans but our pipelines are very solid, and we're pretty optimistic there.

Yeah, Jeff, this is Mark. Our pipeline has been pretty consistent with where they were in the previous quarter, and I think even to some benefit, we're starting to see a bit more shift into the purchase business away from the refi business, so the overall business model, if you recall was for us to make investments so that we add folks that could originate purchase business rather than just refi business, and that seems to be taking hold for us.

Okay. And then on the operating cost side, outside of I guess eventually if mortgage were to slow and you're able to maybe adjust the cost side of that as well, but in terms of core operating costs, is this about as low as you can go or is there some other with OREO cost now less meaningful, are there more cost cuttings to go here or is it pretty at the core?

We're pretty flat with expectations on expenses. I don't think Rick has $800,000 a quarter in OREO gains up his sleeve forever. So, that line couldn't be expected to be get better, and the compensation area will always be an area that will have some challenges related to it, but operating expenses in general, as I pointed out, have been very well managed and we think that there is opportunity for some improvement in efficiency if not the absolute level of expense.

Jeff, again this is Mark, I think if you recall a couple of years ago in 2011 when we were asked this question, we indicated that there would be an expense reduction in the 12% to 16% range from 2011 and that's where we are at. So I would expected that the level off to the extent we cannot as a company continue to grow revenue and have operating leverage along with the strong efficiency ratio like we reported this quarter than we would look for other measures.

Okay. And then Mark maybe one last one, you have talked about kind of the [water falling] (ph) events on the capital side and now that the DTA recovery is behind us and you have now resumed the considerable dividend, I guess what's next in your deal?

Well I think if you look at the dividend that we paid this quarter, we indicated that we thought a normalize run-rate would be between 30% and 35% payout ratio. We wanted to make sure that we had strong visibility on where our earnings are, so we took that payout ratio, we would lean into it more at 20%. So, I still think the cascading effect initially is continue to look for opportunities to reinvest in the franchise, look to make sure that we have a consistent dividend policy going forward, that is in that normalize payout ratio that I just mentioned, and then we would look for possible share repurchase or other items to utilize that capital.

Okay. Thanks.

Thank you, Jeff.

Thank you. (Operator Instructions). Our next question comes from the line of Don Worthington from Raymond James. Please go ahead.

Good morning everyone.

Good morning John

Just a follow on just question there on capital deployment, is the M&A something you'd be looking at terms of fill in to the footprint?

Yes. I think we've been pretty consistent in our message indicating that we've got a business model that's clearly scalable, we want this working our client acquisition indicates that we have a value proposition that the communities in which we do business value strongly. So with those dynamics and along with management debt with those dynamics I think it presents an opportunity for us to do strategic fill-in acquisitions as they become available. But I want to be clear on our commentary here that they have to be strategic and value added to the franchise. This is a not a situational where we are going to do any type of just financial transaction or anything out of footprint.

Okay. And then in terms of the customer acquisition and cross selling do have let say statics in terms on your growth in average products for customers or number of new accounts say that were opened in the quarter?

We don't generally published that information what I can tell you though, is that our client growth rate on the non interest bearing accounted running at an annualize net growth rate of about 13%. So those are very strong numbers in terms of client acquisition. There are whole some relationships given the fact that you're seeing in deposit fee income increases as well as the balance increases. We have been pretty consistent with bank growth rate for the last 24 months. And the way the account growth works it generally takes about 18 months or a client that's been acquire to reach maturity level for balance and fee income. So we are still feeling the benefit of our account acquisition strategies, so that's generally what we're seeing, but again I think it certainly top quartile performance in terms of client acquisition is proof of our value proposition. The second question you asked was in relation to cross sell ratio. Our current cross sell ratios on new client acquisition is running north of 3.5 products, which is again very significant for us and showing that these are truly value added relationships to the institution.

Okay, great thank you.

Thanks, Don.

Thank you. (Operator Instructions) Our next question come from the line of (Inaudible) please go ahead.

Thank you, good morning gentlemen.

Good morning, Tim.

Yeah, I want to follow on some of the comments early about the loan pipeline taking the account that you know you're optimistic about pipeline but yet, still the general economic uncertainty out there, how you discusses with your clients especially you know, recently, have they changed at all versus 6, 12, 18 months ago?

Tim, this is mark. Thank you for the question. Because I think it is a leading indicator in terms of the economic climate. I believe you're seeing some modest confidence build in the C&I business community specifically in the North West, but I would say that's driven by the strength of the enterprises and economies in the North West, meaning aerospace, the retail segment sector along with transportation coming through the ports and the success of Ag through this credit cycle, has yielded a point where the economic impact of growth is being felt and that there has not been any meaningful investment by the feeder businesses into those general industries that now they're in the position where they're re actually going to have to invest. So there is a little bit more of confidence that I would have (Inaudible) a quarter ago. In terms of businesses warning to reinvest or expand. But I would not characterize, it is meaningful. It is just a slight uptick in what our businesses are same because they are feeling very good about their profitability and other generating income for the business. But they're not still not willing to go too far out on lane because there's not enough certainly as to what's the impact of the healthcare sale as long with tax rates and how that's going to impact their business. So it's a little bit better than it was in last quarter, but I would still say it's less than robust.

And where your lines of credit usage right now?

Sorry, didn't hear you Tim

Although the side, do you have the usage grades on your lines of credit.

It's still very low, there below 50% still.

Okay, and then what about, organizational interest in doing construction loans and the availability for those kind of opportunity in the marketplace right now?

Tim, this is Rick Barton. construction lending both for commercial properties and residential construction properties always has been court competency as their organization and continues to be, so we see opportunities that we are taking advantage of during first quarter total construction originations were right at a $135 million about a $125 million of that it was on the residential construction side.

All right, those are my questions. Thank you.

Thank you Tim.

Thank you, I will now turns the conference back over to management. Please go ahead.

Thank you, Josh. Thank you all of you for your questions. Let me just summarize by saying we are pleased with our solid first quarter performance and a continuing evidence that we're making substantial and sustainable progress on our discipline strategic plan to build shareholder value by executing on our super community bank model, by growing market share, strengthening our deposit franchise, improving our core operating performance in maintaining a moderate risk profile. I would like to thank all my colleagues for driving the solid 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 gentleman this concludes the Banner Corporation first quarter 2013 earnings conference calls. If you'd like to listen to a replay of today's conference please dial 303-590-3030 or toll free 1-800-406-7325 the access code is 4610343, ACT that I could thank you for your participation. You may now disconnect.