Good day and welcome to the Banner Corporation’s Third 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, CEO. Please go ahead.

Thank you, Carey, and good morning everyone. I would also like to welcome you to the third 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 June 30, 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 $12.9 million, or $0.62 per diluted share for the quarter ended September 30, 2015. This compared to a net profit to common shareholders of $0.64 per share for the second quarter of 2015 and $0.76 per share in the third quarter of 2014. Results for the quarter just ended were impacted by acquisition-related expenses and a fair value adjustment which net of taxes, reduced net income by $0.10 per diluted share. By comparison the third quarter 2014 earnings included a positive fair value and acquisition expense adjustments, which together net of taxes contributed $0.07 to net income per diluted share in that quarter. Excluding these acquisition related expenses and fair value adjustments Banner’s earnings from core operations were $0.72 per diluted share in the third quarter of 2015 compared to $0.69 per diluted share in the third quarter of 2014. Our core operating performance for the third quarter of 2015 maintained our positive core 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 year-over-year core profits show that execution on our strategic plan is effective, and we continue building shareholder value. Our third quarter 2015 core revenue was strong at $67.4 million, and increased 14% 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…

Thanks Mark. As you read in our press release and heard in Mark’s comments Banner’s loan portfolio maintained its moderate risk profile during the third quarter. Consequently my remarks this morning can again be limited to commenting on select credit metrics and touching on a few general loan portfolio highlights. Net loan losses for the quarter were a modest $9000. Charge-offs for the quarter totaled $1.1 million and were driven by write-downs on two commercial enterprises with different kinds of business and geographies. Recoveries primarily came from payment plans negotiated over the past several years and totaled just $1 million. Non-performing assets increased by $500,000 during the quarter. This increase was occurred because a single relationship of approximately $3 million was added to non-performing loans. This relationship was responsible for one of the loan charge-offs mentioned earlier in my remarks. The other components of non-performing assets either improved slightly or remained stable during the quarter. Classified loans in Banner’s portfolio at quarter end were $47 million versus $54 million at June 30, 2015. Classified loans now represent only 1.1% of total loans, down from 2% one year ago. This improvement reflects ongoing collection efforts and improved economic conditions. The allowance for loan and lease losses remains appropriate for Banners’ growing loan portfolio with no provision for loan losses being made for the eleventh consecutive quarter and it should be noted that the calculation of the reserve to total loans 1.77% and the coverage of non-performing loans, 329% includes the Siuslaw loans with that to purchased accounting market against those loans. Delinquencies remain low at 0.63%, down from 0.65% for the linked quarter as a result of strong portfolio management and a flagrant Northwest economy that is strengthening the balance sheets of our clients. Mark noted that total loans including the…

Thank you Rick, and good morning everyone. As Mark has noted and as reported in our third quarter earnings release, Banner Corporation had another good quarter as well as nine month period ended September 30, 2015. While completion of the purchase and integration of Siuslaw bank was certainly a highlight for the first half of the year, our solid financial performance in the current quarter as well as the nine months year-to-date continues to be highlighted by strong revenue growth driven by a solid net interest margin, significant earning asset growth, both organic and acquisition-related and increased non-interest income including substantially increased deposit fees and service charges in strong mortgage banking revenues. As I’ve noted before, this revenue growth follows trends that have been evident for extended periods and continues to demonstrate the successful execution of our super community bank business model and the increasing value of the Banner franchise. Similar to previous periods, fully appreciating Banner’s core operating results for the current quarter and nine months ended September 30, 2015 requires a clear understanding of the impact of the merger and acquisition-related expenses and the last year’s bargain purchase gain as well as the valuation adjustments for certain financial instruments that we carry at fair value which also flow through our income statement. For the third quarter of 2015, Banner reported earnings available to common shareholders of $12.9 million or $0.62 per diluted share. This amount was adversely impacted by $2.2 million of acquisition-related expenses as well as net fair value charges of $1.1 million which together net of related tax benefits reduced earnings for the quarter by $0.10 per diluted share. By contrast for the quarter ended September 30, 2014 our net income included a positive fair value adjustment of nearly $1.5 million and a recovery of previously…

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

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Paul Miller of FBR Capital. Please go ahead.

