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

Jeff Rulis - DA Davidson Matthew Clark - Piper Jaffray Tim O'Brien - Sandler O'Neill.

Good morning, and welcome to the Banner Corporation Third 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 Mark Grescovich, President and CEO of Banner Corporation. Please go ahead..

Thank you, Kate, and good morning everyone. I would also like to welcome you to the third quarter 2016 earnings call for Banner Corporation.

As is customary, joining me on the call today is Rick Barton, our Chief Credit Officer; Lloyd Baker, our Chief Financial Officer of the Corporation; Peter Conner, Chief Financial Officer of Banner Bank and Albert Marshall, the Secretary of the Corporation.

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

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

Those statements include descriptions of management's plans, objectives, or goals for future operations, products or services, forecast of 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-Q for the quarter ended June 30, 2016.

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

Thank you, Al. As announced, Banner Corporation reported a net profit available to common shareholders of $23.9 million or $0.70 per diluted share for the quarter ended September 30, 2016. This compared to a net profit to common shareholders of $0.61 per share for the second quarter of 2016, and $0.62 per share in the third quarter of 2015.

As anticipated, the third quarter of 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 $0.03 per diluted share.

Excluding the impact of merger and acquisition expenses, gains and losses on the sale of securities, and changes in fair value of financial instruments, earnings from core operations increased $9.9 million or 65% to $25.1 million for the third quarter of 2016, from $15.2 million in the third quarter of 2015.

And increased 9% compared to $23 million in the immediately preceding quarter.

While our core operating performance continued to reflect the success of our proven client acquisition strategies which produced strong core revenue, we also 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 a successful completion of all system conversion, we made additional progress in generating operating synergies through the integration of operational activities. We also experienced the full benefit of having consolidated overlapping branch locations.

More importantly, as a result of the hard work of our employees throughout the company, we are also successful executing on our strategies and priorities to deliver sustainable profitability and revenue growth to Banner.

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

Our third quarter 2016 core revenue was strong, at $117.5 million, and increased 74% compared to the third quarter of 2015, and 3% compared to the second 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 and multifamily revenue.

Overall, this resulted in a return on average assets of 1.01% from core operations and an adjusted efficiency ratio of 64% for the third quarter of 2016. Once again, our performance this quarter reflects continued execution on our super community bank strategy.

That is, growing new client relationships, improving our core funding position by growing core deposits, and promoting client loyalty and advocacy through our responsive service model, while also augmenting our growth with opportunistic acquisitions. To that point, our core deposits increased 91% compared to September 30, 2015.

Also, our non-interest bearing deposits increased 104% from one year ago. Although a large portion of this balance growth is from the acquisitions, we also saw continued strong organic generation of new client relationships. Our organic net client growth in these product categories is now 86% since at December 31st of 2009.

Reflective of this solid performance our dividend in the quarter increased 10% to $0.23 per share. In a few moments Lloyd Baker will discuss our operating performance in more detail.

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

At the end of the quarter, our ratio of allowance for loan and lease losses to total loans was 1.6% when including the net loan discount on acquired loans and our tangible common equity ratio was 11.03%.

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

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

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

Further, we've received marketplace recognition of our progress 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 $31.14 per share versus $30.75 per share at September30, 2015.

Finally, I'd like to welcome three new members of our executive management team, Ms. Kayleen Kohler has joined our company, as Executive Vice President and Director of Human Resources. Ms.

Judy Steiner has joined Banner, as Executive Vice President and Chief Risk Officer and this year Craig Miller, has joined the company as Executive Vice President and General Counsel. These three executives have extensive experience with larger companies and augment our leadership team, as we prepare to grow beyond $10 billion in assets.

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

Thanks Mark. The credit story at Banner was uninvestable [ph] during the third quarter. consequently my remarks will be brief and focused on the company's credit metrics and loan portfolio. Our credit metrics have been relatively stable for a number of quarters, a trend that’s continued in the third quarter.

