Banner Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 19, 2024

There are 11 speakers on the call.

Operator

Good morning, everyone, and welcome to the Banner Corporation 4th Quarter 2023 Conference Call and Web All lines have been placed on mute during the presentation portion of the call with an opportunity for question and answer at the end. I would now like to turn this conference call over to our host, Mark Grescovich, President and CEO of Bana Corporation. Please go ahead.

Speaker 1

Thank you, Candace, Good morning and Happy New Year, everyone. I would also like to welcome you to the 4th Quarter and Full Year 2023 Earnings Call for Banner Corporation. Joining me on the call today is Rob Butterfield, Banner Corporation's Chief Financial Officer Joe Rice, our Chief Credit Officer and Rich Arnold, our Head of Investor Relations. Rich, would you please read our forward looking Safe Harbor statement?

Speaker 2

Sure, Mark. 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, forecasts 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.

Speaker 2

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 on the earnings press release that was released yesterday and a recently filed Form 10 Q for the quarter ended September 30, 2023. Forward looking statements are effective only as of the date they are made and Banner assumes no obligation to update information concerning its expectations. Mark?

Speaker 1

Thank you, Rich. As is customary, today we will cover 4 primary items with you.

Speaker 2

First,

Speaker 1

I will provide you high level comments on Banner's 4th quarter and full year 2023 performance. 2nd, the actions Banner continues to take to support all of our stakeholders, including our Banner team, our clients, our communities and our shareholders. 3rd, Joe Rice will provide comments on the current status of our loan portfolio. And finally, Rob Butterfield will provide more detail on our operating performance for the quarter as well as comments on our balance sheet. Before I get started, I want to again thank all of my 2,000 colleagues in our company who are working Hard to assist our clients and communities.

Speaker 1

Banner has lived our core values, summed up as doing the right thing For the past 133 years, our overarching goal continues to be do the right thing for our clients, our communities, Our colleagues, our company and our shareholders and to provide a consistent and reliable source of commerce and capital through all economic cycles and change events. I am pleased to report again to you that is exactly what we continue to do. I'm very proud of the entire Banner team that are living our core values. Now let me turn to an overview of our performance. As announced, Banner Corporation reported a net profit available to common shareholders of $42,600,000 or $1.24 per diluted share for the quarter ended December 31, 2023.

Speaker 1

This compares to a net profit to common shareholders of $1.58 per share for the Q4 of 2022 and $1.33 per share for the Q3 of 2023. For the full year ended December 31, 2023, Banner reported net income to common shareholders of 183 point $6,000,000 compared to $195,400,000 for the full year 2022. The earnings comparison is primarily impacted by the provision for credit losses and the increase in funding costs. Our strategy to maintain a moderate risk profile and the investments we made during our Banner Forward program to improve operating performance have positioned the company well to weather recent market headwinds. Rob will discuss these items in more detail shortly.

Speaker 1

To illustrate the core earnings power of Banner, I would direct your attention to pretax pre provision earnings, excluding gains and losses on the sale of securities, banner forward expenses, gains on the sale of branches, loss on the extinguishment of debt and changes in fair value of financial instruments. Our full year 2023 core earnings were $262,700,000 compared to $251,900,000 for the full year 2022. Banner's 4th quarter 2023 revenue from core operations was $157,100,000 compared to $157,700,000 for the Q3 of 2023. For the full year 2023, revenue from core operations increased 3% to $643,900,000 when compared to the full year of 2022. We continue to benefit from strong core deposit base has proved to be resilient and loyal to Banner in the wake of a highly competitive environment, a very good net interest margin and core expense control.

Speaker 1

Overall, this resulted in a return on average assets of 1.09 percent for the Q4 of 2023. Once again, our core performance reflects continued execution On our supercomputing and easy bank strategy, that is growing new client relationships, maintaining our core funding position, promoting client loyalty and advocacy through our responsive service model and demonstrating our safety and soundness through all economic cycles and change events. To that point, our core deposits represent 89% of total deposits. Further, we continued our strong organic generation of new relationships and our loans increased 7% over the same period last year. Reflective of the solid performance, coupled with our strong regulatory capital ratios and the fact that we increased our tangible common equity per share by 18% from the same period last year, we announced a core dividend of $0.48 per common share.

Speaker 1

As I mentioned on previous calls, Banner published our environmental, social and governance highlights report last December and published our inaugural ESG report earlier this summer. Both of these documents reflect the many ways in which we continually strive to do the right thing in support of our clients, our communities and our colleagues and provides an outline of the level of commitment Banner has to the many communities it serves. Finally, I'm pleased to say that we continue to receive marketplace recognition and validation of our business model and our value prophecy. Banner was again named 1 of America's 100 Best Banks and 1 of the Best Banks in the World by Forbes. Newsweek named Banner one of the most trustworthy companies in America and just recently named Banner one of the best regional banks in the country.

