Mark Grescovich - President and CEO Albert Marshall - Secretary Rick Barton - Chief Credit Officer Lloyd Baker - CFO.

Jeff Rulis - D.A. Davidson & Co. Tim O'Brien - Sandler O'Neill & Partners Russell Gunther - Macquarie Research Jackie Chimera - Keefe, Bruyette & Woods, Inc. Don Worthington - Raymond James & Associates, Inc..

Good morning and welcome to the Banner Corporation fourth-quarter 2014 conference call and webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mark Grescovich, President and CEO. Please go ahead, sir..

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

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

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

Those statements include descriptions of Management's plans, objectives or goals for future operations, products or services, forecasted 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 certainties 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 September 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 another strong quarter of performance, reporting a net profit available to common shareholders of $12.2 million, or $0.63 per share, for the quarter ended December 31, 2014.

This compared to a net profit to common shareholders of $0.76 per share for the third quarter of 2014 and $0.60 per share in the fourth quarter of 2013. The most recent fourth-quarter results were impacted by acquisition related expenses which, net of taxes, reduced net income by $0.09 per diluted share.

For the full year ended December 31, 2014, Banner Corporation reported net income available to common shareholders of $2.82 per share compared to $2.40 per share for the full year 2013, an increase of 17%. Each of the reporting periods mentioned had significant non-recurring items that make comparisons a bit difficult.

We outlined those in the press release and Lloyd Baker will explain them in more detail shortly.

Looking at our core operating performance, 2014 continued our positive momentum and further demonstrated that through the hard work of our employees throughout the Company, we continued 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 15 quarters solidifies that execution on our strategic plan is effective and we continue building shareholder value. Our operating performance again this quarter and for the full year 2014 was very solid when analyzing our core key metrics.

Our fourth quarter of 2014 core revenue was strong at approximately $59 million, and increased 14% compared to the year-ago quarter. The core revenue was supported by an improved earning asset mix and a net interest margin that remained above 4% and was actually 4.08% in the fourth quarter of 2014.

Also, our cost of deposits again decreased in the most recent quarter to 18 basis points compared to 24 basis points in the fourth quarter of 2013. Overall, this resulted in a solid return on average assets of 1.02% in the quarter.

Our strength again this quarter and throughout 2014 is reflective of the continued execution on our super community bank strategy.

That is, reducing our funding costs by remixing 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 14% compared to December 31, 2013.

Also, our non-interest-bearing deposits increased 16% from 1 year ago. The predominant portion of this balanced growth is from the generation of new client relationships and the acquisition of the 6 new branches in Oregon. Our net client growth in these product categories is 76% since December 31 of 2009.

It's important to note that the major portion of this growth is organic and from our existing branch network. Further, our loan portfolio expanded 12% from a year ago. In a few moments, Lloyd Baker will discuss our operating performance in a bit 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, improving the risk profile of Banner and aggressively managing our troubled assets has also been a primary focus of the Company.

Again this quarter, our credit quality metrics reflect our moderate risk profile and our non-performing assets represent just 0.43% of total assets at December 31, 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 our 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 the allowance for loan losses to nonperforming loans is a strong 454% at December 31, 2014, up significantly from 300% in the fourth 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 1.98%. Our total capital to risk weighted assets ratio was 16.8% and our tangible common equity ratio was 12.3%. In the quarter and throughout the preceding 4 years, we continued to invest in our franchise.

We continue to add talented commercial and retail personnel to our Company in all of our markets and we continue to invest 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 for 2014, they are resulting in positive core revenue growth of 14%, strong customer acquisition, 12% year-over-year growth in the loan portfolio, improving cross sell ratios and strong deposit fee income growth of 25%.

Further, we have received marketplace recognition of our progress in our value proposition as a small business administration named Banner Bank 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 plan and our persistent focus on improving the risk profile of Banner has now resulted in 15 consecutive quarters of profitability and our tangible book value increased nearly 8% to $29.70 per share when compared to December 31, 2013.

