Banner Corp (BANR) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Banner Corporation's Second Quarter 2018 Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. At this time, I would like to turn the conference over to Mark Grescovich, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Denise, and good morning, everyone. I would also like to welcome you to the Second Quarter 2018 Earnings Call for Banner Corporation. Joining me on the call today is Rick Barton, our Chief Credit Officer; Peter Conner, our Chief Financial Officer; and Albert Marshall, the Secretary of the Corporation. Albert, would you please read our forward-looking safe harbor statement?

Thank you. Good morning, our presentation today discusses Banner's business outlook and will include forward-looking statements. Those statements include descriptions of management's plans, objectives or goals for future operations, products or services, forecast of financial or other performance measures and statements about Banner's general outlook for economic and other conditions, as well as statements concerning the merger announcement with Skagit Bancorp, Inc.

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 press releases that were released yesterday and a recently filed Form 10-Q for the quarter-ended March 31, 2018. 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, Mark.

Thank you, Al. As announced, Banner Corporation reported a net profit available to common shareholders of $32.4 million or $1 per diluted share for the quarter ended June 30, 2018. This compared to a net profit to common shareholders of $0.89 per share for the first quarter of 2018 and $0.77 per share in the second quarter of 2017.

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 24% to $32.2 million for the second quarter of 2018 from $25.9 million in the second quarter of 2017. Because of the hard work of our employees throughout the company, we are successfully executing on our strategies and priorities to deliver sustainable profitability and revenue growth to Banner.

Our core operating performance continued to reflect the success of our proven client acquisition strategies, which are producing strong core revenue. We are benefiting from the successful integration of our acquisitions, which has had a dramatic impact on the scale and reach of the company and are providing a great opportunity for revenue growth.

Our second quarter 2018 performance clearly demonstrates that our strategic plan is effective, and we continue building shareholder value. Second quarter 2018 core revenue was $126 million, an increase of 4% compared to the second quarter of 2017. We benefited from a larger and improved earning asset mix, a net interest margin that remained above 4% and good deposit fee revenue. Overall, this resulted in a return on average assets of 1.25% for the second quarter of 2018.

Once again, our performance this quarter reflects continued execution on our super community bank strategy that is, growing new client relationships, adding to 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, excluding the impact of the sale of the Utah operations, our non-interest bearing deposits increased 7% from one year ago, representing 39% of total deposits. Further, we continued our strong organic generation of new client relationships and it continues at approximately a 9% compounded annual rate since the end of 2009.

Reflective of this solid performance, coupled with our strong tangible common equity ratio of 9.79%, we issued a core dividend in the quarter of $0.35 per share and a special dividend of $0.50 per share.

In a few moments, Peter Conner will discuss the operating performance of our company 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.

As expected, due to the addition of new loans and the migration of acquired loans out of the discounted loan portfolio, we recorded a $2 million provision for loan losses during the second quarter. At the end of the quarter, our ratio of allowance for loan and lease losses to total loans was 1.22%, and our total nonperforming assets totaled 0.16%. 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 8 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. We also have made and are continuing to make significant investments in our risk management infrastructure and our delivery platform, positioning the company for continued growth and scale.

While these investments have increased our core operating expenses, they have resulted in core revenue growth, strong customer acquisition, year-over-year growth in the loan portfolio and strong deposit fee income. Further, as I've noted before, we have received marketplace recognition of our progress in our value proposition, as J.D. Power and Associates ranked Banner the #1 bank in the Northwest for client satisfaction, the third year we have won this award. The Small Business Administration named Banner Bank, Community Lender of the Year for the Seattle and Spokane district for 2 consecutive years. And this year, named Banner Bank Regional Lender of the Year for the third consecutive year. And Bankrate.com and Money Magazine named Banner Bank the Best Regional Bank in America. Also, Banner ranked 35 out of 100 in the Forbes 2018 Best Banks in America.

Before I turn the call over to Rick Barton to discuss the trends in our loan portfolio, I want to recognize our new colleagues from Skagit Bank, an outstanding 60-year-old organization in the North Sound region of the Pacific Northwest and their clients that will soon be joining Banner. We're extremely pleased with this opportunity to expand our super community bank model and enhance our density in the Seattle and I-5 corridor.

