Good day, everyone, and welcome to the Banner Corporation’s Fourth Quarter and Full Year Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note today’s event is being recorded. At this time, I’d like to turn the conference call over to Mark Grescovich, President and CEO. Sir, please go ahead.

Thank you, Jamie, and good morning, everyone. I would also like to welcome you to the full year and fourth quarter 2019 earnings call for Banner Corporation. As is customary, joining me on the call today is Rick Barton, our Chief Credit Officer; Peter Conner, our Chief Financial Officer; and Rich Arnold, our Head of Investor Relations. Rich, would you please read our forward-looking Safe Harbor statement?

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, forecasts 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 with AltaPacific Bancorp. 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 the recently filed Form 10-Q for the quarter ended September 30, 2019. Forward-looking statements are effective only as of the date they are made, and Banner assumes no obligation to update information concerning its expectation.

Thank you, Rich. As announced, Banner Corporation reported net income to common shareholders of $33.7 million or $0.95 per diluted share for the quarter ended December 31, 2019. This compares to a net income to common shareholders of $1.15 per share for the third quarter of 2019 and a net income of $1.09 per share in the fourth quarter of 2018. Results for the fourth quarter of 2019 were impacted by $7.5 million of acquisition-related expenses. For the full year ended December 31, 2019, Banner Corporation reported net income available to common shareholders of $146.3 million compared to $136.5 million for the full year 2018, an increase of 7%. Excluding the impact of merger and acquisition expenses, gains and losses on the sale of securities, prepayment penalties on Federal Home Loan Bank borrowings and changes in fair value of financial instruments, earnings from core operations increased 14% to $153 million in 2019 from $135 million in 2018, despite the headwinds of a declining rate environment and the impact of the Durbin Amendment. Due to 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 and we are benefiting from the successful integration of our recent acquisitions. Our full year 2019 core revenue reached a record $551 million and increased 7% compared to the full year 2018, demonstrating that our strategic plan is effective and continuing to build shareholder value. We benefited from a larger and improved earning asset mix, a strong net interest margin and good fee income. Overall, this resulted in a return on average assets of 1.22% for the year.…

Thanks, Mark. At year-end 2019, the credit landscape at Banner includes the AltaPacific Bank loan portfolio. As you have read in our press release and heard this morning, our credit metrics remained stable in the fourth quarter except for an increase in nonperforming loans. This change was centered in a single commercial business credit relationship that is encountering headwinds driven by marketplace changes beyond their control. The challenges faced in this relationship are not present elsewhere in the Banner portfolio. The broader risk profile of the company's loan portfolio is attributed to the continuing hard work of Banner's bankers, the compatible credit culture of AltaPacific and the effort and spirit of cooperation by all involved in planning the integration of Alta’s loan portfolio and loan operations into Banner's. My remaining remarks this morning will be brief and concentrate on the company's credit metrics and our loan portfolio's moderate risk profile. Delinquent loans increased 11 basis points from the linked quarter to 0.41% of total loans. This change in delinquent loans fits within the pattern of recent quarters and should not be unexpected when total delinquent loans are at their current low level. A year ago, delinquencies were 0.45%. The company's level of adversely classified assets remains well below historic norms. Nonperforming assets as noted increased in the fourth quarter of 2019 to 0.32% of total assets, up from 0.15% in the linked quarter. At December 31, 2018, nonperforming assets were 0.16%. Nonperforming assets were split between nonperforming loans of $40 million and REO and other foreclosed assets of $1 million. The increase in REO came from the AltaPacific portfolio. Not reflected in these totals are nonperforming loans of $7 million from acquired portfolios which are not reportable under purchase accounting rules. If we were to include the acquired nonperforming loans…

Thank you, Rick, and good morning, everybody. As discussed previously and as announced in our earnings release, we reported net income of 33.7 million or $0.95 per diluted share for the fourth quarter compared to 39.6 million or $1.15 per diluted share in the prior quarter. Despite the headwinds affecting the net interest margin, the fourth quarter results benefited from organic growth both in core deposits and portfolio loans, strong mortgage loan production as well as revenue lift from the AltaPacific acquisition closed on November 1. The $0.20 decline in per share earnings from the prior quarter was primarily the result of increased noninterest expenses related to acquisition costs associated with AltaPacific, increased provision for loan losses and to a lesser extent the decline in net interest margin. Total loans increased 479 from the prior quarter end as a result of the acquisition of AltaPacific and solid organic portfolio loan growth. Organic portfolio loan growth, excluding held-for-sale loans, contributed 138 million to year-end loan outstanding. Held-for-sale loans declined by 34 million as bulk sales out of the multifamily portfolio exceeded production during the quarter. Ending core deposits increased 418 million from prior quarter end due to both the AltaPacific acquisition and strong organic growth during the quarter. Organic core deposit growth during the fourth quarter, excluding AltaPacific, contributed 113 million to the year-end total and on a linked quarter annualized basis grew 5.2%. Time deposits declined 98 million due to a decline in brokerage CDs and modest runoff of the retail CD portfolio, offset by $8 million acquired with the AltaPacific acquisition. FHLB borrowings increased 68 million due to remixing away from brokered CDs during the quarter. Noninterest income increased 2.9 million from the prior quarter as earning assets increased as a result of the AltaPacific acquisition and organic growth…

Thank you Peter and Rick for your comments. That concludes our prepared remarks. And Jamie, we’ll now open the call and we welcome questions.

Ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator Instructions]. And our first question today comes from Jeff Rulis from D.A. Davidson. Please go ahead with your question.

Good morning.

Good morning, Jeff.

On the margin side of things, did the loans brought on nonaccrual, did that impact margin in the quarter?

Yes. Hi, Jeff. It’s Peter. No, the nonaccrual increase did not have a material effect on the margins in the fourth quarter.

Was it a timing thing or it was not in sum, but like late in the quarter or it had an immaterial effect?

It occurred very late in the quarter, Jeff. This is Rick.

Okay. So to that end I guess Peter and/or Rick, does the outlook on the margin given I think Peter you outlined that the prepayment on FHLB and continued expectation for deposit cost, I guess how does that net out on margin going forward?

Yes, as I mentioned in my prepared comments, Jeff, we had some benefit from loan accretion from AltaPacific and a bit of an increase in interest prepayment-related fees that go into the loan yield in the fourth quarter. If we kind of adjust for those things moving on to a normalized basis and a bit of a decrease in loan accretion that we normally expect as we get further into the acquired portfolios, along with the inertia we now have on reducing deposit cost is we know that there’s a lag in repricing deposits when market rates decline. We’re guiding to a mid-single digit decline in margin in the first quarter given those moving parts. We’d expect a similar mid-single digit decline in cost of funds as well for the company in part due to ongoing declines in repricing of our retail deposit products but also some benefit from prepaying some of the term advance FHLB borrowings that we did in the fourth quarter. We prepaid approximately $100 million of longer-term durated [ph] FHLB advances and moved those into overnight or very short FHLB borrowings by the end of the year.

All right. And, Rick, just hoping for some color on the large commercial relationship. Is that one single loan or a bucket of loans if you could talk about kind of any type and color and then potentially kind of the expected workout timeline?

Okay, Jeff, be happy to address that. It is a single loan and it’s not uncommon for things to be very lumpy in the commercial world when credit events happen. It’s agribusiness credit that we have been monitoring for quite some time and have had it in our classified loan totals. We have scoured the portfolio and have come to the conclusion that this issue with this particular relationship is isolated to that relationship and not found in other credits individually or portfolio segments collectively. This is going to be a more extended workout period that we have our very capable and special assets department managing the credit and we will be driving to a conclusion as soon as we can.

Okay. Thanks. I’ll step back.

Thank you, Jeff.

Our next question comes from Andrew Liesch from Piper Sandler. Please go ahead with your question.

Hi. Good morning, guys. It’s actually Aaron Deer on for Andrew this morning.

Good morning, Aaron.

Just curious going back to the credit that you’re working out, it sounds like a unique situation. Curious what’s the nature of it that gives you confidence that – it didn’t look like you took any sort of provision against the credit in the quarter, so presumably the loss content is pretty small? Just wondering what’s behind that?

Well, in fact we did increase our provision from third quarter from 2 million to 4 million and the increase in the provision was principally linked to the increase in nonperforming loans and to a lesser extent to the organic loan growth in the portfolio.

I’m sorry, I misspoke. I meant to say it didn’t look like you’d taken any charge-off against the credit.

That is correct. We’re still going through the workout period. And if and when we identify the necessity to take a loss on the loan, we will do so.

Okay. And then just wondered if you can give us a sense of how the pipeline stands today and any sort of guidance you can give in terms of your outlook for growth in 2020?

The pipelines are still at a decent condition. There are a lot of opportunities that our bankers are looking at. And I think I’ll defer to Peter just to comment on what we project loan growth collectively to be for 2020.

Yes, Aaron, it’s Peter. We haven’t changed our guidance on loan growth. We’re guiding to mid-single digit continuation and growth of our portfolio loans and a well diversified mix across our portfolio. If you noted in Rick’s comments on that that we’ve continued to have stronger growth in the C&I portfolio than in the CRE category, then we expect that pattern of more emphasis on growing the C&I book to continue into 2020.

And is that because of your finding just a better pricing in that category or there’s just more opportunities?

Aaron, this is Mark. I think what you’re seeing is as confidence in the economy starts to improve, whether that be with some of the trade packs that are getting passed, you’re finding that businesses are looking to increase productivity because of the low unemployment rate, they’re having to invest in capital investment or at least considering it. So we feel more confident that there is some growth in the C&I portfolio that has been muted for a period of time because of lack of capital investment. Also we’re seeing opportunities. It’s a focus of our organization to focus on C&I growth as opposed to just following the commercial real estate market.

Okay, that’s encouraging and good color. And then just one question going back to the guidance you gave earlier on the margin. It sounds – if I heard you correctly, looking for maybe a mid-single digit drop – sequential drop into the first quarter. Is that looking at the core margin, ex any accretion, or what would be the reported margin on the basis of both?