I am very excited about the recently announced acquisition of Siuslaw Bank and AmericanWest Bank also. With these strategic combinations, we will have the opportunity to deploy our super community bank model throughout a strengthened presence in Washington, Oregon and Idaho and enter into attractive growth markets of California and Utah.

These combinations will provide significant benefit to our expanded group of clients, communities, shareholders and employees. I will now turn the call over to Rick Barton to discuss the trends in the loan portfolio.

Rick?.

Thank you, Mark. 2014 saw Banner solidify the moderate risk profile of its loan portfolio while recording portfolio growth of 12%. My comments this morning will focus on these 2 areas. First, let us recap changes in key portfolio credit metrics for both the quarter and the full year of 2014.

Gross charge offs were $5.3 million, down from $10 million a year earlier, or a decrease of 47%. For the fourth quarter and the year, we recorded net recoveries of $1.6 million and $1.7 million, respectively. The strong fourth quarter recovery performance was driven by several non-correlated transactions, not a single in count.

These results reflect the diligent efforts of our collection staff, as they continue to work loans previously charged off. Total non-performing assets during 2014 decreased $9 million to $20 million, a reduction of 31%. Stated as a percentage of total assets, non-performing assets went from 0.66% to 0.43%.

One- to four-family loans continue to be the largest single category of non-performing assets, pointing out that vestiges of the great recession remain. Non-performing loans decreased from $21.9 million to $16.7 million during the year, an improvement of 37%. In the fourth quarter, the decrease in nonperforming loans was $3.2 million, or 16%.

REO declined modestly during 2014 from an already low $4 million to $3.4 million. This was a decline of 15%. For all of 2014, REO sales were $4.9 million, resulting in a net gain of just under $1 million. Valuation adjustments were a nominal $36,000. These statistics show the continued effectiveness of our REO management process.

Classified loans in Banner's portfolio were $65 million versus $91 million at year end 2013. This is a decrease of 29%, with classified loans now standing at only 1.7% of total loans. At December 31, 2014, delinquent loans, including non-performing loans, increased nominally from the same date a year earlier.

Total delinquent loans increased $3 million, while the percentage to total assets went from 0.64% to 0.66%. When compared to the linked quarter, both of these delinquency measures, however, did improve. While this metric was essentially flat year-over-year, it is important to remember that delinquencies under 1% are strong by historical standards.

The reserve for loan and lease losses continues as a source of strength for the Company. The net recoveries recorded during the fourth quarter drove an increase in total reserves when compared to both the linked quarter end December 31, 2013.

The recovery also helped push the coverage of non-performing loans to 454%, up from 376% for the third quarter of this year and 300% at the end of last year. The reserve to total loans ended the year and quarter at 1.98%, down from 2.17% on the same date last year. At this level, the reserve remains strong, even after loan growth of 12% during 2014.

Having just cited loan growth provides a perfect transition to further discussing 2014 loan growth. Excluding loans acquired in the southern Oregon branch transaction, year-over-year total loans increased $327 million, or nearly 10%.

Setting aside the acquired loans, the year-over-year portfolio growth was organic and occurred across the franchise, reflecting the improving economy in the region and a more optimistic view of the future by borrowers, albeit somewhat tempered by world political and economic events.

The press release details fourth-quarter loan growth by portfolio segment. Before making additional comments about this growth, it is important to note that fourth-quarter growth was impacted by expected payoffs in the multifamily loan portfolio and seasonal pay downs in both commercial and agricultural lines of credit.

Multifamily construction loans increased $11.6 million, or 24%, as draw downs on existing commitments continued and selective new commitments were added that will add to totals in future quarters.

As mentioned on previous calls, we continue to be very selective in adding new multifamily commitments because of the multitude and size of new apartment projects in our major markets. Residential construction loans outstanding grew modestly by only 2.7% during the quarter, despite continued significant new loan production.

