Banner Corp (BANR) 2016 Q1 法說會逐字稿

Hello and welcome to Banner Corporation's first-quarter 2016 conference call and webcast. (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 the Banner Corporation. Please go ahead.

Thank you, Amy, and good morning, everyone. I would also like to welcome you to the first-quarter 2016 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 of the Corporation; and Albert Marshall, the Secretary of the Corporation. Also joining us today is Peter Conner, our Chief Financial Officer of Banner Bank.

Albert, would you please read our forward-looking Safe Harbor statement?

Certainly. Good morning. Our presentation today discusses Banner's business outlook and will include forward-looking statements. Those statements include descriptions of management's plans, objectives, or goals for future operations, products, or services; forecasts 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 risks 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-K for the year ended December 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 reported a net profit available to common shareholders of $17.8 million or $0.52 per diluted share for the quarter ended March 31, 2016. This compared to a net profit to common shareholders of $0.20 per share in the fourth quarter of 2015 and $0.61 per share in the first quarter of 2015.

As anticipated, the first-quarter 2016 results were adversely impacted by acquisition- and merger-related expenses associated with the AmericanWest Bank combination, which, net of taxes, reduced net income by $0.13 per diluted share. Excluding the impact of merger and acquisition expenses, gains and losses on the sale of securities, and changes in fair value of financial instruments, earnings increased $9 million or 69% to $22.1 million for the first quarter 2016 from $13.1 million in the first quarter of 2015 and increased by $1.7 million or 9% compared to $20.4 million in the immediately preceding quarter.

While our core operating performance continued to reflect the success of our proven client acquisition strategies, which produced strong core revenue, we also benefited from the successful acquisition and integration of Siuslaw Bank in March 2015, and more recently the transformative acquisition of AmericanWest Bank, which had a dramatic impact on the scale and reach of the Company and is providing a great opportunity for future revenue growth.

In the first quarter, we successfully completed our core system conversion. And while there remains significant additional work to be done to complete the full integration of the two companies and achieve the expected operating synergies, we are exceptionally pleased with the progress we have made.

Importantly, while we continue to successfully execute on our integration plan, through the hard work of our employees throughout the Company, we are also successfully executing on our strategies and priorities to deliver sustainable profitability and revenue growth to Banner.

Our first-quarter 2016 performance clearly demonstrates the positive contribution of AmericanWest Bank acquisition and shows that our strategic plan is effective and we continue to build shareholder value. Our first-quarter 2016 core revenue was strong, at $111 million, and increased 86% compared to the first quarter of 2015.

We benefited from a larger and improved earning asset mix, a net interest margin that remained above 4%, and strong mortgage banking revenue. Overall, this resulted in a return on average assets before acquisition expenses of 91 basis points for the first quarter of 2016. Once again, our performance this quarter reflects continued execution on our super community bank strategy. That is, growing new client relationships, improving our core funding position by growing core deposits, and promoting client loyalty and advocacy through our responsive service model while augmenting our growth with opportunistic acquisitions.

To that point, our core deposits increased 90% compared to March 31, 2015. Also, our non-interest-bearing deposits increased 102% from one year ago. Although a large portion of this balance growth is from the acquisitions, we also saw a continued strong organic generation of new client relationships.

Our organic net client growth in these product categories is now 77% since December 31, 2009. Reflective of this solid performance, we also raised our dividend 17% in the quarter to $0.21 per share. 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 a moderate risk profile and our nonperforming assets remain very low.

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 in our success at maintaining a moderate credit risk profile. Given our successful credit risk management, our low level of nonperforming loans, and our moderate risk profile, we did not record a provision for loan losses again this quarter.

With the acquisition of AmericanWest, Banner's reserve levels are strong and our capital position remains substantial. At the end of the quarter, our ratio for allowance for loan and lease losses to total loans was 1.67% when including the net loan discount on the acquired loans. Our total capital to risk-weighted asset ratio was 13.58% and our tangible common equity ratio was 10.98%.

In the quarter and throughout the preceding six years, we 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 expenses, they have resulted in positive core revenue growth, strong customer acquisition, year-over-year growth in the loan portfolio, improving cross-sell ratios, and strong deposit fee income growth.

