Mark Grescovich – President & CEO Rick Barton – Chief Credit Officer Lloyd Baker – EVP & CFO Albert Marshall – Secretary.

Jeff Rulis – D.A. Davidson & Co. Russell Gunther – Macquarie Capital Timothy O’Brien - Sandler O’Neill & Partners Jacquelynne Chimera – Keefe, Bruyette & Woods Don Worthington – Raymond James Tim Coffey – FIG Partners.

Good day and welcome to the Banner Corporation’s Third Quarter 2014 Earnings Conference Call webcast. All participants will be in listen-only mode. (Operator Instructions) Please note that this event is being recorded. I would now like the conference over to Mr. Mark Grescovich, President and CEO. Please go ahead..

Thank you Andrew. And good morning everyone, I would also like to welcome you to the third quarter 2014 earnings call for Banner Corporation. As is customary, joining me on the call today is Rick Barton, our Chief Credit Officer; Lloyd Baker, our Chief Financial Officer; and Albert Marshall, the Secretary of the Corporation.

Albert, would you please read our forward-looking safe harbor statement..

Good morning. Our presentation today discusses Banner's business outlook and will include forward-looking statements.

Those statements include descriptions of management's plans, objectives and goals for future operations, products or services, forecast of financial or other performance measures and statements about Banner's general outlook for economic and other conditions.

We also may make other forward-looking statements in the question-and-answer period following management's discussion. These forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those discussed today.

Information on the risk factors that could cause actual results to differ are available from the earnings press release that was released yesterday and a recently filed Form 10-Q for the quarter ended June ended 30, 2014.

Forward-looking statements are effective only as of the date they are made and Banner assumes no obligation to update information concerning its expectations. Thank you..

Thank you, Al. As announced, Banner Corporation had yet another strong quarter of performance reporting a net profit available to common shareholders of $14.8 million or $0.76 per diluted share for the period ended September 30, 2014.

This compared to a net profit to common shareholders of $0.60 per share for the third quarter of 2013 and $0.88 per share in the second quarter of 2014.

I would like to remind you that earnings in the second quarter included a $9.1 million gain related to the acquisition of our Oregon branches which net of related expenses, added $0.23 per share to earnings. Exclusive of that gain, Banner had earnings of $0.65 per share in the second quarter of 2014.

The third quarter performance continued our positive momentum and further demonstrated that through the hard work of our employees throughout the company, we continue the successful execution of our strategies and priorities to deliver sustainable profitability to Banner and expand our balance sheet with strong organic loan and deposit growth, coupled with opportunistic acquisitions.

Our return to profitability for the last 14 quarters shows convincingly that execution on our strategic plan is effective and we continue building shareholder value. Our operating performance again this quarter was very solid when analyzing our core key metrics.

Our third quarter of 2014 core revenue was a strong $59 million supported by an improved earning asset mix and net interest margin that remained above 4% and actually was 4.07% in the quarter. Also our cost of deposits again decreased in the most recent quarter to 19 basis points compared to 26 basis points in the third quarter of 2013.

Overall this resulted in a solid return on average assets of 1.23% in the quarter.

Our performance this quarter again reflects the value of continued execution on our super community bank strategy that is, reducing our funding costs by re-mixing our deposits away from high priced CDs, growing new client relationships, improving our core funding position and promoting client loyalty and advocacy through our responsive service model.

To that point, our core deposits increased 19% compared to September 30, 2013. Also, our non-interest bearing deposits increased 24% from one year ago. The predominant portion of this balance growth is from the generation of new client relationships and the acquisition of the six new branches previously mentioned.

Our net client growth in these product categories is 74% since December 31, 2009. It’s important to note that the major portion of this growth is organic from our existing branch network. In addition, our loan portfolio expanded 16% from one year ago. In a few moments, Lloyd Baker will discuss our operating performance in more detail.

While we have been effectively executing on our strategies to protect our net interest margins, grow client relationships and deliver sustainable profitability, improving the risk profile of Banner and aggressively managing our troubled assets, also has been a primary focus of the company.

