Good morning, and welcome to the Banner Corporation Third Quarter 2016 Earnings Conference Call and webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mark Grescovich, President and CEO of Banner Corporation. Please go ahead.

Thank you, Kate, and good morning everyone. I would also like to welcome you to the third quarter 2016 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 of the Corporation; Peter Conner, Chief Financial Officer of Banner Bank 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, 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 risks may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ are available from the earnings press release that was released yesterday and a recently filed Form 10-Q for the quarter ended June 30, 2016. 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 reported a net profit available to common shareholders of $23.9 million or $0.70 per diluted share for the quarter ended September 30, 2016. This compared to a net profit to common shareholders of $0.61 per share for the second quarter of 2016, and $0.62 per share in the third quarter of 2015. As anticipated, the third quarter of 2016 results were adversely impacted by acquisition and merger-related expenses associated with the AmericanWest Bank combination, which net of taxes reduced net income by $0.03 per diluted share. Excluding the impact of merger and acquisition expenses, gains and losses on the sale of securities, and changes in fair value of financial instruments, earnings from core operations increased $9.9 million or 65% to $25.1 million for the third quarter of 2016, from $15.2 million in the third quarter of 2015. And increased 9% compared to $23 million in the immediately preceding quarter. While our core operating performance continued to reflect the success of our proven client acquisition strategies which produced strong core revenue, we also benefited from the successful acquisition and integration of AmericanWest Bank, which had a dramatic impact on the scale and reach of the company, and is providing a great opportunity for future revenue growth. Following a successful completion of all system conversion, we made additional progress in generating operating synergies through the integration of operational activities. We also experienced the full benefit of having consolidated overlapping branch locations. More importantly, as a result of the hard work of our employees throughout the company, we are also successful executing on our strategies and priorities to deliver sustainable profitability and revenue growth to Banner. Our third quarter 2016 performance clearly demonstrates the positive contribution from the AmericanWest Bank acquisition and shows that our strategic…

Thanks Mark. The credit story at Banner was uninvestable [ph] during the third quarter. consequently my remarks will be brief and focused on the company's credit metrics and loan portfolio. Our credit metrics have been relatively stable for a number of quarters, a trend that’s continued in the third quarter. Before discussing some of the metrics, I wanted to once again state that our credit metrics not likely to improve further as we move toward the next credit cycle. Delinquent loans increased 1 basis points to 0.53% of total loans. The company's level of adversely classified assets was stable during the quarter. Non-performing assets increased 1 basis point during the quarter to 0.33% of total assets. Non-performing assets were split between non-performing loans of $26 million and REO of only $5 million. Not reflected in these totals are non-performing loans of $14 million acquired from Siuslaw and AmericanWest Banks which are not reportable under purchase accounting rules. These non-performing loans however are included in our net purchase credit impaired loans of $39 million. If we were to include the acquired non-performing loans in our non-performing asset totals, the ratio of non-performing assets to total assets would still be a modest 47 basis points, unchanged from last quarter. Performing troubled debt restructures continued to decline, and are only 24 basis points of total loans. Net recoveries for the quarter were $900,000, and reflect a continuing collection efforts for our special assets department. And as we have said many times before, recoveries are very hard to project, and it is not realistic to expect recoveries at this level in future quarters. After a provision of $2 million in the net loan recoveries of $900,000, the allowance for loan and lease losses for the company now totals $84 million and is 1.14% of…

Thanks, Rick and good morning everyone. As Mark has noted and reported - as reported in the earnings release, Banner Corporation's strong third quarter and year-to-date 2016 operating results continue to reflect a successful execution of our strategic initiatives, including significant benefits from the acquisition and further progress on the integration of AmericanWest Bank. And compared to the first nine months a year earlier the March 2015 acquisition of Siuslaw Bank also materially added to the operating results of the company. In large part due to those transactions but also reflecting continued organic growth, our financial performance in these periods has been driven by significant revenue growth compared to the same period a year earlier, as a result of substantial increases in the average earning asset balances, coupled with a solid net interest margin and growth in non-interest income reflecting the increased scale of the company. Similar to previous periods fully appreciating Banner's core operating results for each of the period presented requires a clear understanding of the impact of merger and acquisition expenses, as well as valuation adjustments for certain financial instruments that we carried at fair value and when gains and losses on sales of investments securities. In the third quarter of 2016 Banner reported net income of $23.9 million or $0.70 per diluted share, this amount was net of $1.7 million of acquisition-related expenses, and $1.1 million of net charges for evaluation adjustments on the fair value of financial instruments, partially offset by $891,000 of gains on the sale of securities. All of which net related tax effects reduced earnings for the quarter by $0.4 per diluted share. By comparison the acquisition-related expenses were $2.4 million in the second quarter, which along with a total of 757,000 of fair value and charges in securities losses reduced earnings…

Thank you, Lloyd, thank you, Rick for your comments. That concludes our prepared remarks. And Kate, we will now open the call and welcome questions.

