Good day and welcome to the Banner Corporation's First Quarter 2017 Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Mark Grescovich, President and CEO. Please go ahead.

Thank you Allison, and good morning everyone. I would also like to welcome you to the first quarter 2017 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, our 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 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-K for the quarter ended December 31, 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 $23.8 million or $0.72 per diluted share for the quarter ended March 31. 2017. This compared to a net profit to common shareholders of $0.69 per share for the fourth quarter of 2016 and $0.52 per share in the first quarter of 2016. 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 increased 9.5% to $24.2 million for the first quarter of 2017 from $22.1 million in the first quarter of 2016. 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 integration of our recent acquisitions which had a dramatic impact on the scale and reach of the company and is providing a great opportunity for revenue growth. Following the successful completion of all systems conversions of the acquisitions, we continue to make additional progress in generating operating synergies through the integration of operational activities. More importantly however, as a result of the hard work of our employees throughout the company, we are successfully executing on our strategies and priorities to deliver sustainable profitability and revenue growth to Banner. Our first quarter 2017 performance clearly demonstrates that our strategic plan is effective and we continue building shareholder value. Our first quarter 2017 core revenue was strong at $116.4 million and increased 5% compared to the first quarter of 2016. We benefited from a larger and improved earning asset mix and net interest margin that remained above 4% and good mortgage banking and deposit fee revenue. Overall, this resulted in a return on average assets of 0.97% for the first quarter…

Thanks Mark. Credit quality of Banner during the first quarter of 2017 continued the pattern of stability established over the past last several quarters. Our portfolios moderate risk profile is clearly demonstrated by its credit metrics that will now be briefly recapped but at this juncture I will again reiterate my belief that overall credit metrics have plateaued and cannot be expected to further improve. Delinquent loans were 0.51% compared to 0.41% at year end and 0.61% a year ago. This type of fluctuation is expected when delinquencies are at low levels. The company's level of adversely classified assets remains low. Non-performing assets decreased 14 basis points during the quarter to 0.21% of total assets. This improvement was driven by reduction in non-performing loans $4.5 million and REO $8.1 million. Not reflected in these totals are the remaining non-performing loans of $10 million acquired from Siuslaw and AmericanWest banks which are not reportable under purchase accounting rules. If we were to include the acquired non-performing loans at our non-performing asset totals, the ratio of non-performing assets to total assets would still be a modest 31 basis points down from 46 basis points last quarter. Performing troubled debt restructures remain stable at 23 basis points of total loans. Gross charge-offs for the quarter decreased slightly to $1.5 million. However, net charge-offs did increase by $1.2 million as loan loss recoveries during the quarter were down by a similar amount. After a first quarter provision of $2 million, a net loan losses of $1.5 million, the allowance for loan and lease losses for the company now totals $86.5 million and is 1.17% of total loans compared to 1.15% for the linked-quarter. As shown in the press release, the remaining net accounting against acquired loans is $29 million. When this amount is added…

Thank you, Rick and good morning everyone. As Mark has noted, Peter Conner, our Chief Financial Officer for Banner Bank is again with us here today and after a few general remarks from me, Peter will provide more detailed insight into the first quarter results. In particular Peter will address the more unusual or volatile items in the income statement which on balance were a net positive for the quarter but were also more numerous than is often the case. By contrast, our core operations were very consistent with trends we have reported for a number of periods. Banner Corporation's first quarter 2017 operating results continue to reflect the successful execution on our strategic initiatives including significant benefits from the - as a result of the acquisition of AmericanWest bank, as well as meaningfully increased regulatory costs as a result of our approach to and subsequent breach of the $10 billion assets threshold. Our financial performance this quarter again was driven by strong revenue generation reflecting in the increased scale of the company. While we had an expected decrease in revenues compared to the immediately preceding quarter, as a result of normal seasonal patterns compared to the same quarter a year earlier, growth in average earning asset balances coupled with strong net interest margin and growth in noninterest income allowed our revenues from core operations to increase by 5%. Similar to previous periods, fully appreciating Banner's core operating results for each of the periods presented requires a clear understanding of the impact of the merger and acquisition related expenses, as well as the valuation adjustments for certain financial instruments that we carry at fair value and when material gains and losses on the sale of investment securities. However I’m pleased to note that we did not incur any acquisition related…