Speaker 1

S and P Global Market Intelligence ranked Banner's financial performance among the top 50 public banks with more than $10,000,000,000 in assets And the digital banking provider Q2 Holdings awarded Banner their Bank of the Year of Excellence. Additionally, as we have noted previously, Banner Bank received an outstanding CRA rating in our most recent CRA examination. Let me now turn the call over to Jill to discuss the trends in our loan portfolio and her comments on Banner's credit quality. Jill?

Speaker 3

Thank you, Mark, and good morning, everyone. As reflected in our release, Banner's credit metrics continue to remain solid. Delinquent loans ended the quarter at 0.40% and compared to 0.27% as of the linked quarter and 0.32% as of year end 2022. Adversely classified loans remained relatively flat at 1.16 percent of total loans and are down from 1.35% as of December 31, 2022. Banner's non performing assets increased $3,000,000 in the quarter, continue to be centered in non performing loans and now total $30,000,000 representing a modest 0.19 percent of total assets.

Speaker 3

The net provision for credit losses for the quarter was $2,500,000 which included a $3,800,000 provision for loan losses offset in part by a release of 5 1,000 in the reserve for unfunded loan commitments as well as a release of $750,000 of the provision recorded in the 2nd quarter related to financial institution subordinated debt held within the investment portfolio. Loan losses in the quarter totaled $1,700,000 and were set in part by recoveries of $531,000 with net losses for the year totaling a nominal 3 basis points of average total loans. The provision for loan losses this quarter provided for continued loan growth after which our ACL reserve totals 149 point $6,000,000 or 1.38 percent of total loans as of December 31. This coverage level is identical to that reported in the linked quarter, compares to 1.39 percent coverage as of December 31, 2022 and currently provides 506 percent coverage of our non performing loans. As anticipated, loan originations declined modestly again this quarter.

Speaker 3

Still, loan outstandings grew by 100 $99,000,000 or 2% for the quarter and grew by 7% year over year. While C and I line utilization was up 1% in the quarter, Balances were down modestly and were down 2.2% year over year. Small business originations offset these pay downs Such that year over year on a combined basis, commercial and small business scored loans are up 2.1%. Owner occupied commercial real estate production was also positive, up 8.3% year over year, all of which reflects the success of our super community relationship banking business model. As we anticipated, growth in the investor CRE portfolio, excluding multifamily, was muted in the quarter and reflects a modest decline in balances year over year.

Speaker 3

Given the expectation of the increased rate environment Holding in the near term, we continue to anticipate muted commercial real estate loan growth over the next few quarters. Repeating what I have said before, our office portfolio well diversified both in size and in geographic location and overall credit performance has been solid to date. It remains balanced between investor CRE and owner occupied, represents 6% of our loan book and there has been no meaningful change in the portfolio of loans secured by our office properties within the major metropolitan areas across our geographic footprint. We downgraded 2 small office secured loans this quarter. Adversely classified loans secured by office properties are currently limited to 4 loans totaling $7,200,000 with only 2 loans totaling approximately 500,000 currently past due.

Speaker 3

Multifamily real estate loans were up $45,000,000 or 6% in the quarter, almost exclusively related to converting the balance of multifamily loans that were originated for sale into the portfolio after eliminating that business line in Q3. This portfolio has grown 26% year over year and remains approximately 55% affordable housing and 45% middle income market rate housing and remains granular in size with balances spread across our footprint. Growth in the construction and development loan balances during the quarter was found almost entirely in the multifamily construction portfolio, up $51,000,000 or 11% in the quarter. This portfolio grew by 55% year over year, primarily due to our continued emphasis financing affordable housing projects throughout our footprint. Commercial construction outstandings increased a modest 1% in quarter and ended the year 8% lower than that reported as of December 31, 2022, as there has been less demand for new projects in this higher rate environment.

Speaker 3

Residential construction exposure remains acceptable at 5% of the portfolio, flat with last quarter and is now split Approximately 60% for sale housing and 40% are custom 1 to 4 family residential mortgage loan product. Outstanding balances continued their declining trend again this quarter, down 2% and are down 19% year over year. As I have discussed throughout the year, sales of completed starts continued to outpace new takedowns with builders remaining cautious in relation to their unsold inventory. Additionally, production of new custom construction 1 to 4 family mortgage originations has declined, with commitments down 33% year over year. In total, construction and land development loan balances increased 3% year over year, driven primarily by the growth in the multifamily construction portfolio.

Speaker 3

When you include multifamily, commercial construction and land, the total construction exposure remains at an acceptable 14% of total loans. As expected, agricultural loan balances began their seasonal decline with balances down 1% from the linked quarter. When compared to December 2022, balances increased 12% as we both expanded existing and added new relationships during the last growing season. And lastly, we again reported growth in the consumer mortgage portfolio, up 6% in the quarter and 29% year over year, continuing the trend of retaining completed all in one custom construction loans on balance sheet. I will close in the same way I started, Noting that Banner's credit metrics continue to be strong and are reflective of a credit culture that is designed for success through our business cycles.

