Banner Corporation (NASDAQ:BANR) Q4 2023 Earnings Call Transcript

Banner Corporation (NASDAQ:BANR) Q4 2023 Earnings Call Transcript January 19, 2024

Banner Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Mark Grescovich: Thank you, Candace, and good morning and happy new year, everyone. I would also like to welcome you to the fourth 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; Jill Rice, our Chief Credit Officer; and Rich Arnold, our Head of Investor Relations. Rich, would you please read our forward-looking safe harbor statement.

Rich Arnold: 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. 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 in the earnings press release that was released yesterday and the 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?

Mark Grescovich: Thank you, Rich. As is customary, today, we will cover four primary items with you. First, I will provide you high-level comments on Banner’s fourth quarter and full year 2023 performance. Second, the actions Banner continues to take to support all of our stakeholders, including our Banner team, our clients, our communities and our shareholders. Third, Jill 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 extremely hard to assist our clients and communities.

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 $42.6 million or $1.24 per diluted share for the quarter ended December 31, 2023. This compares to a net profit to common shareholders of $1.58 per share for the fourth quarter of 2022 and $1.33 per share for the third quarter of 2023.

For the full year ended December 31, 2023, Banner reported net income to common shareholders of $183.6 million compared to $195.4 million 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 and position the company well to weather recent market headwinds. Rob will discuss these items in more detail shortly. 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 $262.7 million compared to $251.9 million for the full year 2022. Banner’s fourth quarter 2023 revenue from core operations was $157.1 million compared to $157.7 million for the third quarter of 2023. For the full year 2023, revenue from core operations increased 3% to $643.9 million when compared to the full year of 2022. We continue to benefit from a strong core deposit base that 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. Overall, this resulted in a return on average assets of 1.09% for the fourth quarter of 2023. Once again, 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 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. 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 proposition. Banner was again named one of America’s 100 Best Banks and one 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. S&P Global Market Intelligence ranked Banner’s financial performance among the top 50 public banks with more than $10 billion 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?

Jill Rice: 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. The Adversely classified loans remained relatively flat at 1.16% of total loans and are down from 1.35% as of December 31, 2022. Banner’s nonperforming assets increased to $3 million in the quarter, continued to be centered in nonperforming loans and now total $30 million, representing a modest 0.19% of total assets. The net provision for credit losses for the quarter was $2.5 million, which included a $3.8 million provision for loan losses, offset in part by a release of $526,000 in the reserve for unfunded loan commitments, as well as the release of $750,000 of the provision recorded in the second quarter related to financial institution subordinated debt held within the investment portfolio.

Loan losses in the quarter totaled $1.7 million and were offset 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 $149.6 million or 1.38% of total loans as of December 31. This coverage level is identical to that reported in the linked quarter compares to 1.39% coverage as of December 31, 2022, and currently provides 506% coverage of our nonperforming loans. As anticipated, loan originations declined modestly again this quarter. Still, loan outstandings grew by $199 million or 2% for the quarter and grew by 7% year-over-year. While C&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 paydowns 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. 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 remains well diversified, both in size and in geographic locations 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 two small office secured loans this quarter. Adversely classified loans secured by office properties are currently limited to four loans totaling $7.2 million with only two loans totaling approximately $500,000 currently past due. Multifamily real estate loans were up $45 million 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 remained split 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 million or 11% in the quarter. This portfolio grew by 55% year-over-year, primarily due to our continued emphasis on financing affordable housing projects throughout our footprint. Commercial construction outstandings increased a modest 1% in the 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. 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. 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 all business cycles. 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?

Robert Butterfield: Great. Thank you, Jill. We reported $1.24 per diluted share for the fourth quarter 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 tailed for investment. Core revenue, excluding loss on sales 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 million during the quarter, with an increase of $199 million in held for investment loans, partially offset by a decrease of $43 million in held-for-sale loans.

