Mark Grescovich – President and Chief Executive Officer Rick Barton – Chief Credit Officer Lloyd Baker – Chief Financial Officer Albert Marshall – Secretary Peter Conner – Chief Financial Officer-Banner Bank.

Matthew Clark – Piper Jaffray Jeff Rulis – D.A. Davidson Jackie Chimera – KBW Ed Beachley – FBR Tim O'Brien – Sandler O'Neill Tim Coffey – FIG Partners Don Worthington – Raymond James.

Good morning, and welcome to the Banner Corporation Second Quarter 2016 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Mr. Mark Grescovich, President and CEO of Banner Corporation. Please go ahead..

Thank you, Andrew, and good morning everyone. I would also like to welcome you to the second quarter 2016 earnings call for Banner Corporation. As is customary, joining me on the call today is Rick Barton, our Chief Credit Officer; Lloyd Baker, our Chief Financial Officer of the Corporation; and Albert Marshall, the Secretary of the Corporation.

Also joining us today on the call is Peter Conner, our Chief Financial Officer of Banner Bank.

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

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

Those statements include descriptions of management's plans, objectives, or goals for future operations, products or services, 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 risks may differ materially from those discussed today.

Information on the risk factors that could cause actual results to differ are available from the earnings press release that was released yesterday and a recently filed Form 10-K for the year ended March 31, 2016.

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

Thank you, Al. As announced, Banner Corporation reported a net profit available to common shareholders of $21 million or $0.61 per diluted share for the quarter ended June 30, 2016. This compared to a net profit to common shareholders of $0.52 per share for the first quarter of 2016, and $0.64 per share in the second quarter of 2015.

As anticipated, the second quarter 2016 results were adversely impacted by acquisition and merger-related expenses associated with the AmericanWest Bank combination, which net of taxes reduced net income by $0.05 per diluted share.

Excluding the impact of merger and acquisition expenses, gains and losses on the sale of securities, and changes in fair value of financial instruments, earnings increased $7.5 million or 49% to $23 million for the second quarter 2016, up from 15.4 million in the second quarter of 2015.

And increased 4% compared to $22.1 million in the immediately preceding quarter.

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

Following the successful completion of our core system conversion in the first quarter, we made additional progress in generating operating synergies through the consolidation of overlapping branch locations and integration of operational activities. Importantly, we look forward for the successful conclusion of the integration.

As the result of the hard work of our employees throughout the company, we are also successfully executing on our strategies and priorities to deliver sustainable profitability and revenue growth for Banner.

Our second quarter 2016 performance clearly demonstrates the positive contribution from the AmericanWest Bank acquisition and shows that our strategic plan is effective, and we continue building shareholder value.

Our second quarter 2016 core revenue was strong, at $114.4 million, and increased 71% compared to the second quarter of 2015, and 3% compared to the first quarter of 2016. We benefited from a larger and improved earning asset mix, a net interest margin that remained above 4%, and strong mortgage banking revenue.

Overall, this resulted in a core earnings return on average assets of 0.94% for the second quarter of 2016. Once again, our performance this quarter reflects continued execution on our super community bank strategy.

That is, growing new client relationships, improving our core funding position by growing core deposits, and promoting client loyalty and advocacy through our responsive service model, while also augmenting our growth with opportunistic acquisitions. To that point, our core deposits increased 90% compared to June 30, 2015.

Also, our non-interest bearing deposits increased 104% from one year ago. Although a large portion of this balance growth is from the acquisitions, we also saw continued strong organic generation of new client relationships. Our organic net client growth in these product categories is now 81% since December 31, 2009.

Reflective of this solid performance our dividend in the quarter was $0.21 per share. In a few moments Lloyd Baker will discuss our operating performance in more detail.

While we have been effectively executing on our strategies to protect our net interest margin, grow client relationships, deliver sustainable profitability, and prudently invest our capital, we have also focused on maintaining the improved risk profile of Banner. Again this quarter, our credit quality metrics reflect a moderate risk profile.