Speaker 3

Our consistent underwriting remains a source of strength as does our solid reserve for loan losses and robust capital base. Given the continued economic uncertainty, I will again note that our credit quality metrics should not be expected to improve. Still, we remain well positioned to navigate the balance of this economic cycle. With that, I'll turn the microphone over to Rob for his comments. Rob?

Speaker 4

Great. Thank you, Jill.

Speaker 5

We reported

Speaker 4

$1.24 per diluted share for the Q4 compared to $1.33 per diluted share for the prior quarter. The $0.09 decrease in earnings per share was primarily due to lower net interest income and higher losses on the sale of securities, partially offset by a gain recorded on multifamily loans moved from held for sale to held for investment. Core revenue excluding loss on the sale of securities and changes in investments carried at fair value decreased $607,000 from the prior quarter, primarily due to higher funding costs leading to a decline in net interest income. Total loans increased $156,000,000 during the quarter, with an increase of $199,000,000 in held for investment loans, partially offset by a decrease of $43,000,000 in held for sale loans, as $43,000,000 of multifamily loans previously held for sale were transferred to held for investment. The increase in total loans was primarily due to 1 to 4 family real estate loans increasing $79,000,000 and multifamily construction loans increasing $51,000,000 due to advances on affordable housing projects.

Speaker 4

Total securities increased $37,000,000 The recent decline in interest rates led to an increase in the fair value of a Villed for sale securities, which was partially offset by the sale of $34,000,000 of Villehurst sales securities and normal portfolio cash flows. Any additional security sales during the Q1 will be dependent upon market conditions. Deposits decreased by $145,000,000 during the quarter due to a $90,000,000 decrease in retail deposits and a $55,000,000 decline in brokered CDs. Core deposits ended the quarter at 89% of total Banners liquidity and capital profile continue to remain strong with a robust core funding base, a low reliance on wholesale borrowings and significant off balance sheet borrowings with all capital ratios being in excess of well capitalized levels. Net interest income decreased $3,400,000 from the prior quarter due to the increase in funding costs offsetting the increase earning asset balances and yields.

Speaker 4

Compared to the prior quarter, average loan balances increased 152,000,000 And loan yields increased 12 basis points due to adjusted toll rate loans repricing as well as new production coming on at higher interest rates. The average rate paid on new production for the quarter was 8.59%. Total interest bearing cash and investment balances declined $100,000,000 from the prior quarter, while the average yield on the combined cash and investment balances increased 1 basis point. The total cost of funds increased 23 basis points to 131 basis points due to increases in the rates paid on deposits and borrowings. The total cost of deposits increased 24 basis points to 18 basis points reflecting both increases in the rates paid on interest bearing deposits as well as the shift in the mix of deposit with a portion of non interest bearing deposits moving into interest bearing deposits.

Speaker 4

The decline in non interest bearing deposits during the quarter was largely concentrated in the month of November, where we saw some client event driven activity. Non interest Fearing deposits ended the quarter at 37% of total deposits. On a tax equivalent basis, net interest margin decreased 10 basis points to 3.83%. The decrease was driven by increases in funding cost on the interest bearing liabilities outpacing the increase in yields on earning assets. We expect net interest margin will experience some additional moderate compression during the Q1 on Fed actions and market conditions.

Speaker 4

Total non interest income increased $1,400,000 from the prior quarter, primarily due to higher mortgage banking income, partially offset by higher losses on the sale of securities. The current quarter included a $4,800,000 loss on the sale Securities, the average payback on these trades was under 3 years. Core non interest income excluding the loss on the sale of securities and then changes in investments carried at fair value increased $2,800,000 due to a $3,500,000 gain recorded on the multifamily loans moved from held for sale to held for investment as well as increased income from bank owned life insurance, partially offset by lower deposit fees. Deposit fees and other service charges decreased $1,400,000 due to higher costs on debit transactions and card replacement related expenses. Income from residential mortgage operations declined $568,000 due to normal seasonality.

Speaker 4

Total non interest expense increased $730,000 from the prior quarter. The increase reflected higher payment and card processing expense due to higher fraud losses, higher occupancy and equipment expense due to seasonal building maintenance and lower capitalized loan cost. These increases were partially offset by lower compensation expense due to lower severance costs and lower legal expense. Despite the continued Economic uncertainty, we remain focused on the long term. In 2024, Banner will be making strategic investments to expand its loan production capacity by having talented relationship managers in key markets and investing initiatives to grow its non interest income.

Speaker 4

This concludes my prepared comments. Now I'll turn it back over to Mark. Mark?

Speaker 1

Thank you, Jill and Rob for your comments. That concludes our prepared remarks. And Candace, we'll now open the call and welcome questions.

