Banner Corp (BANR) 2015 Q2 法說會逐字稿

Good day and welcome to the Banner Corporation 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?

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 and 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 our 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 these 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 continue 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 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 quarter reflects continued execution on our super community bank strategy. That is, reducing our funding costs by remixing our deposits, growing new client relationships, improving our core funding position and promoting client loyalty and advocacy through our responsive service model. To that point, our core deposits increased 18% compared to June 30, 2014.

Also, our non-interest-bearing deposits increased 23% from a year ago. Although a large portion of this balance growth is from the addition of 10 new branches in Oregon as a result of the Siuslaw Bank acquisition, we also saw continued strong, organic generation of new client relationships. Our net client growth in these product categories is now 96% since December 31, 2009. Further, our loan portfolio expanded 13% from one year ago. In a few moments, Lloyd Baker will discuss our operating performance in more detail.

While we have been effectively executing on our strategies to protect our net interest margin, grow client relationships, deliver sustainable profitability, and prudently invest our capital, we have also focused on maintaining the improved risk profile of Banner. Again this quarter, our credit quality metrics reflect our moderate risk profile and our non-performing assets remained at just 57 basis points of total assets at June 30, 2015.

In a moment, Rick Barton, our Chief Credit Officer, will discuss the credit metrics of the Company and provide some context around the loan portfolio and our success at maintaining a moderate risk profile while also increasing our loan portfolio. Given our successful credit risk management, our low level of non-performing loans and our moderate risk profile, we did not record a provision for loan losses in the quarter, despite additional loan growth. Nonetheless, Banner's coverage of the allowance for loan losses to non-performing loans is a strong 322% at June 30, 2015.

Banner's reserve levels are substantial and our capital position and liquidity remain extremely strong. At the end of the quarter, our ratio of allowance for loan and lease losses to total loans was 1.82%. Our total capital to risk-weighted assets ratio was 16.2% and our tangible common equity ratio was 12.26%.

In the quarter and throughout the preceding five years, we've continued to invest in our franchise. We have added talented commercial and retail banking personnel to our Company and we have invested in further developing and integrating all our bankers into Banner's proven credit and sales culture. While these investments have increased our core operating expense, they've resulted in positive core revenue growth of 22%, strong customer acquisition, 13% year-over-year growth in the loan portfolio, improving cross sell ratios and strong deposit fee income growth of 30%.

Further, we've received marketplace recognition of our progress and our value proposition as the Small Business Administration named Banner Bank community lender of the year for the Seattle and Spokane district for two consecutive years; and this year named Banner Bank regional lender of the year. Also, Forbes magazine ranked Banner Corporation as one of the top 50 most trustworthy financial institutions in the United States. The successful execution of our organic growth plan and our persistent focus on improving the risk profile of Banner has now resulted in 17 consecutive quarters of profitability and our tangible book value increased nearly 6% to $30.22 per share when compared to June 30, 2014.

Finally, I'm very excited about the recently closed acquisition of Siuslaw Bank and the announced acquisition of the AmericanWest Bank. With these strategic combinations, we will have the opportunity to deploy our super community bank model throughout a strengthened presence in Washington, Oregon and Idaho and enter into attractive growth markets of California and Utah. These combinations will provide significant benefits to our expanded group of clients, communities, shareholders, and employees. I would like to reinforce our welcome to the Siuslaw Bank clients, employees and shareholders who joined the Banner Bank team on March 6, 2015.

I'll now turn the call over to Rick Barton, to discuss trends in our loan portfolio. Rick?

Thanks, Mark. As you read in our press release and heard and 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 can 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 recorded 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 tenth consecutive quarter. And it should be noted that the calculation of the reserve to total loans, 1.82%, and the coverage of non-performing loans, 332%, includes the Siuslaw loans, but not the purchase accounting mark against those loans. Delinquencies remain low at 0.65% as a result of strong portfolio management and the vibrant northwest economy that is strengthening the balance sheets of our clients. Mark noted that total loans including the Siuslaw portfolio grew 13% year over year.

Changes in key portfolio segments are summarized as follows. Commercial business loans outstanding were up 10.5% including Siuslaw and 5.3% without Siuslaw. However, commercial commitment utilization remains low. Excluding Siuslaw, Banner's June 30, 2015 unused commercial commitments grew by over 10% when compared to June 30, 2014. Commercial real estate loans, including both investor and owner-occupied, grew by 19.6% with Siuslaw and 10.2% without Siuslaw. This growth occured throughout our footprint.