Our non-performing assets remained very low, and our capital position continues to be substantial. As expected, due to loan growth and the migration of acquired loans out of the discounted loan portfolio, we recorded a $2 million provision for loan losses during the second quarter.

At the end of the quarter, our ratio of allowance for loan and lease losses to total loans was 1.63% when including the net loan discount on acquired loans. Our total capital to risk-weighted assets ratio was 13.52%, and our tangible common equity ratio was 11%.

In a moment, Rick Barton, our Chief Credit Officer will discuss the credit metrics of the Company and provide some context around the loan portfolio, and our success at maintaining a moderate credit risk profile. In the quarter and throughout the preceding six years, we continue to invest in our franchise.

We have added talented commercial and retail banking personnel to our Company, and we have invested in further developing and integrating all our bankers into Banner's proven credit and sales culture.

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

Further, we've received marketplace recognition of our progress and our value proposition as the Small Business Administration named Banner Bank Community Lender of the Year for the Seattle and Spokane district for two consecutive years, and this year named Banner Bank Regional Lender of the Year for the second consecutive year.

The successful execution of our organic growth plan augmented with strategic acquisitions, and our persistent focus on improving the risk profile of Banner has now resulted in 21 consecutive quarters of profitability. And our tangible book value increased to $30.86 per share versus $30.22 per share at June 30, 2015.

Finally, I remain very excited about the recently closed acquisition of AmericanWest Bank. Our successful integration of this strategic combination provides opportunities 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.

This combination provides significant benefits to our expanded group of clients, communities, shareholders and employees.

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

Thanks Mark. My remarks this morning will focus in three areas, Banner's credit metrics, continuing loan growth, and the second quarter provision for loan and leased losses. As you heard in Mark's comments and saw in our press release, our credit metrics remain strong, and support a moderate risk profile.

These metrics have been relatively stable for a number of quarters, and are not likely to improve further as we move toward the next credit cycle. Delinquent loans declined slightly, and are only 52 basis points of total loans.

Loan risk ratings showed little change in the aggregate during the quarter, except for a single credit that was adversely impacted by the depressed energy sector. As scheduled in the press release, non-performing assets increased to 32 basis points of total assets and totaled $32 million.

Non-performing assets were split between non-performing loans of $25 million, an REO of only $6 million. Again this increase was driven by one transaction that we believe is now close to a successful resolution.

Not reflected in these totals are non-performing loans of $15 million acquired from Siuslaw and AmericanWest Banks, which are not reportable under purchase accounting rules. These non-performing loans however are included in our net purchase credit impaired loans of $45 million.

If we were to include the acquired non-performing loans in our non-performing asset totals, the ratio of non-performing assets to total assets would still be a modest 47 basis points. Performing troubled debt restructures continued to decline, and are only 26 basis points of total loans.

Net recoveries for the quarter were $1.1 million, and reflect continuing collection efforts of our special assets department. And as we have said many times before, recoveries are very hard to project, and it is not realistic to expect recoveries at this level in future quarters. Loans grew by $140 million from the linked quarter or 1.9%.

On an annualized basis, this is a growth rate of 7.6%. Growth occurred throughout the company and in most loan categories. Declines did occur by design in multi-family permanent loans $20 million and in the one to four family segment $32 million as low interest rates continue to stimulate refinance activity by home owners.

When these two portfolios segments are excluded all other loans grew by $191 million or 3.2% during the just completed quarter. The following loan segments recorded meaningful growth during the quarter.

Commercial construction grew by $18 million or 20%, this was primarily driven by funding of existing commitments although new commitments were added to cross our five state foot print. This is a very diverse by portfolio with no product or geographic concentrations. Multi-family construction loans also were up $18 million or 23%.

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

Growth occurred in the residential construction portfolio 11% and residential land portfolio 10% that when combined are only $487 million or 7% of the total loan portfolio. These portfolios remain centered in the metropolitan Seattle and Portland markets with totals also being added in Utah and Northern California.