Again this quarter, our quality metrics related to credit reflect a moderate risk profile, and our non-performing assets represent 0.5% of total assets at September 30, 2014.

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 in aggressively managing our problem assets while also increasing the loan portfolio.

Given our successful credit risk management, our reduction in non-performing loans and our moderate risk profile, we did not record a provision for loan losses in the quarter despite our additional loan growth.

Nonetheless, Banner’s coverage of allowance from loan losses to non-performing loans is a strong 376% at September 30, 2014, up significantly from 305% in the third quarter of 2013. Banner’s reserve levels are substantial and our capital position and liquidity remain extremely strong.

At the end of the quarter, our ratio of allowance for loan and lease losses to total loans was 1.95%. Our total capital to risk weighted assets ratio was 16.6%, and our tangible common equity ratio was 12%. In the quarter and throughout the preceding four years, we continue to invest in our franchise.

We continue to add talented commercial and retail banking personnel to our company in all of our markets, and we continue to invest in further developing and integrating all our bankers in the Banner’s proven credit and sales culture.

While these investments have increased our core operating expenses, they are resulting in positive revenue growth, strong customer acquisition, 16% year-over-year growth in the loan portfolio, improving cross-sell ratios and strong deposit fee income.

Further, we’ve received marketplace recognition of our progress in our value proposition as this small business administration made Banner bank the Community Lender of the Year for the Seattle and Spokane District for the second consecutive year.

And Forbes magazine, ranked Banner Corporation as one of the top 50 most trustworthy financial institutions in the United States.

Finally, the successful execution of our organic growth plans and our persistent focus on improving the risk profile of Banner has now resulted in 14 consecutive quarters of profitability and our tangible book value increased nearly 8% to $29.16 per share when compared to September 30, 2013.

Before I will turn the call over to Rick Barton to discuss the trends in our loan portfolio. I wanted to recognize our new colleagues from (inaudible) Bank, an outstanding organization in New Oregon and their clients they will soon be joining banner.

We are extremely pleased with this opportunity to expand our super community bank model in the valley and complement our recent Oregon branch acquisition. I will now turn the call over to Rick.

Rick?.

Thank you, Mark. The same two significant teams again drive my comments this morning about the company’s loan portfolio, credit metrics and loan growth. Banner’s current credit metrics definitely support our objective of maintaining a moderate credit risk profile. And they serve continuing source of strength for the company.

Recoveries on charge-offs loans more than offset the quarter’s loan losses resulting in a net recovery of $21,000 and for the first nine months of 2014 Banner’s net recovery position is $71,000. Total non-performing assets declined another 2% from the linked quarter and are now just one half of 1% of total assets.

Non-performing loan totals were unchanged during the quarter. Orderly liquidation of OREO continues. During the quarter OREO sales reduced, OREO outstanding by q10% and resulted in a net gain of $265,000. And once again no valuation adjustments were recorded. Class V loans in Banner’s portfolio were $75 million versus $78 million at June 30, 2014.

This is a decrease of 3.8%. Class V loans now represent only 1.97% of total loans. Delinquent loans including non-performing loans were down slightly to 0.70% compared to 0.73% in the linked quarter. The allowance for loan and lease losses continue as a source of strength through the company even with no provision for the seventh consecutive quarter.

Coverage of non-performing loans is a strong 376% and the reserve to total loans also is robust at 1.95% even after loan growth during the quarter of $44 million or 1.2%. Having just cited third quarter’s loan growth provides a perfect transition to further discussing the company’s loan growth.

Excluding loans acquired in the southern Oregon branch transaction year-over-year loan totals increased $444 million or 13.6%.

Setting aside the acquired loans the year-over-year and third quarter portfolio growth was organic and occurred cost franchise reflecting an improving economy in the region as well and an optimistic view of the future by borrowers albeit tapered by real political economic events.

The press release details third quarter loan growth by portfolio of segments. Additional comments about this growth include multi-family construction loans increased $9 million or 23% quarter-to-quarter as draw downs continue on existing commitments.

We continue to be very selective in adding new commitments in this portfolio segment giving the multitude and size of new apartment projects in our major markets. Residential construction loans outstanding remain flat during the quarter, despite significant new loan production again demonstrating the vitality of home building in the Northwest.

