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
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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.
Jeff Rulis: Okay. Thank you. I’ll step back.
Mark Grescovich: Thanks, Jeff.
Operator: Thank you. Our next question comes from the line of [Eric Specter] (ph) of Raymond James. Your line is now open, please go ahead.
Unidentified Analyst: 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.
Jill Rice: Yes, Eric. Thanks for the question. We are regularly stress testing our portfolio. So we take a look at 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 our commercial 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. Additionally, because the portfolio is still lowly leveraged on an average basis, where the properties are generally well positioned to sustain 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.
Unidentified Analyst: Okay. That’s helpful. And then maybe just outside of the margin, I’m just curious how you think about the impact of 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 expect to see and what segments do you think you’d see it first? And just curious how you think about your ability to reprice deposits and drive additional core deposit flows if rates begin coming down.
Jill Rice: 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 refinanced down. So those combined together, even in a shifting rate environment is what leads me to say low to mid-single-digit growth rate.
Robert Butterfield: 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 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 within them, meaning that they’re bringing their primary deposit accounts with them as well. So there certainly could be some opportunities there as rates start to come down.
Unidentified Analyst: Okay. That’s helpful. And then just maybe just touching on capital. It was great to see there on TCE given lower rates. Just curious your thoughts on capital just more broadly and capital priorities are at this point, what the capital returns in the cards at all? Just curious your ideal methods of capital deployment today.
Robert Butterfield: Sure, sure. So I mean, just a reminder, kind of our capital priorities. First 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&A activity if it’s the right opportunity at the right price. 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.
Unidentified Analyst: Okay. Thanks for taking my question. And I’ll step back.
Mark Grescovich: 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.
Andrew Liesch: Thanks. 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 then investing in initiatives grow fee income. Any more details you can provide on that? What sort of like hiring plans you may have? What locations? And what some of these initiatives may be?
Jill Rice: 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 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 I5 corridor, but not limited to that. 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 first quarter 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. So we anticipate more client disruption and more new bankers.
Andrew Liesch: Got it. And I think in the past, you’ve mentioned these are coming from larger banks? Is that still the case?
Jill Rice: It is. By in large.
Andrew Liesch: Great. And then just — got it. Just a cleanup question 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-owned life insurance, is this the new run rate to be looking at going forward?
Robert Butterfield: Yes. So first, on the deposit and fee side. So I would say the run rate is probably somewhere in between Q4 and Q3 is what I would say at 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.
Andrew Liesch: Got you. All right. That’s helpful. Thanks for taking the question. I’ll step back.
Mark Grescovich: Thank you, Andrew.
Operator: Thank you. Our next question comes from the line of Andrew Terrell of Stephen. Your line is now open, please go ahead.
Andrew Terrell: Hi. Good morning.
Mark Grescovich: Good morning, Andrew.
Andrew Terrell: I wanted to first kind of follow-up on some of the commentary on the hiring and just maybe first acknowledge you guys have done a really good job in managing the expense base with some of the Banner Forward 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.
Robert Butterfield: Yes, Andrew, it’s Rob. So yes, we have been making those strategic investments. I mean, we want to keep our eye on the long term. And so, if there opportunity just 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. So if you think about all of 2023 — annual 2023 compared to annual 2024, something in that 3% range is probably what we’re currently thinking at this point in time. Just from a quarterly look, I mean, first quarter 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 first quarter of the year.
Andrew Terrell: 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?
Robert Butterfield: 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, endpoint 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.
Andrew Terrell: Got it. Okay. That makes sense. And I guess, just overall on the margin kind of going into the first quarter, just given the noninterest-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 first quarter?
Robert Butterfield: Yes. I mean we hasn’t 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 first quarter. 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 two 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.
Andrew Terrell: 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 $230 million 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? Any color there would be helpful.
Robert Butterfield: 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 have had to chase the market completely all the way up. But the rate on our savings right now, the stated rate, it’s 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. But the average cost on that particular high-yield savings account right now is running right around 3.61% is where we’re at on average on that account.
Andrew Terrell: Got it. Okay. Those are all the questions I had. I appreciate you guys taking time for me there.
Mark Grescovich: Thank you, Andrew.
Operator: Thank you. [Operator Instructions] Our next question comes from the line of Kelly Motta of KBW. Your line is now open, please go ahead.