All markets remain imbalanced with little standing inventory of completed homes. The agricultural portfolio grew by 9% during the quarter as production lines of credit were drawn down as expected. As just discussed the company's credit metrics remained strong.

However solid loan growth third in quarter combined with predictive loan decreases in the accosting mark against acquired loans and routine credit actions on those loans resulted in the need to make $2 million provision for loan and lease losses during the quarter.

The allowance for loan and lease losses for the company now totals $81 million and is 1.11% of total loans compared to 1.09% for the linked quarter. As shown in the press release, remaining net accounting mark against acquired loans is $39 million.

When this amount is added to the traditional allowance the adjusted allowance totals $122 million or 1.63% total loan. Coverage at this level 1.63% aligns with our goal of a moderate risk profile. With those comments completed, I will turn the mike over to Lloyd for his comments.

Thank you Rick, and good morning everyone.

As Mark has noted in his report in our earnings release, Banner Corporation's strong second quarter and year-to-date 2016 operating results reflect continued successful execution on our strategic initiatives, including significant benefits from the acquisition and further progress on the integration of AmericanWest bank.

And compared to the first six months a year earlier the March 2015 acquisition of Siuslaw Bank also materially added to the operating results of the company.

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

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

But in the second quarter of 2016 Banner reported net income of $21 million or $0.61 per diluted share, this amount was net of $2.4 million of acquisition-related expenses, $380,000 of losses on the sale of securities and $377,000 of net charges for evaluation adjustments on the financial instruments, all of which net of related tax benefits reduced earnings for the quarter by $0.6 per diluted share.

By comparison the acquisition-related expenses were $6.8 million in the first quarter, which along with some inconsequential fair value adjustments in securities claims reduced earnings by $0.13 per diluted share.

For the first quarter a year ago acquisition-related expenses were $3.9 million while net fair value gains partially offset by small securities losses added $769,000 to revenue which together net of tax effects reduced earnings by $0.10 per diluted share in that quarter excluding these acquisitions related expenses fair value adjustments in securities gains and losses.

Our earnings from core operations increased to $23 million or $0.67 per diluted share for the current quarter compared to $22.1 million or $0.65 per diluted share in the first quarter of 2016 and $15.4 million or $0.74 per diluted share in the second quarter a year ago.

Again this quarter we have included a reconciliation of earnings from core operations on page 16 of the press release, which I encourage you to review. In addition the current quarter was burdened with $1.4 million charge for expenses related to product benefits not properly recognized in prior periods.

Further adjusting the current quarter to explore this one-time expense would suggest a run rate for core earnings per share of $0.70 for the second quarter of 2016.

For the 6-month ended June 30, 2016 our net income increased to $38.7 million or $1.32 per diluted shared and included $9.2 million of acquisition-related expenses compared to $25.4 million or $1.25 per diluted share for the first 6-months of 2015 which included $5.5 million of acquisitions related expenses as well as $1.8 million of fair value gain.

Excluding the acquisition-related expenses fair value adjustments in securities gains and losses, our earning for core operations increased 58% to $45.1 million for the first 6-months of 2016 compared to $28.5 million for the first 6-months of 2015.

When reviewing the operating results for the current quarter as well as the first quarter of 2016, it's also important to recognize that the integration and consolidation activities with respect to the AmericanWest acquisition we are only partially complete during those periods.

Also while many of the expected operating synergies from combining the two companies were realized in the second quarter results we do expect to incur some additional merger-related expenses in the third quarter.

However we also expect some further reductions in our core operating expenses in the final two quarters of this year as remaining cost savings are realized, although some of those benefits maybe masked by continuing growths in our operations.

Importantly, as Mark already noted underlining these earnings growth are revenue from core operations which is revenue as excluding gains and loss on sales of securities and net fair value adjustments increased substantially compared to a year ago and also increased meaningfully compared to the immediately preceding quarter.

Our revenues from core operations increase 3% to $114.1 million for the quarter ended June 30, 2016 compared to $111 million for the first quarter 2016 and were 71% greater than the second quarter a year ago. As a result year-to-date revenues from core operations increased to $225.4 million or 78% greater than same period a year earlier.