Markets are imbalanced with low levels of unsold inventory and pay offs are keeping pace with residential construction advances. Residential land loans did increase $16.6 million or 23% from the linked quarter. These new loans are located in major markets with strong demand from new housing and shortages of available building lots..

I will conclude my remarks with the recurring theme that the moderate risk profile of Banner’s loan portfolio along with the company’s strong reserve and capital ratios will allow us to continue executing our strategic plans which include further growth of the company. With that, I’ll turn the stage over to Lloyd for his comments..

Thank you, Rick and good morning everyone.

As Mark has already indicated and as reported in our press release, our third quarter operating results again reflect increased revenue generation driven by significant balance sheet growth, additional client acquisition and compared to both the preceding quarter and the third quarter a year ago improved mortgage banking activity.

This strong performance for the quarter, as well as our nine months year-to-date results continues to demonstrate that our well received value proposition the keenly focused efforts of our employees and the strength of our balance sheet are combining to produce consistent earnings momentum and add to the value of the Banner franchise.

Our net income available to common shareholders was $14.8 million or $0.76 per diluted share in the quarter ended September 30, 2014, compared to $11.7 million or $0.60 per diluted share in the third quarter a year ago and $17 million or $0.88 per diluted share in the second quarter of 2014.

As previously noted, the prior quarter’s results were augmented by $9.1 million bargain purchase gain, related to the acquisition of six branches in Oregon, which net of related expenses and taxes added $0.23 to earnings per share in the second quarter.

In the current quarter there were reductions to some of the expense accruals related to that acquisition which added $0.02 to earnings per share.

The current quarter’s results were also increased by $1.5 million net gain for fair value adjustments related to the changes in the valuation of financial instruments carried at fair value which added another $0.05 to earnings per share in the quarter.

For the nine months ended September 30, 2014, our earnings available to common shareholders increased to $42.4 million, compared to $35 million for the first nine months of 2013. Excluding the bargain purchase gain and related costs and taxes, earnings for the first nine months were $37.6 million.

Compared to the nine months period a year earlier increased net interest income and increased deposit fees and other service charges as well as a favorable variance in fair value adjustments more than offset decreased mortgage banking revenues, a reduction in the net gain on sale of securities and increased operating expenses.

However, as I previously noted, our mortgage banking revenue improved in the third quarter compared to the first two quarters of this year as well as the same quarter a year ago, as our origination of home purchases increased largely as a result of additions to our mortgage loan production staff.

Primarily as a result of significant loan, significant growth in the average loan balances outstanding, our net interest income increased by $3.3 million or 7% compared to the preceding quarter, and by $5.2 million or 12% compared to the third quarter a year ago.

In addition for the seventh consecutive quarter we did not identify a need to reduce net interest income in provision for loan losses there’s nearly all of our credit quality indicators continue to improve.

A strong net interest income coupled with significantly increased deposit fees and the additional rebound and mortgage banking revenues allowed our revenues from core operations to increase to $59 million in the quarter ended September 30, 2014.

Revenues from core operations were 13% greater than the same quarter a year earlier and represented a new quarterly record for Banner. Also reflecting a strong year-over-year loan growth for the nine months period ended September 30, our net interest income increased by $8.1 million were 6.5% compares to the first nine months of 2013.

In addition, deposit fees increased by $2.3 million or nearly 12% for the nine months period. As a result our revenues from core operations increased to 164.8 million for the first nine months of 2014. A 5.4% increase compared to the first nine months of 2013 despite $1.7 million decrease in mortgage banking revenues.

As Mark noted our net interest margins remain strong at 4.07% in the third quarter compared to 4.06% in the second quarter and 4.09% in the third quarter of 2013.

The strength in the margin compared to a year ago is notable in light of the continuing decrease in loan yields which declined by 25 basis points compared to last year's third quarter in largely reflects changes to the mix of earning assets as well as further reductions in our funding cost.

For the first nine months our net interest margin decreased to 4.07% compared to 4.15% for the first nine months of 2013. Importantly none of these periods has been margins or net interest income been augmented in any acquisition accounting yield adjustments.

