Banner Corp (BANR) 2016 Q3 法說會逐字稿

Good morning, and welcome to Banner Corporation's third quarter 2016 conference call and webcast. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mark Grescovich, President and CEO of Banner Corporation. Please go ahead.

Thank you, Kate, and good morning, everyone. I would also like to welcome you to the third 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; Peter Conner, Chief Financial Officer of Banner Bank; 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, or services, forecast of other 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, 2016. 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 $23.9 million or $0.70 per diluted share for the quarter ended September 30, 2016. This compared to a net profit to common shareholders of $0.61 per share for the second quarter of 2016 and $0.62 per share in the third quarter of 2015.

As anticipated, the third quarter 2016 results were adversely impacted by acquisition and merger-related expenses associated with the American West Bank combination which net of taxes reduced net income by $0.03 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 from core operations increased $9.9 million or 65% to $25.1 million for the third quarter of 2016 from $15.2 million in the third quarter of 2015 and increased 9% compared to $23 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 benefitted from the successful acquisition and integration of American West Bank, which had a dramatic impact on the scale and reach of the Company and is providing a great opportunity for future revenue growth.

Following the successful completion of all systems conversions, we made additional progress in generating operating synergies through the integration of operational activities. We also experienced the full benefit of having consolidated, overlapping branch locations. More importantly, as a result of 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 third quarter 2016 performance clearly demonstrates the positive contribution from the American West Bank acquisition and shows that our strategic plan is effective, and we continue building shareholder value. Our third quarter of 2016 core revenue was strong at $117.5 million and increased 74% compared to the third quarter 2015 and 3% compared to the second quarter of 2016.

We benefitted from a larger and improved earning asset mix, a net interest margin that remained above 4%, and strong mortgage banking and multi-family revenue. Overall, this resulted in a return on average assets of 1.01% from core operations and an adjusted efficiency ratio of 65% for the third 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 91% compared to September 30, 2015. Also, our non-interest-bearing deposits increased 104% from one year ago. Although a large portion of this balance growth is from the acquisitions, we also saw continued strong organic generation of new client relationships. Our organic net client growth in these product categories is now 86% since December 31, 2009. Reflective of this solid performance, our dividend in the quarter increased 10% to $0.23 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 our moderate risk profile, our non-performing assets remain very low, and our capital position continues to be substantial.

As expected, due to loan growth and the migration of acquired loans out of the discounted loan portfolio, we recorded a $2 million provision for loan losses during the third quarter. At the end of the quarter, our ratio of allowance for loan and lease losses to total loans was 1.6% when including the net loan discount on acquired loans, and our tangible common equity ratio was 11.03%. 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 credit risk profile.

In the quarter and throughout the preceding six years, we continue 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, and strong deposit fee income growth.

Further, we've received marketplace recognition of our progress in 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 for the second consecutive year.

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 22 consecutive quarters of profitability and our tangible book value increased to $31.14 per share versus $30.75 per share at September 30, 2015.

Finally, I would like to welcome three new members of our executive management team: Ms. Kayleen Kohler has joined our Company as Executive Vice President and Director of Human Resources; Ms. Judy Steiner has joined Banner as Executive Vice President and Chief Risk Officer; and Mr. Craig Miller has joined the Company as Executive Vice President and General Counsel. These three executives have extensive experience with large companies and augment our leadership team as we prepare to grow beyond $10 billion in assets.

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

Thanks, Mark. The credit story at Banner was uneventful during the third quarter. Consequently, my remarks will be brief and focus on the Company's credit metrics and loan portfolio. Our credit metrics have been relatively stable for a number of quarters, a trend that continued in the third quarter.

Before discussing some of the metrics, I want to once again state that our credit metrics are not likely to improve further as we move toward the next credit cycle. Delinquent loans increased one basis point to 0.53% of total loans. The Company's level of adversely classified assets was stable during the quarter.