Operator

So our first question comes from the line of Jeff Rulis of D. A. Davidson. Your line is now open. Please go ahead.

Speaker 6

Thanks. Good morning. Just a I guess a follow on to kind of Rob's commentary on the non interest bearing balances and then in the release, I think Mark, you've got comments about still Customers request for higher rates, that non interest bearing balance as a percent of deposits down to 37%. Do you get a sense and maybe Rob you said it was November heavy, but guess what are you talking internally about where you think that troughs at or stabilizes? Any read on that?

Speaker 7

Good morning, Jeff.

Speaker 1

Thanks for the question. I'll turn it over to Rob.

Speaker 4

Okay. Hey, Jeff. Yes, I mean, as you point out, I mean, our non interest bearing deposits are which Is a little perspective, 39% was pre COVID, but the interest rate environment was completely different back then. But the 37% continues to hold up very well compared to peer banks at this point. It's hard to say where that trough is at.

Speaker 4

I mean, I think the crystal ball is a little cloudy there. At this point, I guess, we still expect that we're going to hold up better than most in this category. But Calling the actual trough is a little difficult. We certainly expect that we'll see some additional rotation out during the Q1. And at this point, I would say we're taking it quarter by quarter.

Speaker 4

We want to see that point where we're seeing that continuing trend down in the amount that's rotating out each quarter. And then once we can see that trend kind of holding then I think we'll have better visibility. There certainly could be some help in the second half of the year when and if the Fed starts to bring down rates that could take some pressure off. But at this point, we're just taking it a quarter at a time.

Speaker 6

Okay. Yes, I should have alluded to the fact that in the mid-30s, that's a pretty high number versus peers. I guess if we transition to the margin, Rob, you mentioned additional compression. The decline linked quarter in the 4th quarter is actually larger than the prior quarter trying to get a sense for magnitude. So one margin in the Q1, do we it sounded like there was moderating compression kind of discussion.

Speaker 6

And then the second part of the margin question would be, I think you still screen pretty asset sensitive. What would be the outcome if it were, say, 3 cuts this year versus maybe 6, any kind of read on where you think margin goes from there?

Speaker 4

Sure, Jeff. So I mean, first, if we think look at the loan side, so I would say the asset side is a little more predictable in this equation right now. So if we look at the loan side, if the Fed is on pause, we would expect loan yields to continue to increase similar to what we saw this kind of in that 10 basis point range because we still have a large block of adjustable rate loans have not repriced through this cycle at this point. And then also as fixed rate loans are maturing, they're coming on a much higher interest rate. So absent anything else throughout the year, each quarter we would expect kind of that 10 basis points of yield pickup quarter over quarter.

Speaker 4

Once the Fed starts to decrease, so the floating rate loans which are about 26 of our book, those would reprice down instantaneously with the decline in Fed Funds. And so if that comes at a gradual pace, if there's a couple like 2 cuts this year, If there's a one cut in the quarter, we think that the adjustable rate Rollins repricing will offset any impact of the decline related to the floating rate loans coming down. Where it becomes more challenging is if the Fed becomes more aggressive. If the Fed becomes more aggressive, then we don't think those adjustable rate, that 10 basis points a quarter, we don't think that's going to be able to offset a larger cut of 75 basis points in a particular quarter. On the other side of the equation, The deposits, it's a little more cloudy obviously on that and what that looks like going forward.

Speaker 4

But we do think that we're going to continue to see deposit and funding cost increases probably through the first half of the year. Once the Fed

Speaker 6

Action

Speaker 4

on that. There will be a little bit of even some flattening in the funding deposit cost. And then, as we at some point, we'll actually once they start cutting, we'll be able to see some relief in deposit costs coming down. But I think there's going to be some lag there just because of the overall market liquidity right now.

Speaker 6

Okay. So Rob, Any moves you're making to kind of make it the bank more rate neutral or I don't know about hedges. I guess You kind of have a natural revenue hedge with the mortgage unit. I would guess we get aggressive cuts that kick in, but Any management of the balance sheet? Are you trying to get a little more neutral?

Speaker 6

Or at this point, Any kind of adjustments?

Speaker 4

Yes, sure. I mean, as you said, I mean, the Residential mortgage business is a natural hedge against that. So, and I mean that operation is still Up and operating and if the rate environment changes, we'll see some very quickly be able to take advantage of that in that unit. And we have put head we do have floors on our loans. A large percentage of our loans do have floors on them.

Speaker 4

So That will help in that environment. But as far as being able to artificially hedge the portfolio, that's not really an option because we do have those floors in place and hedges don't play well with floors on the loans.

Speaker 6

Okay. Thank you. I'll step back.

Speaker 1

Thanks, Jeff.

Operator

Thank you. Our next question comes from the line of Erik Spector of Raymond James. Your line is now open. Please go ahead.

