Mark Grescovich - President and CEO Rick Barton - Chief Credit Officer Lloyd Baker - CFO of the Corporation Peter Conner - CFO of Banner Bank Albert Marshall - Secretary of the Corporation.

Jeff Rulis - DA Davidson Jackie Boland - KBW Matthew Clark - Piper Jaffray Tim O'Brien - Sandler O'Neill and Partners Steve Moss - FBR Tim Coffey - FIG Partners Don Worthington - Raymond James.

Good day everyone and welcome to the Banner Corporation’s Fourth Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [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 William, and good morning everyone. I would also like to welcome you to the full year and fourth 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 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, 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 $22.8 million or $0.69 per diluted share for the quarter ended December 31. 2016. This compared to a net profit to common shareholders of $0.70 per share for the third quarter of 2016 and $0.20 per share in the fourth quarter of 2015.

Results for the quarter just ended were modestly impacted by acquisition related expenses which net of taxes reduced net income by $0.02 per diluted share. For the full-year ended December 31, 2016 Banner Corporation reported net income available to common shareholders of $85.4 million compared to $45.2 million for the full-year 2015.

As anticipated, the full-year 2016 results were adversely impacted by acquisition and merger-related expenses associated with the AmericanWest Bank acquisition.

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 $29.9 million or 47% to $94 million in 2016 from $64.1 million in 2015. 2016 was truly a transformational year for Banner Corporation.

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

Following the successful completion of all systems conversations, we made additional progress in generating operating synergies through the integration of operational activities. We also experienced the 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 successfully executing on our strategies and priorities to deliver sustainable profitability and revenue growth to Banner.

Our full-year 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 full-year 2016 core revenue was strong at $460 million and increased 50% compared to the full-year 2015.

We benefited from a larger and improved earning asset mix and net interest margin that remained above 4%, very good deposit fee income and strong mortgage banking and multi-family revenue. Overall, this resulted in a return on average assets before acquisition expenses of 0.96% for the year.

Once again our performance this quarter and for the full year 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 augmenting our growth with opportunistic acquisitions.

To that point, our core deposits increased 6% compared to December 31, 2015 and our non-interest bearing deposits increased 20% from one-year ago. Further, we continued our strong organic generation of new client relationships. Our organic net client growth in these product categories is now 86% since December 31, 2009.

Reflective of this solid performance, we increased our full-year dividend for 2016 by 22%. 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, growth client relationships, deliver sustainable profitability and prudently invest our capital. We have also focused on maintaining the improved risk profile of Banner.

Again, this quarter our credit quality metrics reflect our moderate risk profile and are non-performing assets remain very low. 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 fourth quarter.

At the end of the quarter, our ratio of allowance for loan and lease losses to total loans was 1.57% when including the net loan discount on acquired loans. And our tangible common equity ratio was 10.8%.

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 maintaining a moderate credit risk profile. In the quarter and throughout the proceeding seven years, we continued 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 Banners’ proven credit and sales culture.

While these investments have increased our core operating expenses, they 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 received marketplace recognition of our progress in our value proposition as the small business administration 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.

Also Banner ranked 29 out of 100 in the Forbes 2017 best banks in America.

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 23 consecutive quarters of profitability and our tangible book value increase of $31.06 per share versus $29.64 per share at December 31, 2015.

I’ll now turn and call over to Rick Barton to discuss trends in our loan portfolio.

Rick?.

Thanks Mark. The year-end credit landscape at Banner mirrors the steady story for the first three quarters of 2016. My remarks this morning will be brief and will concentrate on the stable nature of the credit metrics of the company and the loan portfolios moderate risk profile.

Before commenting on some of our credit metrics, I want to once again state that the metrics are not likely to improve further as we move toward the next credit cycle. Delinquent loans decreased 12 basis points from the linked quarter to 0.41% of total loans.

This improvement was driven by the migration as a single commercial real estate loan into REO. A year ago, delinquencies were 0.42%. The company's level of adversely classified assets remains low and changed a little during the year. Non-performing assets increased 2 basis points during the quarter to 0.35% of total assets.