Our success with clients acquisition strategies have resulted in significant core, deposit and loan growth which is offset much of the declining assets yield pressure, it still remains clear that the low interest rate environment will continue to adversely impact the margin going forward.

Deposit fees and services charges were particularly strong at $8.3 million in the third quarter, 13% increase compared to $7.3 million in the second quarter of 2014 and 19% greater than a year ago.

As I noted before, continuing increase in the fees and services charges are directly result of the success of our client acquisition strategies and resulting growth in core deposits as well as our decision to move our debit card relationship to MasterCard.

However the current quarter also included $560,000 adjustment related to the under-accrual of interchange revenues in prior periods. This adjustment added approximately $0.02 earnings per share for the quarter.

As noted in the press release we have another good quarter for loan production however portfolio grow slowed from the elevated pace in the preceding quarter as certain seasonal factories resulted in expected reductions in commercial and agricultural loan balances.

In addition we had a significant amount of loan prepayments for our one to four family residential loans. Nonetheless, the loan portfolio will increase to just over $3.8 billion and increase of 531 million or 16% compared to the end of the third quarter a year ago.

We also had an expected seasonal increase in deposits balances which ended the quarter at $3.99 billion an increase of 13% compared to year earlier.

Importantly deposit growth continued to be largely centered in transaction and savings accounts including non-interest bearing account which increased by 8% during the quarter and by 24% compared to a year earlier.

Total core deposits which includes non-interest bearing and interest bearing transactions and saving accounts but excludes all certificates of deposit increased by 5% during the quarter and by 19% compared to a year earlier.

As the result, at September 30, 2014, core deposits represented 79% of total deposits reflecting the increase in core deposits, the cost of all deposits decreased to 19 basis points for the quarter ended September 30, 2014 compared to 26 basis points for the same quarter a year earlier.

Of course previously noted growth doesn’t come without a cost and this was again true for Banner as our operating expenses also increased compared to the preceding quarter and the co-responding three and nine month periods a year earlier.

The increase in expenses compared to prior periods is largely attributable to acquisition related costs, and the incremental costs associated with operating the acquired branches as well as generally increase compensation expenses.

However as I noted on last quarter's call we are pleased that the six branches in more than 10,000 new client relationships associated with those branches have been fully integrated in the Banner systems and we remain very optimistic about the prospects for this new market.

We also added substantially increase in the advertising and marketing expense during the quarter. In part result the expansion in the seven Oregon but more generally reflecting certain front loaded cost for some new media campaigns as well as full resumption of our direct mail programs that have been scaled back in the first half of the year.

Well the current quarter advertising and marketing expenses were higher than our expected run rate, the two preceding quarters were considerably below our typical pattern. On a year-to-date basis, advertising and marketing expenses were nearly unchanged compared to the prior year.

This concludes my prepared remarks relative to the financial statements. In summary I think it's fair to say Banner Corporation had a very good third quarter as well as first nine months of 2014 and it's clearly positioned for continued success in future periods. As always I look forward to your questions. Mark..

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

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jeff Rulis from D.A. Davidson. Please go ahead..

Thanks. Good morning guys..

Good morning Jeff..

Maybe a couple of questions for Rick. Do you have the loan origination numbers in Q3 versus Q2 and then it would be a similar question in line utilization for C&I in Q3 versus the prior quarter. .

Okay. I will speak specifically to commercial real estate and residential real estate production numbers for the first nine months of the year, those numbers are just short of $550 million and that compares to about $450 million for the same period last year.

As far as line utilizations on C&I you know they are up marginally from what they were previously and if I looked over a longer period of time, it's a pretty consistent level of utilized commitments in the portfolio. .

Rick when you say - marginally you are saying sequentially versus the prior quarter?.

You know there is some seasonal impact in there but taking that out I would say it's sequential..

Okay, and then you quoted those originations kind of year-to-date year-over-year, any sense of origination volume solely in Q3 versus Q2?.

It basically was flat from Q2 to Q3. .

