Banner Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 17, 2024

There are 11 speakers on the call.

Operator

Good morning or good afternoon all. Welcome to the Banner Corporation Third Quarter 2024 Conference Call and Webcast. My name is Adam and I will

Speaker 1

be your operator for today. I will

Operator

now hand the floor to Mark I will now hand the floor to Mark Raskovich to begin. So Mark, please go ahead when you are ready.

Speaker 2

Thank you, Adam, and good morning, everyone. I would also like to welcome you to the Q3 2024 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 3

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, 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.

Speaker 3

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 the most recently filed Form 10 Q for the quarter ended June 30, 2024. Forward looking statements are effective only as of the day they are made and Banner assumes no obligation to update information concerning its expectations. Mark?

Speaker 2

Thank you, Rich. As is customary, today we will cover 4 primary items with you. First, I will provide you high level comments on Banner's Q3 2024 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 status of our loan portfolio.

Speaker 2

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 extremely hard to assist our clients and communities. Banner has lived our core values summed up as doing the right thing for the past 134 years. Our overarching goal continues to be to 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.

Speaker 2

I am 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 $45,200,000 or $1.30 per diluted share for the quarter ended September 30, 2024. This compares to a net profit to common shareholders of $1.15 per share for the Q2 of 2024. Our strategy to maintain a moderate risk profile and the investments we have made and continue to make to improve our operating performance have positioned the company well to weather recent market headwinds and we saw that in this quarter's results.

Speaker 2

Rob will discuss these items in more detail with his remarks. To illustrate the core earnings power of Banner, I would direct your attention to pre tax, pre provision earnings, excluding gains and losses on the sale of securities and changes in fair value of financial instruments. Our Q3 2024 core earnings were $57,000,000 compared to $52,000,000 for the prior quarter. Banner's Q3 2024 revenue from core operations was approximately $154,000,000 an increase of $3,000,000 compared to the Q2 of 2024. We continue to have a strong core deposit base that has proven to be resilient and loyal to Banner in the wake of a highly competitive environment and a very good net interest margin.

Speaker 2

Overall, this resulted in a return on average assets of 1.13% for the Q3 of 2024. Although we are in a very difficult operating environment for commercial banks, our core performance reflects continued execution on our super community 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 continue organic generation of new relationships and our loans increased 6% 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 24% from the same period last year, we announced a core dividend of $0.48 per common share.

Speaker 2

Earlier this year, we released our environmental, social and governance report, which reflects the continued maturation of our approach to ESG. Banner has always been committed to doing the right thing in support of our clients, the many communities that we serve and our colleagues. The accomplishments highlighted in this report are meant to reflect the deep connection we have with all of our stakeholders and our commitment to creating positive change in the communities we serve. Finally, I am pleased to say that we continue to receive marketplace recognition and validation of our business model and our value proposition. Banner was again named

Speaker 4

1 of

Speaker 2

America's 100 Best Banks and 1 of the Best Banks in the World by Forbes. Newsweek named Banner 1 of the Best Most Trustworthy Companies in America and the World again this year and just recently named Banner one of the best regional banks in the country. 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 for Excellence. Additionally, the Kroll Bond Rating Agency affirmed all of Banner's investment grade debt and deposit ratings.

Speaker 2

And as we've 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 portfolio and her comments on Banner's credit quality. Jill?

Speaker 5

Thank you, Mark. Thank you, Mark, and good morning, everyone. Our overall credit metrics remain strong in spite of the slight deterioration reported. Delinquent loans ended the quarter at 0.40 percent, up from 0.29% as of the linked quarter and from 0.27% as of September 30, 2023. Adversely classified loans increased by $28,000,000 in the quarter, driven in large part by 3 isolated relationships and now represent 1.33 percent of total loans, up 24 basis points when compared to June 30.