Kelly Motta: Hi. Good morning. Thanks for the question. I want to follow up on the —
Mark Grescovich: Good morning, Kelly.
Kelly Motta: Good morning. I wanted to follow up on the deposit side. I think, Rob, you made a comment in the Q&A that it doesn’t necessarily make sense to chase deposits here. Just wondering, I saw in 4Q with deposits down, you kind of backfilled funding with FHLB. 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?
Mark Grescovich: Yes, Kelly. I mean our — 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 a $90 million 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 million 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 roll off there. And our brokered CDs, I mean, are also very small at this point at $108 million. And — but as we let those roll off, if the deposit activity overall doesn’t — retail deposit activity doesn’t cover, 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 us the opportunity to pay those down very quickly. But I think from a loan growth standpoint, we’re looking at the roll off of the securities. So we’re getting about $60 million 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.
Kelly Motta: Got it. And I like to circle back a bit the margin going through what you mentioned about loan yields and being able to offset pressure if there’s maybe one or two 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 follow 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.
Mark Grescovich: 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 to the cycle, I think they’re going to benefit us if you see 25 basis points at a time. If you see two or three 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. But again, it’s those adjustable rate loans as time goes by, will continue to reprice up unless rates really come down more rapidly.
Kelly Motta: Super helpful. Maybe last question for me, maybe for Jill. It looks like there was, obviously, in a very small base, but a little bit of an uptick on early delinquencies. Just wondering if there’s anything you’re seeing there to just normal kind of later payments around the holiday season. Just wondering if you could provide any color on that.
Jill Rice: Yes, Kelly, that’s exactly what it is, is year-end holidays and just normal delinquencies. I think what I would emphasize is 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.
Kelly Motta: Absolutely. Thank you so much. I’ll step back.
Mark Grescovich: 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.
Timothy Coffey: Great. Thank you. Good morning, everybody. I guess 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?
Robert Butterfield: Hi, Jim, it’s Rob. Thanks for the question. Yes. I mean I think it’s — I think we are seeing a little bit of different behavior there. In general, I would say, our real clients on is probably as 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. 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 noninterest-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.
Timothy Coffey: 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. Is your — what is your outlook for the economy and within Banner’s footprint? Is it for a soft landing or something harder?
Jill Rice: 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.
Timothy Coffey: All right. Thank you. Those are my questions,
Mark Grescovich: Thanks, Tim.
Operator: Thank you. Our last question is a follow-up question from Jeff Rulis of D.A. Davidson. Your line is now open, please go ahead.
Jeff Rulis: Thanks. Just another quick one on credit and kind of splitting hairs a little bit, but the C&I — the increase in C&I nonaccruals 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 nonaccrual increase was if that was at any — I don’t know if it was granular by segment that you saw.
Jill Rice: 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.
Jeff Rulis: Fair enough, that I check. Then just one other 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 2024 relative to 2023? Do you think it shapes up as a slightly better year from mortgage banking overall if we look at year-over-year.
Robert Butterfield: Yes. It’s Rob. So yes, 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 expectation 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 residential mortgage banking operations during 2024 compared to 2023.
Jeff Rulis: 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?
Robert Butterfield: Yes, it was a Q4 heavy item. I mean we have been writing down 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. So even during the first nine months of the year, we had written $800,000. So part of that gain that we recorded in the fourth quarter was really a recapture of some loss that we had taken during the first nine months of the year. But then there was also some losses in prior years. The write-down that was recaptured. And so — but now we’ve moved all of the multifamily loans out of held for sale, so we don’t expect that to see that benefit anymore. But on the other side of it, we did talk about making some strategic 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 fourth quarter 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 I can’t give any specifics on what our expectations are from that SBA business for 2024, but we do expect that we’ll see some build of gain on loan sales throughout the year in that particular unit.
Jeff Rulis: Great. Thank you for the color there. That’s it from me. Thanks.
Mark Grescovich: 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 Banner Corporation’s President and CEO, Mark Grescovich for closing remarks.
Mark Grescovich: Thank you, Candace, and thank you all for your questions and your attention today. As I 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 kick off to 2024.
Operator: Ladies and gentlemen, this concludes today’s conference call. You may now disconnect your lines.