Non-performing assets were split between non-performing loans of $23 million and REO of $11 million. The shift in mix of non-performing assets from the last quarter resulted from the commercial real estate foreclosure already mentioned.

Not reflected in these totals are the remaining non-performing loans of $11 million acquired from Siuslaw and AmericanWest Banks which are not reportable under purchase accounting rules.

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 46 basis points, down from 47 basis points last quarter. Performing troubled debt restructures remain stable at 25 basis points of total loans.

Net charge-offs for the quarter were $253,000, while for all of 2016 net recoveries were $1,959,000. And at the risk of sounding redundant, recoveries are very hard to project and it is not realistic to expect continuing recoveries at this level in future periods.

After a fourth quarter provision of $2 million and net loan losses of $253,000, the allowance for loan and lease losses for the company now totals $86 million and is 1.15% of total loans compared to 1.14% for the linked quarter. As shown in the press release, the remaining net accounting mark against acquired loans is $31 million.

When this amount is added to the traditional allowance for loan and lease losses, the adjusted allowance totals $117 million or 1.57% of total loans, down from 1.60% last quarter and 1.65% at 12/31/2015. Coverage at this level 1.57% remain substantial and aligns with our goal of a moderate risk profile.

Loans grew by $52 million from the linked quarter and by $136 million when compared to 12/31/2015. Growth was muted during 2016 because of declines in the multi-family real estate portfolio, $225 million and the one to four family real estate portfolio, $140 million.

The decline in multifamily permanent loans reflects a strategy to reduce risk in that portfolio segment while the one to four family segment decline was driven by refinance activity as interest rates remained low during 2016. When these two portfolio segments are excluded, the balance of the Banner portfolio grew by 8.7% during 2016.

Loan segment growth occurred in these areas during the past year. Commercial construction grew by $53 million or 72%. This growth was driven by the funding of existing commitments and adding new commitments across our five-state footprint.

In the fourth quarter of 2016, outstandings actually declined in the segment by $11 million or 8% as projects were completed and repaid. This continues to be a very diversified portfolio with no product or geographic concentrations.

Multifamily construction loans were up $60 million or 94% in the last year with growth during the just completed quarter of the 18%. Growth came principally from funding existing commitments. We continue to see excellent lease up activity on our loans in this portfolio segment as they come to market.

During 2016 growth occurred in the residential construction portfolio 35% and the residential land portfolio 39% that when combined are $546 million or 7% of the total loan portfolio. Growth during the fourth quarter was more modest $20 million or 4% on a combined basis.

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 in balance with little standing inventory of completed homes.

The agricultural portfolio did decline by 4% during the quarter as sales of 2016 crops exceeded drawdowns online to finance 2017 crops. As I said at the outset of my remarks, it was a stable year for credit at Banner, which further solidified the moderate risk profile of our loan portfolios.

With that I will turn the mike over to Lloyd for his comments..

Thank you Rick and good morning everyone.

As Mark has noted and as reported in the earnings release Banner Corporation's fourth quarter and full year 2016 operating results continue to reflect successful execution on our strategic initiatives, including significant benefits from the acquisition of AmericanWest and compared to the 12-month period a year earlier to March 2015 acquisition of Siuslaw Bank also meaning 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 same period a year earlier as a result of substantial increases in average earning asset balances coupled with strong net interest margin and by growth in non-interest income reflecting the increased scale of the company.

In particular for the fourth quarter of 2016, our net interest income was exceptionally strong reflecting higher loan yields and increased accretion from acquisition accounting loan discounts as well as modest changes in our asset and liability mix.

By contrast, non-interest revenues although higher than a year ago, decreased compared to the preceding quarter in part reflecting expected seasonal factors impacting deposit fees and service charges as well as revenues from mortgage banking including a significant decrease in gain on sale of multifamily loans that was more related to market volatility than seasonal factors.

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

For the fourth quarter of 2016, Banner reported net income of $22.8 million or $0.69 per diluted share. This amendment was net of $788,000 of acquisition-related expenses and $1.1 million of net charges for valuation adjustments for financial instruments, partially offset by $311,000 of gains on the sale of securities.