Further, we are thrilled that Cheryl Bishop, Skagit's Chief Executive Officer, will be joining Banner's board of directors.

I will now turn the call over to Rick Barton to discuss the trends in the loan portfolio. Rick.

Thanks, Mark. As shown in our second quarter press release, and noted earlier by Mark, certain aspects of Banner's credit metrics showed further improvement during the quarter. This improvement was driven by the successful resolution of several commercial and agricultural problem loans. Bottom line, Banner's credit metrics remain very well positioned to deal with the next credit cycle and/or the portfolio impacts of tariff increases on international trade.

My brief remarks this morning, as usual, will highlight the continuing moderate risk profile of the company's loan portfolio.

Delinquent loans decreased 27 basis points from the linked quarter to 0.29% of total loans and compares to delinquencies of 0.44% 1 year ago. This pattern of change is normal when total delinquent loans are at their current low level. During the just completed quarter, the improvement was magnified by the problem loan resolutions just mentioned. The company's level of adversely classified assets decreased 14% during the quarter, reflecting problem loan resolution, positive economic activity in our footprint and continuing strong borrower performance.

Nonperforming assets decreased 7 basis points from the linked quarter to 0.16% of total assets. This metric at June 30, 2017 was 0.24%. Nonperforming assets were split between nonperforming loans of $15 million and REO and other assets of $1 million. Not reflected in these totals are the remaining nonperforming loans of $10 million acquired from Siuslaw and AmericanWest banks, which are not reportable under purchase accounting rules. 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 26 basis points.

For the quarter, the company recorded net loan charge-offs of $332,000. Gross charge-offs for the quarter were $1.2 million. We still consider charge-offs at this level to be low when compared to historical norms. Also to be noted is the lower recovery level during the second quarter of 2018.

After a second quarter provision of $2 million and net loan losses of $332,000, the allowance for loan and lease losses for the company totals $93.8 million and is 1.22% of total loans, unchanged from the linked quarter. For the quarter ending June 30, 2017, this measure was 1.17%.

Coverage of nonperforming loans jumped to a very robust 613%. The remaining net accounting mark against acquired loans is $18.2 million, which provides an additional level of protection against loan losses.

During the second quarter of 2018, total loans receivable increased by $129 million, or 1.7% when compared to the linked quarter. On an annualized basis, this is a 6.8% rate of growth. The drivers behind this increase were residential construction, commercial business, production agriculture and commercial real estate loans.

It is also important to note that C&I loan growth occurred across our footprint at an annualized rate of 4.6% during the quarter. While increasing, all sectors within Banner's construction loan portfolios remain at acceptable concentration levels. Residential construction exposure, including land loans, is 8.4%. When both multi-family and commercial construction loans are added into this calculation, our construction exposure is 12.5% of total loans.

Lease-up activity on our multifamily construction loans has not changed in the last 90 days, with these loans paying off in a timely manner. However, we are continuing to observe moderation in the growth of multifamily rents and higher vacancy rates in the luxury apartment market as new projects in this segment are completed. And the markets in which we make residential construction loans remain either undersupplied or in balance, resulting in timely absorption and manageable levels of completed inventory.

As I said at the outset of my remarks, credit remains stable at Banner, which further solidified the moderate risk profile of our loan portfolios and positions us well for the future. With that said, I will pass the microphone to Peter Conner for his comments. Peter?

Thank you, Rick. As discussed previously, and as announced in our earnings release, we reported net income of $32.4 million or $1.00 per share for the second quarter, up from $28.8 million or $0.89 per share in the prior quarter. The $0.11 per share increase from the prior quarter was due to the following items: net interest income increased $0.18 due to a 4 basis point increase in the margin, combined with a $330 million increase in average earning assets.

Noninterest income was flat to the prior quarter, as the decline in the gain on securities carried at fair value in the first quarter were offset by gains on the same of former bank properties acquired through acquisitions in the second quarter, along with increased deposit fee income. Noninterest expense increased $0.04 due to increases in personnel and loan production related expenses. Income tax expense increased $0.03 per share.

Turning to the balance sheet, ending assets increased $62 million from the end of the first quarter to $10.4 billion at the end of the second quarter as a result of growth in held-for-portfolio loans, partially offset from a decline in loans held for sale at the end of the second quarter. The ending investment portfolio balances, including interest-bearing deposits, remained flat to the prior quarter end as the entirety of the bank's releveraging was completed by the end of the first quarter.