Speaker 8

Hey, good morning everybody. This is Eric on the line for David Feaster. Thanks for taking the questions. Starting on the credit front, just given the uncertain backdrop, I know you're very conservative on the credit front, but just curious how maybe you're stressing the book and How you're approaching upcoming maturities and the process for modifications now that TDR rules have changed?

Speaker 3

Yes, Eric, thanks for the question. We are regularly stress testing our portfolio. So we take a look at it reviewing income and debt service Coverage, we stress vacancy levels as to the real estate loans and their impact to the net operating income, debt serviceability, Look at changes in cap rates based on the interest rate and what that does to the collateral coverages. When you think about real estate portfolio that has about 15% of that will have a rate reset over the next 24 months. And our most recent review reflects no significant concerns with regards to the repayment ability based on the current yield curve and their current most recent operating statements.

Speaker 3

Additionally, because the portfolio is so lowly leveraged on an average basis, the properties are generally well positioned to those changes in asset values. So we have not seen to date any issues with people who need to refinance whether it's off balance sheet or in our portfolio.

Speaker 8

Okay. That's helpful. And then maybe just outside of the margin, I'm just curious how you think about declining rates on the balance sheet and income statement, would you expect to see additional loan growth potentially from that? And at what level would you to see in what segments would you think you'd see at first? And just curious how you think about your ability to reprice deposits and drive additional core deposit flows

Speaker 3

So I'll take a stab at our loan growth and then let Rob talk about the deposit side of the equation. But going into 2024, We are expecting a low to mid single digit growth rate. As the rates come down, we would expect Activity to pick up both in commercial real estate, and I would say construction as well. We'll just get more activity that has been on pause. Some of that will be offset by what I would anticipate to be a higher refinance on the residential mortgage book as they refinance down.

Speaker 3

So those combined together even in a shifting rate environment is what leads me to say low to mid single digit growth rate.

Speaker 4

Yes. And on the deposit side, I guess what I'd say there is that clearly in the current environment with the rate environment right now, it doesn't really pay to try to go after deposits right now other than through full relationship. So I think as part of that loan growth that Jill is talking about there is, as rates start to come down, we're focusing that loan growth either on existing clients or clients that are bringing in a full relationship with them, meaning that they're bringing their primary deposit accounts as well. So there certainly could be some opportunities there as rates start to come down.

Speaker 8

Okay. That's helpful. And then just maybe just touching on capital, it was great to see the release on TCE given lower rates. Curious, your thoughts on capital just more broadly and what capital priorities are at this point? What are capital trends in the cards at all?

Speaker 8

Just Just curious, your ideal methods of capital deployment today?

Speaker 4

Sure, sure. So I mean, just a reminder of kind of our capital priorities. 1st and foremost is the core dividend, which we kept at $0.48 for the quarter as we have been paying. And then beyond that, historically, we have done share repurchases and occasionally, some type of special dividend. And beyond that, I mean, of course, we're always interested in M and A activity if it's the right opportunity at the right price.

Speaker 4

And the capital has continued to build. So we haven't repurchased shares for all of last year At this point, so capital levels continue to build. And we think in this current environment with a bit of economic uncertainty, it makes sense to be building that capital currently. And so I wouldn't expect in the near term that we would change any of our priorities or change The capital actions that you've seen really over the last year, once we get into maybe the second half of the year, maybe there's better economic certainty out there and then we can look at changes in our capital actions at that point in time.

Speaker 8

Thanks for taking my questions and I'll step back.

Speaker 4

Thanks, Eric.

Operator

Thank you. Our next question comes from the line of Andrew Liesch of Piper Sandler. Your line is now open. Please go ahead. Thanks.

Speaker 7

Hi, good morning everyone. Just a question on some of the last prepared comments. You Mentioned expanding loan production capacity by adding new bankers and investing in initiatives to grow fee income. Any more details you can provide on that? What sort of like hiring plans you may have?

Speaker 7

What locations?

Speaker 2

And what some of these initiatives may be?

Speaker 3

Sure, Andrew. This is Jill. I'll take that one. As we have discussed throughout the year, we have been adding new bankers and it has included not just commercial and commercial real estate lenders, but we've added business bankers, treasury management officers and other back office personnel as well. It's been across the footprint really and as to relationship managers more up and down the West Coast I-five quarter, but not limited to that.

Speaker 3

And we expect to see that continue into 2024. We're still having good conversations. We kind of hit a Slight pause, I would say, right here in the Q1 until people get their annual or quarterly bonuses, but the conversations are still going on. We would expect to continue to add, and I would throw in that these new team members are not just bringing new client relationships, but they bring a level of enthusiasm about what Banner is able to serve that kind of lifts the whole boat. Say more client disruption and more new bankers.

Speaker 8

Got it. And I think

Speaker 7

in the past you mentioned these are coming from larger banks. Is that still the case?