Excluding a modest Siuslaw portfolio, multi-family loans grew by just 4.4% year over year, as we continue to be selective in the projects we choose to add to the portfolio. Residential construction and land development loans grew by 17.5% when June 30, 2015 balances are compared to those a year earlier. All but $1 million of the $50 million growth occurred in the historic Banner portfolio.

$32 million of the growth has been in the land and land development category and is focused in the Seattle and Portland markets, where robust new home sales have created shortages of finished building lots. Loan turnover in all segments of this portfolio remains brisk, which is indicative of balanced markets. While the rate of growth in this portfolio is significant, it is still only 7.9% of the bank's total loan portfolio. Our bankers closely monitor market dynamics and consider the impact an increase in interest rates will have on market demand.

I want to close my remarks this morning with a reminder that we are continuing to maintain a moderate risk profile for the Banner loan portfolio. This position, along with the Company's strong capital ratios, will allow us to continue executing on our strategic plans, which include the integration of AmericanWest Bank.

With that, I'll turn the stage over to Lloyd for his comments.

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 as 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 substantially increased deposit fees 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 is more complex because of the $9.1 million bargain purchase gain. That net of related expenses added $0.23 per share to earnings in that period. However, excluding the merger related expenses and share 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 reflects significant organic growth to the balance sheet as well as last year's purchase of six branches on the southern Oregon coast and a full quarter's benefit from the Siuslaw Bank acquisition. And as I previously mentioned, includes substantially increased deposit fees and service charges and record mortgage banking revenues.

Revenues in the current quarter included a positive net share value adjustment of $797,000, which similar to the preceding quarter, primarily related to the liquidation of a pool of trust preferred collateralized debt obligation securities, which had previously been carried at a mark down to fair value.

As I frequently remind you, our expectation is that fair value adjustments will most often result in a modest net charge as valuation adjustments on our junior subordinated debentures, or trust preferred securities, are normally the principal component of this Company's income statement line and increases in the fair value of those significantly discounted liabilities will naturally occur as the passage of time brings them closer to maturity. However, for the last two quarters we've been presently rewarded by the full payoff on a couple of the CDO securities that we had previously carried at estimated fair values well below par.

More important, as Mark has already noted, our revenues from core operations, which is revenues excluding gains and losses on sales of securities, net fair value adjustments and last year's bargain purchase gain, were $66.8 million in the second quarter of 2015. An increase of nearly 12% compared to the immediately preceding quarter and more impressively, an increase of $12.3 million, or 22% compared to the same quarter a year ago. As a result, for the first six months of 2015, our revenues from core operations increased by $20.3 million to $126.5 million, an increase of 19% compared to a year earlier.

As I previously noted, this strong revenue generation for the quarter and year to date is the result of significant balance sheet growth, a solid net interest margin, additional client acquisition; and compared to both the preceding quarter and the year ago, increased mortgage banking activity. Taken together, these trends clearly demonstrate that our value proposition is being well received and that the focused efforts of our employees and the strength of our balance sheet are combining to produce consistent earnings momentum and they add to the value of the Banner franchise. Primarily as a result of significant growth in the average balance of loans and core deposits, our net interest income increased by $7.6 million or 17%, compared to the second quarter a year ago.

Improvements in our earning asset mix and further reductions in our funding costs, allowed our net interest margin to increase to 4.19% in the current quarter, compared to 4.09% in the immediately preceding quarter and 4.06% in the first quarter a year ago. Net interest income in the current quarter included $471,000 from a large credit recovery, which added 4 basis points to the margin.

In addition, the current quarter was impacted by the accretion of purchase accounting discounts from the Siuslaw acquisition, which contributed another 3 basis points to the margin. Nonetheless, after accounting for these adjustments, our net interest margin continued to be remarkably stable, and, in fact, expanded modestly compared to recent periods. Further, as Rick has noted, again this quarter we did not identify a need to reduce net interest income with provision for loan losses, as all of our credit quality indicators remain strong and we realized nearly $2 million of net recoveries in our allowance for credit losses.

