Banner Corporation (BANR) Q2 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the Banner Corporation’s Second Quarter 2018 Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. At this time, I would like to turn the conference over to Mark Grescovich, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Denise and good morning everyone. I would also like to welcome you to the second quarter 2018 earnings call for Banner Corporation. Joining me on the call today is Rick Barton, our Chief Credit Officer; Peter Conner, our Chief Financial Officer and Albert Marshall, the Secretary of the Corporation. Albert, would you please read our forward-looking safe harbor statement?

Thank you. 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 as well as statements concerning the merger announcement with Skagit Bancorp, Inc. 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 press releases that were released yesterday and a recently filed Form 10-Q for the year ended March 31, 2018. 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, Mark.

Thank you, Al. As announced, Banner Corporation reported a net profit available to common shareholders of $32.4 million or $1 per diluted share for the quarter ended June 30 2018. This compared to a net profit to common shareholders of $0.89 per share for the first quarter of 2018 and $0.77 per share in the second quarter of 2017. 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 24% of $32.2 million for the second quarter of 2018 from $25.9 million in the second quarter of 2017. Because 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 core operating performance continued to reflect the success of our proven client acquisition strategies, which are producing strong core revenue. We are benefiting from the successful integration of our acquisitions, which has had a dramatic impact on the scale and reach of the company and are providing a great opportunity for revenue growth. Our second quarter 2018 performance clearly demonstrates that our strategic plan is effective and we continue building shareholder value. Second quarter 2018 core revenue was $126 million, an increase of 4% compared to the second quarter of 2017. We benefited from a larger and improved earning asset mix, a net interest margin that remained above 4% and good deposit fee revenue. Overall, this resulted in a return on average assets of 1.25% for the second quarter of 2018. Once again, our performance this quarter reflects continued execution on our super community bank strategy that is growing new client relationships, adding to our core funding position by growing core deposits and promoting client loyalty and advocacy through our responsive service model, while augmenting our growth with opportunistic acquisitions. To that point, excluding the impact of the sale of the Utah operations, our non-interest bearing deposits increased 7% from one year ago representing 39% of total deposits. Further, we continued our strong organic generation of new client relations – relationships and it continues at approximately a 9% compounded annual rate since the end of 2009. Reflective of the solid performance coupled with our strong tangible common equity ratio of 9.79%, we issued a core dividend in the quarter of $0.35 per share and a special dividend of $0.50 per share. In a few moments Peter Conner will discuss the operating performance of our company in more detail. While we have been effectively executing on our strategies to protect our net interest margin, grow client relationships, deliver sustainable profitability and prudently invest our capital, we have also focused on maintaining the improved risk profile of Banner. Again this quarter, our credit quality metrics reflect our moderate risk profile. As expected due to the addition of new loans and the migration of acquired loans out of the discounted loan portfolio we reported a $2 million provision for loan losses during the second quarter. At the end of the quarter our ratio of allowance for loan and lease losses to total loans was 1.22% and our total non-performing assets totaled 0.16%. In a moment Rick Barton, our Chief Credit Officer will discuss the credit metrics of the company and provide some context around the loan portfolio and our success at maintaining a moderate credit risk profile. In the quarter and throughout the preceding 8 years, we continued to invest in our franchise. We have added talented commercial and retail banking personnel to our company and we have invested in further developing and integrating all our bankers into Banner’s proven credit and sales culture. We have also made and are continuing to make significant investments in our risk management infrastructure and our delivery platform positioning the company for continued growth and scale. While these investments have increased our core operating expenses, they have resulted in core revenue growth, strong customer acquisition, year-over-year growth in the loan portfolio and strong deposit fee income. Further, as I have noted before, we have received marketplace recognition of our progress in our value proposition as J.D. Power and Associates ranked Banner the number one bank in the Northwest for client satisfaction the third year we have won this award. The Small Business Administration and Banner Bank Community Lender of the Year for the Seattle and Spokane district for two consecutive years. And this year named Banner Bank Regional Lender of the Year for the third consecutive year and Bankrate.com and Money magazine named Banner Bank the Best Regional Bank in America. Also Banner ranked 35 out of 100 in the Forbes 2018 Best Banks in America. Before I turn the call over to Rick Barton to discuss the trends in our loan portfolio, I want to recognize our new colleagues from Skagit Bank, an outstanding 60-year-old organization in the North Sound region of the Pacific Northwest and their clients that will soon be joining Banner. We are extremely pleased with this opportunity to expand our super community bank model and enhance our density in the Seattle and I-5 corridor. Further, we are thrilled that Cheryl Bishop, Skagit’s Chief Executive Officer will be joining Banner’s Board of Directors. I will now turn the call over to Rick Barton to discuss the trends in the loan portfolio. Rick?