All of which net related tax effect reduced earnings for the quarter by $0.03 per diluted share. By comparison, acquisition-related expenses were $1.7 million in the third quarter, which along with $1.1 million of fair valued charges offset by $891,000 of securities gains reduced earnings net of taxes by $0.04 per diluted share.

For the fourth quarter a year ago, acquisition-related expenses were much larger, $18.4 million. While fair value adjustments and securities losses combined were $1.5 million, which together net of tax effects reduced earnings by $0.40 per diluted share in that quarter.

Excluding these acquisition-related expenses, fair valued adjustments and securities gains or losses, our earnings from core operations were $23.8 million or $0.72 per diluted share for the current quarter compared to $25.2 million or $0.74 per diluted share in the immediately preceding quarter and $20.4 million or $0.60 per diluted share in the fourth quarter a year ago.

Again this quarter we have included reconciliation of earnings from core operations and other non-GAAP financial information in our press release which I strongly encourage you to review.

For the year ended December 31, 2016, our net income increased to $85.4 million or $2.52 per diluted share and included $11.7 million of acquisition-related expenses compared to net income of $45.2 million or $1.89 per diluted share for the year ended December 31, 2015, which included $26.1 million of acquisition-related expenses.

Excluding the acquisition-related expenses as well as value adjustments, securities gains and losses and related tax effect, our earnings from core operations for the full-year 2016 increased 47% to $94 million compared to $64.1 million for the full-year 2015.

Importantly, underlying this earnings growth, our revenues from core operations which is revenues excluding gains and losses on sales of securities and net fair-value adjustments, although unchanged from the immediately preceding quarter 117.5 million for the quarter ended December 31, 2016 were 5% greater than the fourth quarter a year ago.

As a result, our revenues from core operations increased 50% to $460.3 million for the year ended December 31, 2016 compared to $305.9 million for all of 2015.

This strong revenue generation is the result of significant balance sheet growth, a remarkably solid net interest margin, additional client acquisition and account activation that have 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 and the increasing value of the Banner franchise.

Banner’s fourth quarter net interest income before provision for loan losses increased 4% to $97.2 million compared to $93.7 million for the preceding quarter and was 6% greater than the same quarter a year earlier despite a modest decline in average earning assets as a result of our efforts to remain below $10 billion at year end.

Primarily reflecting $3 billion increase in average earning assets, our net interest income for the full year ended December 31, 2016 increased 55% to $375.1 million compared to $242.3 million for all of 2015. Our recorded net interest margin was 4.32% for the quarter ended December 31 2016, 17% basis point increase from the preceding quarter.

As a result of increased contractual loan yields and increased accretion income from the acquisition accounting 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 fourth quarter compared to 14 basis points in both the third quarter of 2016 and the fourth quarter of 2015.

More important, excluding the impact of acquisition accounting, our contractual or normalized net interest margin for the fourth quarter of 2016 was 4.13% compared to 4.01% in preceding quarter and 3.89% in the fourth quarter a year ago.

Loan yields and the net interest margin in the current quarter were positively impacted by increased market interest rates, while deposit pricing remained generally unchanged. Net income, loan yields and the margin were also aided in the fourth quarter by $1.1 million in prepayment fees related to a single credit relationship.

Well, not contributing to net interest income, net interest margin for the current quarter also benefited from the reduction of investment securities, certificates of deposit and federal home loan bank advances as we managed the balance sheet to remain below $10 billion in total assets at December 31, 2016.

For the full-year ended December 2016, our contractual net interest margin excluding the effect of it, acquisition accounting was 4.04% compared to 4.02% for 2015. Deposit fees and service charges were $12.2 in the fourth quarter, 6% decrease from $12.9 million in the preceding quarter, largely as a result of seasonal factors.

Deposit fees and service charges in the fourth quarter also decreased 7% compared to the same quarter a year earlier, primarily as a result of changes in fee structure for certain accounts acquired in the AmericanWest Bank merger that is not yet been implemented in the fourth quarter of 2015.