Deposit fees and service charges were $9.6 million in the second quarter, a 19% increase compared to the first quarter of 2015 and an increase of 30% compared to the second quarter a year ago. For the first six months of 2015, deposit fees and service charges increased by 27%. Similar to recent quarters, the significant increase in these fees and service charges compared to a year earlier is a direct result of our growth in core deposit accounts and related transaction activity, reflecting the success of our client acquisition strategies, as well as the branch purchase in June of last year and more recent merger with Siuslaw Bank in March of this year. The increase in this deposit fees and service charges also reflects the continuing benefit from our decision to move our debit and credit card relationship to MasterCard in the second half of last year.

As reported in the earnings release, our mortgage banking revenues were particularly strong, contributing $4.7 million to 2015 second-quarter revenues, compared to $4.1 million in the preceding quarter and $2.6 million in the second quarter a year ago. For the first six months of 2015, our mortgage banking revenues were $8.8 million, nearly double the amount recorded in the first six months of 2014. While this increase in revenue certainly reflects the current low mortgage rates, which have supported strong home purchase activity in our markets as well as ongoing refinance activity, it also reflects incremental production as a result of our continued investment in this line of business.

Aside from the acquisition related expenses previously noted, our operating expenses increased compared to the prior quarter, largely as a result of the costs associated with operating the 10 Siuslaw Bank branches for the full quarter. Compared to the same quarter a year ago, our operating expenses increased more significantly, as we also incurred expenses associated with the six southern Oregon branches that were not acquired until late June 2014. In addition, the current quarter's expense reflects generally higher compensation costs, increased payment and card processing expenses driven by greater activity volumes and a higher than normal amount of advertising and marketing expense.

Finally, with respect to the income statement, our effective tax rate was 33.3% in the second quarter, slightly lower than the preceding quarter, which included a greater portion of non-deductible acquisition related expenses. For the first six months in 2015, our effective tax rate was 33.5%.

As compared to a year ago, the current quarter-end statement of condition has been significantly impacted by the Siuslaw acquisition. In particular, Siuslaw Bank contributed $245 million to our consolidated loan totals and $320 million to total deposits as of June 30, 2015. We also recorded $21 million of goodwill as a result of the purchase and increased paid-in capital by $58 million to reflect the value of the Banner shares issued to the former Siuslaw shareholders.

As I noted last quarter, aside from these balance sheet changes, we are pleased to report that in addition to closing the transaction, we have very successfully converted all of the data processing and operating systems in the former Siuslaw Bank branches and employees are now all proudly serving their clients under the Banner Bank flag.

Aided by expected seasonal factors, our loan growth was strong in the second quarter. Total loans increased by $129.7 million or 3% during the quarter and as a result of strong organic growth as well as the Siuslaw acquisition, ended the quarter up 13% compared to a year ago. Loan growth during the quarter was broad-based and included increases in commercial real estate, commercial business, agricultural business, construction and development, and consumer loans.

Also reflecting expected seasonal factors, deposit totals were essentially flat for the quarter. However, deposit totals have increased by 10% compared to a year earlier. More importantly, the year-over-year growth in total deposits continues to reflect even more significant growth in core deposits, which increased by 18% and non-interest-bearing deposits, which increased by 23%, compared to a year earlier. As result, core deposits comprised 82% of total deposits at June 30, 2015, compared to 76% at June 30, 2014. These core deposits provide a stable funding base and represent the foundational account for relationship banking, which is the basis for Banner's super community bank model.

This concludes my prepared remarks relative to the financial statements. In summary, I would reiterate that we had another good quarter and that the first six months of 2015 reflect strong revenue growth and solid earnings momentum that position Banner Corporation well for further success in future periods, particularly as we look forward to the integration of AmericanWest Bank into Banner Bank. As always, I look forward to your comments and questions.

Mark, I'll turn it back to you.

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.

(Operator Instructions)

Jeff Rulis with D.A. Davidson.

On the AmericanWest, your expectations of that close, it seems to have slid a couple of months, not a big change but I am interested to hear if there is anything that has occurred with that potential close that slid it a little bit?

Jeff, this is Mark. The slight delay on the closing, to 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 de minimis effect to the combined Company.