The primary Northwest housing markets remain vital and in balance with low levels of unsold inventory. Residential land loans again increased during the fourth quarter, rising $12.8 million, or 14%, from the linked quarter.

As before, these new loans are located in major markets with strong demand for new housing and shortages of available building lots. Project underwriting has not changed on these new commitments and borrower financial capacity remains strong. While this category has increased, it still represents only 2.7% of total loans.

I will conclude my remarks by again noting that during 2014, Banner strongly reinforced the moderate risk profile of its loan portfolio as shown in all credit metrics, including the strength of its reserve for loan and lease losses.

This position, coupled with the Company's strong capital ratios, will allow us to continue executing our strategic plans, which include further organic growth as well as the completion of our announced acquisitions. With those comments, I will turn the stage over to Lloyd for his comments..

Thank you, Rick, and good morning, everyone. On this call a year ago, I noted that we were pleased with Banner's 2013 performance and operating results and the successful execution and strategies that produced those results.

I think it should be obvious that we are equally pleased with the continued success of those strategies and Banner's further improved operating results in 2014.

Of course, as well as being pleased with Banner's 2014 performance, we are excited about the prospects for 2015 and beyond, as we focus on integrating the pending acquisitions of Siuslaw Bank and AmericanWest Bank, which will significant expand and strengthen the Banner franchise.

As reported in our earnings release, Banner's net income available to common shareholders for the year ended December 31, 2014 increased 17% to $54.6 million, or $2.82 per share, compared to $46.6 million, or $2.40 per diluted share, in 2013.

While our net income available to common shareholders for the fourth quarter of 2014 decreased to $12.2 million, or $0.63 per diluted share, compared to $14.8 million, or $0.76 per diluted share, in the immediately preceding quarter, it increased by nearly 6% compared to the $11.6 million, or $0.60 per diluted share, in the same quarter a year ago.

Importantly, in each of these - each of these periods had significant non-recurring charges and/or revenues that make the quarterly comparisons difficult.

In particular, the current quarter had $2.8 million of acquisition related expenses which, net of taxes, reduced net income by $0.09 per diluted share compared to a $494,000 recovery of acquisition related costs in the third quarter of 2014. By contrast, acquisition related costs from the fourth quarter of 2013 were $550,000.

However, revenue in the fourth quarter of 2013 was augmented by $3 million fee related to the termination of a proposed acquisition. Net of the related expenses and taxes, the termination fee added $0.08 to net income per diluted share in last year's fourth quarter.

Further, compared to the immediately preceding quarter, we had an adverse swinging fair value adjustments of $1.7 million, or approximately $0.06 per diluted share, although the net fair value adjustments were nearly unchanged compared to the fourth quarter a year ago.

All of this discussion highlights why, when we evaluate our performance trends, we tend to focus on revenues from core operations, which exclude the acquisition related bargain purchase gain and termination fee as well as gain on sale securities and fair value in other - in temporary impairment adjustments.

Our revenues from core operations, excluding the afore mentioned items, were $58.9 million in the fourth quarter of 2014, nearly unchanged from the immediately preceding quarter but up 14% from the fourth quarter a year ago.

For the year ended December 31, 2014, our revenues from core operations increased 8% to $223.7 million compared to $208 million in the prior year.

This strong revenue generation for the fourth quarter, as well as for the full year 2014, continues to reflect significant balance sheet growth, a solid net interest margin, additional client acquisition and, compared to both the preceding quarter and the fourth quarter year ago, improved mortgage banking activity.

Together, these trends clearly demonstrate that our value proposition is being well received and that 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.

Primarily as a result of significant growth in the average balances of loans and core deposits, our net interest income increased by $5 million, or 12%, compared to the fourth quarter a year ago.

In addition, improvements in our earning asset mix and the further reduction in our funding costs allowed our net interest margin to increase to 4.08% in the current quarter compared to 4.07% in the immediately preceding quarter and 4.01% in the fourth quarter a year ago.