Speaker 5

Non performing assets increased $12,000,000 in the quarter, represent 0.28 percent of total assets and consist of $43,000,000 in non performing loans and $2,200,000 in REO. The net provision for credit losses for the quarter was $1,700,000 and includes a $2,000,000 provision for loan losses and a $262,000 release related to unfunded loan commitments. The provision this quarter was primarily driven by an increase in the reserve for individually evaluated collateral dependent loans. Loan losses in the quarter were a modest $964,000 and were partially offset by recoveries totaling 734,000 dollars After the provision, the reserve for credit losses loans totaled $154,600,000 and provides 1.38% coverage of the portfolio and 3 59% coverage of our non performing loans. By way of comparison, the reserve for loan losses provided 1.37% coverage of the loan portfolio as of the linked quarter and 1.38% coverage as of September 2023.

Speaker 5

Loan growth was muted this quarter and was further impacted by the decision to move $48,000,000 from our 1 to 4 family portfolio to held for sale. In total, portfolio loan balances increased a modest $81,000,000 or 1% from the linked quarter with year over year growth of 6%. Given the limited loan growth, my comments will be brief. The large increase in the multifamily real estate portfolio reflects movement from construction to permanent as several projects transitioned into their mini perm status. The growth in investor CRE was a combination of new originations as well as a shift from construction into the permanent portfolio and we again reported solid growth in owner occupied real estate quarter, up 4% 9% year over year with the growth spread across the footprint.

Speaker 5

Residential construction exposure remains moderate at 5% of the portfolio and reflects a slight shift in mix with approximately 70% for sale housing and 30% 1 to 4 family custom construction residential mortgage loans. Similar to previous quarters, when we include multifamily, commercial construction and land, the total construction exposure is 14%. Given the market dynamics that continue to be driven by limited resale inventories, the absorption of the speculative housing starts across our markets remains timely with builders continuing to slowly rebuild inventory levels. Conversely, given the higher interest rate environment, our custom construction originations have slowed over the past few quarters. The decline reflected in C and I is driven by reduced line utilization, down 1% quarter over quarter.

Speaker 5

This was, however, largely offset by additional growth in the small business portfolio. And as expected, agricultural balances increased again this quarter due to line utilization, up 4% compared to last quarter. As I stated earlier, our overall credit metrics remain strong. While increasing, the level of adversely classified assets remains modest as a percentage of total loans with no concentration in any specific industry or market. The office and multifamily segments of the commercial real estate book continue to perform well and repricing risk continues to be manageable.

Speaker 5

The spike in agricultural non accrual loans is a Northern California tree net relationship and we believe that we are adequately reserved for any potential loss exposure. As I stated last quarter, our credit underwriting criteria has not changed materially over the course of the last decade. The vast majority of our loan book has solid sponsorship, personal guarantees and properly margined collateral support. Our reserve for loan losses remains strong and we continue to have a robust capital base which further solidifies our balance sheet. We remain well positioned for the future.

Speaker 5

With that, I will hand the call over to Rob for his

Speaker 2

comments. Rob?

Speaker 4

Great. Thank you, Jill. We reported $1.31 per diluted share for the Q2 compared to $1.15 per diluted share for the prior quarter. The $0.15 increase in earnings per share was primarily due to an increase in net interest income and lower expenses compared to the prior quarter. Total loans increased $146,000,000 during the quarter with portfolio loans increasing $81,000,000 and held for sale loans increasing $65,000,000 The increase in held for sale loans was primarily due to transferring $48,000,000 of loans from held for investment to held for sale.

Speaker 4

The loan to deposit ratio ended the quarter at 83%. Total securities increased $31,000,000 primarily due to the fair value increases as a result of interest rate decreases during the quarter, partially offset by normal portfolio cash flows. Deposits increased by $459,000,000 during the quarter due to core deposits increasing $462,000,000 which included an increase of $150,000,000 in non interest bearing deposits. The increase in core deposits was partially offset by time deposits decreasing $3,000,000 due to brokered deposits decreasing $55,000,000 partially offset by retail time deposits increasing $52,000,000 dollars Core deposits ended the quarter at 89 percent of total deposits. Total borrowings decreased $89,000,000 during the quarter as the growth in core deposits was used to fund loan growth and reduce FHLB advances.

