Good day ladies and gentlemen, thank you for standing by. Welcome to the Banner Corporation Second Quarter 2013 Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded Thursday, July 25, 2013. I would now like to turn the conference over Mark Grescovich, President and Chief Executive Officer of Banner Corporation. Please go ahead, sir.

Thank you, Cheryl, and good morning everyone. I would also like to welcome you to the second quarter earnings call for Banner Corporation. As is customary, 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.

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 and goals for future operations, products or services, forecasts of financial and other performance measures and statements about Banner's general outlook for economic and 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-Q for the ended March 31, 2013. 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 had another strong quarter of performance reporting a net profit available to common shareholders of $11.8 million or $0.60 per share for the period ended 06/30/2013. This compared to a net profit for common shareholders of $23.4 million or $1.27 per share for the second quarter of 2012. As you all know the second quarter of 2012 had several extraordinary accounting items. Therefore, when looking at earnings before tax and changes in fair value Banner's income improved to $0.91 per share for the second quarter of 2013, compared to $0.58 in the second quarter of 2012, and $0.87 per share in the first quarter of 2013. The second quarter performance continued our positive momentum and solidified 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 nine quarters further demonstrates that our strategic plan is effective and we continue building shareholder value. Our operating performance showed improvement on several core key metrics again this quarter when compared to the same quarter a year ago. The second quarter of 2013 marked the 15th consecutive quarter that we have achieved a year-over-year increase in revenues from core operations. Our net interest margin held strong at 4.20% in the second quarter of 2013 compared to 4.16% in the first quarter of 2013, and our cost of deposits again decreased in the most recent quarter to 29 basis points compared to 31 basis points in the first quarter and 48 basis points in the same quarter of 2012. Our solid performance resulted in a return on average assets of 1.11% in the quarter consistent with the first quarter of 2013. All of…

Thanks Mark. As documented in our press release and noted this morning by Mark, Banner’s credit metrics showed solid improvement in the second quarter. Let me comment on a few highlights. Net charge offs for the quarter were a very low $275,000, down from a similarly low $363,000 in the linked quarter or just 0.01% of average loans outstanding. . : : Delinquencies remained well under control during the second quarter. The delinquency percentage dropped to 0.97% of total loans compared to 1.25% at March 31, 2013, and the delinquency rate for loans 30 to 89 days past due and on accrual was only 0.18%. Because of the low level of net losses and the credit metrics just summarized no provision for loan losses was made for the second consecutive quarter. The reserve for loan losses, however, remains a source of significant strength for the company as a reserve to total loans is 2.34% and the coverage of non-performing loans is 294%. To summarize my remarks this morning, I will draw on a theme stated in past calls. Our consistent and aggressive work out strategies have and are continuing to pay dividends as measured by our current credit metrics and substantially reduced credit costs that clearly support the company’s ability to grow the loan portfolio and execute our long-term strategic plans. With that I will turn the mike over to Lloyd for his comments.

Thank you, Rich and good morning everyone. As Rich and Mark have indicated and is reported in our press release our operating results for the second quarter were again very solid and position Banner Corporation well for continued good performance in future periods. In particular, the continuation of strong revenues from core operations, further improvement in asset quality, additional client acquisition and loan growth all give evidence to the positive momentum we are enjoying, the result of a successful execution of our strategic initiatives and the strength of the Banner franchise. While our past success is making comparisons to prior periods more challenging, particularly with respect to last year’s second quarter when we reversed most of the valuation loans for our deferred tax asset, however, as Mark noted the quarter ended June 30, 2013 marks Banner’s 15th consecutive quarter of year-over-year increases in revenues from core operations. This solid revenue generation again occurred with little help for the economy, which while slowly improving, continued to produce only modest growth and still exceptionally low interest rates. For the quarter ended June 30, 2013 our revenues from core operations, which includes net interest income before provision for loan losses, plus other non-interest operating income that excludes gains on security sales, and fair value, and other-than-temporary impairment adjustments, revenues from core operation were $53.1 million, an increase of 4% from the immediately preceding quarter, and 2% compared to the second quarter a year ago. For the six months end June 30, our revenues from core operations increased to $104 million, a little more than 1% increase, despite the fact that the same period last June was aided by one additional day of earnings because 2012 was a leap year. Reflecting this revenue growth as well as reduced credit cost, our net income available…

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

(Operator instructions) And our first question comes from the line of Jeff Rulis with D.A. Davidson & Co. Please go ahead. Jeff Rulis - D.A. Davidson & Co.: Thanks. Good morning guys.

