Good day and welcome to the Banner Corporation's Second Quarter 2015 Conference Call and Webcast. All participants will be in listen-only mode. [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 of Banner Corporation. Please go ahead sir.

Thank you, Chad and good morning everyone. I would also like to welcome you to the second quarter 2015 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; and Albert Marshall, the Secretary of the Corporation. Albert, 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, 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-Q for the quarter ended March 31, 2015. 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 had another strong quarter, reporting a net profit available to common shareholders of $13.2 million, or $0.64 per diluted share for the quarter ended June 30, 2015. This compared to a net profit to common shareholders of $0.61 per share for the first quarter of 2015 and $0.88 per share in the second quarter of 2014. Results for the quarter just ended were impacted by acquisition-related expenses which net of taxes, reduced net income by $0.13 per diluted share. Further, the second quarter 2014 earnings included a $9.1 million bargain purchase gain related to the acquisition of six branches in Southwest Oregon, which net of related acquisition expenses contributed $0.23 to net income per diluted share in that quarter. Our core operating performance for the second quarter of 2015 maintained our positive momentum and further demonstrated that through the hard work of our employees throughout the company, we continued to successfully execute on our strategies and priorities to deliver sustainable profitability and revenue growth to Banner and expand our balance sheet with strong organic loan and deposit growth coupled with opportunistic acquisitions. Our consistent and increasing quarterly profits show that execution on our strategic plan is effective, and we continued building shareholder value. Our second quarter of 2015 core revenue was strong at $66.8 million, and increased 22% compared to the year ago quarter. We benefited from a larger and improved earning asset mix, a net interest margin that remained above 4%, very good deposit fee income, and strong mortgage banking revenue. Also, our cost of deposits was 16 basis points compared to 21 basis points in the second quarter of 2014. Overall, this resulted in a solid return on average assets of 1.02% for the quarter. Once again, our strong performance this…

Thanks Mark. As you read in our press release and heard in Mark's comments Banner's credit metrics were stable during the second quarter and a moderate risk profile was solidly maintained. That said my remarks are going to be limited to commenting on select credit metrics and touching on a few general loan portfolio highlights. Loan loss recoveries were exceptionally strong during the quarter resulting in a net recovery of $2 million. Driving this performance was the early payoff of a bankruptcy payment plan negotiated several years ago and asset sales that occurred in ongoing bankruptcies and receiverships. The point to be made here is that these events are episodic not recurring. The composition of our non-performing assets changed during the quarter. Approximately $9 million in non-accrual loans from the Siuslaw acquisition are now being reported as loans over 90 days past due and still on accrual. This change was made to align reporting with regulatory and accounting guidance around purchased credit impaired loans but did not result in an increase in total non-performing assets. The asset quality and credit metrics of the Siuslaw Bank portfolio remain what we expected. The performance of non-credit impaired loans is acceptable and the collection efforts on credit impaired loans are making reasonable progress. Classified loans in Banner's portfolio were $54 million versus $80 million at March 31, 2015. Classified loans now represent only 1.3% of total loans versus 2.1% one year ago. The quarterly reduction was driven by the payoff of two large problem loans and the upgrade of others based on improved financial performance. The reserve for loan losses remains appropriate for Banner's growing loan portfolio with no provision for losses being made for the 10th consecutive quarter. And it should be noted that the calculation of the reserve to total loans…