Before discussing some of the metrics, I wanted to once again state that our credit metrics not likely to improve further as we move toward the next credit cycle. Delinquent loans increased 1 basis points to 0.53% of total loans. The company's level of adversely classified assets was stable during the quarter.

Non-performing assets increased 1 basis point during the quarter to 0.33% of total assets. Non-performing assets were split between non-performing loans of $26 million and REO of only $5 million.

Not reflected in these totals are non-performing loans of $14 million acquired from Siuslaw and 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 $39 million.

If we were to include the acquired non-performing loans in our non-performing asset totals, the ratio of non-performing assets to total assets would still be a modest 47 basis points, unchanged from last quarter. Performing troubled debt restructures continued to decline, and are only 24 basis points of total loans.

Net recoveries for the quarter were $900,000, and reflect a continuing collection efforts for our special assets department. And as we have said many times before, recoveries are very hard to project, and it is not realistic to expect recoveries at this level in future quarters.

After a provision of $2 million in the net loan recoveries of $900,000, the allowance for loan and lease losses for the company now totals $84 million and is 1.14% of total loans compared to 1.11% for the linked quarter. As shown in the press release, the remaining net credit mark against acquired loans is $35 million.

When this amount is added to the traditional allowance the adjusted allowance totals $119 million or 1.60% of total loans, down from 1.63% last quarter. Coverage at this level 1.60% remains substantial and aligned with our goal of a moderate risk profile. Loans grew by $73 million from the linked quarter or 1%.

On an annualized basis, this is a growth rate of 4%. Growth was muted during the quarter because of declines in the multifamily real estate, one to four family real estate and commercial business category.

The decline in multifamily permanent loans $21 million reflects continuing loan sales out of that portfolio, while one to four segment declined $32 million was driven by continuing refinance activity, as interest rates remained low during the quarter.

When these two portfolios segments are excluded all other loans grew $126 million or 2.0% during the just completed quarter.

The decline in commercial business loans during the quarter $42 million was driven by lower utilization and continuing lines of credit and business owners either selling assets to pay down debt or selling the company's in whole resulting in pay off of all outstanding loans. Other loan segments did record a meaningful growth during the quarter.

Commercial construction grew by $30 million or 28%. This was primarily driven by the funding of existing commitments, although some new commitments were added to cross our five state footprints. This continues to be a very diversified portfolio with no product or geographic concentrations. Multifamily construction loans also were up $8 million or 3%.

Growth came principally from funding existing commitments. We continue to see excellent lease up activity on loans in this portfolio segment, as they come to market. Growth occurred in the residential construction portfolio 10% and the residential land portfolio of 3% that when combined are $526 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 Northern California, Utah and Idaho.

All markets remain imbalanced with little standing inventory of completed homes and the agricultural portfolio grew by 3% during the quarter as production lines of credit were down drawdown as expected.

As I said at the outset of my remarks, it was a stable quarter for credit at Banner, which further solidifies the moderate risk profile of our loan portfolio. With that, I will turn the stage over to Lloyd for his comments..

Thanks, Rick and good morning everyone.

As Mark has noted and reported - as reported in the earnings release, Banner Corporation's strong third quarter and year-to-date 2016 operating results continue to reflect a successful execution of our strategic initiatives, including significant benefits from the acquisition and further progress on the integration of AmericanWest Bank.

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

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

Similar to previous periods fully appreciating Banner's core operating results for each of the period presented requires a clear understanding of the impact of merger and acquisition expenses, as well as valuation adjustments for certain financial instruments that we carried at fair value and when gains and losses on sales of investments securities.

In the third quarter of 2016 Banner reported net income of $23.9 million or $0.70 per diluted share, this amount was net of $1.7 million of acquisition-related expenses, and $1.1 million of net charges for evaluation adjustments on the fair value of financial instruments, partially offset by $891,000 of gains on the sale of securities.