Further, we have 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, augmented with strategic acquisitions and our persistent focus on improving the risk profile of Banner, has now resulted in 20 consecutive quarters of profitability. And our tangible book value increased to $30.38 per share versus $29.75 per share at March 31, 2015.

Finally, I remain very excited about the recently closed acquisitions of Siuslaw Bank and 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. And I would like to reinforce our welcome to the AmericanWest Bank clients, employees, and shareholders who joined the Banner Bank team this past year.

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

Thanks, Mark. As you heard in Mark's comments and saw in our press release, the credit metrics of Banner's loan portfolio remain sound and continue to support our goal of a loan portfolio with a moderate risk profile.

Before turning to some specific remarks about the portfolio, let me say that the integration of the AmericanWest portfolio is progressing smoothly. Loan quality is as we thought it would be and the cultures are merging well.

Now for my more specific remarks. Banner's outstanding loans shrank 1.8% during the quarter because of the planned sale of multifamily loans originated by AmericanWest's specialty lending group during 2015 and the expected seasonal paydown of agricultural production loans.

Excluding the impact of multifamily portfolio loan sales and seasonal paydowns on agricultural loans, the portfolio grew $101 million or 5.8% on an annualized basis during the first quarter. Loan segments with significant growth during the quarter were as follows.

Commercial construction grew by $15.6 million or 22%. This was driven by both the funding of existing commitments and the addition of new commitments across our five-state footprint. Multifamily construction loans were up $16 million or 25%.

Growth came principally from funding existing commitments. We continue to see excellent lease-up activity on loans in this portfolio segment as they come to market. We monitor the apartment markets closely for signs of slowing lease activity.

More modest growth occurred in the residential construction portfolio -- 7% -- and the residential land portfolio -- 13% -- that when combined are $440 million or 6% of the total loan portfolio. Activity was centered in the metropolitan Seattle and Portland markets, with totals also being added in Utah and northern California. All of these markets remain in balance.

The loan portfolio remains very well diversified by loan type and geography and is very granular in terms of individual relationship exposures. The credit metrics of the portfolio, as already noted, are very solid. Delinquent loans, while up slightly, are still only 61 basis points of total loans. There was no systemic driver of the increase. Classified loans in the portfolio remained level, at $95 million or 1.3% of total loans.

As scheduled in the press release, nonperforming assets declined 24 basis points of total assets and totaled $23 million. Total nonperforming assets were split between nonperforming loans of $16 million and REO of $7 million.

Not reflected in these totals are nonperforming loans of $17 million acquired from Siuslaw and AmericanWest Banks, which are not reportable under purchase accounting rules. These nonperforming loans, however, are included in our net purchase credit impaired loans of $53 million. If we were to include the acquired nonperforming loans in our nonperforming asset totals, the ratio of nonperforming assets to total assets would still be a modest 41 basis points.

Performing troubled debt restructures fell from $22 million to $19 million and are only an inconsequential 26 basis points of total loans. Net recoveries were a modest $189,000 for the quarter. Gross charge-offs were $1.276 million versus recoveries of $1.465 million.

Metrics tied to the allowance for loan and lease losses are impacted by purchase accounting, but are now our new normal. The allowance for the Company totals $78 million and is 1.09% of total loans compared to 1.07% for the linked quarter.

The net loan market against acquired loans is part of purchase accounting requirements. As shown in the press release, the remaining net loan mark is $42 million. And this amount is added to the traditional allowance for loan and lease losses. The adjusted allowance totals $120 million or 1.67% of total loans.

Coverage at this level, 1.67%, aligns with our goal of a moderate risk profile. We also should make note of the fact that no provision expense was recorded for the 13th consecutive quarter.

With that, I will turn the stage over to Lloyd Baker for his comments.

Thank you, Rick, and good morning, everyone. As Mark as noted and reported in our earnings release, Banner Corporation's strong first-quarter operating results reflect continued successful execution on our strategic initiatives, including significant benefits from the acquisition and further progress on the integration of AmericanWest Bank. And of course, compared to the same quarter a year earlier, the March 2015 acquisition of Siuslaw Bank also materially added to the operating results for the Company.