Thanks Mark. As shown in our second quarter press release and noted earlier by Mark, certain aspects of Banner’s credit metrics showed further improvement during the quarter. This improvement was driven by the successful resolution of several commercial and agricultural problem loans. Bottom line, Banner’s credit metrics remained very well positioned to deal with the next credit cycle and/or the portfolio impacts of tariff increases on international trade. My brief remarks this morning as usual will highlight the continuing moderate risk profile of the company’s loan portfolio. Delinquent loans decreased 27 basis points from the linked quarter to 0.29% of total loans and compares to delinquencies of 0.44% 1 year ago. This pattern of change is normal when total delinquent loans are at their current low level. During the just completed quarter, the improvement was magnified by the problem loan resolutions just mentioned. The company’s level of adversely classified assets decreased 14% during the quarter, reflecting problem loan resolution, positive economic activity in our footprint and continuing strong borrower performance. Non-performing assets decreased 7 basis points from the linked quarter to 0.16% of total assets. This metric at June 30, 2017 was 0.24%. Non-performing assets were split between non-performing loans of $15 million and REO and other assets of $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 in our non-performing asset totals, the ratio of non-performing assets to total assets would still be a modest 26 basis points. For the quarter, the company recorded net loan charge-offs of $332,000. Gross charge-offs for the quarter were $1.2 million. We still consider charge-offs at this level to be low when compared to historical norms. Also to be noted is the lower recovery level during the second quarter of 2018. After a second quarter provision of $2 million and net loan losses of $332,000, the allowance for loan and lease losses for the company totals $93.8 million and is 1.22% of total loans unchanged from the linked quarter. For the quarter ending June 30, 2017, this measure was 1.17%. Coverage of non-performing loans jumped to a very robust 613%. The remaining net accounting mark against acquired loans is $18.2 million, which provides an additional level of protection against loan losses. During the second quarter of 2018, total loans receivable increased by $129 million or 1.7% when compared to the linked quarter. On an annualized basis, this is a 6.8% rate of growth. The drivers behind this increase were residential construction, commercial business, production agriculture and commercial real estate loans. It is also important to note that C&I loan growth occurred across our footprint at an annualized rate of 4.6% during the quarter. While increasing all sectors within Banner’s construction loan portfolios remain in acceptable concentration levels. Residential construction exposure, including land loans is 8.4%. When both multifamily and commercial construction loans are added into this calculation, our construction exposure is 12.5% of total loans. Lease-up activity on our multifamily construction loans has not changed in the last 90 days, with these loans paying off in a timely manner. However, we are continuing to observe moderation in the growth of multifamily rents and higher vacancy rates in the luxury apartment market as new projects in this segment are completed and the markets in which we make residential construction loans remain either undersupplied or in balance resulting in timely absorption and manageable levels of completed inventory. As I said at the outset of my remarks, credit remained stable at Banner, which further solidified the moderate risk profile of our loan portfolios and positions us well for the future. With that said, I will pass the microphone to Peter Conner for his comments. Peter?