Good morning Jeff.

Hi Jeff. Jeff Rulis - D.A. Davidson & Co.: On the -- just looking at the loan deposit ratio sort of approaching 100% here, you guys have had really great core deposit growth, will be interested in the philosophy going forward if you have to become maybe less picky on the CD side, or would you access other sources of funding, I guess, how do you see the -- is that a concern at all on the leverage?

Yes, Jeff, this is Mark. As we have stated publicly, we would like to keep that loan to deposit ratio between 90% and 95%. I think the rundown in deposits this quarter again was much more of a seasonal component rather than a systemic issue, and I think what you are going to find is that our new client generation is going to keep us within that loan to deposit ratio, and keep pace with the loan growth. Jeff Rulis - D.A. Davidson & Co.: Got it. And then you guys commented on sort of a low-lying utilization, maybe if you could share what that level is and I guess kind of what -- where you are targeting that in a reasonable fashion, say six months out or kind of a tough number to peg, but do you have that figure?

Hi, Jeff, this is Lloyd. By the way I am looking forward to having concerns about funding loans. That is a good problem to have. Jeff Rulis - D.A. Davidson & Co.: Okay.

Utilization levels are still in the low 40s range on most -- the line of credit type lending, which as I noted continues to be low, and now obviously Ag loan had a seasonal increase this quarter, which brought the utilization up there. So where it is going to go from here, boy, that is the great question, isn’t it, we all would like to see the economy present opportunities that will want people to utilize those credit lines, and if they do, as I said, I look forward to being concerned about how to fund it. Jeff Rulis - D.A. Davidson & Co.: And then lastly Mark, I got to harass you on sort of the update on the capital plan with the TCE above 12%, a little clarity on Basel, maybe you have in the past just sort of prioritized capital usage methods, could you share that with us, update it?

Sure. I don’t think there is anything different in my commentary. We clearly have the shareholders interest in mind and the prudent use of capital. Clearly the organization with the capital and our reserve levels is going to provide us great flexibility going forward in terms of capital utilization. The first priority is going to clearly be to get our dividend payout ratio to that 30% to 35% range. That will be the first priority along with continued reinvestment in the company. And then we would look for additional sources of capital utilization or capital management, which may include stock buybacks and the like. Jeff Rulis - D.A. Davidson & Co.: Any increase in sort of the M&A chatter from your perspective, any sort of inbound calls or the like?

Well, I think -- I think we have seen a couple of recent announcements in M&A. So I think there is opportunities that are out in the marketplace. Clearly with our business model, the scalability of our business model, the successful execution that we put in place, you know, there is always conversations, but as I have indicated before Jeff whatever we would do or look at would have to be very strategic and very beneficial for the shareholders. Jeff Rulis - D.A. Davidson & Co.: Okay. That is it from me. Thanks.

Thanks Jeff.

Thank you. Our next question comes from the line of Tim Coffey with FIG Partners. Please go ahead.

Hi, good morning gentlemen.

Good morning Tim.

I heard in some of the prepared comments that this quarter’s loan activity experienced lower turnover, so I am wondering what kind of loan growth -- growth loans would have looked like had the quarter included kind of normalized loan turnover?

Tim, this is Mark. I’m not sure exactly what you are referring to in terms of lower turnover. I think what you may have heard is that the velocity in our construction and development portfolio is still very strong. So our production levels in particular in construction and development are running at about 25% increase year-over-year, but the balances are not advancing as fast, and that is because the velocity in that portfolio, the turnover is quite significant, and that is just reflective of the demand, supply and demand if that is what you were indicating.

Yes, that is very helpful. So the typical, the pay downs you saw this quarter, there has not been any real difference between this quarter and previous quarters?

We have not -- I would not characterize the pay downs as being aggressive at all. We have been able to keep pace with that. one of the items you maybe referring to also Tim is that we have indicated that a lot of our loan growth, about production that we have had in our targeted portfolios has been masked by the refinance activity and the pay downs in our one to four family portfolio. As rates ticked up and we all know that refi, the refi business has slowed that the pay offs in that portfolio has slowed as well, which has allowed us to grow the loan book, and we would anticipate that trend to continue.