In large part due to those transactions but also reflecting continued organic growth, our financial performance in the current quarter was driven by significant revenue growth compared to the first quarter a year ago as a result of substantial increase in the average earning asset balances. And compared to the immediately preceding quarter by a meaningful expansion of our net interest margin.

In fact, as noted in the press release, the net interest margin increase compared to the fourth quarter was a significant highlight of the first quarter and an encouraging start to 2016.

Similar to previous periods, fully appreciating Banner's core operating results for all three quarters requires a clear understanding of the impact of the merger- and acquisition-related expenses as well as the valuation adjustments for certain financial instruments that we carry at fair value, which also flow through our income statement and when material gains and losses on the sale of investment securities.

For the first quarter of 2016, Banner reported net income of $17.8 million or $0.52 per diluted share. This amount was net of $6.8 million of acquisition-related expenses and some inconsequential fair value and securities gains, which net of related tax benefits reduced earnings for the quarter by $0.13 per diluted share.

By comparison, acquisition-related expenses were $18.4 million in the fourth quarter, while fair value charges and securities losses reduced revenues by $1.5 million. All of which net of tax benefit reduced earnings by $0.40 per diluted share.

For the first quarter a year ago, acquisition-related expenses were $1.6 million, while net fair value gains, partially offset by securities losses, added $540,000 to revenues, which together net of tax effect reduced earnings by $0.05 per diluted share in that quarter.

Excluding these acquisition-related expenses, fair value adjustments, and securities gains and losses, our earnings from core operations increased to $22.1 million or $0.65 per diluted share for the current quarter compared to $20.4 million or $0.60 per diluted share for the fourth quarter of 2015 and $13.1 million or $0.66 per diluted share in the first quarter a year ago. Realizing that this is a lot of excluding, including, and net of tax effect numbers to keep track of, we have included a reconciliation of earnings from core operations on page 17 of the press release this quarter, which I encourage you to review.

When reviewing the operating results for the current quarter as well as the fourth quarter of 2015, it is also important to recognize that the integration and consolidation activities with respect to the AmericanWest acquisition were only partially complete during those periods. However, while there remains work to be done to complete the integration and fully realize the expected operating synergies from combining the two companies, we did make significant progress in the first quarter, including the successful core systems conversion and consolidation of 12 branches in mid-February.

And as I already noted, when comparing operating results to the first quarter a year ago, it is also important to remember the acquisition of Siuslaw Bank, which closed on March 6, 2015.

Importantly, as Mark already noted, underlying this earnings growth are revenues from core operations, which is revenues excluding gains and losses on sales of securities and net fair value adjustments, increased substantially compared to a year ago. While nearly unchanged compared to the fourth quarter, largely as a result of expected seasonal patterns, our revenues from core operations were $111 million for the quarter ended March 31, 2016, an increase of 86% compared to the first quarter of 2015.

This strong revenue generation, particularly compared to a year ago, is a result of significant balance sheet growth, a remarkably solid net interest margin, additional client acquisition, which has driven increased deposit fees, and increased mortgage banking activity, all of which continue to demonstrate the successful execution of our super community bank business model and increasing value of the Banner franchise. Taken together, these trends clearly demonstrate that our value proposition is being well received and that the focused efforts of our employees are continuing to produce consistent earnings momentum.

Despite $160 million decrease in average earning assets compared to the preceding quarter, largely as a result of significant sales in both quarters of multifamily loans acquired through the AmericanWest merger, as well as expected seasonal factors, including the shorter quarter and a $1 million reduction in the contribution from acquisition accounting, net interest income was $91 million for the quarter ended March 31, 2016, a decrease of just $1.1 million compared to $92.1 million for the fourth quarter of 2015. But a 96% increase compared to the same quarter a year earlier, reflecting an increase of nearly $4.3 billion in average earning assets.

While we experienced an expected decline in our net interest margin following the acquisition of AmericanWest Bank, the margin expanded significantly in the first quarter compared to the immediately preceding quarter on both a reported or GAAP basis and more importantly on a contractual basis. Our reported net interest margin was 4.13% for the quarter ended March 31, 2016, an 8 basis point improvement from 4.05% in the fourth quarter of 2015, despite a 4 basis point reduction in the contribution from acquisition accounting.