Thank you Rick and good morning everyone. As Mark has already noted and reported in our second quarter earnings release Banner Corporation had another good quarter as well a six month period ended June 30, 2015. While completion of the purchase and integration of Siuslaw Bank was certainly a highlight of the first six months, our solid financial performance in both periods continued to reflect strong revenue growth driven by a solid net interest margin coupled with significant earnings growth and the increased non-interest income including substantial increase to deposit fee and service charges and record mortgage banking revenues. This revenue growth followed trends that have been evident for extended periods and continued to demonstrate the successful execution on our super community bank business model, the strength of our balance sheet and the value of the Banner franchise. Despite being burdened with $3.9 million of acquisition related expenses which reduced earnings by $0.13 per diluted share, our net income available to common shareholders for the quarter ended June 30, 2015 increased to $13.2 million or $0.64 per diluted share compared to $12.1 million or $0.61 per diluted share in the immediately preceding quarter which included a lesser $1.6 million or $0.07 per share of acquisition related expenses. Of course comparison to the second quarter a year ago was more complex because of the $9.1 million bargain purchase gain, the net of related expenses added $0.23 per share to earnings in that period. However, excluding the merger related expenses and fair value adjustments from both periods and last year’s bargain purchase gain the current quarter’s core operating results were $0.74 per diluted share compared to $0.63 per diluted share for the second quarter a year ago. An increase of nearly 18% for this adjusted earnings measure. This earnings growth reflect significant…

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

Thank you, sir. [Operator Instructions]. And our first question comes today from Jeff Rulis with D.A. Davidson.

Thanks and good morning.

Good morning Jeff.

Hi Jeff.

Hi, on the AmericanWest, I guess your expectations of that close, it seems to have split a couple of months not a big change but interested to hear if there is anything that's occurred with that potential close, that split a little bit?

Yes Jeff, this is Mark. The slight delay on closing through our expectations has been the result of working with our regulators on some competitive market conditions in some of our overlapping markets. We are well along the resolution to those issues, and more importantly it is going to have a deminimus effect to the combined company.

Got you, okay. And then on the, I guess switching gears a little bit, on the mortgage banking, strong six months Lloyd, and you talked about that in your comments, but I guess so far in the quarter and/or what would be your expectations for the second half of the year, maybe just kind of what you have seen month to date and then expectations for the back half of the year?

Well, you are correct Jeff. It was a very good first six months of the year for our mortgage banking operations. Obviously, interest rates and mortgage rates remain low and that is very helpful. As I noted, we have invested in additional capacity there over an extended period of time and some of those folks are really hitting their stride now in terms of production activity. Pipelines remain really quite full. Housing activity in most of the Northwest markets remains pretty strong. So, I think barring an unexpected sharp rise in mortgage rates, the debt activity should continue to be a very positive component of our operations for a number of quarters.

And then lastly on the loan growth, I think Lloyd you mentioned it was pretty broad based amongst these sectors, I guess any regional strength in the foot print that is particularly boosting the loan growth figures, and maybe to close just sort of your expectations, do you think there was some seasonal timing obviously maybe the Ag portfolio, but kind of the expectations going forward as well on loan growth?

Sure, so I am going to defer to Rick here in a moment, but we do see seasonal patterns in both our C&I and our Ag portfolios, and our construction and development business, all three are generally positively impacted by this time of the year in the cycle. I think yet it is as I noted broad based, but I will defer to Rick if he wants to talk about specific geographies.

Jeff this is Rick. I think if we look at the different segments, the residential, construction, and land, the activity there continues to be very robust and is really central -- centralized in Puget Sound and Greater Portland. There is a lot more activity underneath the numbers in terms of production. Because of the velocity, the production numbers are on par with last year, but loan growths remain very modest. In other loan categories, that is pretty well spread across the foot print with no particular geographic concentration. I might point out that pipelines remains generally strong and are actually running 10% to 15% ahead of what they were last year.

Great, thanks for the comments.

Thank you Jeff.

Our next question comes from Paul Miller with FBR.

Good morning guys, this is actually Tom Buchanan [ph] on behalf of Paul. Obviously the net loan growth as you just discussed was solid in the quarter and on seasonality, were there any offsetting impacts there or how did prepays turn in the quarter unless the one thing that we can see in the release was there any outside impact from the higher prepays or anything like that.

There really was not anything that I would consider to be out of the normal prepayment patterns.

Okay.