For the full-year 2016 deposit fees and service charges increased 21% to $49.2 million.

While the full-year 2016 deposit fees and service charges were somewhat adversely impacted by conversion activities and certain product changes earlier in the year, the significant increase compared to 2015 is a direct result of growth in core deposit accounts and related transaction activity reflecting continued success of our client acquisition strategies as well as the impact of the acquisitions.

As noted in the press release, mortgage banking revenues decreased to $5.1 million for the fourth quarter compared to $8.1 million in the third quarter. But increased 15% compared to $4.4 million for the fourth quarter of 2015.

The decrease in mortgage banking revenues compared to the third quarter reflected in expected seasonal pattern from one to four family loan originations amplified slightly by rising interest rates and also reflected meaningfully narrower spreads on loan sales compared to exceptionally widespread levels in the preceding quarter.

In addition, sales of multifamily were significantly less in the current quarter resulting in a decline of approximately $1.1 million in gain on sale compared to previous quarter. However, production in multifamily loans held for sale remained strong resulting in significant growth in the related balance sheet account.

Total non-interest operating expenses were $79.9 million in the fourth quarter compared to $79.1 million in the preceding quarter and $100.3 million in the fourth quarter of 2015.

As previously noted, acquisition-related expenses were 788,000 in the current quarter compared to $1.7 million in the preceding quarter and $18.4 million for the fourth quarter a year ago. Acquisition expenses for the full-year 2016 were $11.7 million.

At the lower end of the range we suggested at this time last year as a result of cost savings compared to earlier expectations. We do not expect to incur any additional acquisition-related expenses related to either of last year's acquisitions.

For the year ended December, 31 2016, total non-interest expenses increased to $322.9 million compared to $236.6 million in 2015.

The year-over-year increase in non-interest expenses was largely attributable to the costs associated with operating at branches and related operations acquired in the AmericanWest Bank and Siuslaw Bank mergers as well as generally increased expenses as a result of organic growth and increased transaction volumes.

Compared to the preceding quarter, the current quarter's non-interest expense also included increased occupancy costs related to infrastructure investments and higher than normal marketing expenses as well as the elevated cost for professional services as a result of seasonal factors relating to accounting and audit processes, and costs incurred in anticipation of enhanced regulatory requirements.

As we have previously indicated that last category that is cost-related to enhance regulatory requirements will continue to increase in future periods.

Finally, with respect to the income statement, our effective tax rate increase slightly compared to the preceding quarter and a year ago to 34.4% principally as a result of proportionately more of our income being subject to California and Oregon income taxes, but also as a result of minor year-end adjustments.

Reflecting our previously announced strategy to maintain total assets below $10 billion through the end of the year, our total assets decreased slightly to $9.79 billion at December 31, 2016.

As a part of this strategy, total securities and interest bearing cash balances decreased by approximately $230 million during the quarter as a result of repayments and sales of securities. Proceeds from these securities transactions were used to fund loans and reduce federal home loan bank advances and certificates of deposit.

As Rick has noted, our loans held for investment increased modestly by $52.5 million dollars or 1% during the quarter. However, we continue to have good production of targeted loans, resulting in meaningful increases in commercial real estate, construction and development and commercial business loans during the quarter.

Total loans held for investment were $7.45 billion at December 31, 2016. Seasonal trends and additional account growth resulted in a 1% increase in core deposits during the quarter. As a result, core deposits increased to 87% of total deposits at December 2016 and the cost of deposits declined to 13 basis points for the quarter.

Importantly, over the course of the year, non-interest bearing accounts increased by 20% to $3.14 billion at December 31, 2016.

Total deposits increased significantly less as a result of planned reductions in time certificates and broker deposits, but at $8.12 billion at December 31, 2016, total deposits have increased by $66.3 million compared to 12 months earlier with the significant core deposit totals providing a very stable funding base for the company going forward.

Finally, we repurchased 660,900 shares of our common stock during the quarter, bringing total repurchases for the year to just over 1,145,000 shares at an average price of $44.29.