Non-performing assets increased 1 basis point during the quarter to 0.33% of total assets. Non-performing assets were split between non-performing loans of $26 million and REO of only $5 million. Not reflected in these totals are non-performing loans of $14 million acquired from Siuslaw and American West Banks, which are not reportable under purchase accounting rules. These non-performing loans, however, are included in our net purchase credit impaired loans of $39 million. If we were to include the acquired non-performing loans in our non-performing asset totals, the ratio of non-performing assets to total assets would still be a modest 47 basis points, unchanged from last quarter.

Performing troubled debt restructures continued to decline and are only 24 basis points of total loans. Net recoveries for the quarter were $900,000 and reflect the continuing collection efforts of our special assets department. And, as we have said many times before, recoveries are very hard to project and it is not realistic to expect recoveries at this level in future quarters.

After a provision of $2 million and the net loan recoveries of $900,000, the allowance for loan and lease losses for the Company now totals $84 million and is 1.14% of total loans compared to 1.11% for the linked quarter.

As shown in the press release, the remaining net credit mark against acquired loans is $35 million. When this amount is added to the traditional allowance, the adjusted allowance totals $119 million or 1.60% of total loans down from 1.63% last quarter. Coverage at this level, 1.60%, remains substantial and aligns with our goal of a moderate risk profile.

Loans grew by $73 million from the linked quarter or 1%. On an annualized basis, this is a growth rate of 4%. Growth was muted during the quarter because of declines in the multi-family real estate, one to four family real estate, and commercial business categories. The decline in multi-family permanent loans, $21 million, reflects continuing loan sales out of that portfolio while the one to four families segment decline, $32 million, was driven by continuing refinance activity as interest rates remained low during the quarter.

When these two portfolio segments are excluded, all other loans grew $126 million or 2.0% during the just completed quarter. The decline in commercial business loans during the quarter, $42 million, was driven by lower utilization on continuing lines of credit and business owners either selling assets to pay down debt or selling their companies in full resulting in payoff of all outstanding loans.

Other loan segments did record meaningful growth during the quarter. Commercial construction grew by $30 million or 28%. This was primarily driven by the funding of existing commitments although some new commitments were added across our five-state footprint. This continues to be a very diversified portfolio with no product or geographic concentrations.

Multi-family construction loans also were up $8 million or 8%. 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.

Growth occurred in the residential construction portfolio 10% and the residential land portfolio 3% that when combined are $526 million or 7% of the total loan portfolio. These portfolios remain centered in the metropolitan Seattle and Portland market with totals also being added in Northern California, Utah, and Idaho.

All markets remain in balance with little standing inventory of completed homes. And the agricultural portfolio grew by 3% during the quarter as production lines of credit were [drawn] down as expected.

As I said at the outset of my remarks, it was a stable quarter for credit at Banner, which further solidifies the moderate risk profile of our loan portfolios.

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

Thank you, Rick, and good morning, everyone. As Mark has noted and as reported in our earnings release, Banner Corporation's strong third quarter and year-to-date 2016 operating results continue to reflect the successful execution of our strategic initiatives including significant benefits from the acquisition and further progress on the integration of American West Bank. And compared to the first nine months a year earlier, the March 2015 acquisition of Siuslaw Bank also materially added to the operating results of the Company.

In large part due to those transactions, but also reflecting continued organic growth, our financial performance in these periods has been driven by significant revenue growth compared to the same period a year earlier as a result of substantial increases in average earning asset balances coupled with a solid net interest margin and growth in non-interest income reflecting the increased scale of the Company.

Similar to previous periods, fully appreciating Banner's core operating results for each of the periods presented requires a clear understanding of the impact of the merger and acquisition expenses as well as valuation adjustments for certain financial instruments that we carry at [fair] value and when material gains and loss on the sale of investment securities.

For the third quarter of 2016, Banner reported net income of $23.9 million or $0.70 per diluted share. This amount was net of $1.7 million of acquisition-related expenses and $1.1 million of net charges [for] valuation adjustments on the fair value of financial instruments partially offset by $891,000 of gains on the sale of securities, all of which net of related tax effects reduced earnings for the quarter by $0.04 per diluted share.