[Operator Instructions] The first question comes from Jeff Rulis of DA Davidson. Please go ahead.

Thanks. Good morning, guys.

Morning, Jeff.

Just a follow-up on the expense line Lloyd, I guess X-merger cost you at a base of 774, could you just give us an update on kind of the cost savings progress to date and maybe what additional may be out there to kind of point us to a kind of run rate when all was said and done on that quarterly expense rate?

Well, Jeff, as you noted 774 is a pretty close to what we would anticipate as run rate today. There is - there continue to be opportunities for synergies as a result of the merger and activity will consider - continue around evaluating locations and rationalization opportunities. But candidly we're also growing and as I noted we anticipate - as we noted for some period of time, we anticipate some ramp up in expenses principally associated with the $10 billion regulatory requirements that we anticipate going forward. So I think you are pretty close to a base rate here.

Okay. The cost savings is largely leading in any synergy you find could be offset by the reasons you just referenced?

Yes, I think that’s exactly correct. We did - we have achieved very close to the $37.5 million that we anticipated way back in November of 2014. So that - the opportunities has played out pretty much as we expected, the one surprise is that noted couple quarters and again this quarter is the entire cost merger related to expenses were somewhat less than we initially projected.

Got you. Okay. And then, just kind of thinking about Q4 and the $10 billion mark, loan growth has been and it sounds like you had some sales and some refi's and utilization, but I guess is that - is your behavior any different given the $10 billion mark and are you more selective on loans or is it again, not really governed by that given the $10 billion mark and in the Q4 I guess, the loan pipeline expectations there?

Yes. Jeff this is Mark. I'll let Rick comment on the pipelines, but clearly we managed doing a number of things and managed the balance sheet below $10 billion, I think what you’ve seen from the numbers in the press release and Rick already noted is the targeted portfolios that we want grow grew at a 2% rate in the quarter. And obviously, that we were allowing the continued reduction in one to four family portfolio. And we continue to sell into the secondary markets with multifamily. So obviously those balance sheet strategy is going on to keep the company on the liability cycle of $10 billion as well. But we still see we are encouraged by the current economic climate, specifically in the metro markets in which we operate. Rick if you want to…

The only thing I would add Jeff, this is Rick, is thus, our bankers pipelines are robust and that are comparable with where they have been in the past, and we see that across the footprint both the legacy Banner and legacy AWB parts of the company.

Got it. Maybe just a follow. Mark, and I - so expectations for '17, if we're to kind of remove this whole $10 billion discussion and just take core growth, I guess, which you are budgeting on a net loan growth in '17, any comments on expectations for the full-year…

Let me answer this way Jeff, we really haven’t changed out thought process. So if you take the targeted portfolios and say we're kind of waxing out on the reduction in some of the other portfolios, we're still looking at high single digit growth rate, provided obviously that the economy continues to cooperate.

Fair enough. Thank you.

You bet.

The next question comes from Matthew Clark of Piper Jaffray. Please go ahead.

Thank you. Good morning. Just on the expenses, again, any sense for how much of the professional services were seasonal, maybe also how much of the legal expenses were tied to the sales and registration of the restricted shares from AmericanWest merger to try and isolate you know, some of that going forward if we can>

Sure. Matthew, this is Lloyd. Good morning. The registrations shares probably contributed $400,000 to the expense line and principally that related to sales that occurred by some of the shareholders. So it is interesting to note that a number of those restricted shares have changed hands I think over the principally since April 1 when it became 144 eligible and since we recorded the S3 at that point in time we are showing no shares as well. So there were some delayed costs associated with that. And there were other things, the seasonal aspect we do get into, year-end Sarbanes-Oxley testing, year-end audit expenses, some of those things. So professional fees can be a little lumpy, but I would caution year-to-date as we've noted moving in incurred additional fees going forward as a result of the $10 billion particularly preparing for to become the DFAS [ph] compliant bank, as well as some additional compensation expense related to that. Having noted all of that, the efficiency ratio, particularly the adjusted efficiency ratio or the ratio of expenses to average assets both continue to show improving trend which is what we've indicated our allies that we will grow into this expense base over the next number of quarter. So again I think that’s the trend. Jeff, asked the question about budget, I think the thing you can anticipate with Banner is that there's a lot of stuff that is just exactly on trend and the plan is unchanged, which is to continue to grow the company and grow into that expense base and grow revenue at this - at a faster pace.