Thank you, Lloyd and good morning, everybody. I will provide some additional detail on our first quarter financial results. As Mark and Lloyd noted, and as we announced in our earnings release, we reported net income of $0.72 per share for the first quarter. The $0.03 increase from the prior quarter was due to several items. Net interest income declined $0.04 due to a decline in acquired loan accretion and fewer calendar days in the first quarter. Non-interest income increased $0.03 due to a credit workout related gain on a sale of a single loan and a reduction in a negative market adjustment on liabilities competitive share value. Reductions in non-interest expense contributed $0.03 and a reduction in the effective tax rate contributed another $0.01 to the increase from the prior quarter. As Lloyd mentioned, total assets for the first quarter ended above 10 billion at 10,068,000,000. The growth in total assets was driven by re-leveraging the balance sheet through purchases of investment securities throughout the quarter. The securities portfolio grew 421 million and ended the quarter at 1.5 billion. The average yield on investment portfolio increased 30 basis points to 2.36% from 2.06% in the prior quarter as new securities were put on a higher market rates during the first quarter. Loans held for sale declined $160 million due to the bulk sale of multi-family loans originated in the prior two quarters. As Rick mentioned, the permanent held for investment loan portfolio declined modestly by $30 million due to expected seasonal paydowns and agricultural portfolio and robust home sales out of the residential construction portfolio. The quarterly decline in the permanent first lien residential mortgage portfolio outstandings, moderated in the first quarter as the rate of prepayments declined with rising rates and the portfolio continues to season. Total deposits…

Thank you, Rick and Lloyd and Peter for your comments. That concludes our prepared remarks and Allison will now open the call and welcome your questions.

[Operator Instructions] Our first question will come from Jeff Rulis of DA Davidson. Please go ahead.

Thanks, good morning guys. On the loan growth front, the average loan growth was decent but obviously superior and balances, were those impacted by some late run off, I think maybe Rick mentioned multi-family sale, but if you could talk about the timing of growth and maybe what impacted the period end balance?

Okay Jeff, this is Rick, I’ll try to address that very quickly. The multi-family paydown was in the final month of the quarter. The Ag sales the rundown in the construction and land portfolio and the multi-family was - not multi-family single-family was spread throughout the quarter without any unusual lumpiness in those reductions.

Okay. And how’s production or net production so flunky to obviously some positive comments on expecting some growth to return but more specifically how is April been from a net production standpoint?

Without trying to get too far out over my skis, we’re very pleased with the way April is shaping up for the bank.

Fair enough. And then I guess trying to hammer down the cost side of things on the - you referenced additional compliance costs and maybe this is for Lloyd or Peter, but I think in the run rate as of Q4 you had about 1 million already baked in and if identified up to 4 to 5 by year end as those cost ramp, at what point are we - I guess added in Q1 kind of in the run rate?

Hi Jeff, this is Peter's. I think its first helpful just to reconcile the first quarter expenses. If we eliminate the non-recurring and one-time unusual expenses in the first quarter, we run around $80 million in expense for the quarter. Included in that $80 million is about $2 million to $3 million of compliance related infrastructure build. So we saw a little bit left to go in terms of additional ramp up if you will in the infrastructure related build into the second and third quarters.

Got it, okay, that's helpful. And then maybe one last one just on the kind of the - well I guess in the healthcare segment what exposure do you have if any kind of portfolio wide in that segment overall?

Jeff, this is Rick. I don't have an exact number but our healthcare exposure is a very modest portion of the portfolio and I would gauge it at less than 5% of the total loan portfolio.

Okay, thanks guys.

Our next question will come from Matthew Clark of Piper Jaffray. Please go ahead.

Good morning, guys. First one on the multi-family gain on sale obviously large bulk sale with not much in the way of gain, I guess can you talk about what you expect for gain on sale margins maybe going forward and whether or not it might make some sense to portfolio, those loans instead of selling them in this case?