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

Banner's second quarter net interest income, before provision for loan losses, increased to $93.1 million compared to $91 million for the preceding quarter. And reflecting an increase of $4 billion in average earning assets increased 81% compared to the same quarter a year earlier.

Our reported net interest margin was 4.20% for the quarter ended June 30, 2016. A seven basis point improvement from 4.13% in the preceding quarter as a result of increased accretion from acquisition account and loan discounts.

Acquisition accounting including the effects on loan yields and the amortization of deposit premiums added 19 basis points to the reported margin in the second quarter compared to 12 basis points in the first quarter and just four basis points in the quarter ended June 30, 2015.

More important, excluding the impact of acquisition accounting, our contractual or normalized net interest margin for the second quarter of 2016 was 4.01%, unchanged from the preceding quarter, but a decline of 14 basis points compared to a year ago.

The favorable comparison to the preceding quarter continues to reflect stability in our margin despite continued pressure from low market interest rates.

The decline in the margin compared to a year earlier principally reflects the lower average yields excluding the purchase accounting discounts on loans acquired in the AmericanWest acquisition, as well as proportionally larger size of the securities portfolio following that acquisition.

Despite these significant changes in the composition of our asset portfolios, excluding the effects of purchase accounting, our contractual interest margin for the first six months of 2016 was 4.01%, just 10 basis points lower than the first six months of 2015.

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

Deposit fees and service charges were $12.2 million in the second quarter, modestly increased from the preceding quarter and a 28% increase compared to the second quarter of 2015. Year-to-date deposit fees and service charges increased 36% to $24 million.

While year-to-date deposit fees and service charges have been somewhat adversely impacted by the conversion activities as well as seasonal factors and certain product changes, the significant increase compared to a year earlier is a direct result of growth in core deposit accounts and related transaction activity, reflecting the continued success of our client acquisition strategies as well as the impact of the acquisitions.

As noted in the release, mortgage banking revenues were strong at $6.6 million for the second quarter as home purchase activity in our markets remained robust and lower long term interest rates fueled refinance transactions. Home purchase activity accounted for 66% of our one-to four-family mortgage loan originations in the quarter.

In addition during the quarter, we realized $1 million of gains on the sale of multifamily loans. These gains related to loans originated subsequent to the acquisition of AmericanWest Bank by the specialty origination unit that we acquired in that merger.

Total noninterest operating expenses were $79.9 million in the second quarter compared to $84 million in the preceding quarter and $47.7 million in the second quarter of 2015.

As previously noted, acquisition-related expenses were $2.4 million in the current quarter compared to 6.8 million in preceding quarter and 3.8 million in the second quarter a year ago.

Acquisition expenses for the quarter were again somewhat less than we had previously suggested, in part because of timing differences that would push certain expenses into the third quarter but more importantly as a result of actual cost savings compared to our earlier expectations.

Aside from acquisition-related expenses, the year-over-year increase in operating expenses is largely attributable to the incremental cost associated with the branches and related operations acquired in the AmericanWest merger.

In addition as I noted earlier, during the quarter we approved $1.4 million of expenses in product benefits we determined were not properly credited to certain clients in prior periods.

The decline in operating expense compared to the previous quarter reflects cost savings associated with consolidation of 12 overlapping branch locations following the core systems conversion midway through the first quarter.

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

As Rick has noted, our total loans increased by $140 million or 2% during the quarter with good production of targeted loans including meaningful increases in commercial real estate, construction, and development in agricultural business loans.

Total loans outstanding were $7.33 billion at June 30, 2016, compared to 7.19 billion at March 31, and increased by 74% compared to 4.17 billion a year earlier. Total deposits were $7.92 billion at June 30. A slight decline compared to March 31, but an increase of 84% compared to $4.3 billion, 12 months earlier.