Got it. Okay. And then in terms of that step up in reg spend, I mean, could you argue or would you say that its already underway or you feel like there's going to be some step up, you know, as we get into 2018 when its official?

We've indicated it is underway. But we've also made it very clear that there are - there is going to be expense growth associated with that specific issue of becoming a $10 billion bank. And our expectations there have not changed for some period of time. But we have…

I think the important point there is much effort underway at the company today to prepare and ensure that we will be able to comply with all those requirements. Now, let's put that back in perspective that we laid out before, we'll stay under $10 billion through the end of this year, likely class it sometime next year, which means that there if there is a Durbin amendment we'll become effective for us in the second half of 2018, there is a revenue impact of that, we have previously estimated to be about $11 million annual revenue. So that's $5 million or $6 million in the second half of '18. And in our first DFAS required submission will likely be in 2019, but we're moving forward with building out the skill set, the capacity to be DFAS compliant by the end of next year.

Matt, this is Mark, just in reference to the questions to expenses that you and Jeff both asked, the company remains extremely focused on generating positive operating leverage. So there's two sides to that equation, obviously we have to continue to grow revenue and what you've seen over the last couple of quarters is that we've had positive operating leverage and we anticipate that going forward.

Got it. Okay. And then on the buyback, I think somewhat unexpected, can you just update us on your thoughts of what your appetitive is right there, and whether we might see that consistently so long as you have, excess capital that you have?

So - this is Lloyd again Matt. As I noted that buyback, we traded that, we've had that authorization for a while. We triggered it with the 10B5 filing in the third week of September as part of our deleveraging strategy. We announced a plan to repurchase about 1.3 million shares there and probably at least halfway through that plan to date, what was may surprise some people just a little bit is that the effect on average shares outstanding in the quarter was fairly modest for the third quarter, it should be significantly more impact on the on the fourth quarter of this year.

All right. Thank you.

Thank you, Matthew.

The next question is from [indiscernible] of FBR. Please go ahead.

Good morning.

Good morning.

I wanted to touch base on the construction lending, you obviously had healthy construction growth this quarter, I heard you guys about proportionally or been diversified. But I was wondering if there any particular market that are driving the growth?

Steve, this is Rick. The growth is occurring across the franchise if you had to say that it was concentrated anywhere would be in major metropolitan markets, particularly Seattle and Portland, but there's also activity in the [indiscernible] market, Sacramento, and down the Southern California market, particularly San Diego.

Okay. And the other thing I was wondering about with regard to the loan loss reserve ratio, obviously it’s returning higher you have given that purchase loans are rolling off. How should we think about that over the next couple quarters in terms of the ratio?

We don't give definitive guidance on that, but I think we've stated on a number of occasions that we want to keep the combined accounting market traditional provision in the 140 to 150 range and the level of exact provisioning is going to be driven by level of loan growth, by the mix of growth, any you know expected credit events and the pace of migration out of the purchase accounting world into the regular provisioning world. And we I think that the level that we've seen in the last couple of quarters is in the ballpark.

Okay. And another thing with regard to agriculture and relatively small part of portfolio. So just wondering if you have any concerns about credit stresses there given, lower beef prices and milk prices in the recent months?

There is stress in certain aspects of the portfolio. We don't have major concentration in any particular Ag sector, particularly dairy and beef cattle. The one area that I see some stress is in we particularly drive land wheat but our exposures there in our very modest and we don’t anticipate any outsized issues to deal with it.

Great. Thank you very much.

Thanks, Steve.

[Operator Instructions] The next question comes from Jackie Bolling [ph] of KBW. Please go ahead.

Hi. Good morning, guys.

Good morning, Jackie.

Lloyd, I wondered if you could comment on what drove the fair value market a little higher this quarter.