Hi, this is Jessica Ribner in for Paul. How are you?

Good. How are you, Jessica?

Good. Thank you. I just have a quick one on rates. We’ve heard a lot of banks who are repositioning their balance sheets and rethinking about their loan portfolios given what looks like will be lower rates for longer. How are you thinking about that?

Jessica, hi, this is Lloyd.

Hi, Lloyd.

As we’ve noted a number of times, our balance sheet is naturally positioned to do slightly better in a rising rate environment but not materially. It’s a very balanced book and that allows us to do things like add fixed rate loans to our portfolio on a regular basis particularly as we continue to grow the non-interest bearing and core deposit portion of the funding source. So we are not quite smart enough to know exactly when and how much rates are going to go up. We are fairly convinced some point they will and so we are not going to dramatically change the composition of the balance sheet based on a forecast. What we will continue to do is add to the own portfolio in general proposition to what it looks like today and that positions us to perform generally well regardless of which direction the interest rates go.

And Jessica, this is Mark. Just to add on to that, we will also continue – it could be aggressive in our client acquisition to grow core deposits and non-interest bearing deposits.

And it looks like you’ve been obviously very successful in that. In terms of your net interest margin kind of a follow-on to that, do you see much downside or should we see relative stability since you’ve already become or you’re already very comfortable with balance sheeting fixed rate loans and the like?

So, Jessica this is Lloyd. Again, you’re fairly new to following Banner, I realize, if you’d been with us for a while you know that I’m always nervous. In the current rate environment the margin will be under pressure, obviously contracted some in the current quarter principally because we have been elevated in the previous quarter by some unexpected collection of interest. If we stay at an extended period of time of low interest rates there will continue to be pressure on asset yields. You saw in the quarter, we had a pretty meaningful drop in deals on our loans.

Right.

We’ve been very successful in maintaining that margin in a very stable well above 4% level for a period of time, principally by some very well disciplined pricing action on the part of some of our lenders, but more importantly by changing the mix of assets and liabilities as Mark pointed out aggressively growing core deposits and also keeping the loan-to-deposit ratio very high. So, that’s allowed us to managing the mix to stabilize that margin at a level that we feel good about, but low interest rates are always going to be a challenge.

All right, great thank you so much.

Thank you Jessica.

Our next question comes from Jeff Rulis of D.A. Davidson, please go ahead.

Thanks, good morning.

Good morning Jeff.

Has any determination been made for potential restructuring of the balance sheet and/or branch’s consolidation with regards to the AmericanWest franchise?

Good morning Jeff, it’s Lloyd. As you’ll recall, we noted when we announced the acquisition that we would carefully manage the balance sheet to stay below $10 billion at the end of this year and that there would be some opportunity to do that principally by managing down a few wholesale liabilities and securities positions in the AmericanWest portfolio. We did, as we did announce and as I mentioned, we’re at $9.9 billion at closing, so we need to get comfortably below that $10 billion, so there will be some of that balance sheet activity going on. With respect to the branches, we have about 11 locations that we have identified whether it’s overlapped and there will be some consolidation, but of course we won’t be affecting that consolidation until we complete the complete integration in data processing conversion, which is currently scheduled for February of next year.

Great, okay and Lloyd, could you remind us on the determination of the actually the $10 billion mark that’s I guess you’re judged for lack of a better word, is it mid-calendar year that that’s and then it wouldn’t – you’re not deemed a $10 billion franchise until you’re subjected to the Durbin Amendment until the following year?