Speaker 4

Banner's 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 borrowing capacity. In addition, all of our capital ratios are in excess of regulatory capitalized levels. Net interest income increased $3,100,000 from the prior quarter, primarily due to average earning assets increasing $142,000,000 and tax equivalent net interest margin increasing 2 basis points to 3.72%. Compared to the prior quarter, average loan balances increased $217,000,000 This increase was partially offset by total average interest bearing cash and investment balances decreasing 75,000,000 dollars The yield on earning assets increased 8 basis points driven by loan yields increasing an equal amount. The increase in loan yields was a result of adjustable rate loans repricing higher as well as new production continue to come on at interest rates above the overall portfolio yield.

Speaker 4

The average rate on new loan production for the quarter was 8.23% compared to 8.47% in the prior quarter. Total cost of funds increased 7 basis points to 173 basis points due to an increase in the cost of deposits, partially offset by lower borrowing balances. Total cost of deposits increased 11 basis points to 161 basis points, primarily due to much of the growth in core deposits during the quarter occurring in higher costing deposit products. The cost of deposits for the month of September were 162 basis points. Non interest bearing deposits ended at 35% of total deposits, identical to the prior quarter.

Speaker 4

The 50 basis point reduction in Fed funds in the middle of September had limited impact on our net interest margin in the current quarter. The 28% of our loan portfolio that are variable rate loans will reprice down in equal amount within 30 days of the rate reduction. We expect deposit cost reductions to lag the portfolio repricing resulting in some moderate compression in net interest margin in the 4th quarter. Total non interest income increased 864,000 dollars from the prior quarter, primarily due to the prior quarter including a $562,000 loss on a bond called early. The current quarter also benefited from having lower fair value write downs on fair value instruments carried at fair value.

Speaker 4

Total non interest expense decreased $1,800,000 from the prior quarter. The decrease reflected lower benefit expense due to a payroll tax refund of $800,000 and self insured medical expense decreasing by $1,000,000 The current quarter also had lower payment and card processing service expense and lower REO expense. These decreases were partially offset by higher legal expense as the prior quarter benefited from an $874,000 reversal of expense related to finalizing 2 legal matters. Our capital and liquidity positions continue to position us well to execute on our Super Community Bank business model. This concludes my prepared comments.

Speaker 4

Now I'll turn it back over to Mark. Mark?

Speaker 2

Thank you, Jill and Rob for your detailed comments. That concludes our prepared remarks. And Adam, we will now open the call and welcome questions.

Operator

And our first question comes from Andrew Terrell from Stephens. Andrew, please go ahead. Your line is open.

Speaker 6

Hey, good morning.

Speaker 2

Good morning, Andrew.

Speaker 6

Hey, if I could just start on the expense side. So we saw kind of a $2,000,000 drop in compensation this quarter. I think it was called out medical premiums and compensation. Just was that drop this quarter lower than you might have expected? Should the run rate normalize higher from here?

Speaker 6

Can you just help us better understand kind of the fluctuation in comp expense and then kind of the overall expense outlook into 4Q?

Speaker 4

Yes. Thanks, Andrew. It's Rob. So yes, I mean, I don't think it's unusual for expenses to kind of bounce around a couple of $1,000,000 quarter to quarter. Clearly, this quarter, we benefited from a couple of items that were not expected.

Speaker 4

So the run rate was a bit lower this quarter. I would expect that to normalize. Certainly, the payroll tax refund that we received, I mean, that's not an ongoing item. We could see the trend of self insured medical expense carry over into Q4, but eventually it's going to normalize back to normal expected levels there. So I don't think that's a long term item.

Speaker 4

So I'm expecting that we'll see some normalization as we move forward in our expenses.