Okay. So I guess getting to the question is more it really was payoff activity on the net growth figure Q3 versus Q2 and I guess if you could comment any of the three on just expectations for growth and to kind of close the year..

Well I think that the pipeline looks like we will continue to have strong production quarter in the fourth quarter but by the same token, on the residential construction side, we see payoff velocity continuing at a similar rate. So I don't see any meaningful expansion and the loan outstanding to that segment to lift the portfolio.

In the commercial construction loans, I think that it's fair to say that there is going to be drive downs on existing commitments and some new commitments added but we also have a number of transactions that are scheduled for payoffs. So I think on a net basis we will see some expansions in that portfolio segment.

In terms of the commercial real estate portfolio we are continuing to add assets in the [permanent] [Ph] portfolio and I see that trend continuing.

As Lloyd mentioned, we are getting into the seasonal pay-down period both on some of our commercial lines of credit and our [Ag] [ph] credit so we have to factor that into what’s going to be happening with loan outstandings there as well. .

Okay..

Jeff, this is Mark, another way to look at it is the portfolio grew by $44 million, overall loan portfolio, $44 million from quarter to quarter with 30 roughly $31 million of payoffs in the one to four family.

So had that one to four family payoffs not occurred that it would plateau would suggest that the growth pattern is a little bit higher than what actually was reported. .

Okay. All right. That helps. And maybe on the Siuslaw acquisition, maybe an update on timing of close and maybe what you’ve secured in terms of approvals and so I guess question one; and then two, related to it, is any idea of how that I guess 930 balances at Siuslaw compared to at announcement..

Jeff, this is Lloyd. So I am going to take the last one first, their balances were just a little stronger at 930 than they were at announcement date. They had a good third quarter and we continue to feel very optimistic about that transaction as well. Having said that the regulatory approval process is going fine.

We do have to wrestle the schedule around a shareholder meeting for them and whether that gets done late this quarter, or early next quarter is still a little bit up in the air. .

Okay. .

Well, we do have, Jeff, this is Mark, we do have a state and the FDIC approval for the transaction. So things are moving according to plan..

Okay. I appreciate it guys. Thanks..

Thank you..

The next question comes from Russell Gunther from Macquarie. Please go ahead..

Good morning guys. .

Good morning Russell..

Just a question around expenses. You guys gave some good color on what you have been investing in and still done a pretty good job keeping a lid on that.

But as you look out through 2015 in terms of other franchise investment and maybe just adjusting for any noise with the transaction but do you have expectations to be able to work down the efficiency ratio from around this 67% range that’s hovering around absent the benefit of any rate movement..

Russell, this is Lloyd. We have been pretty clear for an extended period of time that our business model and our geography don't lend themselves to an efficiency ratio that will be low by anybody’s standards.

Having said that as we continue to grow revenue and the size of the balance sheet and integrate the Siuslaw acquisition and further integrate the [Southcoast] [ph] branches we would expect to push that number down.

We will continue to focus on managing expenses as effectively as we can and still invest in the franchise and grow revenue at the same time. .

All right. Thank you. That I appreciate it. And then just moving to the margin real quick. You know margin has been remarkably resilient over the course of the year. I am just wondering as you look out in addition to the asset remix you are benefiting, the cost of funds has come down.

So as you look forward, what kind of levers remain on the liability side to kind of help support this margin and in the tight range and it's been or are we kind of at the point where just core asset yield pressure may start to whittle things down from there, just your thoughts looking forward please..

Jeff, excuse me, Russell, this is Lloyd. Those who have been on this call for a number of quarters know that I have been pretty consistent in saying I think the margins are going to go down and Mr. Grescovich and rest of the team have proven me wrong.

Having said that, we had a situation this quarter where yields on loans declined, yields on securities and cash declined, the margins actually went up a basis point in large part because the mix changed to have more loans and fewer securities on a relative basis and also because we continued to grow those non-interest bearing account categories, deposit account categories and reduce the cost of funds.

There is – we are at 79% core deposits today. We’ve set internal targets to get that number above 85% as we continue to move in that direction.