Actually the Durbin Amendment is measured based on December 31 end of period balances and so 12/31 of this year is a critical date for us to stay under the $10 billion mark, which would postpone the Durbin impact on fees will take effect six months after whatever the December 31 year you cross that, and Durbin, by the way, is based on the holding company totals not the bank. There are other implications to crossing $10 billion, principally additional regulatory scrutiny and expense that various measurement points generally based on a rolling four quarter average of assets. So, and the timing on those the implications of that take effect in subsequent periods depending on which issue we’re talking about most importantly the DFAS testing. Our expectation is that we will incur incremental costs in preparation of crossing that level as our belief is the regulators will expect and our plan is to adapt more of that DFAS type testing capital planning as well as some of the consumer protection implications of that $10 billion asset size. But most importantly, we do intend to stay under $10 billion at the end of this year and postpone that Durbin hit at least into 2017.

Thanks Lloyd and maybe one quick last one on the just trying to get the mortgage banking run rate, when you roll in AmericanWest I guess either conceptually what are you anticipating as you add that revenue stream to your current projections on mortgage banking?

Well, I don’t have a real hard number for you. Obviously, there’s some additional markets that open up. They have some mortgage production people that are joining the team and so what I will tell you is we expect it to be more than it has been. I can’t scale it very well for you …

But in terms of the management of their mortgage banking group and the momentum there, I guess broadly speaking is that a growing or flat business for them?

Well, I think it was flat for them. We’re fairly hopeful that with our management and product depth and ability that there’ll be some increase in their run rate of production which means obviously it will be additive to ours. Now, mortgage business, we all know mortgage business has some sensitivity in the interest rates and so the good news as I pointed out is that we’re focused on purchased activity and at 71% of current production we’re far less dependent of refinance then might have been the case couple of years ago.

Thanks Lloyd.

Our next question comes from Russell Gunther of Macquarie, please go ahead.

Hey, good morning guys.

Good morning Russell.

The first question, I just I noticed in the release you mentioned this significant potential for growth based on where pipelines were at the end of the quarter, I was just wondering if you could update us sort of sequentially where the pipeline stands this quarter versus last and then maybe how the mix is shaping up for legacy Banner?

Okay. Russell, this is Rick Barton. I think in the last couple of calls, we’ve indicated that the pipeline year-over-year is up about 15% for legacy banner and that number is holding steady, sort of the end of the third quarter. I think it’s a balanced mix if there is a good strong pipeline on the real estate side of the house and the commercial pipelines are holding quite well and as I mentioned just a couple of seconds ago are up about 15% year-over-year.

Okay. Great, that’s helpful and then I heard you guys loud and clear in terms of measured growth, I’m just wondering if you could give us a sense legacy Banner loan growth has been really solid last couple of quarters, understandably managing below that $10 billion line next quarter, but as we layer on AmericanWest could you give us a sense for what that pro forma loan growth opportunity looks like particularly in consideration of some new markets, but again understanding your balanced risk-adjusted approach?

Russell, this is Mark. Our posture has not changed. I think you asked the similar question last quarter and we’re holding our position about the same which is our combined basis where we would estimate high single digit growth in the loan portfolio.

Okay, great. I appreciate that.

And we’ve obviously outperformed that but that’s what we are projecting.

Yes, understood. Thank you. And then I guess just trying to tie all that together at high single-digit growth, obviously credit quality remains, pristine recoveries continue and then as you mentioned, we’ll get a pro forma balance sheet next quarter. How should we think about reserve levels going forward? Maybe if you could give us a sense for where you’re providing new loans and then thought on continued recoveries, just some forward guide there would be helpful.

Well, I’ll try to take a stab at that. I’ll take on the recovery aspect of it first, Russell. That’s really very hard to predict because it’s depended on some factors that are outside of our control. The volume of charge-offs that we had during the recession, it’s realistic to expect there to be some continuing recoveries but I don’t see any kind of outsized recoveries coming down the road if that would be helpful to you. In terms of the reserve, it’s obviously going to change in terms of what the numbers look like, what the AmericanWest portfolio was added in during the fourth quarter, I don’t have an exact number but it will be somewhat closure to 1% than we are right now. Once we take into account purchase accounting mark which is still under consideration, I would expect that the combination of the reserve plus the purchase accounting mark to be somewhere between pick a range of 1.60% to 1.80% in that range. And over the long run I think we obviously don’t give guidance on reserving or anything like that but that we are comfortable in that range or slightly less than that.