For the year ended December 31, 2014, our net interest income increased by $13.2 million, or nearly 8%, to $179.9 million compared to $166.7 million in 2013, again primarily reflecting the growth in the average balances of loans and core deposits.

The net interest margin for the full year 2014 was 4.07%, just 4 basis points less than 4.11% for 2013, as changes in the mix of assets and liabilities, coupled with an eight-basis-point decrease in the cost of funds of deposits - cost of deposits, offset much of the continued downward pressure on loan yields.

Importantly, in none of these periods has Banner's margin or net interest income been augmented by any acquisition accounting yield adjustments. In addition, for the eighth consecutive quarter we did not identify a need to reduce net income with provision for loan losses, as nearly all of our credit volume indicators continued to improve.

As a result, we had no provision for loan losses in either 2013 or 2014. Deposit fees and service charges were again strong at $8.3 million in the fourth quarter, unchanged compared to the third quarter of 2014 and 25% greater than the fourth quarter a year ago.

You may recall that the third quarter included a $560,000 adjustment related to the under accrual of interchange revenues in prior periods, which added approximately $0.02 to our earnings per share for the quarter.

In the current quarter we also has some timing adjustments that added approximately $260,000 to deposit fees for a little less than $0.01 per - to earnings per share.

Aside from these adjustments, increases in these fees and service charges are a direct result of the success of our client acquisition strategies and the resulting growth in core deposits as well as continued benefits from our decision to move our debit card relationship to MasterCard.

As I previously noted, our mortgage banking revenues improved in the fourth quarter compared to the preceding quarter as well as the same quarter a year ago, as our originations for home purchases increased, largely as a result of additions to our mortgage loan production staff.

Mortgage banking operations contributed $3 million to the fourth quarter revenues compared to $2.8 million in the preceding quarter and $2.2 million in the fourth quarter a year ago. Despite the significant reduction in refinancing activities for the full year 2014, mortgage banking revenues were $10.2 million.

By contrast, our mortgage banking revenues were $11.2 million in 2013. However, that 2013 amount was augmented by the reversal of a $1.3 million valuation allowance against our mortgage servicing rights. As noted in the press release, we had another good quarter for loan production.

However, portfolio growth slowed and average loan balances declined for the quarter, as seasonal factors resulted in expected reductions in commercial and agricultural loan balances. In addition, as Rick noted, we had some large multifamily residential loans repayments, reflecting successful completion of the underlying projects.

Nonetheless, the loan portfolio increased to just over $3.8 billion, an increase of $415 million, or 12%, compared to the fourth quarter a year ago.

We also had a slight seasonal decrease in deposit balances, which ended the quarter at $3.99 billion, essentially unchanged from the end of the third quarter but an increase of 8% compared to a year earlier.

Importantly, deposit growth for the year continued to be centered in transaction and savings accounts, including non-interest-bearing accounts, which increased by 16% compared to a year earlier.

Total core deposits, which includes non-interest-bearing and interest-bearing transaction and savings accounts, but excludes all certificates of deposit, increased by 14% compared to a year earlier. As a result, at December 31, 2014, our core deposits represented 80% of total deposits.

Reflecting the increasing core deposits, the cost of all deposits decreased to 18 basis points for the quarter ended December 31, 2014 compared to 24 basis points for the same quarter a year earlier. For the year ended December 31, 2014, deposits costs were 20 basis points compared to 28 basis points for the prior year.

As I previously noted, our operating expenses for the fourth quarter included $2.8 million of acquisition related expenses.

As a result, our total other operating expenses increased to $41.2 million compared to $38.5 million in the preceding quarter, which was net of a $494,000 reversal of acquisition related expenses and $36.9 million for the fourth quarter of 2013, which included $550,000 of acquisition related expenses.

In addition to the swing in acquisition related expenses, other operating expenses for the current quarter included the cost associated with operating the 6 southern Oregon branches that were inquired in June 2014.