Sure. It’s fairly straightforward. The movement in LIBOR which trended up by about 25 basis point if I recall, during had a direct impact on that mark-to-market. So as we noted before, without any change in rates for spreads, we would anticipate about $350,000 a quarter of mark on the trust preferreds, net mark on the trust preferred securities just because of the passage and that’s the principal thing that is going through that fair value account. The movement in LIBOR accounts for most of the difference this quarter.

That’s helpful. Thank you. And then what was the dollar amount, and I am sorry I missed this earlier, of the multifamily loans that were sold in the quarter?

1.4.

1.4…

The actual number of loan sold, I am not sure about 80 million, roughly 80 million.

Okay. And the just one last one, and just looking at the variance between the period balances and average balances in the loan portfolio, was there any end of quarter run off or was most of that variant instrument by the held for sale portfolio and just fluctuations in there?

I think the held for sale, as Rick pointed out in our C&I I am not sure exactly the timing, but we had some clients who have success events for the client, that resulted in some pay-downs and I do think some of that result was fairly late in the quarter there.

Okay. Great. Thanks, guys. Everything else I had were asked.

Thanks, Jackie.

We always want clients to pay us stock, but it’s always painful when they do.

The next question is from Tim O'Brien of Sandler O'Neill. Please go ahead.

Good morning, guys. Hey, Mark, could you give just an update on the M&A prospects, given the market environment we're in and, maybe I geographically?

Yes. Thanks, Tim. And good morning. I don't have anything in particular different to add than I have in the previous quarters. I think there is certainly conversations that are occurring about the difficult operating environment. That a lot of institutions are faced with, with low interest rates and now the concentration limits becoming an issue and some institutions was commercial real estate. So it’s becoming a challenging environment for a number of banks to continue to operate in high performing level. So the conversations continue. But I don't have anything further to add than what I had in the previous quarters.

What about geographically, like, perhaps in California or Oregon, is - are there markets which you are clear from at this point or are you looking to build out in any particular markets if the opportunity arises…

I think all of our markets as we alluded to in many of our investor presentation are very, very attractive market. You certainly see in California be - as you already know, the sixth highest rated economy in the world, all of our markets are doing extremely well and we made additional density. So we're looking to build out in every one of us market. I'm not going [indiscernible] does that help Tim?

It does. Thanks. And then just a little updates on outlook for mortgage and fee income. I know that there's probably some seasonality in purchase markets, but can you talk a little bit about that?

Sure. Tim, this is Lloyd. Obviously there is always been seasonality in the mortgage market, but I think if you look at our balance sheet, you are going to see that we still have very strong position in loans held for sale, interest rates continue to be mortgage rates in particular continued to be very attractive. And the housing affordable, as I noted, there's still refinance activity going on but 65% of what we did was purchase activity, which is indicative of what Mark and Rick have both said about the strength of markets that we operate in. So I I'm optimistic around mortgage as far into the future as I can see which obviously things can change, but the next few quarters look pretty good again. There will be a natural seasonal slowdown, most likely you'll see that in the first quarter would be my expectation.

Great. Thanks a lot, guys.

Thanks, Tim,

And next we have a follow-up from Matthew Clark of Piper Jaffray. Please go ahead.

Good morning. Just on the efficiency ratio, I know Mark you talked about goal of generating positive operating leverage continuing to generate positive operating leverage. And I think you’ve talked about a range for efficiency ratio in the 62% to 65% range. I guess, you know what are your thoughts in getting to the lower end of that range. We require higher rates or you can get there without it?

First of all, that is kind of a range that we said the core operation can operate at and continue to have positive operating leverage. So thank you for reaffirming that range. And on an adjusted basis we're at 64%. We are not - we set our business plans based on a status quo business climate. So we're not relying on rising rates, we continue to take market share like we have and leverage the acquisition of AmericanWest. We will continue to drive down that efficiency ratio. As we've be done in last couple of quarters.

Okay. Thank you.

There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mark Grescovich for closing remarks.

Thank you, Kate and thank you everyone for your questions as well. As I stated we're pleased with our solid third quarter 2016 performance and we there is evidence that we're 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 gaining a moderate risk profile, and prudently deploying excess capital. I'd like to thank all my colleagues who are driving this solid performance for our company. Thank you for your interest in Banner and for joining the call today. And we look forward to reporting our results to you again next quarter. Have a great day everyone.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.