Good morning, ladies and gentlemen and welcome to the Banner Corporation's Third Quarter 2018 Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. At this time, I would like to turn the conference over to Mr. Mark Grescovich, President and CEO. Please go ahead, sir.

Thank you, Denise, and good morning everyone. I would also like to welcome you to the third 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?

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 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 quarter ended June 30, 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.

Thank you, Al. As announced, Banner Corporation reported a net profit available to common shareholders of $37.8 million or $1.17 per diluted share for the quarter ended September 30, 2018. This compared to a net profit to common shareholders of $1 per share for the second quarter of 2018 and $0.76 per share in the third quarter of 2017. Excluding the impact of merger and acquisition expenses, gains and losses on the sales of securities and changes in fair value of financial instruments, earnings increased 20% to $38.5 million for the third quarter of 2018 from $32.2 million in the third 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. Our third quarter 2018 performance clearly demonstrates that our strategic plan is effective and we continue building shareholder value. Third Quarter 2018 core revenue was $129.4 million an increase of 9% compared to the third quarter of 2017. We benefited from a larger and improved earning asset mix and increasing our net interest margin and very good deposit fee revenue. Overall, this resulted in a return on average assets of 1.43% for the third 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 opportunistic acquisitions. To that point, excluding the impact of the sale of the Utah operation, our non-interest bearing deposits increased 7% from one…

Thank you, Mark. As shown in our third quarter press release, Banner's credit metrics were stable during the quarter maintaining the moderate risk profile of the portfolio that the company has, bottom line Banner's credit metrics remain very well positioned to deal with the next credit cycle and the portfolio impacts of rising interest rates and tariff impacts as they work their way through the U.S. economy. My specific remarks on our credit metrics this morning will be brief, delinquent loans were flat decreasing only two basis points from the linked quarter to 0.27% of total loans. Delinquencies one year ago were 0.45%. The company's level of adversely classified assets decreased a further 19% during the quarter reflecting continuing problem resolution, positive economic activity in our footprint and strong borrower performance. Non-performing assets were flat at 0.16% of total assets. This metric at September 30, 2017 was 0.30%. Non-performing assets were split between non-performing loans of $16 million and REO and other assets of $1 million. Not reflected in these totals are the remaining non-performing loans of $8 million acquired from [indiscernible] 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 24 basis points. For the quarter, the company recorded net loan charge offs of $612,000, gross charge offs for the quarter were $1.3 million. We still consider charge offs at this level to be low when compared to historical norms, also to be noted is a slightly lower recovery during 2018 second quarter of 2018 on loans previously charged off that should say that was during the third quarter of 2018. After a fourth quarter provision of $2 million and…

Good morning. Thank you, Rick. As discussed previously and as announced in our earnings release we reported net income of $37.8 million or $1.17 per diluted share for the third quarter up from $32.4 million or $1 per diluted share from the prior quarter. The $0.17 per share increase in the prior quarter was due to the following items. Net interest income increase $0.12 due to a nine basis point increase in the margin combined with the $63 million increase in average earning assets. Non-interest income declined $0.03 compared to the prior quarter. Due to write downs on fixed asset disposals in the current quarter versus gains on property sales taken in the prior quarter which were perfectly offset by an increase in mortgage banking income and all the benefit gains. Non-interest expense declined $0.04 principally due to a decrease in personnel expense as a result of lower FTE and lower medical claims expense. Partially offset by a $1 million increase in scheduled acquisition related expense. Income tax expense decreased $0.04 per share primarily due to a credit adjustment for tax exempt loan interest income from prior periods. Turning to the balance sheet, ending assets increased $135 million from the end of the second quarter to $10.5 billion at the end of the third quarter. As a result of growth in health for portfolio loans, the ending investment portfolio balances including interest range deposits grew $18 million from the end of the second quarter. Total loans increased a $132 million from the first quarter ends as a result of $138 million in growth and held for portfolio loans partially offset by a $6 million decline in held for sale loans. Growth in held for portfolio loans was driven primarily by C&I, AG, CRE and construction loan types. On an annual…

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

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

Good morning, guys.

Good morning, Jeff.

First question on the expense side, it sounds like -- I guess we were to back out the -- couple of the one-timers, you get kind of the low 80 million range per quarter I guess before Skagit comes on board, but from the lower comp expense -- I guess is that sustainable and kind of what are your thoughts about kind of the core expense base going forward?