That’s very helpful and I appreciate the color there. And then just my last question as a follow-up and I just may have missed it but as it relates to the timing, has there been – is the revenue impact a 2016 or 2017 event?

Russell, this is Rick. Assuming that we cross that $10 billion line at December 31 of 2016 the revenue impact will begin in the third quarter of 2017.

Okay, great.

Six month lag there.

Got it. And then with regard to the expenses, you mentioned reg expense and defast and building sort of ahead of that. Do we see some of that incremental spend occur in the back half of 2016?

Yes, even in the first half of 2016 I think you’ll see that we will start moving in that direction. We plan to be well ahead of the curve here in terms of preparation we’re dealing with the regulatory issues around being a larger institution.

Okay. All right guys. Thank you so much for taking my questions.

Thank you, Russell. Have a good day.

Our next question comes from Don Worthington of Raymond James. Please go ahead.

Good morning everyone.

Hello, Don.

Just a little more color on the construction lending particularly kind of the one to four residential construction that you’re doing. It sounds like the location is Seattle, Portland but just curious about the types of projects you’re financing.

Don, this is Rick Barton again. It’s primarily one to four-family detached again centered in for Seattle market, in the Portland market. There is some attached housing and that is fee simple attached housing. There is really no condominium component to it.

Okay, great. Thank you. And then in terms of additional merger costs, do you have a ballpark number for the fourth quarter?

I was hoping somebody was going to ask that question, Don. So, if you recall when we announced the transaction we thought there would be about $50 million of merger related expenses. We also indicated that some of that would be on the books of AmericanWest and some of them would be on the books of Banner. I would tell you that it turns out the accounting literature and guidance is going to put more of it on the books of Banner than I originally anticipate it. So what does that mean? It looks to us right now that there will be somewhere in the neighborhood of $20 million to $25 million of merger related expenses in the fourth quarter and then another $10 million to $15 million in the first quarter of the following year which would be principally related to the data processing conversion and the closure of some offices in the bank. So there is quite a bit to come and I guess they don’t have anything else to say other than the big numbers.

Okay, great. Thanks, Lloyd.

Our next question comes from Tim O’Brien of Sandler O’Neill. Please go ahead. Tim O’Brien: Good morning.

Hi, Tim. Tim O’Brien: Just a little clean up, is there any chance that you guys – are there any potentials for non-mortgage loan sales here post deal close?

Non-mortgage loan sales, is this part of our balance sheet management, is that what you’re getting in? Tim O’Brien: Yes, maybe part of that or maybe there is some loan types that didn’t get reconcile that AmercianWest while it was independent that you guys might look to clear out?

This is Mark, Tim. I don’t think you’re going to see anything material that would be non-mortgage related. There is certainly some real estate that are out there that adds mortgages on it but we could consider offloading but nothing outside of those category, there is nothing material. Tim O’Brien: And then one other question for you guys, can you compare and contrast the construction lending business at AmericanWest versus your own? I know that its smaller obviously but what kind of construction deals do they have on the books and how do you like those businesses and what’s the opportunity there for either scaling those or bringing talent or expertise over that you guys can ramp up in your traditional historic footprint.

Okay. Tim, this is Rick Barton. And looking at the AmericanWest portfolio, their construction lending overall is less than 1% of their portfolio but they have a little bit of residential construction of land and a little bit of commercial construction, and much of that is centered in owner occupied. So really it’s going to be a very easy thing to pull that into our operation. They have a little bit of talent in that area but it’s just simply not been a focus of theirs, so it’s not really a big factor in the integration of the portfolios.

What it does speak to Tim is the opportunity to take our construction expertise and translate it into some higher growth markets. Tim O’Brien: Great. Thanks for answering my questions.

Thank you, Tim.

Our next question comes from Jackie Chimera from KBW. Please go ahead.

Hi guys, good morning.

Good morning, Jackie.

Lloyd, I’m sure you’re expecting this question from me. The fair value mark in the quarter, was there any change to model assumptions or any sales of anything in the quarter ceded with that?