Good morning, this is Peter, I'll speak to the gain on sales. So multi-family the cadence of origination and sales typically runs about 90 days and under that normal origination and sell cycle, we expect somewhat between 1.5% and 2% net gain on sale. And that’s what we’re seeing in the current production environment. The bulk sale in the first quarter was unusual, but it was a season portfolio that was originated in the second half of 2016 at lower coupons and so the reduction in premium was purely a function of interest rates. So, we expect going forward that that business to run on even keel generating about 30 million a month in production and 90 million a quarter in sales typically.

Got it, okay.

And Matt this is Lloyd, I will speak up for Rick. We’ve been on record for some time now seeing that multi-family was not a segment that we intended to have a significant balance sheet commitment to. And that's been the case and continues to be the case from a credit decision asset allocation standpoint. So while we did benefit where we had less gain on sale, we did benefit from the carry which is what you're thinking about in terms of holding on the multi-family we did benefit from the carryover that couple quarter period of time but we intend to continue to run that unit as an origination for sale unit.

Okay. And then just on purchase accounting accretions, unusually low it seemed here in the first quarter, I know it was usually high in the fourth. But can you remind us how much you have left that you expect to accrete in the interest income and would you think a more normal run rate could be, could be somewhere closer to the third quarter or do you think this lower level is where it's going to drift from?

Yes, this is Peter's. Yes, we had a somewhat muted quarter in terms of loan accretion. We have 29 million in remaining loan discounts and that will - a portion of that will get accreted into interest income over the remaining life. It's hard to predict but prepayment activity would be, but I would take the normal run rate result somewhere between what we saw in the fourth quarter and what we saw in the first quarter. So I think it's - I would split the difference in terms of picking about the projections.

Okay Matt's, this is Lloyd again, Peter has made this point in the past and I’ll bring it up again which is that, that will naturally decline over time, okay. And so the first quarter was actually pretty consistent with the first quarter a year ago and net accretion income will decline over time which is why again we’re so much more focused on what's really happening with contractual loan yields in his book Peter and I noted we had meaningful improvement in contractual loan yields compared to a year ago and some improvement compared to the most recent quarter.

And that was my next question really on the margin outlook, the uptick in the core loan yields obviously you’re going to have mix change here, securities increasing relative to earning assets but I mean is the outlook for - maybe some modest improvement and then some stabilization with the latest rate hike is that how you can see this unfolding?

Yes, this is Peter's. So we did see and observed some improvement in loan yields at the end of March with the rate hike. And so we do expect that benefit to continue into the second quarter. However, as we noted the build out of the investment portfolio was done over the first quarter and so the effect of that average build and the investment portfolio and the increasing percentage of those securities and earning assets really won't be felt until the full second quarter. So it has some offsetting effects of having a higher percentage of our earning assets in securities in the second quarter relative to the first quarter that will offset the improvement we saw in the loan yields. So I would characterize as a modest improvement in contractual net interest margin going to the second quarter due to the fact that it will have a higher carry balance of securities going into Q2.

Got it. Okay, thank you.

Our next question will come from Jackie Boland of KBW. Please go ahead.

Hi, good morning everyone. Kind of layering into the margin question again, I’m looking more at the actual yield. How much of that was related to purchases in the quarter and how much more do you think there could be expansion into the second quarter as a result?

Hi Jackie, this is Peter. Are you referring to the investment portfolio?

Yes sorry, the investment securities portfolio.

Yes we leveled off at the end of March and so as going forward we would just contemplate a normal proportionate growth of the investment securities and not take any additional leverage. We really are focused on growing the loan portfolio going forward. So I would not anticipate any significant meaningful increase in the investment book other than just a proportionate growth in total assets going forward.

Okay. And would it be a correct to assume that the linked-quarter increase in the yield on investment securities with that, there could be more benefit in 2Q just full quarter run rate played out from your 1Q purchases?

Yes there is a little bit of that. We were fortunate in de-levering rate from the beginning of the year when rates were high. And so we'll see some of that carry benefit going into Q2 but most of it I would say the vast majority of that increase in the yields is already reflected in the first quarter.

Okay, that's helpful. Thank you. And then switching over to deposits, have you had any movement in rates with the March increase?