Nonetheless, tangible book value has increased from $29.64 at December 31, 2015, the first reporting period following the AmericanWest Bank acquisition to $31.06 at December 31, 2016, a 5% increase over that 12-month period, which was further augmented by dividend payments of $0.88 per share for the year. This concludes my prepared remarks.

In summary, Banner had another good quarter and a very solid 2016 with continued encouraging trends for future periods. As always, I look forward to your questions and now, I’ll turn the call back to Mark..

Thank you, Rick. Thank you, Lloyd for your comments. That concludes our prepared remarks. And William, we’ll now open the call. We welcome your questions..

[Operator Instructions] And the first questioner is Jeff Rulis with DA Davidson. Please go ahead..

Thanks. Good morning. Okay.

Catching up to the budgeted, if you could remind us of the regulatory cost ramp you expect through, I guess the mid-way through ‘18 and maybe what portion of that was included in this quarter?.

Hi, Jeff. This is Peter Conner. Yeah. In regards to your question in Q4 and go forward expectations on regulatory cost, we incurred about 20% to 25% of the run rate expense on regulatory build towards our efforts in creating and building out our [indiscernible] and compliance infrastructure.

On a run rate basis, we expect that number to reflect $4 million to $5 million of run rate expense based increase on an annual basis when we’re fully completed, which we anticipate sometime in the second half of ’17..

Okay.

You said in total, 4 million to 5 million in total ramp and you incurred 25% of that in Q4?.

Right. .

And basically kind of a steady ramp through the second half of this year and then largely complete by the end of ‘17..

Right..

Jeff, this is Lloyd. Let me -- just to clarify that a little bit. We incurred 25% of what would be a quarterly run rate in the fourth quarter. So there's plenty to go and unfortunately, unfortunately, as we've discussed a number of times, crossing 10 billion is going to significantly add to the expense load.

As Peter mentioned, $4 million to $5 million on an annual run rate basis..

Fair enough.

And then as it relates to the, I guess, the core, if you back, if we're done with merger costs, if you're kind of at a $79 million core this quarter, any expectation for, excluding the compliance costs kind of the core growth rate of the bank on expenses is, do you have a number on that?.

Yes. Jeff, this is Peter again. So, we did have some investments in the fourth quarter related to our branch in IT and telephony network, some of which were one-time. We also had some elevated marketing costs related to some marketing campaigns in the fourth quarter.

While we don't expect some of those items to occur again, in the first quarter, we do expect some increases in compensation and professional services that will offset this declines in the first quarter. So we would expect approximately the same run rate that we saw in the fourth quarter and first quarter in terms of our core expense run rate..

But in terms of growth for ’17 per se, are you anticipating any or just holding the line on core expenses?.

We would expect a typical 2% increase in expenses in ’17 for revenue growth and small expense increases instead..

Got you. Thanks.

And then maybe just more on the margin, maybe one for Lloyd, how much in basis points did the prepayment fees at, to margin and then if you could just touch on your margin outlook, given expected rate hikes for the full year?.

Do you expect rate hikes for the full year?.

If you include, right, I see the assumption, yeah..

I'm not that certain. So the prepayment penalty added about 4 basis points to the quarter’s margin and about 1 basis point obviously then for the full year. And again, that was in an unusually large amount of prepayment income, not something we would normally expect.

The increase in interest rates then obviously had a positive impact on the margin as well and I would calibrate that, it's somewhere between 4 to 8 basis points, maybe, the impact. And then as noted, we did pay down the securities portfolio, those are lower yielding assets.

We do anticipate some re-leveraging in the securities portfolio that will be beneficial to net interest income, will actually bring the margin back down a little bit.

The wild card is just what you expressed, which is what's going to happen with interest rates and at what point in time increases in interest rates will translate into increased funding costs. However as I noted, we’re now sitting with over $3 billion of non-interest bearing deposits.

So, our expectation is that if rates do rise, that will be beneficial to the company. Having said that, there still are -- we're still recording or funding loans at levels that are not materially different from the average portfolio yield..