Total loans increased $66 million from the prior quarter end as a result of $129 million in growth in the held-for-portfolio loans, partially offset by a $63 million decline in held-for-sale loans due to sales of multi-family loans in the month of June. Growth in the held-for-portfolio loans was diversified across commercial real estate, C&I, construction, agriculture, first lien mortgage and consumer loan types.

On an annual basis, compared to the second quarter a year ago, portfolio loans grew $133 million. The growth in held-for-portfolio loans was impacted by the sale of $254 million of loans with the Utah operations last year.

Ending core deposits declined $146 million or 1.9%, compared to the prior quarter due to typical seasonal declines in deposit balances, driven by tax payments and outflows of certain large commercial client related deposits that came in during the first quarter. The company historically experiences seasonal growth in the first quarter core deposit balances, followed by a decline in April and May due to tax payments and then a steady increase in balances in the third and fourth quarter.

On an annual basis, core deposits grew $102 million, or 1.4% from the prior year quarter end. The growth in core deposits was impacted by the sale of $160 million in deposits with the Utah operations in the fourth quarter of last year.

Time deposits increased $130 million in the second quarter due to increases in brokerage CDs.

Turning to the income statement, net interest income increased $5.7 million from the prior quarter due to an increase in the net interest margin driven by increases in loan and security portfolio yields and growth in both average securities and loan balances. Loan yields increased 17 basis points to 5.15% in the second quarter from 4.98% in the first quarter. Acquired loan interest accretion accounted for 9 basis points of the loan yield in the second quarter, compared to 11 basis points in the previous quarter.

Improvement in loan yields were the result of repricing of contractual loan yields on the existing loan portfolio, along with higher yields on new loan production across the yield curve. 6 basis points of the loan yield increase in the second quarter was related to loan workout related interest recoveries.

The total cost of deposits in the second quarter was 20 basis points, up 4 basis points from the prior quarter, primarily the result of shifting the bank's wholesale funding mix away from FHLB borrowings and into brokered CDs. While brokered CDs carry a substantially higher interest rate in the bank's retail CDs, they have been and continue to be less costly than equivalent term FHLB borrowings. The increase in brokered CDs accounted for 2 basis points of the increase in the overall cost of deposits in the second quarter.

The net interest margin increased 4 basis points to 4.39%. The effect of purchase accounting, principally loan accretion, accounted for 7 basis points of the net interest margin in the second quarter compared to 8 basis points in the previous quarter.

Noninterest income was flat to the prior quarter. The current quarter included $2.1 million of gains on the sales of bank branch and administrative properties, while the prior quarter included a $3.3 million gain on certain securities held for trading. Deposit fee generation was solid, with continued growth in deposit account service charges and interchange income.

Total mortgage banking income declined modestly due to lower premiums on multi-family loans in the second quarter. Income on residential mortgage sales was up modestly due to an increase in purchase related mortgage loan sales, which more than offset a decline in refinance volume.

Noninterest expenses increased by $900,000 in the second quarter from the previous quarter. Personnel expenses increased $1.4 million due to the impact of annual merit increases and elevated medical claims expense.

Miscellaneous expenses increased $1.4 million due to increases in loan production and employee travel and training related costs. Real estate operations expense decreased $800,000 due to gains and expense recoveries on non-performing asset workouts. Professional services declined $600,000 as the company completed the build-out of its risk management infrastructure and concluded the related outside consulting engagements.

Finally, we are excited about the Skagit Bank acquisition, the addition of Skagit Bank team, the positive impact they will have on Banner's presence in the North Sound region, the opportunity to leverage the investments we have made to the company's risk and support infrastructure over the last two years, and the enhancements to the company's already low-cost core deposit base.

This concludes my prepared remarks. Mark?

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

(Operator Instructions) And your first question today will be from Jeff Rulis of D.A. Davidson.

Thanks, good morning. I guess a couple of questions on -- well, pertaining to the margin. You guys keeping deposit costs pretty well in check relative to peers. I guess the first part of that is kind of what you're seeing in the market and do you think you could have continued success keeping those down? And then maybe just a second question on the margin outlook from here. Thanks.