As I noted on last quarter's call, we are pleased that the 6 branches and more than 10,000 client relationships associated with those branches have been fully integrated into the Banner system and we remain very optimistic about the prospects for that market, particularly as we look forward to adding nearby Siuslaw Bank and AmericanWest branches to the Banner franchise.

Finally, as noted in the press release, we had a modest adjustment to our income tax accrual as a result of finalizing and filing amendments to certain prior periods' state income tax returns, which reduced the current quarter and year-to-date tax expense by approximately $300,000.

As a result, our effective tax rate of 29.5% for the fourth quarter was somewhat below our normal expectation of 32.5% to 33%. This concludes my prepared remarks relative to the financial statements.

In summary, I will reiterate that we are pleased with our performance in 2014, excited about the opportunities in 2015 and that we continue to believe that Banner is very well positioned for further success in future periods. As always, I look forward to your questions.

Mark?.

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

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Jeff Rulis, D.A. Davidson. Please go ahead..

Thanks. Good morning. .

Good morning, Jeff..

Looks like net loan growth slowed in the second half of the year and I guess some large payoff activity contributed to that.

But could you comment on the overall demand in your marketplace toward the end of the year versus the first? And as we roll into 2015, I guess your expectations for growth versus 2014?.

Jeff, this is Rick. Let me take that by segment. First of all, on residential construction, we saw strong demand throughout 2014 and we still see market fundamentals remaining unchanged, so we anticipate that those markets should continue to produce lending opportunities in 2015. The commercial real estate loan market remains quite active.

There's a lot of continuing multifamily opportunities out there as well as opportunities in other property types, some new construction and refinance activity as well. In the commercial and industrial arena, we see the gradual continued strengthening as the economy continues to perform. That market remains extremely competitive.

Ag markets I would characterize essentially as stable, without any meaningful change in the pattern of loan demand..

Okay. That all sounds fairly positive, I guess.

The net production slowing in the second half is really a product of more either seasonal or some payoff activity?.

Yes, it was very much impacted by large multifamily payoffs that went as expected to institutional lenders as well as seasonal pay downs on the agricultural portfolio and, on the commercial side, particularly in the seafood portfolio..

Interesting. Okay. Management of the balance sheet discussion, more on the deposit side as you have got - anticipated a couple banks rolled in this year, in 2015.

I guess some of that remixing of the deposit portfolio, is that more for what you have done with the branch acquisitions or is it more prepping the balance sheet for what you anticipate to close on in coming quarters?.

Jeff, this is Mark. It is a combination of both, is the correct answer. We will end up, as we progress with the Siuslaw Bank acquisition and the AmericanWest bank acquisition, with a loan-to-deposit ratio closing somewhere around 86%.

The core basis on a combined - the core deposit base on the combined enterprise would be probably slightly north of 80%, so somewhere around 82%.

The answer to your question is, each of those organizations appear to be running ahead of where we had forecasted and the combination of adding in those additional deposits will continue to fund and fuel the organization's loan growth going forward..

Great.

Mark, could you update us on the timing of the closing of the Siuslaw and maybe even the AmericanWest?.

I can update you on Siuslaw, which is, that has been filed in a shareholder meeting. Their shareholder meeting has been scheduled for the end of February, so we would anticipate a closure sometime in late first quarter. The AmericanWest is still in process. Obviously, applications have been filed.

They are projected to close the Bank of Sacramento transaction sometime in the first quarter as well and we would anticipate we're still on target to close either late second quarter or early third quarter..

Okay, thank you..

Our next question is Tim O'Brien, Sandler O'Neill. Please go ahead..

Good morning..

Good morning, Tim..

Hi, Tim..

.

First question, just to follow up on what Jeff was talking about on the lending side, the big payoffs in multi that occurred this quarter, are there any more out there on the horizon in the near term that you guys can give us a heads up about today?.

I don't have the exact detail on that, Tim. This is Rick. We do have projects that we started funding in 2013 which will pay off in the first half of 2015. That is part of the normal cycle of that kind of lending..