Acquisition accounting added 12 basis points to the reported margin in the first quarter compared to 16 basis points in the fourth quarter and just 2 basis points in the quarter ended March 31, 2015. Excluding the impact of acquisition accounting, our contractual or normalized margin for the first quarter of 2016 increased by 12 basis points to 4.01% compared to 3.89% in the fourth quarter of 2015 and compared favorably to 4.07% in the first quarter a year ago.

The increase in the margin from the preceding quarter reflects higher loan and securities yields, in part as a result of the increase in short-term market interest rates following the change in the Federal Reserve's fed funds target rate in mid-December as well as changes in the mix of loans and securities. And incurred despite continuing pressure on long-term asset yields.

By contrast, the change in market rates did not result in an increase in the cost of deposits, nor have a meaningful impact on our total cost of funds. The favorable comparison of the contractual margin to the first quarter a year ago is also notable, given the significantly larger portion of securities to average earning assets following the acquisition of AmericanWest Bank as well as differences in the acquired loan portfolio.

Deposit fees and service charges were $11.8 million in the first quarter, a decrease of approximately $1.4 million compared to the fourth quarter, but a 45% increase compared to the first quarter of 2015. The decline compared to the preceding quarter generally followed normal seasonal patterns, but also reflected approximately $250,000 of one-time fee waivers in connection with the system conversion and an additional $250,000 related to product changes for certain former AmericanWest clients that were not fully implemented in the fourth quarter.

Our expectation is that those product changes will accelerate client acquisition and ultimately increase activity-based fees for those products and provide additional cross-sell opportunities. However, there is a near-term revenue give-up as a result of the changes.

The significant increase in deposit fees and service charges compared to a year earlier is a direct result of growth in core deposit accounts and related transaction activity, reflecting the success of our client acquisition strategies as well as the acquisitions.

As noted in the release, mortgage banking revenues were strong at $5.6 million for the first quarter as home purchase activity in our markets remained robust and lower long-term rates again fueled refinance transactions. Home purchase activity accounted for 61% of our one- to four-family mortgage loan originations in the quarter.

In addition, during the current quarter, we realized $725,000 of gains on the sale of multifamily loans. These gains related to loans originated subsequent to the acquisition of AmericanWest Bank, but is specialty origination unit that we acquired in that merger and were in addition to sales of loans that were included in the acquired portfolio. Gains related to the sale of those loans were reflected as adjustments to the fair value -- to their fair values as of the acquisition date and were offset against goodwill.

Total other operating expenses were $84 million in the first quarter compared to $100.3 million in the preceding quarter and $41.9 million in the first quarter of 2015. As previously noted, acquisition-related expenses were $6.8 million in the current quarter compared to $18.4 million in the preceding quarter and $1.6 million in the fourth quarter a year ago.

Acquisition expenses for the quarter were somewhat less than I had previously suggested, largely as a result of timing differences that will push certain expenses into the second quarter. But also as a result of actual cost savings compared to our earlier expectations.

Aside from acquisition-related expenses, the year-over-year increase in operating expenses is largely attributable to the incremental costs associated with operating the AmericanWest branches. And as I noted earlier, included costs associated with the 12 branches and overlapping systems that were not consolidated until midway through the quarter.

Finally, with respect to the income statement, our effective tax rate increased slightly to 34.1%, principally as a result of proportionally more of our income being subject to California and Oregon income tax.

As Rick noted, largely as a result of the $139 million of multifamily loan sales, but also reflecting expected seasonal reductions in agricultural loans and accelerated prepayments on one- to four-family loans as a result of the low interest rate environment, our total loans decreased by $128.5 million during the quarter. However, production of targeted loans remains solid and produced meaningful increases in commercial business, construction and development, and investor real estate loans. Total loans outstanding were $7.19 billion at March 31, 2016, compared to $7.31 billion at December 31, 2015, and increased by 75% compared to $4.11 billion a year earlier.

Total deposits were $8.03 billion at March 31, 2016, a slight decline compared to $8.06 billion at December 31, 2015, but an increase of 86% compared to $4.32 billion 12 months earlier. The modest $25 million decrease compared to the prior quarter end was entirely attributable to decreases in time certificates and brokered deposits, as core deposits actually increased by nearly $41 million in what for us is typically a seasonally slow growth quarter. Core deposits now represent 84% of total deposits.