Speaker 6

Okay. And then if I just look back at kind of the past few years, you've generally been growing overall operating expenses and call it the low single digits range. I guess we've seen inflation come down quite a bit. Is it fair to think that absent, any kind of M and A you could continue that kind of low single digits that expense growth into 2025?

Speaker 4

Yes. In general, the way I would think about it is that we would expect normal inflationary increases, whatever inflation is for a particular period. If you think about compensation expenses, 2 thirds of our expenses. So there's going to be obviously some increases in that next year just due to normal inflationary pressures on it. Beyond that, I would say that we continue to make strategic investments in the organization.

Speaker 4

And so if we were going to continue to make those investments, there could be a little bit of additional expense related to that.

Speaker 6

Okay. And then moving over to the margin just quickly. Can you talk about where were spot deposit costs either interest bearing or total at the end of the period? And then just more broadly kind of what's your approach is to repricing deposits lower for the 50 basis points cuts we've already seen as well as kind of expected future cuts?

Speaker 4

Sure. Just first on the cost of deposits for September, it was 162 basis points, so one basis point higher than the quarter number. If we think about how we approached kind of the reduction in deposit costs related to the reduction in Fed funds in the middle of September, We did make some reductions subsequent to that rate reduction. If you look at our advertised CD specials, those went down by 25 basis points initially. We also did some repricing of our exception price deposits and then also the tiers in our high yield savings account.

Speaker 4

And I would say overall, probably the reductions that we did in those was similar to what we did on the CD book. And at this point, we're just monitoring what competitors are doing in the environment and we think that we'll be able to take some additional portion of that 50 basis points in a month or so.

Speaker 6

Okay, great. I appreciate the color. I'll hop back in the queue. Thank you.

Speaker 2

Thank you, Andrew.

Operator

The next question comes from Jeff Rulis from D. A. Davidson. Jeff, your line is open. Please go ahead.

Speaker 7

Thanks. Good morning. Good morning. Rob, maybe just to follow on, on the margin. So got your comments about expectations into the Q4 and it sounds like a kind of a wait and see a little bit on the competition.

Speaker 7

A little bit further out into 'twenty five and where the balance sheet is positioned, I think you've mentioned 28% of loans variable. If we do see further cuts, Could you either specific to margin or big picture and how you think the balance of margin, how that reacts in the 25?

Speaker 4

Yes, sure. So I would point to the ramp down scenarios that we provided in the investor presentation. We use Moody's for the interest rate forecast and their forecast right now seems to be kind of a gradual decline in the fed funds rate. And if that's the scenario that comes to play, if you look at our down 100 basis point ramp scenario, it suggests that we're slightly asset sensitive where we would see a negative 1% reduction in our net interest income over the next 12 months. Of course, that assumes a flat balance sheet, which isn't the reality of the situation.

Speaker 4

And then also what that's assuming is that it has a deposit beta on the downside of 28%. The deposit beta that we've experienced on the upside is 45%. So I think we have a chance to outperform that. But I think we want to see kind of what deposit behavior is as rates start to decline, what competitor behavior is to get a better read on that.

Speaker 7

Thanks, Rob. Jill, just hopping over to credit, the $12,000,000 increase in non accruals, I think you mentioned Northern California ag credit. Could you just outline the additions this quarter? It sounds like it was isolated into a few credits.

Speaker 5

Yes. Good morning, Jeff. So, in that non performing, the primary driver was that 1 larger ag relationship in the tree nuts. But outside of that, it was primarily consumer, in the 1 to 4 family home equity space and then small business related. The average loan size of the rest of the non performing were roughly $200,000

Speaker 7

Got it. Okay. And the not to get the ag credit, is that sort of commodity pricing? I mean, it's been a challenged industry. Is this more operator or more climate sort of pressures on the industry or is it the operator issues?