The decrease compared to the prior quarter end was largely attributable to expected seasonal factors but also continues to reflect planned reductions in time certificates and broker deposits. As a result, core deposits represented 85% of total deposits in June 30, 2016 and the cost of deposits declined to 14 basis points for the quarter.

This concludes my prepared remarks. In summary, Banner had a good second quarter and first six months of 2016, with some encouraging trends for the balance of the year.

And although we have additional work left to fully realize all the benefits of the increased scale of the Company, we are looking forward to reporting continued progress and solid operating results in future periods. As always, I look forward to your questions.

Mark?.

Thank you, Rick and Lloyd for your comments. That concludes our prepared remarks. And Andrew, we 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 Matthew Clark of Piper Jaffray. Please go ahead..

Hey, good morning guys..

Good morning, Matthew..

First on the non-interest expense run rate, $76 million operating this quarter, you talk about some further reductions from cost savings related to AWB in the second half, can you speak to how much you might expect will come out of that run rate in the third quarter and then again in the fourth?.

Hi, Matthew. It's Lloyd. So, as we noted, the core operating number that we reflect for the quarter did include the $1.4 million of prior period expenses, we do exclude, so that will go away going forward.

In addition, we would probably expect another million to a million-and-a-half of run rate expense reduction through the final phases of the integration and cost savings related to the acquisitions.

However, as I did note earlier, it's certainly entirely possible that growth in our operations will mask some of that, specifically if we continue to have good success in mortgage banking you realize that those are variable costs that can increase, and there will be some additional expenses associated with our progress towards becoming a $10 billion bank.

But we're getting close to the run rate that we expect in the second half of the year, but there's a little bit of room left to go..

Okay. And then, as you look out beyond the second half of this year and you think about your operations and the potential opportunity to gain efficiencies in your branch network, maybe make your mortgage bank more profitable.

Just thinking about an efficiency ratio that you might be striving for longer term relative to what we'll see in the second half?.

Well, I think we've indicated a number of times that on a long-term basis, we expect with our business model and our geography, than an efficiency ratio in the 63% to 65% range is probably a reasonable target to allow us to sill deliver a value proposition that resonates with clients.

If we exclude the one-time expense and the merger-related expenses on a normalized basis, we were just right around 65% for the quarter that just ended. So we're getting pretty close, as I indicated..

Matthew, this is Mark. What I would add to that is we are very focused on creating positive operating leverage, not specifically just the efficiency ratio. So as long as the organization continues to be able to grow aggressively the revenue stream and outpace the expense to create that positive operating leverage, we will stay focused on that..

Okay. And then on your loans held-for-sale spiked this quarter. It looks like your gain on sale income might have been held back in the quarter, just curious. I assume that'll be one way to keep your balance sheet from growing here in the second half, and the standard $10 billion is to sell those into the secondary market.

Is that fair that we'll see that in the third quarter?.

Well, that's certainly the expectation. So I guess, as I said, an encouraging sign would be the loans held-for-sale portfolio. I hope it's not because they weren't salable, let's put it that way. And we don't think they are. So that is an encouraging sign, and that will be part of the strategy for saying under $10 billion.

There are also, as long we've opened that subject, you can see that we had a pretty substantial amount of federal home loan bank borrowings at the end of the quarter. We will be able to liquidate some securities to pay those down. And we will expect to see some continued runoff in some of the brokered CDs, and other times certificates.

So we still remain optimistic that staying under $10 billion is going to be very doable. And as you know, that has significant impact in terms of pushing off the financial consequences of the Durbin amendment if we do go over $10 billion.

So the strategy remains the same, and it does appear to us that we have the levers to pull to execute on that strategy..

Okay. And then last one for me, your core loan yields ex-purchase accounting looked stable. Can you just speak to the new money yields, what you are getting on a weighted average basis in the quarter on your production this quarter relative to last….

Not enough. Yes, actually that -- the core yield probably dropped a few basis points on the loan portfolio. The table that shows yields on loans includes the impact of purchase accounting. And as I noted, that was 18 basis for the press release noted, it was 18 basis points during the quarter.