Also of note with respect to deposits, during the quarter, in connection with certain product changes, we converted approximately $420 million of former AmericanWest interest-bearing deposits to non-interest-bearing deposits.

This concludes my prepared remarks. In summary, Banner had a good first quarter with some encouraging trends for the balance of 2016. And although we still have a fair amount of work left to fully realize the benefits of the increased scale of the Company, we are looking forward to reporting continued progress in future periods. As always, I look forward to your questions.

Mark?

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

(Operator Instructions) Jeff Rulis, D.A. Davidson.

On the cost side, maybe, Lloyd, on the merger cost of the $6.8 million, could you break that out in terms of -- I'm assuming most was in salaries and occupancy -- by category?

Yes, Jeff. It's significantly related to compensation and exit expenses on various locations and leases. And still, some significant amount of consulting and data processing conversion expenses as well. So a mix of the three.

And let me anticipate your next question, which is how much is left? Because as I noted, we came in a little light to our expectation in the quarter. We think we probably have $3 million to $5 million left that will most likely come in in the second quarter of this year. And the reason for the delay principally relates to the triggering events for recognizing exit costs on leased properties and termination of certain systems.

Got you. Thanks. Then turning to more of the core expenses and to the kind of expense guidance of obtaining that 75% of the $37.5 million on the cost saves, I guess how far along are you in -- what, if any, have you already recognized in terms of savings or what's left? Whichever piece you want to give there.

Right. We recognized some, as evident by the decline in the core operating expense compared to the prior quarter. But as I noted, we actually didn't complete the conversion until midway through February. So we were still paying for systems, duplicate systems, platforms, and locations. And staffing through really through the end of the quarter.

So there is -- there are reasons to be optimistic looking forward that we will see continued reduction in benefit from the integration in terms of lower operating expenses. Probably something in the neighborhood of $2 million to $2.5 million of expenses in the current quarter that should go away as a result of the consolidations principally.

So you are getting closer to a $75 million run rate on a quarterly basis?

Yes, I think that's right. And you know, we are going to strive to do better than that. But something in the neighborhood certainly for the next quarter or two.

Great. Okay, and then just the other question on the multifamily loan sales. Two parts. One: if you could just address the risk management, were those identified as reasons to exit that for a credit purposes? And then the second is I guess do you have other budgeted or planned going forward?

I'm going to let Rick address the credit issue there for you, Jeff. But that production unit, we do have expectations that that production unit will continue to contribute going forward. And our expectation is it would be a little bit stronger contribution than what was made in the current quarter. So mortgage banking revenues, you know, looking forward should continue to be pretty strong.

Rick, do you want to address the credit question there on the multifamily?

Yes, my pleasure to do that, Lloyd. Jeff, it very definitely was a credit quality risk management play by selling the loans. The product that that unit produces is not the top tier multifamily product. And we feel that over the long run, through the next credit cycle, that there may be outsized loan problems in that loan category. So we took a proactive approach to risk management and sold them out of the portfolio.

And Jeff, this is Mark. Let me just follow that up with saying part of this obviously we've said has been a macro risk profile management for the organization. We've said we wanted our multifamily to not be more than 5% of the overall loan book. And that's kind of where we are guiding to.

That being said, our production unit that we have that came over from AmericanWest is very important to us and an important source of revenue for the Company.

And Mark, what is the current percentage of multifamily?

We are running at about 4%, just north of 4%.

Okay. So going forward, it's sort of a manage at that number and then sell any production.

Yes, I think that's the general direction, yes.

Okay.

And by the way, let's be perfectly candid and say that is also a very competitive space with some lower yields right now.

Sure. Okay, thank you.

Matthew Clark, Piper Jaffray.

Maybe first on the fee waivers. It's good that you quantify that for us. Just curious. Is it fair to assume with the conversion complete that we'll see some relief or see some -- see those fee waivers -- see those related fees, you know, step back up here in the coming quarter?

Matthew, this is Lloyd. As I indicated, there's about $0.25 million of the reduction that was specifically as a result of waivers associated with the conversion activity.