Speaker 5

This one I would suggest is a mix of both of those issues. This is a large ag processing operation, walnuts and almonds and yes, it involves not just the commodities pricing.

Speaker 7

Okay. Thank you. And then lastly, I guess, a question for Mark. Any thoughts on the credit unions in the Northwest in terms of M and A activity, you've been pretty aggressive. I guess I'm just interested in your thoughts on how that impacts expectations as you have conversations or little to no impact.

Speaker 7

Just thought I'd bounce it off you to see if you have any thoughts on that activity.

Speaker 2

Well, probably, Jeff, thank you for the question. Probably nothing I want published, as it relates to the credit unions and how there is an unfair advantage in terms of their business models. But what I would suggest to you is that as you might anticipate, specifically on the West Coast, there are a limited number of buyers that can afford to absorb some of these banks. Banner, fortunately, is one of those. So what you can suspect is that if some of these institutions that the credit unions are purchasing are in the market to be acquired, I think the buyers, not just Banner, but the other buyers in our market have looked at them as well.

Speaker 2

So I'm not here to criticize their business decisions. However, they do warrant an unfair advantage in terms of pricing. And to the extent that some of these institutions want to take cash, that creates a whole different dynamic as well. So I think it's fair to say that the buyers in the West Coast have looked at the institutions that the credit unions are purchasing.

Speaker 7

Okay. Fair enough. Thanks, Mark. Thanks, Jeff.

Operator

The next question comes from David Feaster from Raymond James. David, your line is open. Please go ahead.

Speaker 8

Hey, good morning, everybody. Good

Speaker 1

morning, David. I wanted to touch on the deposit landscape. You guys have done a great job growing core deposits broadly, especially good to see the increase in IB. I'm just curious, how you think about your ability to continue to drive core deposits? Where are you having success there?

Speaker 1

And would you kind of expect core deposit growth to continue outpacing loan growth and maybe be able to reduce borrowings and brokered deposits continuing to do that?

Speaker 4

David, it's Rob. And I'll see if Mark or Jill has any additional comments. But maybe on the last point first, I don't think long term we would expect that deposit growth would outpace loan growth. We would expect that loan growth would probably outpace deposit growth. But long term, we have to grow our core deposits if we're going to grow our loan book.

Speaker 4

I mean, I think we saw some seasonality in Q3. I mean, we talked about that before we went into Q3 that we expected it to be a good quarter. Historically, Q3 is our best quarter for us. Better than historical is the way I described the Q3. I think where what we saw is we saw some carryover from the Q2.

Speaker 4

Normally, we see some build in deposits as we move through the Q2 into June, especially, and we really didn't see that in the Q2. So I think there was some carryover from the Q2, just normal build back after the payment of taxes and stuff like that. Beyond that, we also had some success this quarter in kind of bringing some core deposits back to the bank, some core deposits that had left to some brokerage accounts, that type of stuff. And so we had some success in bringing some of those core deposits back to the organization. I think long term, if you think about it, really where the core deposit growth comes from is really the small business area as a percentage of the loan balances.

Speaker 4

That's been very good for us historically. We have a focus really on small business lending. And as part of that small business lending, the deposits come with it and typically are pretty rich from a loan to deposit ratio standpoint. So pause there. I don't know, Mark or Jill, if you guys want to add anything there.

Speaker 2

No, I think you covered it well.

Speaker 1

Okay. That's great. And then maybe touching on the other side, touching on loan growth, we've kind of talked about that low to mid single digit pace. I'm curious, how do you think about loan growth as we look forward? How is demand trending?

Speaker 1

What do you expect to be key drivers of growth? And just given kind of where the 5 year is and potential for are you starting to and where CRE pricing is? Are you seeing any early payoffs or refi activity within the CRE book, which could maybe weigh on growth?

Speaker 5

Yes. Thanks, David. Starting with that last part of your question, we really haven't started to see any of that accelerated CRE payoffs yet. And I guess the way I would address that is that as they come to looking to refinance, we should be looking to see if we want to hold that as well if we can do it at a market rate. The commercial pipelines have continued to rebuild throughout the year.