By comparison, acquisition-related expenses were $2.4 million in the second quarter which along with a total of $757,000 of fair value charges and securities losses reduced earnings by $0.06 per diluted share for that quarter. For the third quarter a year ago, acquisition-related expenses were $2.2 million while fair value charges were $1.1 million, which together net of tax effects reduced earnings by $0.11 per diluted share.

Excluding these acquisition-related expenses, fair value adjustments, and securities gains and losses, our earnings from core operations increased to $25 million or $0.74 per diluted share for the current quarter compared to $23 million or $0.67 per diluted share in the immediately preceding quarter and $15.2 million or $0.73 per diluted share in the third quarter a year ago. Again this quarter we have included the reconciliation of earnings from core operations on Page 17 in the press release, and I encourage you to review that analysis.

For the nine months ended September 30, 2016, our net income increased to $62.6 million or $1.83 per diluted share and included $10.9 million of acquisition-related expenses compared to $38 million or $1.87 per share for the first nine months of 2015, which included $7.7 million of acquisition-related expenses.

Excluding the acquisition-related expenses as well as fair value adjustments in securities gains and losses, our earnings from core operations increased 61% to $70.2 million for the first nine months of 2016 compared to $43.7 million for the first nine months of 2015.

Importantly, as Mark has already noted, underlying this earnings growth our revenues from core operations, which is revenues excluding gains and losses on the sale of securities and net fair value adjustments, increased substantially compared to a year ago and also increased meaningfully compared to the immediately preceding quarter.

Our revenues from core operations increased 3% to $117.5 million for the quarter ended September 30, 2016 compared to $114.4 million in the second quarter of 2016 and were 74% greater than the third quarter a year ago. As a result, year-to-date revenue from core operations increased to $342.8 million, 77% greater than the same period a year earlier.

This strong revenue generation is the result of significant balance sheet growth, a remarkably solid net interest margin, additional client acquisition and account activation, which is driven in increased deposit fees, and increased mortgage banking activity, all of which continue to reflect the successful execution of our super community bank business model, the increase in value of the Banner franchise, and clearly demonstrates that our value proposition is being well received and that the focused efforts of our employees are continuing to produce consistent earnings momentum.

Banner's third quarter net interest income before provisioning for loan losses increased to $93.7 million compared to $93.1 million in the preceding quarter and reflecting an increase of $4 billion in average assets increased 80% compared to the same quarter a year earlier. Our reported net interest margin was 4.15% for the quarter ended September 30, 2016, a 5 basis point decrease from 4.20% in the preceding quarter as a result of a reduced amount of accretion income from acquisition accounting loan discounts.

Acquisition accounting including the effects on loan yield and the amortization of deposit premiums added 14 basis points to the reported margin in the third quarter compared to 19 basis points in the second quarter and just 4 basis points in the quarter ended September 30, 2015.

More important, excluding the impact of acquisition accounting, our contractual or normalized net interest margin for the third quarter of 2016 was 4.01%, unchanged from the preceding two quarters but a decline of 9 basis points compared to a year ago. The decline in the margin compared to a year earlier principally reflects the lower average yields excluding the purchase accounting discount on the loans acquired in the American West acquisition as well as proportionately larger size of the securities portfolio following that acquisition.

The favorable comparison to the preceding two quarters continues to reflect remarkable stability in our contractual margin despite continued pressure from low market interest rates. Further, despite the significant changes in the composition of our asset portfolios excluding the effects of purchase accounting, our contractual net interest margin for the first nine months of 2016 was also 4.01%, just 10 basis points lower than the first 9 months of 2015.

Including the impacts of the acquisition accounting, the reported or GAAP margin for the first 9 months of 2016 was 4.16% compared to 4.14% for the same period a year earlier.

Deposit fees and service charges were $12.9 million in the third quarter, a modest increase from $12.1 million in the preceding quarter, but a 33% increase compared to the third quarter of 2015. Year-to-date deposit fees and service charges increased 35% to $37 million. While the year-to-date deposit fees and service charges have been somewhat adversely affected by the conversion activities and certain product changes, the significant increase compared to a year earlier is a direct result of growth in core deposit accounts and related transaction activity reflecting the continued success of our client acquisition strategies as well as the impact of the acquisition.