So we're still in an environment where term loans in particular are coming in with interest rates in the very low fours. And sometimes we're seeing good clients. This is not news to our change, but clients in commercial banking lines that are sub-4%. So the pressure on loan yields has not dissipated. It will be there.

But as noted, the margin has continued to hold up reasonably well..

Okay, thank you..

Thank you, Matthew..

The next question comes from Jeff Rulis of D.A. Davidson. Please go ahead..

Thanks. Good morning..

Good morning, Jeff..

Hi Jeff..

Maybe a question or two for Rick, just a little more color on the non-performing loan additions, and you alluded to one transaction. I may have missed the color on what loan segment that is, and maybe just a little more additional detail on the additions..

Okay, Jeff. This is Rick. The increase during the quarter was really driven by that single transaction. It was a commercial real-estate transaction. There was a squabble between the owner and the tenant that resulted in a cessation of lease payments. As I mentioned in my comments, we believe that a successful resolution has been crafted to that issue.

And we are hopeful that that will be consummated in the early part of the third quarter..

And that was the bulk of the $10 million, the size of that or what --?.

Yes, that really drove the increase in non-performing assets..

All right.

And I guess if you look at the -- you've seen in the last couple of quarters the reserve-to-loans, and that may not be a very meaningful metric for you guys, but maybe indicative of -- do you think you've stopped running that reserve down, given the growth, that it's a slow build or at least maintain on that reserve level from here?.

I think so..

Okay, and then maybe following up. Lloyd, I think you alluded to further managing CD levels.

I guess if you speak to overall deposit balances, what would you anticipate for the second half of the year?.

Well, we would overall expect growth there, Jeff, as I've noted. The first half of the year is always seasonally weak for us, and I think for most banks, typically banks in the Northwest that I'm familiar with.

So core deposit growth, the strategies that we have in place, we would anticipate an uptick in balances in additional client acquisition along the lines that we've achieved for a number of years now. But there will be that planned runoff continued on the CD portfolio. It's getting smaller all the time. As I noted, 85% of the deposits now are in core.

So just simple math means that runoff will slow down..

Sure. Thanks guys..

Thanks Jeff..

The next question comes from Jackie Chimera of KBW. Please go ahead. Jackie Chimera, your line is open. Please go ahead with your question..

Yes. Sorry, I was muted. Good morning everyone. Do you have -- I know that you've mentioned the $1 million to $1.5 million will come out from cost saves that are still remaining.

But did you quantify what merger charges are left to take in the next two quarters?.

Hi Jackie, this is Peter Conner. Through the first six months of this year, we've incurred $9.2 million. We expect another $1 million to $2 million that we'll incur in the third quarter. There may be a small tail in the fourth quarter, and that will primarily relate to some additional consulting expense, and some premises cost..

Okay. Thank you.

And was there an interest reversal that was attached to the movement of that non-accrual in the quarter?.

There was a minor amount of interest reversal. I don't remember the exact number, Jackie. This is Rick. But that's a common occurrence any time a loan migrates to non-accrual..

Okay, so it was nothing that was any kind of different than what you'd see in past quarters?.

No, not at all..

Okay.

And then just lastly, Mark, if you might update us on your thoughts of the buyback now that the integration is largely finished, and just given the healthy capital position you have?.

Yes, Jackie. Good morning. Again, our capital deployment plan hasn't changed. Our first and foremost goal is to make sure that we have a solid core dividend that has a payout ratio between 30 and 35% that we are reinvesting effectively in the franchise to maintain that core dividend.

And then we would look to potential ways in which we could augment the franchise and then look finally to the buybacks and/or special dividends. So we still have authorization up to 5%. We have not utilized till to-date and but we're exploring all options on utilization of capital going forward..

Okay. Thanks for the color on that..

Thank you, Jackie..

The next question comes from Paul Miller of FBR & Company. Please go ahead..

Hey, it's Ed Beachley here for Paul Miller..

Hi, Ed..

So just looking forward we're hoping you gave us some color on where do you guys see provisions going from here, should we expect the ramp up?.