That would be the GAAP margin, Aaron, so that’s the reported margin.

Okay, very good.

Yes. And by the way we think that margin compression will taper off after the first quarter. There’s still a bit of inertia running through in terms of loan pricing. But absent another Fed cut, we think that lending level will stabilize and in part because the positive repricing will continue to benefit the margin even after the first quarter, right. So we’ll continue to see deposit prices catch up to some extent into the second, even third quarter.

Got it. Okay, great. Thank you. I’ll step back.

Thanks, Aaron.

Our next question comes from Jackie Bohlen from KBW. Please go ahead with your question.

Hi. Good morning, everyone.

Good morning, Jackie.

Just a quick question again, Rick, sorry to hop back into this nonaccrual. It’s just so unusual for you guys to have an uptick in that. I was just curious as given that the factors are outside of the borrowers’ control, so that strikes me as more of a macro event. How is it isolated to this specific borrower and not others? Does it have to deal with the type of agribusiness that the borrower is involved in?

That’s exactly right, Jackie.

Okay, well that easy. Then in terms of cost savings on the conversion, understanding that you’re looking to 1Q conversion and there could be some cost saves trickling into 2Q, do you expect the majority of cost saves to come out in 2Q or will you have a lot of those realized by the end of the first quarter with some tickle into 2Q?

Yes, Jackie, it’s Peter. The conversion is actually mid quarter in terms of all the systems and branch consolidation and remaining FTE displacement to go with that. So we anticipate recognizing just about all of the synergies for the full second quarter. And we’re still tracking to what we had guided to when we announced the transaction back in the end of July, the 45% expense synergy.

Okay. It sounds like 2Q is pretty clean and 3Q should be a very clean run rate.

Yes. And there may be a little bit of M&A expense popping [ph] through Q2, but it will be fairly small. But we expect to see the majority of the synergies reflect in the second quarter.

Okay, great. Thank you.

Thank you, Jackie.

[Operator Instructions]. Our next question comes from Tim Coffey from Janney. Please go ahead with your question.

Thank you. Good morning, gentlemen.

Good morning, Tim.

Given that the increased nonaccrual loan was a commercial loan, was there any corresponding deposit relationship with it?

We always have corresponding deposit relationships with our major commercial exposures. And off the top of my head I don’t know exactly what the size of the deposit relationship is, but it’s a fraction of the credit exposure.

Okay. Is it your estimation that that deposit relationship could be at risk as well?

Independently, no, I don’t think so.

Okay. And then, Peter, looking at the level of borrowings that you have on the balance sheet as a percentage of your total funding, it’s a bit higher than it has been historically. Is that a function of kind of the organic deposit growth this quarter or is that something that you see increasing – the absolute balance of borrowings increasing as the funding base increases?

Yes, so we actually – one of the reasons we had higher level of borrowings – well, there’s a couple of reasons why we had higher levels of borrowings at year end. One, we carried over the multifamily held-for-sale portfolio and some of the borrowings was used to fund the held-for-sale portfolio until it sells. And so that’s one reason for the elevation. Two, we actually were a bit cautious given some of the disruption in the repo markets and the treasury side that we saw in the third quarter essentially repeated year end. So as an abundance of caution we put some short duration term FHLB borrowings over year end to prevent any risk of disruption in that overnight market. And so that was just a tactical decision to increase the FHLB borrowings over year end. And then third, we did roll down brokered CDs and put the difference back in FHLB borrowings. And again as I mentioned in my prepared comments, the organic core deposit growth, excluding AltaPacific, was very good in the fourth quarter. It grew by 113 million or 5.2%. So we had one of the best quarters actually in terms of core deposit we’ve seen all year. So our core deposit growth in account generation didn’t diminish in the fourth quarter. But I’d summarize the comment to say it was really just a tactic to manage our wholesale funding base between brokered CDs and FHLB borrowings, but it’s not – we actually expect the borrowing levels to drop in the first quarter.

Okay. And then looking at the AltaPacific deposit portfolio, do you expect to move some of those deposits out or do you anticipate it will be kind of the status quo going forward?

No. AltaPacific deposits were actually a couple basis points lower than Banner’s at acquisition point. So we actually – and we repriced them to Banner’s rates as we’ve gone through our mapping. And so we actually don’t expect to see any outflow in Alta’s deposit base. And we think there’s some benefit in bringing Banner’s products and service capability to the AltaPacific client base that will actually potentially create some upside on the fee income.

Okay, great. Those were my questions. Thank you.

Thanks, Tim.

[Operator Instructions]. Ladies and gentlemen, at this time I’m showing no additional questions. I’d like to turn the conference call back over to management for closing remarks.

Thanks, Jamie. As I stated, we are pleased with our solid 2019 performance in a challenging interest rate environment 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 model risk profile and prudently deploying excess capital. I would 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 us our call today. We look forward to reporting our results to you again in the future and hope everyone has a great day.

Ladies and gentlemen, that does conclude today’s conference. We do thank you for joining today’s presentation. You may now disconnect your lines.