Sure, Jeff. This is Peter. And so in terms of your first question on deposit costs, as I mentioned in my prepared remarks, a good portion of the increase in our cost to deposit in the second quarter was due to the fact that we shifted some of our typical wholesale funding into brokered CDs this quarter instead of using FHLB. The FHLB is running about 20 basis points higher than brokered CDs and we also get the benefit of extending our duration a bit by going out to 6 and 12 months on the brokered CD curve. So they cause a 2 basis point increase in our cost of deposits in the second quarter. That being said, we did see some modest increase in the remaining deposit portfolio, principally in the money market and savings account categories. We are seeing the green sheets of increased deposit competition and it continued to increase from the first quarter to the second quarter and we continue to be very tactical about responding to who we consider true bank competitors and focus on retaining our existing deposits while continuing to grow through our account acquisition model and maintaining our noninterest bearing core deposit base.

And the thoughts on margin I guess going forward, kind of what you saw this quarter as the outlook.

Yes, so the growth in the margin this quarter, it was caused and driven by a substantial increase in our loan yields, our contractual loan yields. And as we've discussed previously, our loan portfolio mix is 30% floating tied to prime or LIBOR, 30% tied to an adjustable rate between 3 months and 5 years. And the remaining portfolio is 40% is fixed. And so we're benefitting from the change in Fed funds and to a lesser extent, the increase in the 5 and 10-year part of the yield curve over the last 6 months. And so our loan portfolio continues to reprice faster than our cost of deposits.

As we go forward into the third quarter, we typically experience an increase in our core deposit base, so we would anticipate somewhat less reliance on our wholesale funding sources in the third quarter than we did in the second quarter, which will have some positive tailwinds to our margin. So that being said, we did experience an increase in our core margin excluding loan accretion in the second quarter and we'd anticipate that level of margin would be -- it would continue at the current pace from the second quarter into the third quarter. But we wouldn't anticipate any substantial continuing improvement in the margin as the cost to deposit will continue to move up. And we continue to see continued pressure in the commercial loan market for CRE loans especially in terms of pricing.

And just two quick ones on the Skagit deal. I guess within the Q4 closing does it look like kind of an early quarter or kind of within the quarter? And then do you have a preliminary goodwill estimate?

We would anticipate closing towards the middle or end of the fourth quarter. Obviously subject to regulatory approvals, but our anticipation would be the mid to the end of the fourth quarter.

We do not have an exact number for you, Jeff, on goodwill. I think you can deduce what that number would be through disclosures on the marks in the loan book and the core deposit intangible. We did announce obviously the dilution of 3% on day one in terms of EPS and 4% accretion in the first full year of the acquisition.

The next question will be from Tyler Stafford of Stephens Inc.

This is actually Gordon McGuire on for Tyler this morning. So I just wanted to start on the loan growth. Definitely an improvement from the first quarter, but year-to-date it's still coming in below your -- I think you had mentioned a high single-digit expectation. Can you discuss what you're seeing? Are you seeing accelerated payoffs that are impacting the growth? And do you still think you can achieve high single-digits for the year?

Gordon, this is Rick Barton. Recalling in the first year -- our first quarter of the year, we had some very heavy payoffs in the CRE portfolio, which muted loan growth in that quarter. I think that we are seeing in the second quarter a pickup in activity. The loan payoffs were down from what they were in the first quarter. And in looking at our pipelines whether they be commercial C&I pipelines or commercial real estate pipelines, they're very full and we look forward to being able to generate loan growth in the mid to high single-digit range.

Then just turning to Skagit, do you have an anticipated conversion date in mind right now? And how should we be thinking about the timing of the cost saves?

This is Peter. So right now we're targeting the first quarter of 2019, likely in February. In terms of the cost saves, we'd anticipate about approximately -- we'd see about 25% to 30% of them in the first quarter with the remaining cost saves -- the first quarter of the closing, with the remaining of the cost saves achieved in the first two quarters of '19. So fully phased -- in other words all the cost saves will be fully phased in by the phased in by the second quarter of 2019.

And then did the discussions with Skagit impact your ability to buy back stock in 2Q? And how should we be thinking about capital distribution for the remainder of the year?