The next questioner today is Jackie Boland with KBW. Please go ahead..

Hi. Good morning, everyone. Just to touch on expenses, just again because you gave a lot of great color. I want to make sure that I understood everything you said. Since you’ve incurred around 20% to 25% of that 4 million to 5 million, on an annualized basis, that's already 1 million. So the future run rate in 2017 would be around 3 million to 4 million.

And then your core rate, which 59, given some fluctuations, is a good core rate. It would be 2% on top of that plus the expense ramp still to come, that 75% that’s left.

Is that a good summation?.

Yes. That’s a good characterization, Jackie..

Okay. Great. Thank you.

Touching base on the multi-families, had that there have been some timing differences in that, and I noticed that the held for sale portfolio was up as a result, is that something where you could see an outsized gain in 1Q as things kind of even out or would it be more back to a regular level in 1Q?.

All right. Jackie, this is Lloyd. I think it's more back to a regular level. As I noted, changes there, the slowdown in the fourth quarter was somewhat reflective of market, it is a little thinner than the normal mortgage banking market and a little more subject to volatility.

And I don't think even given the growth in the held for sale portfolio, we would want to go out on the limb far enough to say that it's going to be an outsized gain in the first quarter, but we certainly expect it to return to the levels that we've discussed in the past as our expectations..

And can you remind us what those are?.

Yeah. I think it’s probably in the neighborhood of $1 million quarterly..

Okay.

So is it possible that held for sale could on a go-forward basis maybe not be as high as it is this quarter, but trend a bit higher just with the mix of single family and multi-family that's in there?.

I don't think that the balance sheet will trend higher. I don't expect it to, that would be indicative of not selling enough to be honest with you. So the balance sheet category, I would expect and hope will actually decrease a little bit as the quarter progresses in the year 2017..

Okay.

And is there any sort of a target level at which you might look to reduce some of your multi-family sales or is this likely to just be a continuous ongoing effort?.

Right now, we anticipate that, as we've said before, to be an originating sale business unit. Is it possible that we would end up putting some in portfolio, I’d have to defer to my friend Mr.

Barton here to answer that question?.

My outlook is what it has been that we would like to have that be a flow basis operation because we do not want to increase our multi-family concentration in the long run..

Our next questioner today is Matthew Clark with Piper Jaffray. Please go ahead..

Hi. Good morning all. Let me first just on the loan growth in the quarter, low single digits here again. But obviously trying to stay under 10 billion.

So I think it's prudent and probably understandable, but just curious what the outlook is like in the pipeline, whether or not, now that we're kind of beyond the $10 billion issue, wan we see high single digit loan growth once again?.

Matthew, this is Rick Barton. In talking with our production people, pipelines are very comparable to what they have been in past periods and that's across the footprint. And I think that is supportive of what you just said about potential loan growth..

In the high single digits, is that right?.

Yes..

Okay. Okay.

And then also in terms of your excess capital, just curious on what the latest priorities are there, obviously, the stock has had a decent run, not sure if share repurchases is attractive as it once was to you all, but just curious what your thoughts are on using that excess capital for organic growth deals, share repurchase of special duties..

Yes. Matthew, this is Mark. Our priorities have not shifted. They include reinvestment in the franchise, first and foremost, continuing to increase the core dividend to a 30% to 35% payout ratio.

Obviously, reinvestment in the franchise through opportunistic combinations and strategic fill-in and obviously then we would look to the different components we already utilized the share repurchase like you're correct at the current price, probably a special dividend would be more in line..

Okay. Great.

And then just last one on the securities portfolio, I know you guys have been de-leveraging and it sounds like we might see some growth restored there, just how should we think about the size of that securities portfolio, should it grow consistent with the rest of the balance sheet or lag or vice versa?.

Yeah. Matthew, this is Peter Conner. So we anticipate de-levering the balance sheet to the same level of securities that we held in the first half of ’16 by the end of the quarter. And that will be funded through a combination of deposit growth and additional borrowings, primarily [indiscernible]..