Got you. Okay. Switching gears a little bit, on the mortgage banking, a strong six months, Lloyd, and you talked about that in your comments. So far in the quarter, and/or what would be your expectations for the second half of the year, what you've seen month to date and expectations for the back half of the year?

You are correct, Jeff, it was a very good first six months of the year for our mortgage banking operations. Obviously, interest rates, mortgage rates remain low and that's very helpful. As I noted, we've 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, that activity should continue to be a very positive component of our operations for a number of quarters.

Lastly, on the loan growth, I think Lloyd did mention it was pretty broad-based amongst the sectors. Any regional strength in the footprint that is particularly boosting the loan growth figures? And to close, your expectations? Do think there was some seasonal timing, obviously maybe the ag portfolio, but the expectations going forward as well on loan growth?

Sure. I'm going to defer to Rick here in a moment. 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 it is, as I noted, broad-based, but I'll defer to Rick if he wants to talk about specific geographies.

Jeff, this is Rick. I think if we look at the different segments, residential construction and land, the activity there continues to be very robust and is really centralized in Puget Sound and greater Portland. There's 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 growth remains very modest. In other loan categories, that's pretty well spread across the footprint with no particular geographic concentration. I might point out that pipelines remain generally strong and are actually running 10% to 15% ahead of what they were last year.

Great. Thanks for the comments.

Paul Miller with FBR.

This is Thomas LeTrent on for Paul. Obviously the net loan growth, as you just discussed, was solid in the quarter. On seasonality, were there any offsetting impacts there? How did prepays turn in the quarter? That's the one thing we can't see in the release. Was there any outsized impact from 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'd note that the one category that did go down was one to four family loan balances. I think Rick is right, it wasn't outside of norm, but there continues to be refinance activity. And because we see most of our originations in the secondary market, you saw some contraction in that portfolio. What we also saw, which was interesting though, is some growth in the HELOC portfolio for the first time in quite a period of time, despite the fact that when people refinance, they frequently not only will pay off a first mortgage, but also a HELOC transaction. We had some very good production there out of our retail banking group.

Okay. Then switching gears quickly. I think you mentioned two payoffs 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?

As I mentioned in my comments, the big recoveries for the second quarter were more episodic than 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. 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. One more, if I may and this may be 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 acquirer in the last year or so. What are the opportunities you guys are evaluating in terms of hiring teams of lenders, either in new markets or existing ones?

Well, we've consistently looked 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're properly staffed and serving the market and continuing our market share growth.

Okay. That's great. Thank you guys.

Jackie Chimera with KBW.

I wonder if you could touch base, a question for Lloyd here, on what cost-savings, if any, were realized from the Siuslaw conversion in the quarter, just the timing on that and what is left in future quarters to realize?

Well, cost savings during in the quarter, I'll have to admit, Jackie, I don't have a good handle on that. We have had some pretty meaningful reduction in staffing in the back office, as you would expect, at the Siuslaw operation. We benefited from that, probably about two-thirds of the quarter, because there was still transitioning going on in the first month of the quarter. But, I'm sorry I can't put an exact number on that. Maybe another number that I will scale, just for your benefit and others'; 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 there, the $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's driving that expense is ongoing and is progressing really quite well.

Okay.

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's great to hear. With the conversion done and a 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 standpoint. And, again, I think it's 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's tracking ahead of our expectations, actually.

Okay. 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've 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. For instance, their legal fees, their investment banking fees, some of the change of control expenses around contracts, that sort of thing; a 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's going to be a lot of expense related to some of those activities for us as well in the next couple of quarters.

Okay. 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 amount that we postponed the closing of the transaction. So you'll recall I originally modeled it to close in the quarter that just ended, the June 30 quarter. Now, most likely, it is sometime late this quarter, as we indicated. So, that does put you 90 days behind in terms of some of the cost savings activity.

Since the 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'm sorry -- by the end of 2015, the cost saves, so we could have a clean run rate by 2Q 2016?

2Q 2016 I think will probably be a pretty good run rate. There may be just 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. Great.

Assuming Mark doesn't do something else to change the dynamics. (laughter)

Jackie, that's 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.

Okay. Definitely understood. Thank you both very much for the color. I appreciate it.

Russell Gunther with Macquarie.