Speaker 5

They're being bolstered by the success of our newer relationship managers. So I feel good about that. We're still projecting that low to mid single digit for 2024 and I think that I would if I was looking further out into 2025, probably mid single digit is where we would anticipate barring a massive real estate refinance.

Speaker 1

Okay. Okay. That's helpful. And then just going back to the margin, I don't want to beat a dead horse here, but just kind of thinking, how do you think about the trajectory? I mean, because you did talk about the lag impact on the repricing side.

Speaker 1

I mean, assuming the forward curve kind of comes to fruition, I'm just kind of curious, how do you think about the timing of a potential trough in 2025 or because there's other there's like you said, the rate assumptions assume a static balance sheet. There's a lot of other moving parts into that obviously. I'm just kind of curious how you think about the margin trajectory as we look forward.

Speaker 4

Yes. The way I think about it, David, is I mean, I talked about some of the scenarios we have out there as far as the ramp scenarios and stuff. And so I certainly point back to those as well. But if I just think about it from a big picture standpoint, I mean, we did see an increase in net interest margin during the current quarter, which was before the Fed started to cut. So during the up cycle, I guess, or the long higher for longer cycle, we kind of troughed there.

Speaker 4

And I think what's going to happen there just overall that as long as the Fed takes kind of a balanced approach to things where it's a more balanced approach, 25 basis points a quarter or something like that, I think we can overcome that and we certainly could see margin flat to up in that scenario If the Fed is more aggressive and takes 50 basis points or higher a quarter, we could see some initial decline there, moderate compression as the lag in the deposit cost funding there. But longer term, I think really what we want to get back to and I think the M and A industry wants to get back to is a normal shape yield curve. And so if I think out longer, I think that's where we can really start to really expand margin again is once we get back to that normal shape yield curve.

Speaker 1

Has there been any change in your appetite for a securities repositioning or anything to help maybe accelerate some of that margin, just given the decline in rates and maybe the math is a little bit less painful?

Speaker 4

Yes, sure. So we've kind of had that barometer out there where we were willing to make a security repositioning if we are going to have an earn back within that 3 year period of time. Currently, there's probably limited opportunities for us to stay within that 3 year earn back. So we would have to expand that earn back in order to do that. Certainly, as the rate environment continues to change, we continue to evaluate whether that makes sense or not.

Speaker 4

I can't say that we have anything planned at this point in time, but we're also remaining flexible there and continuing to do evaluations. So I can't say that it never will happen or it won't happen, but we don't have anything currently planned.

Speaker 1

All right. Great. Thanks, everybody.

Speaker 2

Thank you, David.

Operator

The next question comes from Andrew Liesch from Piper Sandler. Andrew, your line is open. Please go ahead.

Speaker 8

Thanks. Good morning everyone. Just one question for me here on the M and A environment. Mark, you got much better currency over the last few months. I guess, how is the chatter in your markets?

Speaker 8

I guess, going up and down

Speaker 2

the West Coast because you can acquire in

Speaker 8

a lot of different regions. Are you getting inbound interest? Are you reaching out? How the M and A chatter

Speaker 2

what's the M and A chatter been? Great. Thank you, Andrew, for the question. Look, our philosophy has never changed. So you're probably tired of hearing my same story, which is we recognize there are some partners on the West Coast that would be a great fit for our organization.

Speaker 2

And we continue to have dialogue with all of those parties. I think we have a great reputation. We have a very strong integration team. And so those the conversations of when the timing is right, if the timing is right, that continues. But again, we are very focused on our organic business growth strategy.

Speaker 2

And to the extent there's something opportunistic that presents itself, we will the good news is we're in a position to take advantage of that.

Speaker 8

Got it. From a size perspective, is there a certain size range that you're targeting that you would like to do or something too big or too small?