Our next questioner today is Tim O'Brien with Sandler O'Neill and Partners. Please go ahead..

Good morning. A question for Lloyd on following up on the margin discussion. So the text notes that it was market interest rates kind of generally speaking that drove some of the expansion. Lloyd you described it 40 basis points to the margin this quarter.

Does that suggest that it was general market interest and it's not just tied to the Fed hike in December, right?.

That’s certainly, yeah Tim, certainly a significant part of it. If you recall, LIBOR started moving up well in advance of the Fed move, right.

And if we have a meaningful portion of the loan portfolio that's index to either one or three months LIBOR, one I think is more predominant and then we also had late in the quarter, the move from the Fed, which influenced prime, which is another significant component of the portfolio.

I don't seek in terms of movement in further out the curve that it had a huge impact during the quarter other than, it's certainly, the increase in ten year treasury and mortgage rates and similarly term structured rates reduced the pressure that has been with us for an extended period of time on producing loans at lower and lower rates all the time in the last seven year economic cycle.

So, it reduced the pressure, but as you would expect, there wasn't that much in the way of new loan relative to the size of the portfolio. So it's mostly the impact on those floating rate instruments that are tied to either prime or LIBOR and again LIBOR started moving early in the quarter, back late in the third quarter.

And all of that have a positive impact on loan yields..

And Ken, this is Peter. One other kind of to add to Lloyd’s, we had some benefits on the de-leveraging the fourth quarter. So as a higher percentage of our earning assets were made up of loans versus securities as we de-lever, that also had some positive effects on the core margin.

We expect the offset to happen going to the first quarter, so we’ll have some dilutive effect on margin as we grow and re-lever the securities..

And then also excluding kind of the higher accretion or acquired loan related benefit and marks on deposits or benefit there and excluding that 1.1 million prepayment penalty.

So those things being left off the table, how much of your LIBOR tied loan book repriced during the quarter and are there any of those loans that are set on a lag where, I don’t know, a , monthly or quarterly lag that they haven't really repriced much. And there's more to come in the first quarter..

This is Lloyd. There is some fall in to that category. I think perhaps in the first quarter in terms of the rate move, the more significant point is the prime rate increase only impacted us for about 15 days. Now, the wildcard that I’ve mentioned earlier and I'll reiterate again is that at some point in time, deposit pricing may be impacting.

And part of the re-leveraging that Peter was mentioning includes interest sensitive funding in the form of federal home loan bank advances.

So I don't want to imply that the margin is going to be ever expanding because of 125 basis point increase in rates, but as we’ve indicated for a long time, first of all, as we indicated for a long time is that if rates didn't go up, it was going to become increasingly more painful. And second, as we've indicated, we are slightly asset sensitive.

So that’s a positive. But I've been in this business long enough to know that at some point in time, there will be some adjustments in deposit pricing as well..

And then just a housekeeping item, miscellaneous fee income was up nicely a little over 2 million sequentially this quarter relative to 1 million, a little over a 1.3 million in the third quarter.

Lloyd, do you have any color on that?.

We had a strong quarter for sale of SBA loans. We recorded gains on those, about $700,000 in the quarter. That sales activity is somewhat lumpy. We also had a good quarter for some swap fees. And we sold an excess piece of property that had a couple of hundred thousand dollar gain in it. So just a lot of good things came together in the fourth quarter.

In terms of miscellaneous income, we would certainly expect SBA and swap fees over time to be recurring. We don't expect to have excess property to sell on a recurring basis..

Our next questioner today is Steve Moss with FBR. Please go ahead..

Good morning.

I was wondering going back to the investments, what’s the rate or the yield on these securities you’ll be purchasing as you leverage up here?.

Well, this is Peter Conner. So we’re going to reinvest in a very similar path, security since that we currently have in the portfolio and so you can, that’s going to be in the same level of duration and yield that we have currently, but at prevailing market rates.

So we expect some modest increase in the portfolio yield as we re-lever, given the integration stuff in the fourth quarter. But there is not going to be anything unusual or exotic in the re-leveraging activity other than increasing at the same mix of securities that we had traditionally..