There is still some room for improvement on the funding side but as I’ve said for a long time, low interest rate environment and we seem to be stuck in that low interest rate environment there will be ongoing pressure on asset yield and our loan to deposit ratio is currently 95% so changing the mix there that way gets more and more difficult.

But if we continue to grow and continue to have the success we have had, and I would be remiss if I didn’t compliment our bankers on the success they have had at maintaining asset yields in this very challenging market and rate environment.

But I still believe that without an adjustment in interest rates at some point in time that margins is going to drift a little lower. Your point is really valid. It’s been exceptionally well performed over a number of quarters now and we couldn’t be more pleased about that..

All right. Thanks Lloyd. Thanks guys for taking my questions..

Russell, this is Mark, let me just add one additional comment to that is you asked what are the leverages are, we outlined our strategic priorities last year to the investment community and suggested that protecting our net interest margin was one of our top priorities.

79% core deposits funding, we need to be 85% so we need to continue the client acquisition on the deposit front to help protect that net interest margin but to Lloyd's point, it will drift lower in a prolonged low interest environment..

Thanks Mark..

The next question comes from Timothy O’Brien from Sandler O’Neill & Partners. Please go ahead..

Good morning. .

Hey Lloyd can you clarify so is it kind of a jump of 50/50 proposition that the deal closes this quarter versus next quarter..

Yes I think that’s fair..

And there are no other regulatory approvals needed right, you don't need Fed, it's just FDIC and the state are done so it's just a matter of getting shareholder approval now on the other side?.

That’s right which of course involves getting documents prepared and approved by the SCC for that and then the approval process and then you know as we get close to the end of the year, it becomes more challenging. .

Got it.

Would you guys like to see the deal close before the end of the year?.

Of course we would. Of course we would like to but what we like to do regardless of when it closes..

And you know anything pushing it off in the early next quarter is not material financially what we want to make sure of is that we do it correctly and that’s the most important thing..

That makes great sense.

And then another question, on the mortgage banking a couple of questions in the P&O side, mortgage banking income $2.8 million, can you characterize that given – you guys are going to get any benefit from mortgage way up for it sounds like from last week and this week and lot of people locked you guys are getting any benefit from that?.

Well we certainly should get some benefit from that although the nature of the production has changed significantly to purchase activity away from refinance. But the most recent decline in mortgage rates if it holds is we will add some additional refinance volume.

I think the main thing there is that we have added we have a group of securities as well as our issued debenture that we carried on fair value for well for eight years or something like that now.

And included in that group of securities was – were some trust preferred CDOs, Obligations structured transactions and for the second quarter in a row we were carrying those at about $0.78 on the dollar for the second quarter in a row, they were auctions of the underlying collateral which are resulting in us receiving $1 on the dollar.

So that happened at the end of the second quarter and again at the end of the third quarter. Unfortunately we don't have a lot expectations that that’s going to continue going forward and that contributed about $2.2 million gain in fair value for that one block of securities in the current quarter.

So as you can see then other things move the other direction, principally as we have said for a long time the debentures which are marked down well will continue with passage of time to go up to the par now that’s over still remaining 20 years roughly and that would also equal you would expect about $300,000 - $350,000 charge in that outline and then it depends on what ends with interest rates on the rest of it..

Okay.

So I know last quarter there was the change in the discount rate to 5% so none of that happened this quarter with all just that happened?.

Yes, that’s correct..

Okay.

And as of remaining securities that you have in the portfolio do those continue to be held at $0.78?.

The remaining CDO does. We also have a few single issuer trust preferred.

They are carried at value that’s cost to that maybe a little bit less they value exactly the way we value our junior subordinated debentures and then they are still residual of mortgage back securities and some other securities in there which would be much closer to par base in fact many of them will carried at a premium because of they have been on the books for a long time and interest rates are so low right now.

.

Okay. So essentially that lined items should be fairly steady absent other transactions like this which are unpredictable and then absent the potential for the discount rate to change once again..

That’s correct..

Okay.

And then on the interchange income, you mentioned that’s the accrual was based on prior period, how many prior periods is that from?.

From whenever we started issuing debit cards so it built over an extended period of time that we in the process of implementing the MasterCard there was some changes in the procedures and we recognized that we essentially had a missing month of accrual. .