Speaker 8

It is, by

Speaker 3

and large.

Speaker 7

Great. And then just got it. Just So cleanup questions on the fee income side. So it sounds like maybe the deposit fees and other service charge line, is that going to snap back to the prior run rate? And then on Bank Home Life Insurance, is this the

Speaker 2

new run rate to be looking at going forward?

Speaker 4

Yes. So first on the deposit and fees side. So I would say the run rate is probably somewhere in between Q4 and Q3 is what I would say is the run rate. And then on the bank owned life insurance, there was a death claim in that area. So the current quarter was a bit higher than the run rate.

Speaker 7

Got you. All right. That's helpful. Thanks for taking the questions. I'll step back.

Speaker 4

Thank you, Andrew.

Operator

Thank you. Our next question comes from the line of Andrew Terrell of Stephens. Your line is now open. Please go ahead.

Speaker 9

Hey, good morning.

Speaker 4

Good morning, Andrew.

Speaker 9

Wanted to first kind of follow-up on some of the commentary around the hiring and just maybe first acknowledge that you guys have done a really good job managing the expense base with some of the Banner Ford initiatives. But just as we look into 2024, it sounds like the pipeline for hiring still is Solid today. Just want to maybe marry that with how you're thinking about just expense growth and the rate of expense growth in 2024?

Speaker 4

Yes, Andrew, it's Rob. So yes, we have been making those strategic investments. I mean, we want to keep our on the long term. And so if there's opportunities to take advantage of the current market disruption by getting the right talent into the bank, we're willing to make those investments. Just thinking about expenses overall for 2024, we're expecting kind of a normal inflationary increase.

Speaker 4

So If you think about all of 'twenty three, annual 'twenty three compared to annual 'twenty four, something in that 3% range, What we're currently thinking at this point in time. Just from a quarterly look, I mean, Q1 is always a bit high because all the payroll taxes reset. So we expect that Q1 will probably be the highest of the year. So we would expect it to be a bit higher than the true run rate in the Q1 of the year.

Speaker 9

Okay. That's helpful. I appreciate it. If I could ask on the margin, Rob, do you have the spot cost of either interest bearing or total deposits in the month of December?

Speaker 4

I don't have that in front of me here, but what I'd say Andrew is the cost of deposits for Q4 was essentially in line with probably just November cost of deposits. And so if you take the starting point, ending point And the trajectory, I would think that December, you can probably kind of interpolate where December would have been out. But November and the cost of deposits average for the quarter were about the same and December is higher than that.

Speaker 9

Got it. Okay. That makes sense. And I guess just overall in the margin kind of going into the Q1, just Given the non interest bearing decline and maybe a higher starting point on the deposit cost side, I mean, is it fair to think that the margin could see more compression than the 10 basis points you saw in 4Q as we go into the Q1?

Speaker 4

Yes. I mean, I we're a bit hesitant to put a number on it just because of there's a lot of cloudiness out there at this point in time. But I think we're looking at the trends. So Q3 was 7 basis points, Q4 is 10. It certainly could be in that 10% or 10 basis points decline there compression in the Q1.

Speaker 4

But what I would say too is that historically Q1 has been a better deposit quarter for us compared to Q4. And then Q3, usually the 2 best deposit quarters for us are actually Q3 and Q1. And Q3 behaved a lot better than Q4. So I think while we could be A bit higher than 10 basis points, we certainly could be a bit lower than that as well.

Speaker 9

Okay. And maybe last one for me, Just on the savings deposits, they were up really nicely this quarter. Just wanted to get a sense of I think it was up $30,000,000 or so quarter on quarter. For that deposit growth that you saw in the savings bucket specifically, Do you have kind of what the incremental rate paid was for the new growth? And what I'm trying to get a sense of is just whether there's kind of Money coming on from like a new high yield savings offering or just, is it more kind of in line with the average deposit costs?

Speaker 9

Any color there would be helpful.

Speaker 4

Yes, sure. So I mean our stated deposit specials, we haven't changed those since May. Really, we hit because of our strong liquidity position that we have and strong core funding base, We had to chase the market completely all the way up. But the rate on our savings right now, the stated rate, it's a tiered, but the top tier is 4% currently on that. But we are willing to make some exception pricing for our very best clients in that particular product and we would probably have exception priced up into that 5% range.

Speaker 4

But the Average cost on that particular high yield savings account right now is running right around 361 is where we're at on average on that account.

Speaker 9

Got it. Okay. That's, those are all the questions I had. I appreciate you guys making time for me today.

Speaker 1

Thank you, Andrew.

Operator

Thank Our next question comes from the line of Kelly Malta of KBW. Your line is now open. Please go ahead.

Speaker 10

Hi, good morning. Thanks for the question. I wanted to follow-up on the deposit side. I think, Rob, you made a comment in the Q and A that it doesn't Necessarily makes sense to chase deposits here. Just wondering, I saw in 4Q With deposits down, you kind of backfilled funding with FHLB.