Okay. And then with regard to purchase accounting accretion, it was up this quarter.

Just kind of wondering what are your expectations for 2017?.

Yeah. This is Peter again. So we heard, I believe just under $12 million in accretion income in full year ’16. That will diminish substantially in 2017 and you could kind of think about half the accretion result in ‘16 would be our expectations in ’17. As noted before, this won’t be based on prepayment activity.

So, it’s challenging to predict it quarter to quarter, but as that loan discount burns down and more of the acquired loans get renewed and come out of coverage, there is just less discount accretion available to run into the income statement.

So in general, we think of it approximately half of the prior year as a way to think about forecasting loan accretion..

Okay. And then, earlier I believe you mentioned of possibly still an acquisition, I was just curious what M&A opportunities if any are you seeing out there and if you have any updated thoughts on your M&A strategy..

This is Mark, Steve. There really is no update. I think conversations obviously continue. There's been some significant activity in the Northwest that’s been announced here recently.

I would expect that there is continuing dialog going on with many people in terms of trying to extract additional value out of each franchise and get some additional efficiencies and so the conversations continue..

[Operator Instructions] Our next questioner is Tim Coffey with FIG Partners. Please go ahead..

Thanks. Good morning, gentlemen. Mark, it’s kind of a question on the non-interest expense growth going forward.

If you're going to be growing more than you have been this last year, why wouldn't non-interest expenses go up more?.

Thank you for the question, Tim. There's a couple of things obviously we remain focused on, we continue to remain focused on. And that’s the operating leverage, positive operating leverage.

So our expectation obviously is with the type of revenue growth we're seeing that that continues in the pace of expense growth actually slows, so we get additional efficiency out of our franchise so that we restore the company to strong positive operating leverage into the second half of ‘17..

Okay.

So there's no kind of identifiable deductions from expenses, i.e., additional cost saves or initiatives on that front?.

Well, I think we’ve extracted the cost saves that we expected out of the AmericanWest combination. And so right now, it's a matter of getting additional efficiency out of the franchise we’ve built..

Okay.

And then just kind of piggyback on the last M&A question, is the focus for M&A on holding to acquisitions or would you consider business lines?.

I think all actions are open, Tim. What we won’t do or what we're not interested in is nationwide monoline businesses.

So if we can have a business line that would augment our super community bank model, meaning middle market, small business and consumers around the bridge distribution system in our current geography that would certainly be on the table, but monoline businesses that have a national footprint are some things that we're not interested in..

Our next questioner is Don Worthington with Raymond James. Please go ahead..

Good morning.

I think I missed it in your comments Rick, but the OREO increase that was basically one CRE loan, was that correct?.

That is correct, Don..

Okay. And then just any color on how the strategy is being rolled out in Southern California and maybe the Utah markets that were new to you with the AmericanWest transaction..

Yes. Don, this is Mark. I think what, from our vantage point, the strategy that we rolled out is very similar to the rest of the franchise and we've had some very good success early on. As I indicated in the last call, we've seen substantial amount of growth in those markets.

What is too early to tell is the extent of whether we can continue that type of growth or whether we plateaued because we are new entrant or with the new products. So sustainability of that growth is something we still are going to monitor.

The other thing I’d comment on is, if you take a look at our growth, as we did two conversions and an acquisition and you see that we had 6% core deposit growth, the indicators are that what you would normally see in the form of attrition did not happen.

And we're actually growing that part of the franchise, so we're pleasantly surprised at how quickly that integration has been accepted in those marketplaces..

[Operator Instructions] Looks like we have no further questioners. So this will conclude our question-and-answer session. I'd like to turn the conference back over to Mark Grescovich for any closing remarks..

Thank you, William and thank you everyone for your attention and your questions.

As I stated, we are pleased with our solid 2016 performance and see it as 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'd like to thank all my colleagues throughout the company who are driving the solid performance. Thank you again for your interest in Banner and for joining us on the call today. We look forward to talking with you in future regarding our results. Have a great day, everyone..

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