Thank you, Rick. As discussed previously and as announced in our earnings release, we reported net income of $32.4 million or $1 per share for the second quarter, up from $28.8 million or $0.89 per share in the prior quarter. $0.11 per share increase from the prior quarter was due to the following items. Net interest income increased 18% due to a 4 basis point increase in net margins combined with the $330 million increase in average earning assets. Non-interest income was flat to the prior quarter as the decline in the gain on securities fair value in the first quarter, were offset by gains on the sale of former bank properties acquired through acquisitions in the second quarter along with increased deposit fee income. Non-interest expense increased $0.04 due to increases in personnel and loan production related expenses. Income tax expense increased $0.03 per share. Turning to the balance sheet, ending assets increased $62 million from the end of the first quarter to $10.4 billion at the end of the second quarter as a result of growth in held for portfolio loans, partially offset from a decline in loans held for sale at the end of the second quarter. The ending investment portfolio balances including interest bearing deposits remained flat to the prior quarter end as the entirety of bank’s de-leveraging was completed by the end of the first quarter. Total loans increased $66 million from the prior quarter end as a result of $129 million in growth in held for portfolio loans, partially offset by a $63 million decline in held for sale loans due to sales of multi-family loans in the month of June. Growth in the held for portfolio loans was diversified across commercial real estate, C&I, construction, agriculture, first lien mortgage and consumer loan types. On an annual basis compared to the second quarter a year ago portfolio loans grew $133 million. The growth in held for portfolio loans was impacted by the sale of $254 million of loans with the Utah operations last year. Ending core deposits declined $146 million or 1.9% compared to the prior quarter due to typical seasonal declines in deposit balances driven by tax payments and outflows of certain large commercial client related deposits that came in during the first quarter. The company historically experienced the seasonal growth in the first quarter core deposit balances followed by a decline in April and May due to tax payments and then the steady increase in balances in the third and fourth quarter. On an annual basis core deposits grew $102 million or 1.4% from the prior year quarter end. The growth in core deposits was impacted by the sale of $160 million in deposits with Utah operations in the fourth quarter of last year. Time deposits increased $130 million in the second quarter due to increases in brokerage CDs. Turning to the income statement, net interest income increased $5.7 million from the prior quarter due to an increase in the net interest margin driven by increases in loan and security portfolio yields and growth in both average securities and loan balances. Loan yields increased 17 basis points to 5.15% in the second quarter from 4.98% in the first quarter. Acquired loan interest accretion accounted for 9 basis points of the loan yield in the second quarter compared to 11 basis points in the previous quarter. The improvement in loan yields was the result of the re-pricing of contractual loan yields on the existing loan portfolio along with higher yields on new loan production across the yield curve. 6 basis points of the loan yield increase in the second quarter was related to loan workout related interest recoveries. The total cost of deposits in the second quarter was 20 basis points, up 4 basis points from the prior quarter, primarily the result of shifting the bank’s wholesale funding mix away from FHLB borrowings and into brokered CDs. While brokered CDs carry a substantially higher interest rate than the bank’s retail CDs, we have been and continue to be less costly than equipment terms FHLB borrowings. The increase in brokerage CDs accounted for 2 basis points of the increase in the overall cost of deposits in the second quarter. The net interest margin increased 4 basis points to 4.39%. The effective purchase accounting principally loan accretion accounted for 7 basis points of the net interest margin in the second quarter compared to 8 basis points in the previous quarter. Non-interest income was flat to the prior quarter. The current quarter included $2.1 million of gains on the sales of bank branch and the administrative properties while the prior quarter included a $3.3 million gain on certain securities held for trading. Deposit fee generation was solid with continued growth in deposit account service charges and interchange income. Total mortgage banking income declined modestly due to lower premiums on multifamily loans in the second quarter. Income on residential mortgage sales was up modestly due to an increase in purchase-related mortgage loan sales, which more than offset a decline in refinance volume. Non-interest expenses increased by $900,000 in the second quarter from the previous quarter, personnel expenses increased $1.4 million due to the impact of annual merit increases and elevated medical claims expense. Miscellaneous expenses increased $1.4 million due to increases in loan production and employee travel and training-related costs. Real estate operations expense decreased $800,000 due to gains and expense recoveries on non-performing asset workouts. Professional services declined $600,000 as the company completed the build-out of its risk management infrastructure and concluded the related outside consulting engagements. Finally, we are excited about Skagit Bank acquisition, the addition of Skagit Bank team, the positive impact they will have on Banner’s presence in the northbound region, the opportunity to leverage the investments we have made to the company’s risk and support infrastructure over the last 2 years, and the enhancement to the company’s already low cost core deposit base. This concludes my prepared remarks. Mark?

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

Thank you, sir. [Operator Instructions] And your first question today will be from Jeff Rulis of D.A. Davidson. Please go ahead.

Thanks. Good morning.

Good morning, Jeff.

I guess a couple of questions, well pertaining to the margin and you guys keep the deposit costs pretty well in check relative to peers. I guess the first part of that is kind of what you are seeing in the market and do you think you have continued success keeping those down and then maybe just the second question on the margin outlook from here? Thanks.