Yes, Jeff. This is Peter. So, where we typically expect in the short quarter is less than seasonal increases in our core expense related to marketing and contributions along with some elevated professional services costs principally related to some of the audit activity that begins to tick up in the fourth quarter. So we see a normal increase just due to seasonal factors on the core expense. Beyond that, we would consider the results in the third quarter basically baseline and what we are going to grow on a more normalized basis, our personal expense and other production-related expenses going into '19. So I would consider it as a good baseline. We don't expect any additional reductions in the -- what we did going from the second to third quarter, but I wouldn't view it as a baseline going forward.

Okay. And then maybe a similar question on the margin, you saw a nice pop in the accretion this quarter and maybe you will see another uptick with Skagit coming on board, but what is the outlook on the core margin -- any thoughts there?

Yes, I mean -- I think in the first period, talk about as a deposit cost, so our overall deposit cost moved up five basis points in the third quarter. And we anticipate the same pace of movement into the fourth quarter. So we are seeing meaningful deposit competition as we discussed previously across our markets. And we are seeing a consistent pace of increase at the levels we saw from second to third quarter, and we expect that again in the fourth quarter. As you know our loan portfolio is well-diversified between floating, adjustable and fixed, 30% of the portfolio is floating. Most of that's on prime plus the LIBOR. And so we continue to benefit from the increase in rates on existing portfolios that rephrases up. I generally characterize our core margin excluding accretion as -- there is limited amount of additional margin expansion going forward. So the deposit began to accelerate. We are anticipating very little additional core margin expansion with the next round of rate hikes. And then the accretion has been very lumpy as we saw in the third quarter, and on a long run basis that will continue to diminish as we work through the portfolio for AmericanWest.

Okay. Maybe one quick last one for Mark, just on the capital side, I guess if you closed Skagit, any thoughts on revisiting potentially the special dividend or kind of buyback options I guess you kind of gaping up on the stock today, but any thoughts on capital?

Yes. Thanks Jeff for the question. I don't envision any less turn in our overall philosophy on deployment of capital. It's going to be reinvestment in the franchise first, obviously establishment of a strong core dividend. You saw the increase -- the 9% increase in the most recent third quarter, on the core dividend. Beyond that obviously any M&A opportunities that would present themselves would be a good utilization as reinvestment in the franchise. We do have a 5% authorization for share repurchases that are still on and through our shelf registration. So, you could potentially do some deployment of capital either in stock repurchases of special dividend or diagnostic it depends on what the market does.

Great, thank you.

[Operator Instructions] We do have a question that just came in from Tyler Stafford of Stephens Inc. Please go ahead.

Hey, good morning guys. Sorry about that.

Good morning, Tyler.

Thought I was in the queue. I just wanted to clarify the margin comments you just made. Is the similar pace of deposit cost increase, is that inclusive or exclusive of the impacts of Skagit in the fourth quarter?

That's excluding it, Tyler. Skagit has a lower loan-to-deposit ratio than Banner, so they have a higher proportion of their earning assets in securities. So, while we will get some accretion pickup from the Skagit acquisition, on a core basis they're very slightly dilutive to our core margin because of the higher proportion of securities they hold on their balance sheet. So, while they're relatively small at Banner, there's a very small dilutive effect on the core margin from Skagit.

Got it. Okay, that's it from me. Thanks.

Thanks, Tyler.

[Operator Instructions] Your next question will be from Don Worthington of Raymond James. Please go ahead.

Thank you. Good morning everyone.

Good morning, Don.

Just a question on the mortgage banking revenue, would you expect further gain on sale of multifamily kind of at the level this quarter. And then maybe the single-family component, the outlook there with the rising rates going forward?

Yes, good question, Don. This is Peter. Yes, in regards to multifamily we did have a significant improvement in the gain on sale of the ones that were sold in the third quarter relative to the second quarter. However I would consider that was a bit of an anomaly. It was higher than we had anticipated, but I wouldn't anticipate that level of gain on sale for the multifamily business going forward. We typically get between 85 and 95 basis points of net gain on sale on the multifamily business. And they typically generate about $75 million to $80 million a quarter in production and sales. So that's generally our expectation with multifamily going forward. We did enjoy a very good level of execution. Our multifamily loans are well received in the secondary market, and that showed up for sure in the third quarter. Turning to residential mortgage, we continue to have a resilient mortgage business. The decline in refi volume from last year has been all made up in the form of additional purchase volume in the third quarter. And in fact, on the production basis we were even in the third quarter with the second quarter in terms of overall mortgage production. And we've seen our gain on sale remain very steady in terms of what we're getting in the secondary market there.