Well, Ed, that's a great question. This is Rick Barton. And like all great questions, they are not easy to answer, but I'll take a stab at it by saying the following.

Assuming that we see similar patterns in loan growth and a similar migration of acquired loans into the provisioning arena we would expect to see provisioning to be similar to what we had this quarter, but we need to keep in mind that it's not realistic to expect that there would be a run rate of over $1 million in that loan recoveries going forward..

Okay, yes, that sounds good. Thank you..

Thank you..

The next question comes from Tim O'Brien of Sandler O'Neill. Please go ahead..

So first question just regarding I think everybody is pretty teed up and understands what the balance sheet management game plan is but is there any change or shift in that beyond the end of this year can we expect asset growth to kind of kick in and see a net positive here heading into at the end of the first quarter, is that the what you guys anticipate?.

Well, Tim, this slide -- and good morning by the way.

You know, as we've suggested in the past we think that normal organic growth minister with the economy and taking a little additional market shares going to have your balance sheet or your deposits in particularly funding resource growing by 6 to 8% annualized rate maybe even a little higher than that but it -- so that's going to organically take you over 10 eventually.

And our expectation has been continues to be that that sometime during 2017.

Are there other levers that we could possibly pull to push that $10,000 threshold out even another year, yes, they are there but they become more strategic in nature and we haven't approached or announced any sort of decisions relative to any of that? So I think in our normal -- our thought process is still remains that sometime next year we'll cross $10 billion.

That and I guess the answer to that is I mean if you think you're going to do it organically might you do something a little more aggressively to get even further beyond 10.That's a possibility because of strategic decision that are further down the road..

So I guess what you see, Lloyd, is as far as the assets that you have on balance sheet now and management of those plus liabilities you have more room to make the adjustments to optimize those in terms of the return that comes out of that, squeeze profitability and such and but those are going to diminish over time in 2017 barring a strategic move?.

Well, I think that is right and as Mark has pointed out we have strong capital position, and so, implying that capital is an additional element to the thought process..

And then another question, do you guys have delinquent credit or classified credit trends and can you give a little color on what you see in there and any concerns?.

Yes, this is Rick. I think as mentioned in the comments I made actually our delinquency declines slightly during the quarter and really in terms of looking at the risk rating of credits and the portfolio has been remarkably stable over the last several quarters.

There's migration in and out but the net effect with the exception of that one large credit impacted by the energy sector it's been very stable picture..

Thanks, Rick.

And then hey, Lloyd, can you quantify the brokered CDs or jumbos, you know, that a portion of the time deposits that are scheduled to mature in the second half of this year?.

Almost all of the brokered CD would be maturing in the second half of this year. And there is a table in here that the management -- remember the number off the top of my head I want to say about $90 million..

All right.

And then you also in response to a question if I caught it right that 113 million higher held for sale loans, did you -- Lloyd, did you say some of those loans appear to be unsalable, did I catch that or not?.

I didn't appear to I said, I don't want to find out that they are..

Okay. He is really a nuance guy, Lloyd, you got to really listen closely when you answer because everything is….

May have been a bit flip in that but it is a fairly significant build-up compared to the prior quarter. So hopefully it's very good news in terms of what to expect going forward on gain on sale, so, yes..

How much of that to multi?.

Probably about two-thirds of it..

Thanks for answering my questions, guys..

You bet..

Thanks, Tim..

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

Thanks, good morning everybody..

Good morning, Tim..

I want to follow-up on O'Brien's question there about staying under 10 billion. Now I understand that is you're selling of securities, lowering deposits, SHLV advances or have used, is kind of what you've been saying. But is that the only plan or is there something broader to keep you under 10 billion..

No, that's the plan..

Okay, all right.

And then I might have missed it in the early comments or elsewhere but the loan growth of the held for investment loan growth in the quarter what was the break out between new relationships to the bank versus renewals from the existing portfolio?.