All of which net related tax effects reduced earnings for the quarter by $0.4 per diluted share. By comparison the acquisition-related expenses were $2.4 million in the second quarter, which along with a total of 757,000 of fair value and charges in securities losses reduced earnings by $0.06 per diluted share for that quarter.

For the third quarter a year ago acquisition-related expenses were $2.2 million while fair value and charges were $1.1 million, which together net of tax effects reduced earnings by $0.11 per diluted share.

Excluding these acquisition related expenses, fair value adjustments in securities gains and losses, our earnings from core operations increased to $25 million or $0.74 per diluted share for the current quarter, compared to $23 million or $0.67 per diluted share in the immediately preceding quarter and $15.2 million or $0.73 per diluted share in the third quarter a year ago.

Again this quarter we have included reconciliation of earnings from core operations on page 17 of the press release and I encourage you to review that analysis.

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

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

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

Our revenues from core operations increased 3% to $117.5 million for the quarter ended September 30, 2016, compared to $114.4 million in the second quarter 2016 and were 74% greater than the third quarter a year ago.

As a result, year-to-date revenues from core operations increased to $342.8 million, 77% percent greater than the same period a year earlier.

The strong revenue generation is the result of significant balance sheet growth, a remarkably solid net interest margin, additional client acquisition and account activation which is driven in increased deposit fees and increased mortgage banking activity, all of which continue to reflect a 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 third quarter net interest income, before provision for loan losses, increased to $93.7 million, compared to $93.1 million in the preceding quarter and reflecting an increase of $4 billion in average assets increased 80% compared to the same quarter a year earlier.

Our reported net interest margin was 4.15% for the quarter ended September 30, 2016, a 5 basis point decrease from 4.20% in preceding quarter, as a result of a reduced amount of accretion income from acquisition accounting loan discounts.

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

More important, excluding the impact of acquisition accounting, our contractual or normalized net interest margin for the third quarter 2016 was 4.01%, unchanged from the preceding two quarters. But a decline of 9 basis points compared to a year ago.

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

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

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

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

Deposit fees and service charges were $12.9 million in the third quarter, a modest increase from $12.1 million in the preceding quarter was a 33% increase compared to the third quarter 2015. Year-to-date deposit, fees and service charges increased 35% to $37 million.

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

As noted in the release, mortgage banking revenues were strong at $8.1 million for the third quarter, as home purchase activity in our markets remained robust and low long term interest rates fueled refinance transactions. Home purchase activity accounted for 65% of our one to four family mortgage loan originations in the quarter.

In addition, during the current quarter we realized $1.4 million of gains on the sale of multifamily loans. These gains related to loans originated by the specialty origination unit, we acquired in the AmericanWest merger.

Total non-interest operating expenses were $79.1 million for the third quarter compared to $79.9 million in the preceding quarter and $46.7 million in the second quarter 2015.

As previously noted, acquisition related expenses were $1.7 million in the current quarter compared to $2.4 million in preceding quarter and $2.2 million in the third quarter a year ago. Acquisition expenses for the quarter were at the low end of the range we had previously suggested, as a result of cost savings compared to our earlier expectations.

We do not expect to incur a material amount of additional acquisition expenses related to either of last year's acquisitions. For the nine months ended September 30, 2016, total non-interest expenses increased to $243 million compared to $136.3 million for the first nine months of 2015.

The year-over-year increase in non-interest expense are largely attributable to the cost associated with operating the branches and related operations acquired in the AmericanWest Bank merger, as well as generally increased expenses as a result of organic growth and increased transaction volume.

Compared the preceding quarter, the current quarter's non-interest expense also included an elevated - also included elevated costs for professional services, as a result of seasonal factors relating to accounting, audit and examination processes.

Costs in anticipation of enhanced regulatory requirements and costs associated with sales and registration of restricted shares issued in the AmericanWest Bank merger.