Sure, Jeff. This is Peter. So in terms of your first question on deposit costs as I mentioned in my prepared remarks, a good portion of the increase in our cost of deposits in the second quarter was due to the fact that we shifted some of our typical wholesale funding into brokered CDs this quarter instead of using the FHLB. The FHLB is running about 20 basis points higher than brokered CDs and we also get the benefit of extending our duration of it by going out to 6 and 12 months on the brokered CD curve. So they cost a 2 basis point increase in our cost of deposits in the second quarter. That being said, we did see some modest increase in the remaining deposit portfolio principally in the money market and savings account categories. We are seeing the green sheets of increased deposit competition and it continued to increase from the first quarter or the second quarter and we continue to be very tactical about responding to who we consider true bank competitors and focus on retaining our existing deposits will continue to grow through our talent acquisition model and maintaining our non-interest bearing core deposit base.

And the thoughts on margin, I guess going forward kind of what you saw this quarter is the outlook?

Yes, the growth in margin this quarter was caused and driven by substantial increase in our loan yields, our contractual loan yields. And as we have discussed previously, our loan portfolio mix is 30% floating tied to prime or LIBOR 30% tied to an adjustable rate between 3 months and 5 years and the remaining portfolio 40% is fixed and so we are benefiting from the change in Fed Funds and to a lesser extent the increase in the 5 and 10-year part of the yield curve over the last 6 months. And so our loan portfolio continues to re-price faster than our cost of deposits as we go forward into the third quarter we typically experienced an increase in our core deposit base, so we would anticipate somewhat less reliance on our wholesale funding sources in the third quarter than we did in the second quarter which will have some positive tailwinds to our margin. So that being said, we did experience an increase in our core margin excluding loan accretion in the second quarter. We would anticipate that level of margin would be – it would continue at the current pace from the second quarter into the third quarter, but we wouldn’t anticipate any substantial continuing improvement in the margin as the cost of deposit will continue to move up and we continue to see continued pressure in the commercial loan market for CRE loans especially in terms of pricing.

Thanks Peter. And maybe just two quick ones on the Skagit deal, I guess within the Q4 closing is that look like kind of an early quarter within – in the quarter and then do you have a preliminary goodwill estimate?

Yes. So we would anticipate closing towards the middle or end of the fourth quarter. Obviously, it’s subject to regulatory approvals, but our anticipation would be the mid to the end of the fourth quarter. We don’t have an exact number for you just on goodwill. I think you can what that number would be through the disclosures on the marks in the loan book in the core deposit intangible. We did announce obviously the dilution of 3% day 1 in terms of EPS and 4% accretion in the first full year of the acquisition.

Got it. Thank you.

Thanks Jeff.

The question will be from Tyler Stafford at Stephens Inc. Please go ahead.

Hi guys, this is actually Gordon McGuire on for Tyler this morning. Good morning.

Good morning Gordon.

So I just wanted to start on the loan growth definitely an improvement from the first quarter, but year-to-date it’s still coming in the low I think you had mentioned a high single-digit expectation, can you discuss what you are seeing – are you seeing accelerated payoffs that are impacting the growth and do you still think you can achieve high single-digits for the year.

Gordon, this is Rick Barton. We are calling in the first year – our first quarter of the year, we had some very heavy payoffs in the CRE portfolio which viewed its loan growth in that quarter. I think that we are seeing in the second quarter a pickup in activity, the loan payoffs were down from what they were in the first quarter. And in looking at our pipelines whether they would be commercial, C&I pipelines or commercial real estate pipelines they are fairly full and we look forward to being able to generate loan growth in the mid to high single-digit range.

Thank you. And just turning to Skagit, do you have an anticipated conversion date in mind right now and how should we be thinking about the timing of the cost saves?

Yes. This is peter, so right now we are targeting the first quarter of 2019 likely in February, in terms of the cost saves we would anticipate about approximately we would see about 25% to 30% in the first quarter with the remaining cost saves – the first quarter of the closing with the remaining of the cost saves achieved in the first two quarters of ‘19. So fully saved, in other words all the costs will be phased in by the second quarter of 2019.

Okay, thank you. And then did the discussions with Skagit impact your ability to buyback stock in 2Q and how should we be thinking about capital distribution for the remainder of the year?