Speaker 2

No, I don't think so. I think certainly on the smaller end, something less than $1,000,000,000 doesn't make a lot of sense with the current regulatory environment, right? What you don't want to do is find yourself in a position where just because an opportunity presents itself that the regulators lock you out for a period of time. So I think all parties, not just me, but all of my colleagues are being very thoughtful in what the approach is going to be to M and A. But I wouldn't roll out any size variable that it doesn't make a lot of sense.

Speaker 2

We've done small deals as small as $350,000,000 or $400,000,000 in asset size.

Speaker 8

Right, right. All right. All my other questions have been asked and answered. Thanks so much. I'll step back.

Speaker 2

Thank you, Andrew.

Operator

And the next question comes from Kelly Muuto from KBW. Kelly, your line is open. Please go ahead.

Speaker 9

Hey, good morning. I guess circling back to the funding side, you had incredible deposit growth and I think some release called out some seasonality. It's been a couple of years where normal seasonal trends have kind of gotten buried in some of the just overall deposit trends here. So I'm just hoping to get a better color and a better sense of how we should be thinking about the seasonality now. And if now that liquidity is more normalized to normal levels, if that's something you see returning more prominently on a go forward basis?

Speaker 4

Yes, Kelly, it's Rob. So yes, I would say, I mean, this year overall, I think we have seen more of a return to normal seasonality. Q1, we saw core deposit increase because of tax refunds starting to come in. Q2, we saw that outflow deposits related to tax payments and some seasonality there and ag clients using their deposits to fund their operations on the initial side of before they started to draw down their lines. Q3 here was very strong for us obviously and even much stronger than we would normally see from a seasonality standpoint.

Speaker 4

And so it really does feel like we're returning to kind of those normal seasonal flows, plus or minus what we would expect. Of course, as we look forward, if you think about Q4, Q4 is more of a I'd call it more characterized as more of a flat quarter for us. We could certainly see our ag clients that had cash come in from crops that went into their deposit balances initially. We could see them start to pay down some of their lines in the Q4. That's typical.

Speaker 4

And then also what we could see too is there are property tax payments in many of the states that we operate in that occur in October. So there's some seasonal output for that. So but overall, I mean, I think we I think it feels like we have returned to somewhat normal seasonality absent. There's always kind of it'll just in crowded acre one off events that are out there that caused deposits and balances to move that wasn't expected, but it feels like it's seasonality at this point.

Speaker 9

Got it. Thanks for that. That was helpful, Rob. Maybe last one for me. Most of my questions have been asked and answered at this point.

Speaker 9

You have, I think, about $100,000,000 of sub debt that is redeemable in

Speaker 1

a couple of quarters potentially. Just wondering

Speaker 9

if you look at your would that be on the table and you have the buyback authorization, your thoughts around that?

Speaker 4

Sure. So if we think about the sub debt specifically, I mean, obviously, we're evaluating that right now to determine if we want to call and replace that sub debt or because of our capital position right now, which is very strong, whether we would just want to call that sub debt and pull it back. It's going to move to a variable rate, which is less advantageous to us, effective really July 1, 2025. And at that point, we start to lose some of the capital treatment and then also the rate goes up as well. So at this point for that, I think we're just continuing to monitor what the sub debt market looks like and whether it makes sense to replace that or to call it at that point in time.

Speaker 4

If we just think about our overall capital stack right now, the core dividend, of course, is our priority, continues to be at a very reasonable payout level there, which is key to have a long term continued core dividend there. We do have the share repurchase authorization that our board put into place back in late July last this year. And so we're continuing to evaluate whether at some point in time it makes sense to restart those share purchases. Beyond that, I think there's we have done special dividends in the past. I would say those are a vehicle that we've used less, but we have done those in the past.

Speaker 4

So that's kind of how we're thinking about capital right now.

Speaker 9

Awesome. Thanks for the questions. I'll step back.