We have not the press competition has been benign in the first quarter, I will say however that we did intentionally extend our CD maturity portfolio debt for liquidity and asset liability purposes which did have a modest impact to the contractual deposit cost I believe about one basis point. You’ll see us continue to emphasize core deposits but we will also plan to keep our CDs balances where they are without any more meaningful or significant runoff that we experienced in prior years.

Okay so Jackie.

And those haven't been - I'm sorry go ahead Mark.

This is Lloyd I was going to say get your finger on the $64 question right for banking which is what is going to happen with rates moving up with deposit pricing. We would be insincere if we told you we had more insight into that than anybody else.

I certainly don’t have any either. So at this point than no increases, the CD cost increases just purely on an intentional extension of duration and probably some of the broken CDs that were added in the quarter had an impact on that as well.

Exactly right.

Okay. More on next quarter conference call then. Thanks guys.

Our next question will come from Tim O'Brien with Sandler O'Neill and Partners. Please go ahead.

Good morning. A question on - so you guys had payoffs - good payoffs in the construction, land and development book. Is there a seasonal aspect can you just give a little color on what your outlook is for, I mean that total part of your business including commercial et cetera. Can you see increasing growth opportunities there in 2017 or is that going to be contributing to overall growth as you anticipate and is that business strong and healthy in moving forward. And can you give a little color?

Tim, this is Rick. As I noted, there was some runoff in the first quarter that was driven by purchases by national homebuilders, both of finished lots and a couple of local builders. We expect that to have a permanent impact on the number of customers in the portfolio but we feel that the remaining book of business that we have as we go through the year will see the same kind of expansion possibilities that we had in 2016 as we went through the year. Velocity out of the vertical construction of residential homes is continuing at a very robust pace with very little standing inventory. So we feel that there's room for the market to continue to go for additional period of time. Little harder to project on the commercial and multi-family construction part of the portfolio. There are continuing opportunities in the marketplace and we are being selective about the ones that we choose to take on. And I think I would characterize that area more as a replacement as loans pay-off rather than a significant expansion of commercial and multi-family construction.

Thanks for the color there. And then a question on loans that repriced in the quarter. Do you have a ballpark or a hard number dollar amount of loans whose rates moved as a result of either changes in LIBOR or the Fed rate hike in March?

Yes, Tim, this is Peter. So 25% of our loan book is indexed to Prime, and there's roughly another 9% that’s indexed to floating rate LIBOR. So, we’re just right around a third of our portfolio is what we’ve consider floating or adjustable and responds basically immediately to changes in short-term rates.

Any of those have active floors or could had active floors that came off-floors? And is there any residual with active floors?

All of our floor compression is gone. We've worked through all that over the last two or three years. So there's no impact from trying to reach a strike price any longer. So we had no effect from the floors and the repricing in the first quarter.

Great. And then as far as - what was the - of the wholesale funding you put on, or use tap this quarter for your leverage strategy, was that termed out, was that latter? How was that structured?

We did a combination of brokerage CDs and FHLB advances and we typically with latter, both of those sources over perspective period out two years typically. So we will do a combination of short term and mid-term funding on both sources.

And going forward, you mentioned, you hinted that you extended the weighted average life I guess of your CD book a little bit or attempted to do that this quarter and that resulted in a net cost increase of a basis point. Am I characterizing that fairly accurately?

Yes, in terms of our pricing tactics within each market, we obviously look at our competition and our mix and where we fall across all of our CD tenures. And we've begun to emphasize the longer tenures more in the last two quarters, A, just because the price relative to the yield curve in the longer term, the 24 and 36 month tends to be more favorable. And also the liquidity benefits and the asset liability benefits of extending our liabilities has a positive effect on our asset liability profile. We intend to stay modestly asset sensitive and we continue to be in that position at the end of the quarter.

Thanks for answering my question guys.

[Operator Instructions] Showing no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Grescovich for any closing remarks.

Thank you, Allison. As I've stated, we're pleased with our solid first quarter 2017 performance and see it as continuing 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, maintaining 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 again for your interest in Banner and joining us on our call today. We look forward to reporting our results to you again in the future. Have a great day everyone.

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