Also, the decline in the balances in Washington, in particular in the state of Washington, that - really it just has to do more with the nature of the product and good business practices and things working as they should rather then you guys pulling back in any way, shape, or form from Washington multi, right? Is that a fair characterization?.

I think that is a fair characterization. As I mentioned in my comments and we have mentioned before, we are watching all of the major markets very closely because of the level of multifamily activity, but we have continued to make new commitments during the latter part of 2014..

Great.

Lloyd, did I - I thought I heard you say there was no yield enhancements in that 4.08% margin number from deal-related yield enhancement?.

That is correct, Jim. That has been the case for us all along. The only acquisition that is recently funded under those new accounting standards, of course, was the 6 branches in southern Oregon. There was really no adjustment there on those.

Going forward, it looks like that will be a comment that I won't continue to make, although we don't expect to see large adjustments on either the Siuslaw or the AmericanWest transaction as a result of purchase accounting.

The good news in the Internet comment, obviously, is that interest margin, which as Mark noted, has stated above 4% all year, and really for the past couple of years, continues to reflect very good, solid core note rates in loan fee activity related to the portfolio.

It's really a complement to our lending staff that, that has occurred as well as the fact that we've continue to reduce the cost of deposits..

Thanks for that color, Lloyd. Last question, you guys were pretty good last quarter about talking about deal cost accruals on a quarterly basis.

Can you give us any indication at all as to what we might see here in the first quarter or first half of this year at this point?.

Sorry, was that deal cost?.

Yes, just the non-recurring deal cost..

There will be, there will certainly be deal costs associated with the Siuslaw transaction this quarter, including the conversion of the system - data processing system which is scheduled to occur in March simultaneous with the closing of the transaction.

The big numbers coming down the pike obviously relate to the AmericanWest transaction and I would be hard pressed to give you timing on that, but if you go back and look at our investor presentation you will note that we thought, in aggregate, some of - a significant amount of this expense will be on books of AmericanWest, not Banner, but in aggregate, we expect those costs to be in the $45 million to $50 million range..

Thanks for all the color. Nice quarter..

Our next question is Russell Gunther from Macquarie. Please go ahead..

Hey. Good morning, guys. .

Good morning, Russell..

I appreciate the color on the deposit service charges. You checked a question off my list before you got me. Moving on to the expenses, you guys did a nice job reducing core expenses quarter on quarter. I had one question as it relates to the advertising marketing line.

I know that was up last quarter on the direction of - on the resumption of direct mail, but it dropped off a little more than I would have thought.

Could you give some color on what the incremental decline was attributed to and how that budgeting might shake out in 2015, particularly given some pending deals?.

Russell, this is Lloyd. Really, principally, timing as well is direct mail situation the prior quarter was impacted by some media advertising production cost and enhancements there.

It is mostly timing, although there's also a little bit of that advertising expense in the current quarter was specifically directed at the Siuslaw transaction and is included in those transaction expenses there. You're going to ask me how much and I'm afraid I cannot remember that number, but it's not a really large portion of it..

I think, Russell - this is Mark. If you take a look at our annual advertising expense as it related to 2014, you will probably see a modest increase in 2015 associated with the combination of the acquisitions that we have..

All right, great. That's helpful. I appreciate that.

Maybe just circling back to Tim's question on merger expenses, could you give us some color on what this quarter's expenses are related to? Is that all the pending Siuslaw deal or is there some of the potential AmericanWest pulling forward?.

There was a significant amount of AmericanWest involved in that.

As you might expect, the legal expenses leading up to the announcement of that transaction, as well as filing of the regulatory applications and the work on the SEC filings, which we are currently waiting to hear from the SEC how they feel about the proxy statement which we have filed, that sort of - legal expenses were really quite high related to that.

It is a large transaction. There were some investment banking expenses and some travel expenses associated with that as well..

Okay. No, that helps.