Okay, okay, now that is very helpful. Thank you. Speaking of the mortgage business, could you give me a break down between refi and purchase activity in the quarter, as well as loan sale margins?

Tim, this is Lloyd. The refi activity in the quarter slowed as you would expect, and as Mark noted. So our production in the quarter was about 55% refi and 45% purchase transaction, and that is down, first-quarter production was about 70% refi. Margins have also come in a little bit. They are still very strong, but really didn’t come in a lot from the first quarter, where they have come in from was the very high levels in the second half of last year.

Okay, okay.

Tim this is Mark. Also just one additional comment on that as we have indicated in past calls and you are aware, we have invested heavily in our mortgage operation, and we again were investing in the fourth quarter and first quarter in additional mortgage officers that can -- that are adaptive to the purchase type of portfolio. So that we have been investing in that and that is also paying off for us.

Okay, and then Rick, I had a question for you. The dollar value of the recoveries for the last three quarters has been substantial. Do you anticipate those kind of levels continuing, or do you see them declining in forward quarters?

Well, that is a very good question Tim. You know, those things are very, very hard to predict. You know, they tend to come in lumps. But I think it is safe to say that the low hanging fruit has been picked off the tree at this point and that it is not going to be something that will be easy to replicate in future quarters.

Well, thank you gentlemen.

Tim, while I will characterize that a little differently, there are less favorable, because we have had such success in reducing problem assets and collecting on previous problem assets.

So, you definitely have had a kind of success?

Yes, it is not just low hanging fruit. It is just that there is less of it out there, which is a good thing.

Well, gentlemen, thank you very much. Those are my questions.

Thank you Tim.

Thank you, and our next question comes from Don Worthington with Raymond James. Please go ahead.

Hi, good morning everyone.

Good morning Don.

A couple of questions, in terms of the other comprehensive income account, and you have shown in the press release other components of stockholders equity, is that primarily what is in there?

Hi Don. It is Lloyd here. That is exactly what is in there still. It was about a $5.6 million charge for the quarter. Other comprehensive income, which is the mark-to-market on the available for sale portfolio. Not surprising given the interest rate increase. I think what is -- what all of us need to bear in mind is that the bulk of that would be recovered over time as those assets continue to perform and roll down the curve.

Okay, thank you. And then in terms of the loan pipeline, I know you don’t necessarily give specific numbers, but on a relative basis where was the pipeline versus last quarter?

Our pipeline continued -- this is Mark Don, our pipeline continues to be very strong. We see those numbers increasing, and what I can tell you is one thing I commented in terms of year-over-year production, I commented on our construction and development production up about 25%. Our C&I and Ag production and real estate production is running at the same level. So we are seeing about 25% increase year-over-year.

Okay. All right. Thank you.

You are welcome. Thank you Don.

Thank you. (Operator instructions) And our next question comes from the line of Jacquelynne Chimera with Keefe, Bruyette & Woods. Please go ahead. Jacquelynne Chimera - Keefe, Bruyette & Woods: Hi, good morning everyone.

Good morning Jackie. Jacquelynne Chimera - Keefe, Bruyette & Woods: I apologize if this was covered in the prepared remarks, and I just missed it. But I wanted to see what had happened in your securities portfolio, I was surprised by the decline in duration during the quarter, I had in my notes, and maybe this is incorrect, but I had in my notes it was 4.6 years last quarter and then the press release mentioned 3.8 years this quarter?

Hi, Jackie, it is Lloyd. A couple of things there, we did have some securities sales in the (inaudible), which affected debt. We also, the duration analysis that we are utilizing is not very effective when interest rates are exceptionally low, and as we looked at it more closely this quarter, we just felt that the number that we have been putting out there before was overstating the duration of the portfolio, and effective duration really is that 3.8 type number that we put in the press release. And it is -- there still is some duration there and I think the comments that we have made is over time is that we have added a little duration compared to where we were a year and a half ago, let us say, when we had a much larger balance of cash and cash equivalent because it is just too painful to stay invested at 25 basis points in cash. But again, we -- I think that the 3.8 number that is in there is a better indication of the true duration than what we had produced before. Jacquelynne Chimera - Keefe, Bruyette & Woods: Okay. No, that is helpful. I was confused on the comments and the press release versus what appeared to be a decline in the quarter. But now that explains that perfectly. Thank you. And Mark I wondered if you can provide a little more background on the asset-based lending that you added in the quarter?