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

Reflecting our previously announced strategy to maintain total assets below $10 billion through the end of this year, our total assets decreased slightly to 9.84 billion at September 30, 2016.As a part of the strategy, total securities and interest-bearing cash balances decreased by approximately $141 million, as a result repayments and sales of securities.

Proceeds from these securities transactions, along with deposit growth in excess of loan growth, we is to reduce Fed home bank advances by $263 million and to repurchase 484,000 shares of common stock which reduced equity by $21.1 million.

As Rick has noted, our total loans increased by $73 million or 1% during the quarter with good production of targeted loans, including meaningful increases in commercial real estate, construction and developments and agricultural business loans.

Total loans held for investment were $7.31 billion at September 30 and increased 70%, compared to a year earlier.

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

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

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

Total equity decreased by $7.2 million during the quarter and our tangible book value per share has increased from $29.64 at December 31, 2015, the first reporting following the AmericanWest Bank acquisition, the $31.14 at September 30, 2016 of 5% increase over the nine month. This concludes my prepared remarks.

In summary, Banner had another great quarter and solid first nine months of 2016 continued encouraging trends for the future periods. As always I look forward to your questions.

Mark?.

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

[Operator Instructions] The first question comes from Jeff Rulis of DA Davidson. Please go ahead..

Thanks. Good morning, guys..

Morning, Jeff..

Just a follow-up on the expense line Lloyd, I guess X-merger cost you at a base of 774, could you just give us an update on kind of the cost savings progress to date and maybe what additional may be out there to kind of point us to a kind of run rate when all was said and done on that quarterly expense rate?.

Well, Jeff, as you noted 774 is a pretty close to what we would anticipate as run rate today. There is - there continue to be opportunities for synergies as a result of the merger and activity will consider - continue around evaluating locations and rationalization opportunities.

But candidly we're also growing and as I noted we anticipate - as we noted for some period of time, we anticipate some ramp up in expenses principally associated with the $10 billion regulatory requirements that we anticipate going forward. So I think you are pretty close to a base rate here..

Okay.

The cost savings is largely leading in any synergy you find could be offset by the reasons you just referenced?.

Yes, I think that’s exactly correct. We did - we have achieved very close to the $37.5 million that we anticipated way back in November of 2014.

So that - the opportunities has played out pretty much as we expected, the one surprise is that noted couple quarters and again this quarter is the entire cost merger related to expenses were somewhat less than we initially projected..

Got you. Okay.

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

Yes. Jeff this is Mark. I'll let Rick comment on the pipelines, but clearly we managed doing a number of things and managed the balance sheet below $10 billion, I think what you’ve seen from the numbers in the press release and Rick already noted is the targeted portfolios that we want grow grew at a 2% rate in the quarter.

And obviously, that we were allowing the continued reduction in one to four family portfolio. And we continue to sell into the secondary markets with multifamily. So obviously those balance sheet strategy is going on to keep the company on the liability cycle of $10 billion as well.

But we still see we are encouraged by the current economic climate, specifically in the metro markets in which we operate. Rick if you want to….

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

Got it. Maybe just a follow. Mark, and I - so expectations for '17, if we're to kind of remove this whole $10 billion discussion and just take core growth, I guess, which you are budgeting on a net loan growth in '17, any comments on expectations for the full-year….

Let me answer this way Jeff, we really haven’t changed out thought process. So if you take the targeted portfolios and say we're kind of waxing out on the reduction in some of the other portfolios, we're still looking at high single digit growth rate, provided obviously that the economy continues to cooperate..

Fair enough. Thank you..

You bet..

The next question comes from Matthew Clark of Piper Jaffray. Please go ahead..

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

Sure. Matthew, this is Lloyd. Good morning. The registrations shares probably contributed $400,000 to the expense line and principally that related to sales that occurred by some of the shareholders.