As noted in the release, mortgage banking revenues were strong at $8.1 million for the third quarter as home purchase activity in our markets remained robust and low long-term interest rates fueled refinance transactions.

Home purchase activity accounted for 65% of our one to four family mortgage loan originations in the quarter. In addition, during the current quarter, we realized $1.4 million of gains on the sale of multi-family loans. These gains related to the loans originated by the specialty origination unit we acquired in the American West merger.

Total non-interest operating expenses was $79.1 million for the third quarter compared to $79.9 million in the preceding quarter and $46.7 million in the second quarter of 2015. As previously noted, acquisition related expenses were $1.7 million in the current quarter compared to $2.4 million in the preceding quarter and $2.2 million in the third quarter a year ago.

Acquisition expenses for the quarter were at the lower end of the range we had previously suggested as a result of cost savings compared to our earlier expectations. We do not expect to incur a material amount of additional acquisition expenses related to either of last year's acquisitions.

For the nine months ended September 30, 2016, total non-interest expenses increased to $243 million compared to $136.3 million for the first nine months of 2015. The year-over-year increase in non-interest expenses are largely attributable to the costs associated with operating the branches and related operations acquired in the American West Bank merger as well as generally increased expenses as a result of organic growth and increased transaction volumes.

Compared to the preceding quarter, the current quarter's non-interest expense also included elevated costs for professional services as a result of seasonal factors relating to accounting, audit, and examination processes, costs in anticipation of enhanced regulatory requirements, and costs associated with sales and registration of restricted shares issued in the American West Bank merger.

Finally, with respect to the income statement, our effective tax rate increased slightly compared to a year ago to 34% principally as a result of proportionately more of our income being subject to California and Oregon tax.

Reflecting our previously-announced strategy to maintain total assets below $10 billion through the end of this year, our total assets decreased slightly to $9.84 billion at September 30, 2016. As a part of this strategy, total securities and interest-bearing cash balances decreased by approximately $141 million as a result of repayments and sales of securities. Proceeds from these securities transactions along with deposit growth in excess in of loan growth were used to reduce [federal] (inaudible) bank advances by $263 million and to repurchase 484,000 shares of common stock which reduced equity by $21.1 million.

As Rick has noted, our total loans increased by $73 million or1% during the quarter with [good] production at targeted loans including meaningful increases in commercial real estate, construction, and development and agricultural business loans. Total loans held for investment were $7.31billion at September 30, an increase of 70% compared to a year earlier.

Seasonal trends in additional account growth resulted in a significant 4% increase in core deposits during the current quarter. As a result, core deposits represented 86% of total deposits at September 30, 2016, and the cost of deposits declined to 14 basis points for the quarter.

Total deposits increased somewhat less as a result of planned reductions in time certificates and broker deposits but at $8.1billion at September 30, 2016, total deposits have increased by 85% compared to 12 months earlier.

Finally, as I noted, we did reduce FHLB advances by $263 million during the quarter as part of our deleveraging strategy and principally as a result of stock repurchase activity, which also was an element of that deleveraging strategy as well as recognition of our cash dividends which were increased 10% to $0.23 per share. Total equity decreased by $7.2 million during the quarter.

Nonetheless, tangible book value per share has increased from $29.64 at December 31, 2015, the first reporting period following the American West Bank acquisition, to $31.14 at September 30, 2016, a 5% increase over that 9-month period.

This concludes my prepared remarks. In summary, Banner had another good quarter and a solid first nine months of 2016 with continued encouraging trends for the future periods. As always, I look forward to your questions.

Mark?

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

We will now begin the question and answer session. (Operator Instructions) Jeff Rulis, D.A. Davidson.

Thanks. Good morning, guys. Just to follow up on the expense line, Lloyd, I guess X merger costs, you're at a base of 77-4. Could you just give us an update on kind of the cost savings progress to date and maybe what additional may be out there to kind of point us to kind of a run rate when all is said and done on the quarterly expense rate?