Speaker 10

Just how we should be thinking about the funding of growth and the use of Wholesale funding as we look ahead with kind of that low to mid single digit loan growth anticipated?

Speaker 4

Yes, Kelly. I mean, we did see an uptick in our FHLB advances, But I will point out our reliance on wholesale funding is very small, but we did see that uptick. And I mean, if you look at the activity, we saw that about $90,000,000 decline in retail deposits and some of that was event driven activity, so not necessarily something we expect to continue there. And then we also let $55,000,000 of brokered CDs run off as well. And so I would look at part of the increase in FHLB advances as essentially covering the brokered CDs that we let roll off there.

Speaker 4

And our brokered CDs, I mean, are also very small at this point at 108,000,000 And but as we let those roll off, if the deposit activity overall doesn't retail deposit activity doesn't cover it, we'll have to cover those with FHLB advances. But the advantage of the FHLB advances is we're staying short on those. So it's essentially overnight. So we're able to Pay those down as deposit activity comes in. And then clearly, if rates start to come down later in the year, then it will give The opportunity to pay those down very quickly.

Speaker 4

But I think from a loan growth standpoint, we're looking at the Roll off of the securities, so we're getting about $60,000,000 of cash flows off our security portfolio. So part of it will come from that. We could consider some additional security sales similar to what we have been doing here. Although given the current rate environment and everything that's going on, I mean, we continue to kind of evaluate all options there. But other than that, I think It would come kind of the last bucket that we'd use as infill as those FHLB advances.

Speaker 10

Got it. And I'd like to circle back a bit to the margin going through what you mentioned about loan yields and being able to offset pressure if there's maybe 1 or 2 cuts, but it would be more draconian or More punitive if we potentially follow the forward curve. Is that how to think about it with the margin that you might see some Greater relief on margin with some modest rate cuts, but there would still be greater downward pressure at least initially if Rates followed the forward curve, just trying to kind of where expectations Relative to what the market is pricing in versus what KBW, what we have internally on our rate expectation side.

Speaker 4

Sure, sure. Yes. No, I think that's accurate. I mean, I think we're well positioned for kind of a gradual decline in interest rates because I think we're going to The adjustable rate loans that haven't repriced through the cycle, I think they're going to benefit us if you see 25 basis points at a time, If you see 2 or 3 cuts in the second half of the year, I think the adjustable rates will cover that. But if the Fed got more aggressive than that and then I think temporarily you'd see more impact on margin.

Speaker 4

But again, it's those adjustable rate loans as time goes by will continue to reprice up unless rates really come down more rapidly.

Speaker 10

Very helpful. Maybe last question for me, maybe for Jill. It looks like there was Obviously, obviously, you have a very small base, but a little bit of an uptick on early stage delinquencies. Just wondering if there's anything you're seeing there, such as normal I guess later payments as around the holiday season. Just wondering if you could provide any color on that?

Speaker 3

Yes, Kelly, that's exactly what it is, is year end holidays and just normal delinquencies. I think what I would emphasizes that when the credit metrics are as clean as they have been, any little change moves the dial. So 0.4% delinquency is still very strong.

Speaker 10

Absolutely. Thank you so much. I'll step back.

Speaker 1

Thank you, Kelly.

Operator

Thank you. Our next question comes from the line of Timothy Coffey Of Janney, your line is now open. Please go ahead.

Speaker 5

Great. Thank you. Good morning, everybody. Question is for Mark and Rob. As you kind of look at the type of depositors that are still chasing rate, Are you seeing a difference between your urban customers and your more rural depositors?

Speaker 4

Tim, it's Rob. Thanks for the question. Yes, I mean, I think it's a I think we are seeing a little bit of different behavior there. In general, I would say our Rural clients on is probably has more consumer type deposits. Not that there's not A number of commercial clients there as well, but on average and then Metro probably has a higher percentage of business.

Speaker 4

And so I would so rather than rural versus urban, I would probably characterize Consumer versus commercial. And I think we're seeing that consumers are probably Even more rate sensitive than some of our commercial clients. And so we're probably seeing more movement there. I mean, clearly, commercial clients are managing their balance sheet at this point and moving stuff back and forth, but They also have to maintain a certain level in their non interest bearing checking accounts just for normal operations and stuff. So I think that activity probably happened a while ago, but we're continuing to see sensitivity on the consumer clients.

Speaker 5

Okay. That's helpful. Thank you. And then a question for Jill. As kind of The credit metrics start to somewhat normalize towards pre COVID levels.

Speaker 5

What is your outlook for the economy within Banner's footprint? Is it for a soft landing or something harder?