Well, I think -- this is Rick Barton, Tim. I think that there's a healthy balance between the two. Of course there is some expansion of credit granted to existing relationships, but we've been very pleased by the progress we've been making in the historic and the new footprint with the addition of new borrowing customers.

I don't have an exact split between the two but it's balanced..

Okay.

And in the quarter as you've reported combined financials between Banner and AmericanWest, have you seen a identifiable trend and how much of AmericanWest portfolio is coming up for renewal, is it higher or lower than your expectations?.

It's what we expected nothing out of the norm..

Okay, great. Thanks Rick.

And then there's a question on kind of core operating expenses obviously some of that you expect us to come down but as you reinvest in the business what percentage of the cost saves anticipate in the second half of this year, do you think we'll get eaten up by investments in the business and I'm not talking about kind of the volatile expenses relative to mortgage but more of kind of the fixed costs in reinvesting in the business?.

It's literally tough to answer, Tim, this way. You know, as opportunity presents itself growth opportunities present themselves. We will make appropriate investments and those generally require some expense investment. But do I know exactly what those are going to be? No.

I think the other point today I was trying to make with that comment is there are expenses related to ultimately crossing $10 billion in terms of DFAS compliance, in terms of organizational staffing and the like, it could come into play here as well.

So, you're going to have growth opportunities presented by just the business and economies still in our market area is performing well, and then there is going to be a little bit of perhaps catch-up with respect to preparation for crossing $10 billion.

Those will be in contrast to expected cost savings as a result of further completion of the integration process..

Okay..

Tim, this is Mark. Tim, let me just add that if you reflect on Peter and Lloyd's comments regarding future run rate of the expense base and what the makeup of that is, that contemplates that investments..

Right. Okay. Thank you, gentlemen for you answers. Those were all my questions..

Thanks, Tim..

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

Good morning, everyone..

Hi, Don..

In terms of the multifamily gain on sales, do you expect that to continue at about million a month -- quarter? I am sorry..

Yes, Don. This is Peter Conner. So that business typically will generate about 75 million to 99 a quarter in terms of loan production. We would expect that business to generate between $1 million to $1.5 million a quarter on a normal basis.

So, you could expect to see what we saw in the second quarter, may be with some additional gain on sale going forward..

Okay. Great, thank you.

And then in terms of entering the new markets particularly Utah and California; are you getting the transaction you thought you were there? Or maybe another way to say it is the business model resonating with clients in those markets?.

California and Utah. We're actually seeing quite a bit of client relationship growth. And it's too early to tell. But what early indications are we had a nominal amount of attrition, and we are actually seeing growth in those particular markets with our new product offering and our sales strategy and service levels..

Okay. Great, thank you..

Thanks, Don..

And we have a follow-up from Matthew Clark of Piper Jaffray. Please go ahead..

Hi, just again little bit more on the multifamily gain on sales. Just curious how much in the way of multifamily loans were sold in the first quarter that gave you that million dollar gain on sales? Just trying to back into it sale margin..

It's just under $50 million, Matthew..

Okay. So it looks like you got about 75 million in held for sale right now that would get you the 1.5 run rate going forward. Okay.

And then just lastly on the de-leveraging and the core margin outlook, I would suspect that that would help your core margin a little bit here in the back half helping to mitigate that incremental pressure on loans, is that fair?.

Yes, I think to the extent that we reduce holdings of securities which are yielding Western loans. That's going to be a mitigating factor on the net interest margin, but as I pointed earlier, low interest rates are still a factor of life and there is an awful lot of pressure on origination rates..

Okay, got it. Thank you..

Thanks, Matthew..

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

Thanks, Andrew. As I stated, we are pleased with our solid second quarter 2016 performance.

And see it as evident, we are making substantial and sustainable progress on our disciplined strategic plan to build shareholder value by executing on our super community bank model by growing market share, strengthening our deposit franchise, improving our core operating performance, maintaining a moderate risk profile, and prudently deploying excess capital.

I would like to thank all my colleagues for driving this solid performance for our company and for joining our call today. We look forward to reporting our results again to you in the future. Have a good day everyone..

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