Okay, great. Thanks for the color.

Thanks, Don.

And your next question will be from Tim Coffey of FIG Partners. Please go ahead.

Thank you. Good morning, gentlemen.

Good morning, Tim

The relative stability, the outright improvement in your non-performers last three quarters, does that imply a relatively stable state of provision expenses going forward, like we've seen already?

Well, Tim, this is Rick Barton. As we have discussed many times, the provisioning that we put up is based on the pace of loan growth, the mix of the loan growth, individual credit events, and macroeconomic trends that we see. I think that we look at those factors being fairly stable in terms of in the next couple of quarters as to what we've seen in the last few quarters. So I think you can draw a conclusion from that as to how we view provisioning. Personally, I think we're very well positioned where we're at.

And Rick, to follow-up on your comments earlier, just in your professional experience, how concerned are you with some of the weakness that we're seeing in the multifamily complex right now?

Well, the concerns I have are centered primarily on the luxury apartment market. And I say that because of what we're seeing in terms of the concessions being granted. And a good deal of the pipeline of projects that are to be delivered in the next six to 12 months fall into that category as well. Banner's portfolio exposure in that market segment is modest and has good sponsorship behind it. So while I'm concerned about the market in general, I'm not particularly concerned About outsized problems in our own portfolio.

Okay. Thanks for that. And Mark, if we look at kind of the cost of your total deposits over the last couple quarter, they've been very good, you know, especially this last quarter with the deposit data. [Indiscernible] better quality deposits that you have, the lower cost deposits that you have give you competitive advantage in the market when it comes to pricing new loans?

Well, we certainly thank you for that question, Tim,. We certainly think so, but I will tell you it's a highly competitive market right now for good earning assets. So pricing discipline hasn't really shifted much, but in a rising rate environment, it could very well help us to gain additional market share with a low cost deposit beta.

And then a second question, Mark, if I could. So the stock market, especially for banks has been, you know, to the downside in the last several weeks. I'm wondering from your view, where you said -- has your business fundamentally worsened in the last several weeks?

That's a good question, Tim. No, I think the fundamentals of the bank as per -- strong third quarter would suggest that the business continues to do very well and the economies in which we operate are still quite strong. So you know, I think the fundamentals of the organization continue to be positive.

Okay. Thank you. Those are my questions.

Thanks, Tim.

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

Hi, good morning, everyone. - Rick Barton: Good morning, Jackie.

Good morning.

I know we've been going into deposits quite a bit lately, but it is kind of the topic of the day. Looking at it a different way are there differences between the geographies in terms of pricing pressures that you're seeing?

Yes, Jackie, this is Peter, that's a good question. We have -- you know, we're in four states and we actually looked at our business across 15 actually different geographic markets and in terms of our deposit pricing process and you know, up until a year ago or even six months ago, we really didn't see a lot of deviation in our market competition in where we were positioned. Now we're beginning to see some differences by market in terms of what our competition is doing and we're beginning to take advantage of that and calibrate our pricing and positioning of our deposit rates and products a bit differently in those markets. So we are beginning to see some separation. And as you'd expect, in general we're seeing a bit more competition in the metro markets of our franchise and a bit less in the more rural areas where 55% of our deposits exists.

And that's kind of where I was going and what I thought might be the case with my question. So looking to the rural exposure that you have, I guess, are you increasing any deposit campaigns there or any ways to generate additional funds in kind of the less pressured areas?

We stayed away from deposit specials in general or big campaigns. We continue to be focused on generating core deposits with our existing business model which continues to resonate very strongly in all of our markets. And so we haven't entertained doing any major specials or deposit campaigns but simply rely on existing business model and our team to generate and grow our core deposit base and account base.

Okay. Thanks for the color. That's helpful. Everything else I had was already asked.

Thank you, Jackie.

[Operator Instructions] And in showing no questions we will conclude the question-and-answer session. I would like to hand the conference back over to Mark Grescovich for his closing remarks. End of Q&A:

Thank you Denise and I thank all of you for your questions. As I stated, we're pleased with our strong third quarter 2018 performance and see it as 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 amount of risk profile and prudently deploying excess capital. I would like to thank all of my colleagues who were driving the solid performance for our company. Thank you for your interest in Banner and joining our call today. We look forward to reporting our results to you, again, in the future. Have a great day, everyone.

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time you may disconnect your lines.