I just note that one category that did go down was 1 to 4 family loan balances. So I think Rick is right, it wasn’t outside of norm, but there continues to be refinance activity and because we sell most of our originations in the secondary market, you saw some contraction in that portfolio. What we also saw which was interesting though was some growth in the HELOC portfolio for the first time and quite a period of time despite the fact that when people refinance they frequently not only will pay off their first mortgage but also a HELOC transaction, but we had some very good production there out of our retail banking group.

Okay and then switching gears quickly, I think you mentioned two pay outs in the quarter in the credit portfolio and also you had the $471,000 credit recovery in net interest income, can you provide a little color there on what drove those recoveries and whether you think that is something that could continue to happen?

Well as I mentioned in my comments, the big recoveries for the second quarter were more episodic then something that you can count on to be recurring. The one large recovery that we had was out of a previous bankruptcy plan that had been negotiated and it just paid off early. The company recovered nicely and had the ability to pay it off so we were happy to record that. Outside of that one it’s just continuing to mind the charge offs that we had during the recession to look for pockets of recovery and our special assets people are doing a very good job of that.

Okay and one more if I may and this maybe more of a question for Mark. When AmericanWest closes obviously you guys are entering new markets and you’ve been more of a whole bank acquiring a lot of here so but what are the opportunities you guys are valuing in terms of hiring change of lenders either in new markets or in existing ones.

Well we consistently look at opportunities in which we can enhance revenue generation for our company and clearly we are in the service and people business and our bankers are the primary asset for our company to drive that revenue growth. So we look for those opportunities on a consistent basis in all of our markets to make sure that we are properly staffed and serving the market and continuing our market share growth.

Okay, great. Thank you, guys.

Thanks Thomas.

Next question comes from Jackie Chimera with KBW.

Hi, good morning everyone.

Good morning Jackie.

I wondered if you could, actually there are so many questions for Lloyd here, just on what cost savings if any were realized from the Siuslaw conversion in the quarter, just a timing on that and then what’s less in future quarters were realized?

Cost savings in the quarter with Jackie I don’t have a good hand on that. We have had some pretty meaningful reduction in staffing in the back office as you would expect at the Siuslaw operation. And that we benefitted from that probably about two thirds of the quarter because there were still transitioning going on I would say in the first months of the quarter. But I am sorry I can’t put an exact number on that, maybe another number that I will scale just for your benefit and other so we did mention $3.9 million worth of acquisition related expenses in the current quarter, about 900,000 of that related to the Siuslaw acquisition and the balance, the other $3 million was with respect to the AmericanWest acquisition. So, as Mark and Jeff discussed we are a little behind where we wanted to be closing that. But the integration activity that is driving that expense is ongoing and is progressing really quite well.

Okay, alright.

And Jackie, this is Mark, just a little bit more color to the Siuslaw Bank, if you recall the modeling that we presented as part of that acquisition called for some 30% expense savings in the transaction. What I can tell you is that we are tracking well above the 30% cost saves.

Okay, that is great to hear. And with the conversion done and lot of the staffing reductions taken place, realizing that obviously this quarter was not a full run rate, it sounds like from the Siuslaw perspective you would have a full run rate in 3Q?

We should from an expense stand point.

And again I think it is important to note that Siuslaw made a nice contribution to the revenue activity during the quarter as well. So, we are very pleased with that acquisition. It is tracking ahead of our expectations actually.

Okay. And relative to the comment about the 3 million in AmericanWest related M&A charges, I think it was a couple of quarters ago Mark you might have mentioned that some of the originally guided 50 million in costs associated with AmericanWest might come out of AmericanWest that bank itself prior to the acquisition, is that still the case?

Jackie, this is Lloyd. That is certainly still the case. So, for instance there are legal fees, there are investment banking fees. Some of the change of control expenses around contracts, that sort of thing any meaningful portion of that will end up running through their books and will be reflected in the net equity that we acquire. But there will be, I don’t want to underestimate, there is going to be a lot of expense related to some of those activities for us as well in the next couple of quarters.