So it is interesting to note that a number of those restricted shares have changed hands I think over the principally since April 1 when it became 144 eligible and since we recorded the S3 at that point in time we are showing no shares as well. So there were some delayed costs associated with that.

And there were other things, the seasonal aspect we do get into, year-end Sarbanes-Oxley testing, year-end audit expenses, some of those things.

So professional fees can be a little lumpy, but I would caution year-to-date as we've noted moving in incurred additional fees going forward as a result of the $10 billion particularly preparing for to become the DFAS [ph] compliant bank, as well as some additional compensation expense related to that.

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

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

Got it. Okay.

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

We've indicated it is underway. But we've also made it very clear that there are - there is going to be expense growth associated with that specific issue of becoming a $10 billion bank. And our expectations there have not changed for some period of time. But we have….

I think the important point there is much effort underway at the company today to prepare and ensure that we will be able to comply with all those requirements.

Now, let's put that back in perspective that we laid out before, we'll stay under $10 billion through the end of this year, likely class it sometime next year, which means that there if there is a Durbin amendment we'll become effective for us in the second half of 2018, there is a revenue impact of that, we have previously estimated to be about $11 million annual revenue.

So that's $5 million or $6 million in the second half of '18. And in our first DFAS required submission will likely be in 2019, but we're moving forward with building out the skill set, the capacity to be DFAS compliant by the end of next year..

Matt, this is Mark, just in reference to the questions to expenses that you and Jeff both asked, the company remains extremely focused on generating positive operating leverage.

So there's two sides to that equation, obviously we have to continue to grow revenue and what you've seen over the last couple of quarters is that we've had positive operating leverage and we anticipate that going forward..

Got it. Okay.

And then on the buyback, I think somewhat unexpected, can you just update us on your thoughts of what your appetitive is right there, and whether we might see that consistently so long as you have, excess capital that you have?.

So - this is Lloyd again Matt. As I noted that buyback, we traded that, we've had that authorization for a while. We triggered it with the 10B5 filing in the third week of September as part of our deleveraging strategy.

We announced a plan to repurchase about 1.3 million shares there and probably at least halfway through that plan to date, what was may surprise some people just a little bit is that the effect on average shares outstanding in the quarter was fairly modest for the third quarter, it should be significantly more impact on the on the fourth quarter of this year..

All right. Thank you..

Thank you, Matthew..

The next question is from [indiscernible] of FBR. Please go ahead..

Good morning..

Good morning..

I wanted to touch base on the construction lending, you obviously had healthy construction growth this quarter, I heard you guys about proportionally or been diversified.

But I was wondering if there any particular market that are driving the growth?.

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

Okay. And the other thing I was wondering about with regard to the loan loss reserve ratio, obviously it’s returning higher you have given that purchase loans are rolling off.

How should we think about that over the next couple quarters in terms of the ratio?.

We don't give definitive guidance on that, but I think we've stated on a number of occasions that we want to keep the combined accounting market traditional provision in the 140 to 150 range and the level of exact provisioning is going to be driven by level of loan growth, by the mix of growth, any you know expected credit events and the pace of migration out of the purchase accounting world into the regular provisioning world.

And we I think that the level that we've seen in the last couple of quarters is in the ballpark..

Okay. And another thing with regard to agriculture and relatively small part of portfolio.

So just wondering if you have any concerns about credit stresses there given, lower beef prices and milk prices in the recent months?.

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

Great. Thank you very much..

Thanks, Steve..

[Operator Instructions] The next question comes from Jackie Bolling [ph] of KBW. Please go ahead..

Hi. Good morning, guys..

Good morning, Jackie..

Lloyd, I wondered if you could comment on what drove the fair value market a little higher this quarter..

Sure. It’s fairly straightforward. The movement in LIBOR which trended up by about 25 basis point if I recall, during had a direct impact on that mark-to-market.