If that's something that we would - if we're thinking about the $50 million aggregate charges disclosed with the deal of this, we kind of, left the 4Q $2.8 million as we think that the aggregate impact, or is that $50 million still a good number for when we get to close?.

The $50 million is still a good number but let me remind you one more time that a significant portion of that will be incurred on the books of AmericanWest, so it will be reflected not through our reported earnings but it will be reflected in their net equity at the time we close the transaction and therefore will have some impact on goodwill calculations..

Okay. That's great. That's helpful. Lastly on loan growth, I appreciate the color you provided in prepared remarks and in response to questions. In the release, you talked about the continued strength of the pipeline. I was wondering if you give us a little color on how that is looking at the end of 4Q relative to 3Q.

Are we up, down? I don't know if you give exact numbers, but maybe just directionally..

Russell, this is Mark. We don't give guidance on that but directionally, I would characterize it as consistent with the third quarter. Our pipeline, I would suggest, are still strong but they are consistent with where they have been..

Great. All right, guys, thanks for taking my question..

[Operator Instructions] Our next question is Jackie Chimera, KBW. Please go ahead..

Hi. Good morning, everyone..

Good morning, Jackie..

Touching back on that $50 million, I must have misunderstood that during the deal conference call. So that's not the amount of expenses that will come out from contract terminations and legal fees and everything else.

After the deal closes, a big portion of that will actually hit AmericanWest prior to that so you will get the hit in equity but not post-deal then, as much? Am I understanding that correctly?.

That's true. There will be, post closing, some conversion related expenses because on that particular transaction, we will likely close well in advance of the actual data processing conversion.

But don't confuse those deal costs, which would include contract terminations, investment baker fees, legal fees and similar things, signage changes, don't confuse that with the projected cost savings in the run rate going forward.

If you will recall from that merger slide deck that we put out, our expectation is, is by 2016, the combined run rate of expenses will have been reduced by about $37.5 million..

Okay..

There are different issues there..

My question stems more from the timing of the impact to tangible book.

I know in the net of it all, it will end up the same but I'm just trying to calculate out whether the expenses occur immediately at close because it has already been incorporated into AmericanWest or whether that full $50 million amount trickles in as you do conversions, payout termination fees, that type of thing..

Unfortunately, Jackie, it is some of both..

Okay..

Okay? It's some of both, so there will be costs that will come in after closing that will impact that.

The convention that has been adopted by the investment banking community, investor community, is to sort of front load all of those so when we estimated the book value dilution on the transaction, the presumption was that they would all have occurred immediately prior to closing.

The reality is, some of them will and some of them will come in post closing..

Okay..

You won't get as large of a book value dilution immediately as projected in the investor deck, but you will also have some expenses rolling through subsequently..

Okay. No, I hadn't expected it all to go in on day one. I'd actually was expecting all $50 million to come in after the close. I didn't realize some of it would occur prior to. That's very helpful, thank you.

Just looking at the mortgage banking income in the quarter, did you see any uptick in refi volume, just given the craziness that is interest rates right now?.

No, we really didn't. I think for the full year our purchases ran about 74% of total production activity. Mortgage rates are exceptionally low again. They are sub-4% for 30-year fixed-rate loans so I would expect some pickup in refinance but it was not really evident in our fourth-quarter statistics.

I think we had 70% purchase transactions in the fourth quarter..

Okay.

How are volumes looking as we have started out the year, realizing that we are in a seasonally slow period?.

That is a good comment because as you know, the mortgage business is notoriously seasonal. I think that we feel good about where the pipeline is for mortgage production right now.

As I noted in my comments, we've continued to add production capacity throughout 2014 so those additions to staff are generating additional activity, which is all a positive now. The margin for gain on sale on mortgages continues to run at exceptionally high levels.

The banker in me that has been around for 40-some years keeps wondering if that will be sustainable, but right now we continue to feel very good about that business. Then also, we feel very good about the cross-sale activity that our mortgage origination group has done in terms of bringing additional deposit customers into the bank as well..