And then as I noted, there was also a decision that we made around certain products that we changed the fee structure, reducing the fee structure, with the expectation that that would encourage growth in core deposits. And ultimately, incremental income out of activity-based fees, interchange revenues, if you will, as well as incremental revenue from just growing at a faster pace. But that latter $250,000 is something that will take some time to replace.

Yes. Got it, okay.

Matthew, this is Mark. It's still too preliminary to say whether this strategy is being effective for us, but we are encouraged by what we are seeing in terms of client acquisition in the legacy AmericanWest branches. So we think the product changes have been well received by the marketplace, and we are hopeful over time that it's going to -- it will return to deposit fee income growth for the Company.

And then one final point, Matthew, of course is that the fourth quarter is always your strongest quarter for deposit fee revenues. And there is a seasonal impact that comes into play in the first quarter. And so all of those things contributed to the decline, but as I noted, the significant increase year over year is a result of the much larger core deposit activity.

Got it, okay. Sorry, Mike, go ahead.

That's okay. Go ahead.

Just switching gears a little bit to the net recoveries that you guys had been enjoying. Just want to get a better sense of the pipeline of potential recoveries still to come and your expectation for net charge-offs to be maybe still in a net recovery position here for a few more quarters.

Well, our guys have been working the charged-off loan portfolio very hard for the last two or three years post-recession. And it's safe to say that the further we get into the recovery, the harder it's going to be to maintain recoveries that will cover charge-offs completely. There still is some runway in front of us, but that runway is a very lumpy and it's hard to project exactly when those recoveries are going to occur.

Okay. And then I guess on your total assets being down I think 1% linked quarter, it looks like that may give you some flexibility to stay under $10 billion by the end of this year. Just curious on your updated thoughts on the strategy there.

Well, that is our updated thought on the strategy there. So yes, we -- as I noted, the decline in the funding liabilities was in time certificates and brokered CDs. The reduction in the multifamily and some reduction in the securities area -- cash and securities area on the asset side.

We finished the quarter -- what was it -- $9.75 billion. And we are fairly optimistic that without slowing down our organic growth of core deposits, we still will be able to manage ourselves below the $10 billion level at the end of this year. And that's the current strategy as we look out.

But in -- the only thing that would cause that not to work would be exceptionally strong core deposit growth, which is a good thing, I guess, over a longer period of time. But we do think we can stay under $10 billion for another year.

Great. And then just maybe on the margins. Obviously, up probably more than most would've expected. Just curious what your thoughts are. And kind of the redeployment of excess liquidity and loan to deposit ratio down at 91%, just the ability to kind of mitigate the loan yield pressure here going forward.

There's a whole lot of things at play in the margin there. So first and foremost is I noted and as you've noted, there is still pressure on long-term asset yields. And there still are certain assets that are carrying yields above current market.

The $139 million of one- to -- excuse me, multifamily that we sold had a below average portfolio yield. And so that helped the margin during the quarter. And the short quarter actually helps the annualization a little bit.

And then finally, there's the fairly significant wildcard of what is the Federal Reserve going to do? We did as expected see that for us and I suspect for everybody in the industry that the first 25 basis point move from the Fed did not translate into higher deposit costs. But you have to believe at some point in time if they keep increasing rates that will happen as well.

So long way of saying there's always pressure on the margin. We've done a remarkably good job of keeping it around that 4% level. And the current quarter was a pleasant result. Maybe a little stronger than we expected.

Yes, okay. Then just maybe last one. I'm curious what the rate on -- weighted average rate on new production was this quarter versus last.

You know, we don't have a statistic on that specifically, Matthew. I don't think it was meaningfully different from what it was the prior quarter. Particularly, if you get into term financing as opposed to things that are tied to the front end of the curve.

So production in general, rates on new loans in general, continue to be somewhat below the average portfolio yield. So as I said, pressure on the margin wall is a constant in this interest rate environment.

Got it. Okay, thanks, guys.

Paul Miller, FBR.

This is Tim Hayes for Paul Miller. Thanks for taking my question. Just to touch on provisions again quickly, obviously the timing and magnitude is uncertain. But when you do start to start taking some provision expenses, do you have a certain reserve level that you have in mind that you are looking to maintain? Or I know it's going to be a function of growth, but is there just some type of level you are looking at to maintain?