Well, Jeff, as you noted, 77-4 is pretty close to what we would anticipate as a run rate today. There continue to be opportunities for synergies as a result of the merger and activity will continue around evaluating locations and rationalization opportunities. But candidly, we're also growing and as I noted, we anticipate -- and as we've noted for some period of time, we anticipate some ramp up in expenses principally associated with the $10 billion regulatory requirements that we anticipate going forward. So, I think you're pretty close to a base rate here.

Okay. So the cost savings is largely complete and any synergy you find could be offset by the additions you just referenced?

Yes, I think that's exactly correct. We did -- we have achieved very close to the $37.5 million that we anticipated way back in November of 2014. So, that -- the opportunities have played out pretty much as we expected. The one surprise as I've noted a couple quarters and again this quarter is that the entire cost merger-related expenses were somewhat less than we initially projected.

Got you. Okay. And then just kind of thinking about Q4 and the $10 billion mark, loan growth and sounds like you had some sales and some refis and lower utilization, but I guess is that -- is your behavior any different given the $10 billion mark and are you more selective on loans or is it, again, not really governed by that given the $10 billion mark and in the Q4, I guess the loan pipeline expectations there?

Yes, Jeff, this is Mark. I'll let Rick comment on the pipelines, but clearly we're doing a number of things to manage the balance sheet below $10 billion. I think what you've seen from the numbers in the press release and Rick already noted is the targeted portfolios that we want to grow grew at a 2% rate in the quarter. And obviously, we're allowing the continued reduction in the one to four family portfolio, and we continue to sell into the secondary markets for -- with multi-family. So, obviously, there's balance sheet strategies going on to keep the Company on the liability side below $10 billion, as well, but we still see -- we are encouraged by the current economic climate, specifically in the metro markets in which we operate.

Rick, if you have anything further.

The only thing I would add, Jeff, this is Rick, is that our bankers' pipelines are robust and at levels that are comparable with where they have been in the past, and we see that across the footprint both in the legacy Banner and legacy AWB parts of the Company.

Got it. Maybe just a follow-up then, Mark, and I -- so expectations for 2017, if we're to kind of remove this whole $10 billion discussion and just say core growth, I guess what you're budgeting on a net loan growth in 2017 -- any comments on expectations for the full year post (inaudible)?

Well, let me answer it this way, Jeff. We really haven't changed our thought process. So, if you take the targeted portfolios and you say we're kind of maxing out on the reduction and some of the other portfolios, we're still looking at high single-digit growth rates provided, obviously, that the economy continues to cooperate.

Fair enough. Thank you.

You bet. Have a great day.

Matthew Clark, Piper Jaffray.

Thank you. Good morning. Just on the expenses again, any sense for how much of the professional services were seasonal? Maybe also how much of the legal expenses were tied to the sales and registration of the restricted shares from the American West merger? Just trying to isolate some of that going forward if we can.

Sure. Matthew, this is Lloyd. Good morning. The registration of the shares probably contributed $300,000 to $400,000 to the expense line, and principally that related to sales that occurred by some of those shareholders. So it is interesting to note that a number of those restricted shares have changed hands over the -- principally since April 1 when it became 144 eligible and since we recorded the S-3 at that point in time, registering those shares as well. So there were some delayed cost associated with that, and you know, there were other things. The seasonal aspect we do get into year-end Sarbanes-Oxley testing, year-end audit expenses, some of those things. So professional fees tend to be a little lumpy, but I would caution here that as we've noted, we're going to incur additional fees going forward as a result of the $10 billion particularly preparing for it to become a DFAS compliant bank as well as some additional compensation expense related to that.

Having noted all of that, the efficiency ratio, particularly the adjusted efficiency ratio or the ratio of expenses to average assets both continue to show improving trends, which is what we've indicated all along is that we will grow into this expense base over the next number of quarters. So, again, I think that's the trend.

Jeff asked the question about budget. I think the thing you can anticipate with Banner is that there's a lot of stuff that is just exactly on trend, and the plan is unchanged, which is to continue to grow the Company and grow into that expense base and grow revenue at a faster pace.