Yes. Gordon this is Mark, clearly the negotiations or conversations we had would put us in blackout period, so that clearly since we don’t – didn’t have a program in place we would have restricted the amount of repurchase activity we can do. I think I will ask Peter to comment on capital deployment going forward.

Yes. As we have guided to you previously we are targeting a mid 9 TCE ratio and we anticipate with the acquisition of Skagit will be right in that range at the end of this year. So we don’t foresee a need to do any further capital to fund and obviously between now and year end as Skagit’s absorb some of that remaining excess capital. Obviously going forward into ‘19 we will continue to evaluate the deployment of our excess capital over and above our 40% shareholder payout ratio in the form of again either special dividends or share repurchases in ‘18.

Thank you. That’s all my questions.

Thanks, Gordon.

[Operator Instructions] The next question will come from Tim Coffey of FIG Partners. Please go ahead.

Great. Thank you. Good morning, everybody.

Good morning, Tim.

Mark, I had a question for you around kind of the M&A strategy going forward, obviously it’s been a while since you completed a deal and now we are with Skagit and I am wondering is this the start kind of are you in the mood or in the frame of mind to start looking at more and more M&A deals now?

Yes, Tim, thank you for the question. I don’t think our strategy has changed in particular from where it’s been, recognizing that our stock price was not in a position to aggressively bid on auction transactions the types of deals that we have done historically that added economic benefit to our shareholders really resulted in negotiated transactions which would provide additional density to our footprint and a strong core deposit franchise. So, Skagit fits right in that wheelhouse. As we have said before, crossing the $10 billion threshold, we needed to augment our organic growth with some modest acquisitions and Skagit certainly hits every single one of those triggers that we have been discussing over the last several quarters, which is a strong core deposit franchise, a very strong franchise being 60 years old and providing significant density for us specifically in the northbound region of the Puget Sound. So it hit every one of those categories and the economics are clearly accretive to the organization as well. So looking forward into the future, our strategy has not changed. It will look very similar to what we have been looking for in the past.

Okay. And then you sold the Utah operations, but you still have some other footings that are outside kind of your core markets, have you thought about trimming those back or adding to them or is it still kind of you are still evaluating?

I think, Tim if you look at some of the things that are outside the core footprint, they are de minimis and there really are associated with our client base, it’s actually in our footprint or relationships that we have. So I would characterize those footings as de minimis to the overall organization. It’s certainly not going to be a focus going forward, but there is no reason to jettison them from the balance sheet.

Okay. Alright, well thank you. Those are my questions.

Thanks, Tim.

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

Hi, good morning.

Good morning, Matthew.

Wondered if this deal impacts your longer term efficiency ratio target range of 62% to 65% and when you think you might be able to achieve that if not do a little better?

Yes, Matthew, this is Peter. So, we continue to maintain our guidance of targeting a low 60% range in efficiency ratio. This acquisition will help accelerate our process in achieving that target. The company as we said before doesn’t rely on a low efficiency ratio to improve its ROA and bring that ROA target up towards the top quartile of our peer banks over time, because of the fee income we generated in our deposit business and mortgage businesses.

Let me just add to that, Matthew, once again, there is two sides to that, that ratio, the revenue side and one of the issues that we have indicated in the past, our primary goals are to protect our net interest margin adding what is 96% of other deposit bases core of the roughly $800 million of deposits that being core, it’s going to go a long way for us to protect our net interest margin going forward, which clearly will help the revenue.

Okay, great. And then on the net interest margin and the core margin excluding purchase accounting accretion that 433, I guess can you quantify any – that is how much in loan fees might have been in there that may move around or be lumpy tied to the construction business from first to second?

Yes. We – so if we talk just about the loan yield by itself not the margins 6 basis points of the increase in the loan yields between Q1 and Q2 were related to interest recoveries on loan workout related activities. And so that was a bit higher than we normally experienced and so I would characterize that as something that’s we wouldn’t typically expect it will occur every quarter. Regarding your question on the construction side, we actually this quarter the loan growth and the loan production was much more diversified across all of our loan categories including construction than it was in the first quarter where we had a bit more waiting towards construction production which influenced the amount of deferred fee income that was going into the loan yield this quarter. There was less of an impact overall on deferred fee income component from construction loans because of the diversification of our production in the second quarter. So I would characterize it as a run rate in the second quarter nothing unusual.