This is Rick Barton again. As we've said in the past, we don't want to see the combined ALLL and net credit mark remaining fall below 150.

Okay, great. Thank you.

Don Worthington, Raymond James.

Just curious in terms of the shift from interest-bearing checking to non-interest-bearing DDA. What was the impact on the cost of funds?

Don, this is Lloyd. The impact was pretty minimal because those accounts were only paying about 5 basis points. Which is -- the reason that we were able to make that adjustment, of course, is that we offer a better product in terms of non-interest features than the account we were switching them out of.

But going forward, that should have a very positive impact on margin, particularly if rates should continue to rise, short-term rise. When and if deposit rates start moving up, having an additional $400 million that are no longer interest-sensitive is a good thing.

Yes, okay. Thanks. And then in terms of the deposits from AmericanWest, are you seeing any attrition there or is that holding up pretty well?

There's a little bit of attrition in the interest-sensitive portions of the portfolio. But for the most part, it's going well. And as Mark pointed out, we are actually seeing some pretty good new account opening in those branches.

Okay, great. Thank you.

Russell Gunther, Macquarie.

Just first, I'd like to follow-up on the expense conversation. You know, you guys have pointed to that $37.5 million of cost saves. Could you just quantify for us how much of that was recognized in this quarter?

Boy, that's a good question that I don't have a good answer for, Russell. I apologize. I would suggest that we probably have achieved 25% to 30% of the run rate cost savings in the current quarter that we were expecting.

Okay. Directionally, that's helpful. And then is -- yes.

Russell, this is Mark. Said differently, we expected to get about that target level hitting the run rate in the fourth quarter. So that's the way we are looking at it.

Got it. And so that $37.5 million number is still unchanged. It just showed up a little earlier than maybe I expected.

Yes.

Okay. Perfect. Thank you for that. And then just circling back to the margin, could you parse for us what the contribution to the core NIM was from the December rate hike versus the mix shift in loans and securities?

No. (laughter)

I said there's just a whole lot of moving parts that go on in the margin. So I think that -- I think you could probably attribute about 8 basis points of increased loan yield as a result of that change in rate hike. And the rest of it is all the other moving parts that contribute to the margin.

Got it. Okay. And thanks for that. I wanted to just follow-up, if I could, just a modeling geography question. But the gain on sale of the multifamily loans, that's in that mortgage banking line and that's where we should see it going forward?

That's correct. Unless we at some point in time decide to split it into a second separate line on the face of the income statement, it will be included with mortgage banking revenues. It really is -- it is a mortgage banking unit. That is really what it is. It just happens that their mortgages are on multifamily as opposed to one to four.

Absolutely. And then I guess with the updated strategy to remain below $10 billion through 2016, just remind me does that push the revenue impact from Durbin into the back half of 2018 now?

That's correct.

Okay. And then my last question is as it relates to capital, you guys still are around 11% PCE. Give us a sense, if you could, for your priorities this year. I know you have a lot to do with regard to integrating recent deals.

But is M&A sort of front of the line, given we're kind of toeing the $10 billion line? Or how are you thinking about that? I know you raised the dividend this quarter, but maybe just update us on your thoughts.

Russell, this is Mark. Our capital deployment strategy hasn't changed over time. Our first and foremost use of capital is going to be reinvestment in the franchise. The second is obviously having a strong core dividend that has a payout ratio between 30% and 35%.

Also then would be M&A capital deployment. And then depending on what the utilization of capital looks like and how much capital we actually continue to generate, we would look then for either special dividends or share repurchase. And as you know, in the quarter, we did renew our share repurchase plan.

Yes, okay. And then just a quick follow-up there. So would -- if would the right transaction to come along, is that something that you would consider in 2016? Or do you think you have your hands full with the current integration?

I think the early indicator is that this integration has gone very successfully. So should an opportunity present itself, that is certainly a strategy for us.

Great. Okay, thanks, guys. Thanks for taking my questions.

Jacque Chimera, KBW.