Okay, and does the change in the timing of the deal close, does that change your general thoughts on when you will realize the cost savings associated with the deal?

It does, it postpones them by about the same amounts that we postpone the closing of the transaction. So, if you recall I originally modeled it to close in the quarter that just ended June 30 quarter and now I am going to spike it sometime late this quarter as we indicated. So that does put you 90 days behind in terms of some of the cost savings activity.

So, you can say your original guidance was to have the cost saves out by the end of 2016, is it a fair assessment that we could have a pretty clean run rate by 2Q 2016, I am sorry by the end of 2015 the cost save, so we could have a clean run rate by 2Q 2016?

Yes, 2Q 2016 I think will probably be a pretty good run rate. It might just be a little bit left there but for the most part it should be indicative of what the expense levels will look like going forward.

Okay.

Assuming Mark doesn’t do something else dynamic.

Jackie, that is a very good question. I think the other component to respond to your question is at the same time that we did the modeling both organizations Banner and AmericanWest are performing better than planned, so…

Okay, no definitely understood and thank you both very much for the color, I appreciate it.

Thank you Jackie.

The next question is from Russell Gunther with Macquarie.

Hey good morning guys.

Good morning Russell.

Appreciate the color on the margin this quarter and even on a core basis you guys margin continued to defy expectations. So, congratulations there. Just had a quick question on the Siuslaw contribution from the purchase accounting Mark, so obviously that could be lumpy quarter-on-quarter but do you have an expectation or just the general sense directionally what that contribution might be going forward?

Russell, this is Lloyd. As we noted it was about three basis points during the quarter. We really don’t anticipate that it will be terribly lumpy and the reason for that is it wasn’t a lot of significant purchased credit impaired loans there and therefore not a lot of meaningful discount that will come in a lumpy fashion that you are used to seeing on some other purchase transactions where there is a higher percentage in the portfolio that’s not performing.

Okay great, now that’s helpful. And then as it relates to AmericanWest, I think last quarter we talked about perhaps closer to 15 basis points of margin compression when that deal closes, is that still your expectation and is the order of magnitude something we should consider from this quarter’s results may be less the four basis points of recovery or how should we think about that?

Yes, our expectation is still that 15 basis point level of compression on the margin is a result of that transaction initially and I would think of it in terms of what I would call our adjusted margin for this quarter which I think is probably more like that 411 or 410 area. But, I wade into a deep puddle here because as many of the people on the call know I still think that this little interest rate environment has some room to play out in terms of pressure on the margin. So you know…

I appreciate your commitment to continued concern about the lower rate environment despite your cash ability to continue to show core expansion. And then let me just one last margin question, so I also believe that, that 15 basis point compression is absent any estimated impact from purchase accounting on the AmericanWest deal so, could you help us with maybe a net impact if we get 15 basis points compression initially, what might purchase accounting contribute to the margin.

I think that 15 basis points is in anticipation of the purchase accounting contribution. So similar to Siuslaw we don’t expect it to be terribly lumpy. Now obviously it’s a bigger portfolio and therefore there will be room for some problem assets to pay off in less than a smooth fashion if you will. It will bump around some but we did -- that 15 basis points is inclusive of expected amortization of purchase accounts and discounts.

Thank you for the clarification there Lloyd and then just switching gears to loan growth, obviously a really solid quarter and I appreciate the color on the trends, just to follow up on the loan pipeline, I know you guys don’t quantify this numbers but if you could give us a sense directionally where the pipeline went quarter-on-quarter and then maybe with some of the drivers are there?

Well I think quarter-over-quarter the pipeline was stable. It was not spiked in the second quarter by any stretch of the imagination. And drivers I think, the primary driver has to be the very vibrant Northwest economy and the success that our clients are having and our prospects are having in terms of expanding their companies.

Got it, okay and then just I understand that there is some seasonality to the strength this quarter but as we kind of step back and think about the combined company with the AmericanWest deal closing, obviously some noise there and perhaps maybe a little run off but how do you think about the loan growth potential for the combined institution year-over-year in 2016?