Speaker 3

Well, Tim, I wish I had a crystal ball. I'm leaning to a soft landing, and it's really because of the markets that we're serving. I feel really good about the West Coast and how strong it has held up. But, at the end of the day, we're well positioned to deal with whatever is thrown our way and we're just going to keep on doing what we do.

Speaker 5

Okay. All right. Thank you. Those are my questions. Thanks, Tim.

Operator

Thank you. Our last question is a follow-up question from Jeff Bruelis of D. A. Davidson. Your line is now open.

Operator

Please go ahead.

Speaker 6

Thanks. Just another quick one on credit and kind of splitting hairs a little bit, but the C and I the increase in C and I non accruals linked quarter, I mean overall NPAs to assets under 20 basis points, Small number, but just trying to get any read on what that commercial non accrual increase was if that was And any I don't know if it was granular by segment that you saw?

Speaker 3

It was Granular, Jeff, I mean, actually we've had a little bit of movement out and movement in, but it's not industry specific or anything that points to a larger concern.

Speaker 6

Fair enough. That I check. Then

Speaker 9

just one of

Speaker 6

the last one is on the mortgage side. Just trying to get a read On it looked like a benefit on the move within the multifamily Investment, I mean, a little bump in the mortgage banking line. Where could you see that Kind of in 'twenty four relative to 'twenty three, do you think it shapes up as a slightly better year from mortgage banking overall if we look at year over year?

Speaker 4

Yes. Hey, it's Rob. So yes, I think it's Obviously, heavily interest rate environment driven, but we have seen a bit of a pullback in rates. So that should help the activity if we continue to see rates come down. Our expectations is that 2024 would look better than 2023, still could be a challenging year for the industry obviously, but we do think that we would see some pickup in in residential mortgage banking operations during 2024 compared to 2023.

Speaker 6

Rob, would you anticipate any more multifamily kind of moves that would bump that would be a benefit to that line item or was that kind of a Q4 heavy item?

Speaker 4

Yes, it was a Q4 heavy item. I mean, we had been writing as interest rates have been coming up, we had been writing down the multifamily loans, the fair value of those, and all that was running through mortgage banking operations. And so even during the 1st 9 months of the year, we had written $800,000 So part of that Gain that we recorded in the Q4 was really a recapture of some loss that we had taken during the 1st 9 months of the year, but then there was also some losses in prior year's write downs that was recaptured. And so but now we've moved all of the multifamily loans out of held for sale. So we don't that to see that benefit anymore.

Speaker 4

But on the other side of it, we did talk about making some investments into some different areas and one of those is our SBA operations and we've made we've hired a number of folks in the Q4 here as well as far as business officers. So what we're looking at is kind of growing our SBA business and growing our gain on sale related to SBA loans to kind of offset that historical gain on sale that we would have saw from multifamily during kind of a normal environment. So, can't give any specifics on what expectations are from that SBA business for 2024, but we do expect that we'll see some build of gain on loan sale throughout the year in that particular unit.

Speaker 6

Great. Thank you for the color there. That's it for me. Thanks.

Speaker 1

Thanks, Jeff.

Operator

Thank you. As there are no additional questions waiting at this time, I'd like to hand the conference call back over to Banna Corporation's President and CEO, Mark Grescovich for closing remarks.

Speaker 1

Thank you, Candace, and thank you all for your questions and your attention today. As I've stated, we're very proud of the Banner team and our 2023 performance in the wake of what is a Very challenging environment for our industry. So thank you again for your interest in Banner and for joining our call today. We look forward to reporting our results to you again in the future. Have a wonderful day, everyone, and again, Happy New Year and a kickoff to 2024.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect your line.

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Key Takeaways

  • Banner reported Q4 net income of $42.6 million (EPS $1.24) versus $1.58 in Q4 2022 and full-year 2023 net income of $183.6 million (down from $195.4 million in 2022), driven by higher credit provisions and funding costs even as core pre-tax, pre-provision earnings rose to $262.7 million (from $251.9 million).
  • The net interest margin fell 10 bp to 3.83%, as funding costs climbed 23 bp; management expects moderate NIM compression in Q1 from continued deposit repricing and Fed actions, while non-interest-bearing deposits remain resilient at 37% of total deposits.
  • Credit quality remains strong: delinquencies at 0.40%, non-performing assets 0.19% of assets, and ACL at 1.38% of loans, with total loans up 7% YoY driven by multifamily, owner-occupied CRE and agricultural growth, and muted investor CRE exposure.
  • Banner is making strategic investments—adding relationship bankers across key markets and building its SBA and non-interest income platforms—while targeting ~3% expense growth in 2024 and maintaining its $0.48/share quarterly dividend on a robust capital base.
  • During 2023 Banner achieved multiple market recognitions—including Forbes’ top 100 banks and Newsweek’s most trustworthy companies—and published its inaugural ESG report alongside an outstanding CRA rating.
AI Generated. May Contain Errors.
Earnings Conference Call
Banner Q4 2023
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