Gordon, this is Mark. Clearly the negotiations and conversations we had would put us in a blackout period. So that clearly, since we didn't have program in place, would have restricted the amount of repurchase activity we could do. I think I'll ask Peter to comment on capital deployment going forward.

Yes, as we've guided to previously, we're targeting a mid-9 TCE ratio and we anticipate with the acquisition of Skagit we'll be right in that range at the end of this year. So we don't foresee a need to do any further capital deployment obviously between now and year end as Skagit's absorb some of that remaining capital.

Obviously going forward into '19, we'll continue to evaluate the deployment of our excess capital over and above our 40% shareholder payout ratio in the form of, again, either special dividends or share repurchases in '19.

(Operator Instructions) The next question will come from Tim Coffey of FIG Partners.

Mark, I had a question for you around kind of the M&A strategy going forward. Obviously it's been a while since you completed a deal and now here you are with Skagit. And I'm wondering is this is the start of kind of a -- are you in the mood to, or in the frame of mind to start looking at more M&A deals now?

Yes, Tim. Thank you for the question. I don't think our strategy has changed in particular from where it's been. Recognizing that our stock price was not in a position to aggressively bid on auction transactions, the types of deals that we've done historically that added economic benefit to our shareholders really resulted in negotiated transactions and which would provide additional density to our footprint and a strong core deposit franchise. So Skagit fits right in that wheelhouse.

As we've said before, crossing the $10 billion threshold, we needed to augment our organic growth with some modest acquisitions and Skagit certainly hits every single one of those triggers that we've been discussing over the last several quarters, which is a strong core deposit franchise, a very strong franchise being 60 years old, and providing significant density for us specifically in the North Sound region of the Puget Sound. So it hit every one of those categories and the economics are clearly accretive to the organization as well.

So looking forward into the future, our strategy has not changed. It will look very similar to what we've been looking for in the past.

And then you've sold the Utah operations, but you still have some other footings that are outside kind of your core markets. Have you thought about trimming those back or adding to them or is it still kind of a -- are you still evaluating?

I think, Tim, if you look at some of the things that are outside the core footprint, they're de minimis and they really are associated with our client base that's actually in our footprint or relationships that we have. So I would characterize those footings as de minimis to the overall organization. It's certainly not going to be a focus going forward, but there's no reason to jettison them from the balance sheet.

The next question will be from Matthew Clark of Piper Jaffrey. Please go ahead.

Wondered if this deal impacts your longer-term efficiency ratio target range of 62% to 65%? And when you think you might be able to achieve that if not do a little better?

Matthew, this is Peter. So we continue to maintain our guidance of targeting the low 60% range and efficiency ratio. This acquisition will help accelerate our process in achieving that -- in achieving that target. The company, as we said before, doesn't need to rely on a low efficiency ratio to improve its ROA and bring that ROA target up towards the top quartile of our peer banks over time because of the fee income we generate in our deposit business and mortgage businesses.

Let me just add to that, Matthew. Once again there's two sides to that ratio. The revenue side and one of the issues that we've indicated in the past, our primary goals are to protect our net interest margin. Adding what is 96% of their deposit base's core of the roughly $800 million in deposits, that being core, it's going to go a long way for us to protect our net interest margin going forward, which clearly will help the revenue.

And then on the net interest margin, the core margin excluding purchase accounting accretion, that 433, I guess can you quantify any, I guess how much in kind of loan fees might have been in there that might move around or be lumpy tied to the construction business from first to second?

So if we talk just about the loan yield by itself, not the margin, 6 basis points of the increase in the loan yields between Q1 and Q2 were related to interest recoveries on loan or [CAT] related activities. And so that was a bit higher than we normally experience. And so I would characterize that as something that we wouldn't typically expect it recur every quarter.

Regarding your question on the construction side, we actually this quarter the loan growth and the loan production was much more diversified across all of our loan categories, including construction, than it was in the first quarter where we had a bit more weighting towards construction production, which influenced the amount of deferred fee income that was going into the loan yield. This quarter there was less of an impact overall on the deferred fee income component from construction loans because of the diversification of our production in the second quarter. So I'd characterize it as a run rate in the second quarter, nothing unusual.

And then last one from me, just wondering if you have any interest in acquiring branches with deposits should they come up for sale.