Russell, this is Mark you know we continue even under the combination of AmericanWest one of our key drivers is to maintain a moderate risk profile. So we are going to look for a diversified loan portfolio very similar to what we had done at Banner and you could anticipate a modest growth. We are not going to outsize the growth rate. I think given the Western United States and their performance including California and Utah, the economic performance has been a bit better than the rest of the country. So you could see upward digits loan growth.

Alright, thank you guys. That’s very helpful. I appreciate you taking my questions.

The next question comes from Don Worthington with Raymond James.

Good morning everyone.

Hi Don.

In terms of Lloyd you mentioned the marketing cost up in the current quarter, would you expect those to remain high particularly following the AmericanWest transaction as you kind of try to get the brand known in California and Utah?

Well I don’t want to give the marketing department too long of a lease here. They might be listening to the call as well. Yes, certainly there is going to some incremental expense associated with promoting the brand in new markets. I don’t have a real solid number on that. I do think again the $2.2 million level that we expensed in the current quarter is high for what we would consider a normal run rate. And how much our normal run rate is going to change as a result of that acquisition is still to be determined.

Okay.

What’s not going to change is our marketing strategies okay. So we are going to employ few more strategies that we have in terms of some of our direct mail strategies, in terms of some of our brand advertising, and in terms of our focus on client acquisition. So all of that will remain the same. The absolute dollar amount calibrating that’s a little bit hard right now.

Okay, alright thanks. And then you commented in the past that the deposit retention from the branch purchase and the whole bank acquisition was pretty strong, is that still the case?

It is, if you look in the press release I think we noted $210 million of deposits from the Southern Oregon purchase. I think that we closed on 212. So a year later that looks good and Siuslaw at the end of the quarter was $320 million and we closed on $316 million. So you would expect always when there is a transaction that you are going to lose a few customers that for whatever reason want to change but I think we are really quite pleased with the performance of both of those divisions in terms of deposit activity. Then both of that client growth, even though the totals are fairly flat with the acquisition time that both areas have had a client growth so, we feel good about it.

Good, thank you.

Thanks Don.

Our next question comes from Tim Coffey with FIG Partners.

Hey good morning gentlemen.

Good morning Tim.

Most of my questions have been answered but I just want to ask you about the core legacy loan yields on your portfolio. It’s been pretty solid for about a year now, my question is that just kind of the market trying to -- your portfolio is down the bottom in the current market that you are in or is that really kind of remix of the portfolio towards higher yielding loans.

Little bit of both Tim. I just got through saying that I am not sure we’ve seen the bottom in the current interest rate environment for core level so there is still our higher yielding things paying off. But the mix was particularly important to the yield in the current quarter and the margin in the current quarter. So Rick mentioned construction and development turnover there was very rapid, sales activity was strong and that helped the yield on that portion of the portfolio quite a bit. And some of that seasonal activity that I mentioned in C&I and Ag can be in slightly higher yielding portions of those portfolio as well. So mix was important, low interest rate is still a challenge.

And quickly, I too appreciate your commitment to lower interest rate forecast but are there further opportunities to improve the mix of the portfolio on a legacy basis?

I don’t think we envision significant changes in the mix. We like where it is and as I mentioned the growth was pretty much across the loan categories and as Rick mentioned across the geography. So, I think in terms of our net interest margin barring changes in the interest rate environment it is still a matter of can we continue to grow core deposits and take another basis point or two out of funding cost.

Okay. Thanks, those are my questions.

Thanks Tim.

This concludes our question-and-answer session. I would like to turn the conference back over to Mark Grescovich for any closing remarks.

Thank you, Chad. As I stated we are pleased with our solid second quarter 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 a moderate 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 on our call today. We look forward to reporting our results to you again in the future.

Thank you, sir. The conference is now concluded. Thank you for attending. You may now disconnect.