Got it. Okay. And then in terms of that step-up in reg spend, I mean, could you argue or would you say that it's kind of already underway or do you feel like there's going to be some step-ups as we get into 2018 when it's official?

Well, it's both. We've indicated it is underway, but we've also made it very clear that there are -- there's going to be expense growth associated with that specific issue of becoming a $10 billion bank and our expectations there have not changed for some period of time. We have started. I think the important point there is that there is much effort underway at the Company today to prepare and ensure that we will be able to comply with all of those regulatory requirements.

Now, let's put that back in perspective that we've laid out before. We'll stay under $10 billion through the end of this year, likely cross it sometime next year, which means that the Durbin Amendment will become effective for us in the second half of 2018. There's a revenue impact of that that we have previously estimated to be about $11 million annual revenue, so that's $5 million to $6 million in the second half of 2018.

And our first DFASed required submission will likely be in 2019, but we're moving forward with building out the skillset and the capacity to be DFAS compliant by the end of next year.

Matthew, this is Mark. Just in reference to the questions to expenses that you and Jeff both had, the Company remains extremely focused on generating positive operating leverage. So, there's two sides to that equation. Obviously, we have to do -- we have to continue to grow revenue and what you've seen over the last couple of quarters is that we have had positive operating leverage and we anticipate that going forward.

Got it. Okay. And then on the buyback, I think somewhat unexpected, can you just update us on your thoughts of what your appetite is like there and whether or not we might see that consistently so long as you have the amount of excess capital that you have?

So -- this is Lloyd again, Matthew. As I noted that buyback, we triggered that. We've had that authorization for a while. We triggered it with a 10(b)(5) filing in the third week of September as part of our deleveraging strategy. We announced a plan to repurchase about 1.3 million shares there, and we're probably at least halfway through that plan to date. What may surprise some people just a little bit is that the effect on average shares outstanding in the quarter was fairly modest for the third quarter. Should be significantly more impact on the fourth quarter this year.

Thank you.

Steve Moss, FBR.

Good morning. Wanted to touch base on the construction lending. You obviously had healthy construction growth this quarter. I heard you guys about the portfolio being diversified, but I was wondering if there are any particular markets that are driving the growth.

Steve, this is Rick. The growth is occurring across the franchise. If you had to say that it was concentrated anywhere, it would be in the major metropolitan markets, particularly Seattle and Portland, but there's also activity in the Boise market, Sacramento, and down in the Southern California market, particularly San Diego.

Okay. And the other thing I was wondering about with regard to the loan loss reserve ratio, obviously it's going to be trending higher here given that purchased loans are rolling off. How should we think about that over the next couple quarters in terms of the ratio?

Well, we don't give definitive guidance on that, but I think we've stated on a number of occasions that we want to keep the combined accounting mark and traditional provision in the 140 to 150 range, and the level of exact provisioning is going to be driven by the level of loan growth, the mix of the growth, any unexpected credit events, and the pace of migration out of the purchase accounting world into the regular provisioning world. I would think that the level that we've seen the last couple of quarters is in the ballpark.

Okay. And another thing with regard to agricultural, and I know it's a relatively smaller part of the portfolio, but I was just wondering if you have any concerns about credit stresses there given lower beef prices and milk prices in recent months?

There is stress in certain aspects of that portfolio. We don't have a major concentration in any particular ag sector, particularly dairy and beef cattle. The one area that I see some stress in is in wheat, particularly dry land wheat, but our exposures there, again, are very modest and don't anticipate any outsized issues to deal with.

Great. Thank you very much.

(Operator Instructions) Jacque Bullen, KBW.

Hey, good morning, guys. Lloyd, I wondered if you could comment on what drove the fair value mark a little higher this quarter.

Sure. The -- it's fairly straightforward. The movement in LIBOR, which trended up by about 20 basis points to 25 basis points as I recall, during the quarter had a direct impact on that mark to market. So, as you've noted before, without any change in rates or spreads, we would anticipate about $300,000 to $350,000 a quarter of mark on the trust preferreds -- net mark on the trust preferred securities, just because of the passage of time, and that's the principal thing that is going through that fair value account. The movement in LIBOR accounts for most of the difference this quarter.