Matthew, this is Mark. Obviously that would fit nicely with our strategy of growing core deposits as long as those branches or whatever divestiture that was occurring within a different organization provided density for our operation in which we could leverage it.

And the next question will be from Jackie Bohlen of KBW. Please go ahead.

Mark, just as a follow-up kind of on the construction, has the velocity of the portfolio changed at all between the second quarter and the first quarter? And is that impacting the loan yields at all?

Jackie, this is Rick Barton. The velocity is very consistent between the two quarters, both in terms of the pace of production and the payoff rate of homes as they're completed. It will continue to be a little bit lumpy when you look at the commercial side and you see some of the larger projects be completed and be refinanced into a permanent status, so there will be that phenomenon from time to time as we go forward with that portion of the portfolio.

And then just my last one. Most everything I have has been asked and answered. But Rick, just in terms of the various markets that you're operating in, are you seeing any pockets of weakness in any portfolios? Not maybe your portfolios, but just what you're lending into and maybe it's reduced your appetite for certain markets or certain categories?

Probably the two that come to mind immediately are the [luxury] segment of the multi-family market. We're seeing a slowdown, if not a stop, in the growth of rents, particularly in Portland and in some pockets of Seattle. And we're seeing rental concessions being offered in those markets. So that's always a sign that you want to be cautious about adding additional exposures. And there are some categories of retail that we continue to look at very closely before we consider adding loans to the portfolio.

And is the -- the retail I'm guessing is just broadly across your footprint?

Yes, that's correct. And I might add also that healthcare is another segment that we pay close attention to in adding exposure to the portfolio.

And is that a new attention that you're paying or is it consistent from the past?

It's consistent with the past. We've had our eye on that for quite some time.

And the next question will be from Don Worthington of Raymond James. Please go ahead.

In terms of mortgage banking operations, what's your outlook there? Maybe on the multi-family sales and just in general mortgage banking revenue.

This is Peter. So in the second quarter we actually saw a substantial increase in mortgage loan production. It was actually up 27% from the first quarter and that's typical as we go into the second quarter with the seasonal increases we expect. We continue to do very well on the purchase volume, despite the fall off in refi volume, our production numbers continue to remain solid.

The one change that we saw between the first and second quarters is that we portfolio-ed a larger percentage of the mortgage production onto balance sheet this quarter. So we actually sold about the same total line of loans between Q1 and Q2, however we increased the total production and that different went onto balance sheet.

In terms of a gain on sale, we continue to see no diminishment in the gain on sale we're getting on loans that are being sold on the residential mortgage side. That continues to remain robust.

The question around multi-family, we did see a bit of a fall off on both production and gain on sale in the multi-family business in the second quarter. However, on a year-to-date basis, and in terms of our expectations for the full year, we still expect that business to generate between $300 million and $350 million a year in production with a net gain on sales between 80 to 90 basis points. So we haven't changed our outlook on that business, we just -- we did see a bit of a slowdown relative to the first quarter in terms of production, but no change for our expectation on a full year basis with that business.

And then just curious in terms of how the Southern California operation is performing, say relative to your other markets in terms of loan growth and profitability.

It's been very consistent. We have between $700 million and $800 million in both loan and deposit balances in the Southern California franchise. And as we said earlier, they continue to respond well to the Banner product site. They were all former American West locations and so when you look at the deposit growth on their baselines, they've actually been at the same or better than the legacy Banner markets in terms of account acquisition and deposit growth.

And we see very consistent level of loan growth out of those operations, so with the rest of the organization. So it continues to be a very vibrant economy we've got a great banking team down there and we're very happy with it.

And ladies and gentlemen, that will conclude the question-and-answer session. I would like to hand the conference back over to Mark Grescovich for his closing remarks.

Thanks, Denise. As I stated, we're very pleased with our solid second quarter 2018 performance and see it as evidence that we're making substantial and sustainable progress on our disciplined strategic plan to build shareholder value by executing on our super community bank model by growing market share, strengthening our deposit franchise, improving our core operating performance, maintaining a moderate risk profile and prudently deploying excess capital. I would like to thank all my colleagues who are driving this solid performance for our company. Thank you for your interest in Banner and for joining our call today. We look forward to reporting our results to you again next quarter. Have a great day, everyone.

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.