Speaker 2

Thank you, Kelly.

Operator

The next question comes from Tim Coffey at Janney. Tim, your line is open. Please go ahead.

Speaker 10

Great. Thank you. Thanks for the opportunity to ask a question here.

Operator

Just if I could talk about

Speaker 10

ask a question about loan growth from the angle of loan originations. Clearly, originations were up $100,000,000 year over year and rates are coming down. Is it your sense that there is pent up demand for credit from your customer base?

Speaker 5

Yes. Thanks, Tim. The way I would answer that is, yes, there is demand. And I think that as we get past the election and get some understanding of what the economy maybe is going to look like under whatever the administration is, I think we'll start to see some of that break loose. Certainly, there was waiting for rates and that playing in as well, but I do believe there is demand.

Speaker 10

Okay. All right, great. Thanks. And then my second question was on the new Chief Banking Officer role, kind of

Speaker 3

a 2 part question. 1st,

Speaker 10

kind of provide some insight to the strategy to refilling that position? And 2, does putting that seat in Sacramento reflect greater emphasis on originating loans in California?

Speaker 2

Yes. Thanks, Tim, for the question. Look, I think Banner has been very focused over many years on making sure that succession planning is a significant part of our operation. And as you know, we in the commercial banking space, succession is a very big deal in finding talent, recruiting talent and having great leadership. So we were very, very fortunate to have the opportunity for Mark to join our organization.

Speaker 2

He's got depth as the CEO. He has depth in the California and West Coast market, in commercial banking and retail banking. So anytime you have an opportunity to add talent to the organization, I think it's a great scenario for the company. At the same time, I think it's really important to say that we have focused and you've heard us talk about improving operating efficiency. So we've isolated the Chief Operating Officer, Jim Costa, with the operations and how we can improve efficiency from an operation standpoint, Cindy Purcell from a strategy standpoint and integration if we were to do some combinations or acquisitions.

Speaker 2

She has 45 years of experience with this organization and a great background in integration. And now the opportunity to add all the revenue lines under a Chief Banking Officer really streamlines the operations going forward. So I think it's a very focused approach on behalf of the company.

Speaker 10

Okay. And then putting the seat having that seat in Sacramento, does that imply a greater emphasis on originating loans in California?

Speaker 2

I think California is a fantastic market opportunity for us. So I would just leave it at that.

Speaker 1

All

Speaker 10

right. Thank you. Those are my questions.

Speaker 2

Thanks, Tim.

Operator

We have no further questions. So I'll hand the call back to Mark for some concluding remarks.

Speaker 2

Thank you all for your questions and certainly for your participation today in our Q3 earnings call. As I've stated, we're very proud of the Banner team and our results for the quarter. Given the current operating environment, it's been challenging, but it's nice to see that we're making great progress and it's been evidenced by our performance this quarter. Thank you for your interest in our company and joining the call. We look forward to reporting our results to you again in the future.

Speaker 2

Thank you, everyone, and have a wonderful day.

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Key Takeaways

  • Banner reported Q3 2024 net income of $45.2 million (earnings of $1.30 per diluted share), up from $1.15 in Q2, driven by strong core earnings of $57 million pre-tax and pre-provision.
  • Core deposit balances grew by $462 million (ending the quarter at 89 % of total deposits), while loans increased 1 % sequentially and 6 % year-over-year.
  • The company maintained robust capital metrics with tangible common equity per share up 24 % versus prior year, enabling a $0.48 per share quarterly dividend.
  • Credit quality remains solid with nonperforming assets at 0.28 % of total assets, a coverage ratio of 359 % of nonperforming loans, and a modest quarterly provision of $1.7 million.
  • Net interest margin widened to 3.72 % (up 2 bps), though management expects moderate margin compression in Q4 as variable-rate loans and deposits reprice following Fed rate cuts.
AI Generated. May Contain Errors.
Earnings Conference Call
Banner Q3 2024
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