I appreciate the color on the margin this quarter and even on a core basis, you guys' margins continue to defy expectation. So congratulations there. I just had a quick question on the Siuslaw contribution from the purchase accounting, Mark. Obviously, that could be lumpy quarter on quarter. Do you have an expectation, or just a general sense, directionally, what that contribution might be going forward?

Well, Russell, this is Lloyd. As we noted, it was about 3 basis points during the quarter. We really don't anticipate that it will be terribly lumpy. The reason for that is, there wasn't a lot of significant purchased credit-impaired loans there. Therefore, not a lot of meaningful discount that would come in in a lumpy fashion that you are used to seeing on some other purchase transactions, where there's a higher percentage of the portfolio that's not performing.

Okay. Great. That's helpful. 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? Is the order of magnitude something we should consider from this quarter's results, maybe less the 4 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 as a result of that transaction initially. 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 [4.11%], [4.1%] area.

Okay.

But, I will wade into a deep puddle, here. As many of the people on the call know, I still think that this low interest rate environment has some room to play out in terms of pressure on the margin. So, you know -- (multiple speakers).

Understood. I appreciate your commitment to continued concern about the low-rate environment, despite your guys' ability to continue to show core expansion. One last margin question. I also believe that that 15 basis point compression is absent any estimated impact from purchase accounting on the AmericanWest deal. Could you help us with a net impact? If we got 15 basis points compression initially, what might purchase accounting contribute to the margin?

No, I think that 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. 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. That 15 basis points is inclusive of expected amortization of purchase accounting discounts accretion.

Got it. Thank you for the clarification there, Lloyd. Switching gears to loan growth, obviously a really solid quarter and I appreciate the color on the trends. A follow-up on the loan pipeline; I know you guys don't quantify this number. But, if you could give us a sense, directionally, where the pipeline went quarter on quarter and maybe what some of the drivers are there?

Well, I think quarter over quarter, I think the pipeline was stable. There was not a spike 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. I understand that there is some seasonality to the strength this quarter. As we step back and think about the combined company with the AmericanWest deal closing, obviously some noise there and perhaps a little runoff. But how do you think about the loan growth potential for the combined institution year over year in 2016?

Russell, this is Mark. We continue, and 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've done at Banner and you could anticipate a modest growth. We're not going to outsize the growth rate. I think, given the western United States and the performance, including California and Utah, the economic performance has been a bit better than the rest of the country. So you could see upper digits loan growth.

All right. Thank you, guys. That's very helpful. I appreciate you taking my questions.

Don Worthington with Raymond James.

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

Well, I don't want to give the marketing department too long of a leash, here. (Laughter) They might be listening to the call, as well. Certainly, there's going to be 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, that 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. We're going to employ [a 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 acquisitions. All of that would remain the same. The absolute dollar amount calibrating that is a little bit hard right now.

Okay. All right. Thanks. You've 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 million. So a year later, that looks good. And Siuslaw, at the end of the quarter was $320 million and we closed on $316 million. You would expect always when there's a transaction, that you are going to lose a few customers that for whatever reason want to change. But I think we're really quite pleased with the performance of both of those divisions in terms of deposit activity. Both have had client growth, even though the totals are fairly flat to with the acquisition time, that both areas have had client growth. We feel good about it.

Great. Thank you.

Tim Coffey with FIG Partners.

Most of my questions have been answered. I do want to ask you about the core legacy loan yields on your portfolio. They have been pretty solid score for the better part of a year now. My question is, is that just the market trying -- your portfolios are on the bottom in the current market that you are in? Or, is that really kind of a remix of the portfolio towards higher-yielding loans?

A little bit of both, Tim. I just got through saying that I'm not sure we've seen the bottom in the current interest rate environment for core levels. So, there are still 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. 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. Some of that seasonal activity that I mentioned in C&I and ag, can be slightly higher-yielding portions of those portfolios as well. So mix was important. Low interest rates are still a challenge.

I too appreciate your commitment to the lower interest rates forecast. Are there further opportunities for you 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. As I mentioned, the growth was pretty much across the loan categories and as Rick mentioned, across the geography. I think, in terms of our net interest margin, barring changes in the interest rate environment, it's still a matter of, can we continue to grow core deposits and take another basis point or 2 out of funding costs?

Okay. That's it. Thanks. Those are my questions.

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

Thanks, 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'd 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.