There were no changes to the model assumptions. There was a unique transaction that we had the opportunity to repurchase a trust preferred security out of one of the CDOs that was liquidating collateral where we were the issuer. And it’s fairly complex but the essence of it is we bought the security at a deep discount but we market down a little bit further to market consistently with the way that we are marking some of our other assets that are similar in nature as well as the liabilities that we have. The economics of the transaction were very positive in terms of essentially a riskless transaction of repurchasing your own debt, but because of the structure we couldn’t just collapse the debt and it did have an impact on the fair value adjustments. And then if you recall the two preceding quarters we had positive fair value adjustments principally as a result of some securities that we had marked in substantially that ended up paying often full at par. So it did create a fairly significant swing from quarter-to-quarter that one unique transaction.

So the mark was basically related to this and excluding anything else of this nature it would go back to its normalized level in future quarters, is that a good assumption?

Yes, that’s a good assumption and recall that normally what I’ve said all along is that because we have the fair value mark against our senior subordinated debentures that all else being equal, there will be about $300,000 to $400,000 charge each quarter as those march towards maturity. Obviously there are other parts of the portfolio that it can be affected by interest rates and the like although a number of securities that we have they’re carried at fair value was fairly modest.

Okay. And this event in the quarter, does it create the potential for a positive event in the future?

No, I don’t think it creates the contender for capacity. Let me dig perfectly honestly potential advantage out there would be if spreads were deemed to be materially tighter we might take a fairly good size charge against marking our subordinated debt back up. I think the important thing we remember there always is these are just accounting. They are not real economics, they are just accounting entries based on some valuation decisions that were made a long time ago.

Okay. Thank you. That’s really good color. Was there anything unusual in the payment and card processing line item this quarter?

Not really. Not unusual, just a reflection of continued growth in that activity. So recall that debt one expense – if that expense goes up there is – the reason is revenue has gone up as well.

Okay. So that’s fairly good. Assuming that revenue continues to be where it is at, that’s a good run rate then going forward.

Yes. I think so. There is a little bit of lumpiness in there but not much.

Okay. And can I get just a reminder, I have in my notes that the impact of interchange would be around $8 million, was that legacy banner or is that combined banner AmericanWest or do I have that number completely off altogether?

No, that is what we discussed although as we continue to grow, that is a combined number from AmericanWest and Banner. And as we continue to grow looking forward, the impact might be a little bit more. By the time we get around 2017 and actually see that, so we are currently thinking it could be $9 million to $10 million instead of $8 million.

Okay. And the $9.9 million that you’ve discussed in terms of the combined franchise that’s before the – any work on borrowings or anything of that nature, right?

That’s right. That’s as of October 01 closing and so as I mentioned, we are going to want to be comfortably flow well the $10 million at $12.31. It’s not unusual for us to see $50 million to $100 million swings in deposit totals anymore and so we need to make sure that clients have the propensity to do some window dressing at the end of the year. So, we’re going to want to be comfortably below that $10 billion level.

Okay, understood. And then just one last one, so the timing on the cost saving, given the October 1 close date, if you could just update us on when you think you can have those, the cost saves enacted and if that $37.5 million is still kind of the level that you are thinking.

It is still in line with our thought process. The debt will be a run rate that we won’t achieve until late in 2016 in terms of being all the way there, so we will begin to effect cost savings and already have effective with this current quarter, but having said that as I mentioned earlier there is going to be much of the merger and acquisition related expense that will be in this quarter and next quarter as well because, again it was in October 1 closing. So, things that are triggered by the closing of the transaction will start flowing through, but the biggest cost savings if the energy course comes after we were able to convert systems and consolidate locations. And as I noted that main conversion is scheduled toward February or next year.

So we will probably see the majority of cost savings in 2Q then, is that a good assumption?

I’d probably say 2Q or 3Q.

2Q or 3Q. Okay. Great. Thank you very much.

Thanks, Jackie.

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

Thanks, Carey. As I stated we are pleased with our solid third 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 our call today. We look forward to reporting our results to you again in the future. Have a good day everyone.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day.