Okay, great. And then last one from me just wondered if you have any interest in acquiring branches with deposits, should they come up for sale?

Matthew, this is Mark. Obviously that would fit nicely with our strategy of growing core deposits as long as those branches or whatever divestiture that was occurring within a different organization provided density for our operation in which we could leverage it.

Okay, thank you.

And the next question will be from Jackie Bohlen of KBW. Please go ahead.

Hi, good morning.

Good morning Jackie.

Mark just as a follow-up kind of on the construction, has the velocity of the portfolio changed at all between the second quarter and the first quarter and is that impacting the loan yields at all?

Jackie, this is Rick Barton. The velocity is very consistent between the two quarters both in terms of the pace of production and the payoff rate of homes is there completed. It will continue to be a little bit lumpy when you look at the commercial side and you see some of the larger projects be completed and be refinanced into a permanent status so there will be that phenomenon from time to time as go forward with that portion of the portfolio.

Okay. And just my last one that’s everything I have has been asking after the impart, but Rick just in terms of the various markets that you are operating in, are you seeing any pockets of weakness in any portfolios not maybe your portfolios that just what you are lending into and may it’s reduced your appetite for certain markets or certain categories?

Probably, the two that come to mind immediately are the luxury segment at the multifamily market. We are seeing a slowdown of not a stock and the growth of rents, particularly in Portland and in some pockets of Seattle and we are seeing rental concessions being offered in those markets, so that’s always a sign that you want to be cautious about adding additional exposures. And there are some categories of retail that we continued to look at very closely before we consider adding loans to the portfolio.

And is the retail I am guessing is just broadly across your footprint?

Yes, that’s correct. And I might add also that healthcare is another segment that we pay close attention to in adding exposure to the portfolio.

And is that a new attention that you are paying or is it consistent from the past?

It’s consistent with past, we have had eye on that for quite some time.

Okay, great. Thank you very much.

Thanks Jackie.

And the next question will be from Don Worthington of Raymond James. Please go ahead.

Thank you. Good morning everyone.

Good morning Don.

In terms of mortgage banking operations with your outlook there maybe on the multifamily sales and just in general mortgage banking revenue?

Yes. Don, this is Peter. So in the second quarter we actually saw a substantial increase in mortgage loan production was actually up 27% in the first quarter and that’s typical as we go into second quarter with the seasonal increases we expect. We continued to do very well in the purchase volume despite follow-up in refi volume. Our production numbers continue to remain solid. The one change that we saw between the first and second quarters that we portfolio at a larger percentage of the mortgage production onto the balance sheet this quarter, so we actually sold about the same total line of loans between Q1 and Q2. However we increased the total production and that difference went on to balance sheet. In terms of a gain on sale we continue to see no diminishment in the gain on sale we are getting on loans that are being sold. On the residential mortgage side that continues to remain robust. The question on multifamily, we did see a bit of falloff on both production and gain on sale in the multifamily business in the second quarter. However, on a year-to-date basis and in terms of our expectations for the full year, we still expect that business to generate between $300 million and $350 million a year in production with net gain on sales between 80 basis points and 90 basis points. So we haven’t changed our outlook on that business we just – we did see a better slowdown relative to the first quarter in terms of production, but no change for our expectation on a full year basis for that business.

Okay, great. Thank you. And then just curious in terms of how the Southern California operation is performing, say relative to your other markets in terms of loan growth and profitability?

Yes. It’s been very consistent. We have between $700 million and $800 million in both loan and deposit balances in the Southern California franchise. And as we have said earlier they continued to respond well to the Banner product set, they were all from American West locations. And so when you look at the deposit growth on their baselines have actually been at the same or better than legacy Banner markets in terms of account acquisition and deposit growth. And we see very consistent level of loan growth that was operations with the rest of the organization. So, it can just be very vibrant time economy. We have got a great banking team down there. We are very happy with it.

Okay, great. Thank you.

Thanks, Don.

And ladies and gentlemen, that will conclude the question-and-answer session. I would like to hand the conference back over to Mark Grescovich for his closing remarks.

Thanks, Denise. As I stated, we are very pleased with our solid second quarter 2018 performance and see it as 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, maintaining a moderate risk profile and prudently deploying excess capital. I would like to thank all my colleagues for 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 next quarter. Have a great day everyone.

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today’s presentation. You may now disconnect your lines.