So as we noted before, without any change in rates for spreads, we would anticipate about $350,000 a quarter of mark on the trust preferreds, net mark on the trust preferred securities just because of the passage and that’s the principal thing that is going through that fair value account.

The movement in LIBOR accounts for most of the difference this quarter..

That’s helpful. Thank you.

And then what was the dollar amount, and I am sorry I missed this earlier, of the multifamily loans that were sold in the quarter?.

1.4..

1.4….

The actual number of loan sold, I am not sure about 80 million, roughly 80 million..

Okay.

And the just one last one, and just looking at the variance between the period balances and average balances in the loan portfolio, was there any end of quarter run off or was most of that variant instrument by the held for sale portfolio and just fluctuations in there?.

I think the held for sale, as Rick pointed out in our C&I I am not sure exactly the timing, but we had some clients who have success events for the client, that resulted in some pay-downs and I do think some of that result was fairly late in the quarter there..

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

Thanks, Jackie..

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

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

Good morning, guys.

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

Yes. Thanks, Tim. And good morning. I don't have anything in particular different to add than I have in the previous quarters. I think there is certainly conversations that are occurring about the difficult operating environment.

That a lot of institutions are faced with, with low interest rates and now the concentration limits becoming an issue and some institutions was commercial real estate. So it’s becoming a challenging environment for a number of banks to continue to operate in high performing level. So the conversations continue.

But I don't have anything further to add than what I had in the previous quarters..

What about geographically, like, perhaps in California or Oregon, is - are there markets which you are clear from at this point or are you looking to build out in any particular markets if the opportunity arises….

I think all of our markets as we alluded to in many of our investor presentation are very, very attractive market. You certainly see in California be - as you already know, the sixth highest rated economy in the world, all of our markets are doing extremely well and we made additional density. So we're looking to build out in every one of us market.

I'm not going [indiscernible] does that help Tim?.

It does. Thanks. And then just a little updates on outlook for mortgage and fee income.

I know that there's probably some seasonality in purchase markets, but can you talk a little bit about that?.

Sure. Tim, this is Lloyd. Obviously there is always been seasonality in the mortgage market, but I think if you look at our balance sheet, you are going to see that we still have very strong position in loans held for sale, interest rates continue to be mortgage rates in particular continued to be very attractive.

And the housing affordable, as I noted, there's still refinance activity going on but 65% of what we did was purchase activity, which is indicative of what Mark and Rick have both said about the strength of markets that we operate in.

So I I'm optimistic around mortgage as far into the future as I can see which obviously things can change, but the next few quarters look pretty good again. There will be a natural seasonal slowdown, most likely you'll see that in the first quarter would be my expectation..

Great. Thanks a lot, guys..

Thanks, Tim,.

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

Good morning. Just on the efficiency ratio, I know Mark you talked about goal of generating positive operating leverage continuing to generate positive operating leverage. And I think you’ve talked about a range for efficiency ratio in the 62% to 65% range. I guess, you know what are your thoughts in getting to the lower end of that range.

We require higher rates or you can get there without it?.

First of all, that is kind of a range that we said the core operation can operate at and continue to have positive operating leverage. So thank you for reaffirming that range. And on an adjusted basis we're at 64%. We are not - we set our business plans based on a status quo business climate.

So we're not relying on rising rates, we continue to take market share like we have and leverage the acquisition of AmericanWest. We will continue to drive down that efficiency ratio. As we've be done in last couple of quarters..

Okay. Thank you..

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

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

As I stated we're pleased with our solid third quarter 2016 performance and we there is evidence that we're making substantial and sustainable progress on our disciplined strategic plan to build shareholder value, by executing on our super community bank model, by growing market share, strengthening our deposit franchise, improving our core operating performance and gaining a moderate risk profile, and prudently deploying excess capital.

I'd like to thank all my colleagues who are driving this solid performance for our company. Thank you for your interest in Banner and for joining the call today. And we look forward to reporting our results to you again next quarter. Have a great day everyone..

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