As I think about the multifamily loan sales in future quarters, I am assuming that -- I know that the originations have been since the deal, but we've had two quarters since the deal closed. So how much of that was originated in the current quarter? And then what are kind of your expectations for originations on a go-forward basis in that line item?

Jacque, this is Lloyd. I think the origination of that was somewhat spread out. But it's important to point out that similar to most mortgage banking operations and maybe a little more so because of the integration effort here, their production was a little slow in the fourth quarter. And so it ramped up in the first quarter.

And as I noted earlier, we would expect a higher level of gain associated with that production going forward than the 700 -- $725,000 that we recognized in the current quarter. Historically, they were able to produce in the neighborhood of $25 million to $30 million a month and we are optimistic that that will continue.

Okay. And where are they in regards to the $25 million to $30 million? Historically, where are they running at in, say, if you have it, in March maybe?

I don't have that number. I apologize. Peter, do you --?

It's about $25 million.

About $25 million of production in March.

Okay. So we are pretty much almost there. And would that number be increased at all? Because I'm assuming that's a legacy AmericanWest number, and now that you have the combined franchise is there's a possibility that production could pick up because you have more people that are able to do it? Or is it just very specialized and there wouldn't be any increase from there?

No, it's a specialty unit. The merger was not additive to that process. That unit was additive to us, but Banner didn't bring anything that would significantly increase that production from what they historically were doing.

Okay. That's helpful, thank you. And then just lastly, as you start to think about provisioning and obviously keeping the reserve ratio at the 150 level you discussed, does any of that have to do with changes in the local economic conditions? Or any loan segments that you are planning to grow that might shift how the reserve is done? Or is it all just purely loan growth and it's not really driven by changing economic factors?

Jacque, this is Rick. In my mind, there are four factors which really drive the provisioning equation. One -- and two you've already identified, which is the pace of loan growth and the mix of that growth.

But also impacting it is the rate of migration of loans out of the acquired portfolios into being accounted for in the ALLL instead of being covered by the purchase accounting mark. And then the final factors are any risk rating changes if they should occur in the existing portfolio.

And have any of the -- has the fourth factor changed at all?

No, it has not.

Are there any areas of the economy that you are looking at that you are feeling more cautious or you might be looking to -- obviously, you have very strong underwriting standards. But anything that you might look to tighten even further?

Well, I don't think -- I'm looking at anything that would be tightening further from our existing underwriting standards. But in terms of things that we keep a wary eye on, one would be agriculture because of the pressure on commodity prices. Another would be the multifamily market and the pace of new loan production there. And the third would be residential construction because of the very robust recovery in many markets.

And has your view on any of those three loan segments changed over the last three months?

No, it has not.

Jacque, this is Mark. It's also important to note that, you know, we don't participate aggressively in leverage transactions or shared national credits or the energy segment. So that brings you back to what Rick's views are on the overall portfolio.

Okay, thank you. And I -- obviously, Mark, you run a very conservative shop. So I was just curious on kind of how you are testing the market and what you're seeing. Thank you very much for the added color.

We have another question. Do you think you have time for it?

Sure.

Jeff Rulis, D.A. Davidson.

All right, guys. I'll be quick. The OREO reduction was significant. Was that a sale of fair value adjustment or what was the decline there?

Jeff, this is Rick again. The big driver was sale of two or three very significant REO parcels that came over in the AmericanWest acquisition. They had been working them very hard and their efforts came to fruition during the first quarter.

And then one quick last one. Just the rationale behind withdrawing the S-1 or the request to withdraw the S-1 in favor of the S-3. Does that just provide more flexibility?

Jeff, this is Lloyd. That's exactly right. Effective April 1, we were eligible to file under a universal shelf S-3 filing again. The S-1 is one that needs to be continually updated to be effective. And so just the passage of time that allowed us to change the vehicle there.

Fair enough. Thanks.

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

Thanks, Amy. As I stated, we are pleased with our solid first-quarter 2016 performance and see it as evidence that we are making substantial and sustainable progress on our disciplined strategic plan to build shareholder value by executing on our super community bank model by growing market share, strengthening our deposit franchise, improving our core operating performance, maintaining a 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 our call today. And we look forward to reporting our results to you again in the future. Have a great day, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.