Sure. We have added additional talent. It has been an objective of ours over the course of the last three years to continue investing in product categories for our commercial and retail platforms, and we have been doing so aggressively in the commercial bank with additional treasury management products, the addition of our small business administration team, the addition of our specialty product areas, and again, I mean, that is part of the expense increase, but at the same time it is generating increased revenue and pipeline activity for us. In the quarter, we felt the timing was right to add an asset-based lending specialty to our product offerings in the commercial bank. So we have hired a couple of bankers to drive that performance for us, very experienced individuals in the marketplace that will drive our asset based lending specialty across our footprint. Jacquelynne Chimera - Keefe, Bruyette & Woods: You have any preliminary growth expectations you are comfortable sharing?

Well, we are certainly not giving guidance, but what I can tell you is I’m very pleased with our early success. Jacquelynne Chimera - Keefe, Bruyette & Woods: Okay, and then lastly you have had success in the rundown in the deposit costs; do you think there is much room left in there?

Jackie, this is Lloyd. There is still more room. There is still more room in terms of pricing on some certificates of deposit. We have continued to see more rollover, or migrate out, but the success will most importantly be made by growing core deposit, changing the mix of that portfolio further. As I indicated, we are at about 73% transaction accounts today, and we need to drive that number higher. Jacquelynne Chimera - Keefe, Bruyette & Woods: Okay, great.

And Jackie, this is Mark. I think the guidance we have said is we need that number north of 85%. Jacquelynne Chimera - Keefe, Bruyette & Woods: Okay.

So, those are our goals. Jacquelynne Chimera - Keefe, Bruyette & Woods: Great. Thank you both very much. It was very helpful.

Thank you Jackie.

Thank you. And our final question comes from the line of Louis Feldman with Wells Capital Management. Please go ahead.

Good morning gentlemen.

Hi Louis.

Hi Louis.

Quick question for Rick, where are you in terms of your provision, where you would like to see it versus where the regulators would like to see it versus where the accountants would like to see it, and how long -- while the loan portfolio is turning over, I mean with balances remaining similar, but you are getting new loans in, do you feel that you are going to be able to -- at what point do you think you are going to start taking provisions again?

Well, that is a very complicated question with many facets to it Louis. You know, the credit guy always likes to have more in the stock than less. But I know, I think that over time as the portfolio continues to grow that the level of the reserve to total loans will come down and probably settle somewhere south of 2%, just talking of the top of my head. It is really very difficult to pinpoint any kind of period of time that we would begin to make some provision to the reserve. It is going to depend upon, you know, a number of things, the rate of loan growth, the economic conditions that exist going forward, and also probably the mix of the loan growth we are realizing and enjoying. So I can’t really give you anything from my perspective more precise than that.

Given -- I mean, while it is at a very nice level right now, and I don’t know a regulator that wouldn’t like to keep it up there, as well as you. Would you let it run off given the difficulties in effectively provisioning on the stocks? If you let it get down to a point, I guess the question is do you feel you can build it back up in a timely manner if you let it run down too far?

Louis, this is Mark. I think if you were to do an analysis, you would look at the portfolio and you would say, we clearly have significant reserves right now. If we have several different models that we utilize in terms of reserve methodology, clearly if you get that reserve closer to 1.5 or 1.75 total loans, there is plenty of room to grow the balance sheet with our current reserves. So that should provide you enough clarity I think to indicate, you know, some type of comfort level. Regulators are extremely comfortable with our reserve methodology, with the stress tests we provide, and along with our credit controls that we have in place. So it is more than just having a strong balance sheet. They look at our operations and say, you are effectively managing the loan portfolio and your reserve methodologies and stress tests are very sound, and we have a very good relationship with the regulators.

Okay. Thank you very much.

Thank you, Louis.

Thank you. There are no further questions at this time. I would like to hand the call back To Mark Grescovich for closing remarks?

Great, thanks Cheryl. As I stated, we are very pleased with our strong second-quarter performance, and the reinforcing evidence that we are making substantial and sustainable progress on our disciplined, 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 and maintaining a moderate risk profile. I want to thank all my colleagues who are driving this 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.