That's helpful. Thank you. And then what was the dollar amount, and I'm sorry if I missed this earlier, of the multi-family loans that were sold in the quarter?

$1.4.

Not the --

The $1.4 was the (inaudible) but the actual number of loans sold I'm not sure I know that.

About 80 million.

Eighty million?

Roughly 80 million.

Okay. And then just one last one. I'm just looking at the variance between end of period balances and average balances in the loan portfolio. Was there any end of quarter runoff or was most of that variance driven by the held for sale portfolio and just fluctuations in there?

Yes. I think they held for sale although as Rick pointed out, in our C&I portfolio, and I'm not sure of exactly the timing, but we had some clients who had success events for the clients that resulted in some pay downs, and I do think some of that result was fairly late in the quarter.

Okay. Great. Thanks, guys. Everything else I had was asked.

We always want clients to pay us back, but it's always painful when they do.

Tim O'Brien, Sandler O'Neill.

Good morning, guys. Hey, Mark, could you give just an update on M&A prospects given the market, the environment we're in, and perhaps maybe geographically?

Yes. Thanks, Tim, and Good morning. I don't have anything particular different to add than I have in the previous quarters. I think there are certainly conversations that are occurring about the difficult operating environment that a lot of institutions are faced with with low interest rates and now with concentration limits becoming an issue in some institutions with commercial real estate, so it's becoming a challenging environment for a number of banks to continue to operate at a high performing level. So the conversations continue, but I don't have anything further to add than what I have in the previous quarters.

What about geographically, like perhaps in California or Oregon? Is -- are there markets you would steer clear from at this point or are you looking to build out in any particular markets if the opportunity arises?

I think all of our markets as we've alluded to in many of our investor presentations are very, very attractive markets. We are certainly seeing California be, as you already know, the sixth highest rated economy in the world. It's -- all of our markets are doing extremely well, and we need additional density, so we're looking to build out in every one of those markets. I'm not going to go to Nevada though. We're not there yet. Does that help, Tim?

It sure does. Thanks. And then just a little update on outlook for mortgage and fee income. I know that there's probably some seasonality to purchase markets, but can you talk a little bit about that?

Sure, Tim. This is Lloyd. Obviously, there's always been seasonality in the mortgage market, but I think if you look at our balance [sheet] you're going to see that we still have a very strong position in loans held for sale. Interest rates continue to be, mortgage rates in particular, continue to be very attractive and make housing affordable. As I noted, there's still refinance activity going on, but 65% of what we did was purchase activity, which is indicative of what Mark and Rick have both said about the strength of markets that we operate in. So I'm optimistic around mortgage as far into the future as I can see, which obviously things can change, but the next few quarters look pretty good again. There will be a natural seasonal slowdown. Most likely you'll see that in the first quarter would be my expectation.

Great. Thanks a lot, guys.

Matthew Clark, Piper Jaffray.

Hey, good morning. Just on the efficiency ratio, I know, Mark, you talked about the goal of generating positive operating leverage, continuing to generate positive operating leverage, and I think you've talked about a range for an efficiency ratio in the 62% to 65% range. I guess what are your thoughts in getting to the lower end of that range? Would it require higher rates or do you think you can get there without it?

First of all, I -- that is kind of the range that we've said that the core operation can operate at and continue to have positive operating leverage, so thank you for reaffirming that range, and on an adjusted basis, we're at 64%. We are not -- we set our business plans based on a status quo business climate, so we're not reliant on rising rates. If we continue to take market share like we have and leverage the acquisition of American West, we will continue to drive down that efficiency ratio as we've done in the last couple of quarters.

Okay. Thank you.

There are no other questions at this time. This concludes our question and answer session. I would like to turn the conference back over to Mark Grescovich for closing remarks.

Thank you, Kate, and thank you, everyone, for your questions, as well.

As I stated, we're pleased with our solid third quarter 2016 performance, and we 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 of my colleagues who are driving the solid performance for our Company. Thank you for your interest in Banner and for joining the call today, and we look forward to reporting our results to you again next quarter.

Have a great day, everyone.

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