As $43 million 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 million, and multifamily construction loans increasing $51 million due to advances on affordable housing projects. Total securities increased $37 million. The recent decline in interest rates led to an increase in the fair value of available for sale securities, which was partially offset by the sale of $34 million of available for sales securities and normal portfolio cash flows. Any additional security sales during the first quarter will be dependent upon market conditions. Deposits decreased by $145 million during the quarter, due to a $90 million decrease in retail deposits and a $55 million decline in brokered CDs. Core deposits ended the quarter at 89% of total deposits.

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 borrowings with all capital ratios being in excess of well-capitalized levels. Net interest income decreased $3.4 million from the prior quarter. Due to the increase in funding costs offsetting the increase in earning asset balances and yields. Compared to the prior quarter, average loan balances increased $152 — or $142 million and loan yields increased 12 basis points due to adjustable 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 million 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 118 basis points reflecting both increases in the rates paid on interest-bearing deposits as well as the shift in the mix of deposits with a portion of noninterest-bearing deposits moving into interest-bearing deposits. The decline in noninterest-bearing deposits during the quarter was largely concentrated in the month of November, where we saw some client event-driven activity. Noninterest bearing 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 costs on interest-bearing liabilities, outpacing the increase in yields on earning assets.

We expect net interest margin will experience some additional moderate compression during the first quarter, depending on Fed actions and market conditions. Total noninterest income increased $1.4 million 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 $4.8 million loss on the sale of securities. The average payback on these trades was under three years. Core noninterest income, excluding the loss on the sale of securities and the changes in investments carried at fair value increased $2.8 million due to a $3.5 million 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 $1.4 million. Due to higher cost on debit card transactions and card replacement related expenses. Income from residential mortgage operations declined $568,000 due to normal seasonality. Total noninterest 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 costs. 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 adding talented relationship managers in key markets and investing in initiatives to grow its noninterest income.

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

Mark Grescovich: Thank you, Jill, and Rob, for your comments. That concludes our prepared remarks. And Candice, we’ll now open the call and welcome questions.

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Q&A Session

Operator: Thank you, Mark. [Operator Instructions] So our first question comes from the line of Jeff Rulis of D. A. Davidson. Your line is now open, please go ahead.

Jeff Rulis: Thanks. Good morning. Just I guess, a follow-on to kind of Rob’s commentary on the noninterest-bearing balances. And then in the release, I think, Mark, you’ve got comments about still customers request for higher rates — that noninterest-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 I guess what are you talking internally about where you think that trough at or stabilizes? Any read on that?

Mark Grescovich: Good morning, Jeff. Thanks for the question. I’ll turn it over to Rob.

Robert Butterfield: Okay. Jeff. Yes, I mean, as you point out, I mean, our noninterest-bearing deposits are [Technical Difficulty] 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. 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 first quarter. And at this point, I would say we’re taking it quarter-by-quarter.

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 of that. But at this point, we’re just taking it a quarter at a time.

Jeff Rulis: 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 fourth quarter is actually larger than the prior quarter. Trying to get a sense for magnitude. So one, margin in the first quarter, do we — sounds like it was moderating compression kind of discussion. 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, three cuts this year versus maybe six? Any kind of read on where you think margin goes from there?

Robert Butterfield: 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 quarter kind of in that 10 basis point range because we still have a large block of adjustable rate loans that have not repriced through this cycle at this point. And then also, as fixed rate loans are maturing, they’re coming on at much higher interest rates. So, absent anything else throughout the year, each quarter, we would expect kind of that 10 basis points of yield pickup quarter-over-quarter. 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 two cuts this year, if there’s one cut in a quarter, we think that the adjustable rate on 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. 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 action [Technical Difficulty] will be a little bit [Technical Difficulty] even some flattening in the funding deposit costs. 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.

Jeff Rulis: 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, we get aggressive cuts that kick in. But any management of the balance sheet are mean trying to get a little more neutral? Or at this point any kind of adjustments.

Robert Butterfield: 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 — we do have floors on our loans. A large percentage of our loans do have floors on them. 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.