Okay. So it's go forward impact of the change in the process would be.

That’s correct. It should be nothing. The go forward impact is that we will continue to issue more debit cards as we increase clients and we will benefit marginally from the change to MasterCard in terms of the fee structure there. .

Okay. Thank you that’s helpful. And then just one last one, I for you, first I looked out over the last call maybe two years or so your recoveries almost matched charge off what kind of pool do you have left I know you can get guidance or anything but I guess do you think this is a sustainable over the next couple of quarters.

Is it possibility that it's sustainable?.

Well as everyone well know there was a substantial pool of charge-offs that we had during the great recession and our special assets people continued to mine those for recoveries. We have got an obviously a lot of the lower hanging proved behind us but there are still potential areas that we can get some recoveries out of..

Okay.

And if I look at the gross charge-offs, are there – how much of that is related to legacy substandard loans and how much of it is related to just new generation within last four years or so?.

There is an element that can be traced back to legacy loans but I think what we are seeing now is normal charge-offs pattern..

Okay. Great. That’s good color. Thank you very much..

Thank you Jacquelynne..

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

Good morning everyone. .

Morning Don. .

In terms of the acquisition related cost Lloyd you mentioned that there was I guess some sort of adjustment to the accrual that resulted in a reduction and expense in the quarter.

Are there more acquisitions cost that you would expect say over the next couple of quarters related to the pending acquisition?.

Yes absolutely related to the pending acquisition the adjustment related to the accrued expenses relative to the branch acquisition in southern Oregon where we had overestimated some expenses and as we work to the transaction, we were little more efficient that we had hoped for when we close the books 90 days earlier.

There will be normal meaningful expenses related to the silence acquisition that should impact the fourth quarter as well as the first quarter of 2015. .

Okay. Thank you.

And then just any general commentary on the M&A outlook in the region spread, changes from last quarter and kind of what your thoughts are there on additional merger activity?.

Hey Don, this is Mark. I don't think it's changed substantially from last quarter. I think they are still quite a bit of excitement around some combinations that are occurring obviously with the one we announced and I think you will see continued progress on some smaller acquisition occurring over time. .

Okay. Thank you..

The next question comes from Tim Coffey of FIG Partners. Please go ahead..

Thanks. Good morning gentlemen. .

Morning Tim..

Hey talked about earlier in the Q&A about the improvement and earning asset mix more loans, more securities, or more loans, less securities. Now that rather consistent for last seven quarters or so.

Do you see more ability to improve the mix going forward?.

We do to the extent that we continue to grow deposits and fund loans with those deposits. We have had a fairly stable size securities and cash equivalents portfolio for a long period of time but we have been growing the long book and so on a relative basis it goes down.

At some point in time, I guess if we grew deposits successive we would end up with the need to invest in securities again but right now as Rick pointed out earlier loan demand continues to be reasonably robust and we are optimistic that that mix continue to change slightly on the other hand we are at as I mentioned 95% loan to deposit ratio which is the top end of our comfort level.

.

Right. Right.

So flat interest rate environment, growth and spread income then it's likely to come from overall balance sheet growth, right?.

Absolutely. Absolutely. We are not optimistic about the margin widening..

As I have noticed last several quarter.

Yes despite being wrong in the past, I am thinking about it. .

Hold that against you.

So the balance sheet grow mark any expenses you know obviously going forward start to rise?.

You know potentially but I think our program is – has been pretty stable with the level that’s been at for a number of years and entail the footprint expands dramatically I don't know why it would go up a lot. .

Okay.

Feel pretty good about kind of the pipeline for customer acquisition then?.

Yes. We continue to do well in terms of client acquisition. There is no doubt about that. .

Okay. All right. Those are my questions. Thank you..

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

Thank you Andrew.

As I stated we are very pleased with our strong third quarter performance and the reinforcing 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 as evidenced by our extending balance sheet, strengthening our deposit franchise improving our core operating performance, and maintaining our moderate risk profile.

I would like to thank all my colleagues who are driving this solid performance for our company..

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