The success of the mortgage banking operation is also contributing to some of the deposits or the charges increases that we have been seeing?.

Sure. They had very good statistical success in converting loan customers into full-service deposit customers as well..

Which, Jackie - this is Mark. That's how the strategy is supposed to work with. When we realigned the mortgage banking operations and the retail platform, it was obviously to generate new client acquisition in cross-sale ratios and that's what we mentioned in our remarks.

In terms of pipeline, let me just add that the pipeline that we have in place, the mortgage business heading into the first of this year is up anywhere between 10% and 15% of where it was last year. The mortgage banking operation continues to gain momentum..

Okay. Great. That's good to hear. One quick last one, if I could.

The cost expense, did that include any year-end true-ups, or is that just an increasing run rate?.

Yes, it is really an increasing run rate. It was not significantly different from the third quarter, if memory serves me right..

No, it is not huge or anything. I just wanted to clarify if there was any year-end noise in there..

No, there was no under accruals of large incentive compensation payments of that..

Okay. Great. Thank you very much for all the color. I appreciate it..

Thanks, Jackie..

Our next question is Don Worthington, Raymond James. Please go ahead..

Well, good morning, everyone..

Hi, Don..

Just a couple of follow-ups.

On the multifamily construction lending, Rick, you mentioned you would be selective there in terms of funding new projects, but what is a typical property or average size of loan that Banner does in the segment?.

In the new production that we have been doing, a small end would be in the $7.5 million range; the high-end would be as much as $15 million on a very selective basis..

Okay. Thank you.

Any update in terms of the outlook for provisioning and where you're comfortable with the reserve level as a percent of loans?.

As we've stated before, we're very comfortable with the positioning of the reserve and its ability to fund loan growth.

Going forward, obviously, we don't give guidance on where the reserve is going to be but I think it is fair to say that directionally, as a percentage of total loans, it will continue to move down as the portfolio grows and stabilize somewhere in excess of 1.5% of total loans..

Okay. Great. Thank you..

Thanks, Don. .

Our next question is a follow up from Tim O'Brien, Sandler O'Neill. Please go ahead..

Hey, one last question, guys, related to the margin and loan yields and stuff.

Was there anything ancillary or nonrecurring? Any kind of prepay interest that you collected that benefited the margin that's noteworthy?.

Noteworthy is a good qualifier there. There always is some, so as we noted, we had some pay downs and some multifamily that undoubtedly had some deferred loan fee associated with that, that came in. We had….

Could that have been enhancing just a little bit the NIM - a basis point or two, do you think, Lloyd?.

Absolutely. The question is, is it recurring or not? Those who have been on the call with me for a long time know I am always cautious about the margin and candidly surprised that holds up as well as it does. Again, I complement our lending group for that, as well as the ongoing improvement in the funding mix.

It is a low interest rate environment and you would expect there will be continued pressure on that margin a bit.

We did have one, in securities portfolio, we had 1 Fannie Mae dust bond that had a prepayment penalty associated with it that added - I don't remember, I think it was about $30,000 or $40,000 to net interest income for the quarter on that bond. There is always that kind of adjustment in there.

The good news is, is that the core rate continues to be very strong. Under pressure from low interest rates, but very strong..

Great.

I am a little surprised you guys didn't - to Jackie's question, the mortgage refi prospects weren't a little bit more but maybe that is just a reflection of the nature of your business, which is more purchase oriented?.

That is certainly where we are directing our attention. The other point of that, I think, is that the most significant drop in rates occurred a little late in the quarter for it to show up in the current production statistics..

It is here now..

That is right. These rates are extremely low..

All right. Well, thanks. Nice quarter..

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mark Grescovich for any closing remarks..

Thanks, Maureen.

As I stated, we are pleased with our strong 2014 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, strengthening our deposit franchise, improving our core operating performance, maintaining a moderate risk profile, and prudently deploying our excess capital.

I would like to think 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 in the future. Have a good day, everyone..

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