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spk04: Hello, and welcome to the Banner Corporation's third quarter 2023 conference call and webcast. All lines have been placed on mute during a presentation portion of the call, with an opportunity for question and answer at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to turn the conference call over to our host, Mark Ressus-Fitch, President and CEO of Banner Corporation. Please go ahead.
spk03: Thank you, Banner. And good morning, everyone. I would also like to welcome you to the third quarter 2023 earnings call for Banner Corporation. Joining me on the call today is Rob Butterfield, Banner Corporation's chief financial officer, Joe Rice, our chief credit officer, and Rich Arnold, our head of investor relations. Rich, would you please read our forward-looking safe harbor statement?
spk10: 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 from the earnings press release that was released yesterday and the most recently filed Form 10-Q for the quarter ended June 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?
spk03: 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 third quarter 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, Joe Rice will provide comments on the current status of our loan portfolio And finally, Rob Butterfield will provide more detail on our operating performance for the quarter, as well as comments on our balance sheet. Before I get started, I want to again thank all of my 2,000 colleagues in our company who are working 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 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. 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 $45.9 million, or $1.33 per diluted share for the quarter ended September 30th, 2023. This compares to a net profit to common shareholders of $1.15 per share for the second quarter of 2023. and $1.43 per share for the third quarter of 2022. The earnings comparison is primarily impacted by the provision for credit losses and the increase in funding costs. Our strategy to maintain a moderate risk profile and the investments we made during our Banner Forward program to improve operating performance have positioned the company well to weather recent market headwinds. Rob will discuss these items in more detail shortly. 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, Banner forward expenses, and changes in fair value of financial instruments. Our third quarter core earnings were $62.8 million compared to $63.4 million for the second quarter of 2023. Banner's third quarter 2023 revenue from core operations was $157.7 million compared to $158.6 million for the second quarter of 2023. 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 1.17% for the third 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 8% over the same period last year. Reflective of this solid performance, coupled with our strong regulatory capital ratios and the fact that we increased our tangible common equity per share by 11% from the same period last year, we announced the core dividend of 48 cents per common share. As I've mentioned on previous calls, Banner published our environmental, social, and governance highlights report last December and published our inaugural 2022 ESG report earlier this summer. Both of these documents reflect the 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 we serve. 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 companies and banks and one of the best banks in the world by Forbes. Newsweek named Banner one of the most trustworthy companies in America. 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 for excellence. Additionally, 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 trends in our loan portfolio and her comments on Banner's credit quality. Jill?
spk01: Thank you, Mark, and good morning, everyone. Banner's credit metrics continue to be strong and our super community bank model continues to serve our clients well. Delinquent loans as of September 30th were 0.27% of total loans compared to 0.28% of total loans reported as of June 30th and 0.22% of total loans as of September 30th, 2022. Adversely classified loans represent 1.17% of total loans down from 1.38% as of the linked quarter and compared to 1.39% as of September 30, 2022. Net loan losses continue to be moderate at $663,000 for the quarter and $1.8 million year-to-date, and Banner's non-performing assets remain low at 0.17% of total assets. Our reserve for loan losses continues to be a source of strength. We posted a provision for loan losses of $2.9 million this quarter, covering the moderate level of net charge-offs taken in the quarter, as well as providing for loan growth. In addition, we provided $346,000 to the Reserve for unfunded loan commitments for a total provision for loan losses of $3.3 million. Due to an improvement in market valuation, we released $1.3 million of the provision recorded last quarter that was related to financial institutions subordinated debt held within the investment portfolio. In total, the net provision for credit losses for the quarter was $2 million. After the provision for credit losses, our ACL reserve totals $147 million or 1.38% of total loans as of September 30th. This coverage level is identical to that reported in the linked quarter as well as that reported as of September 30th, 2022, and currently provides 560% coverage of our non-performing loans. As reflected in the release, loan originations declined modestly quarter over quarter. Still, loan outstandings grew by $139 million or 5.3% on an annualized basis and are up 8% year over year. C&I line utilization decreased 1% in the quarter and balances were down $49 million in the quarter due to a combination of loan payoffs and decreased line utilization. This was partially offset by a 2% increase in small business scored loans. Compared to September 30, 2022, commercial and small business scored loans are up 5.4%. We also saw an increase of $17 million in owner-occupied CRE, or 7.4% on an annualized basis. Excluding multifamily, our commercial real estate balances decreased 1% in the quarter, driven primarily by the payoff of a substandard assisted living facility as well as an underperforming self-storage property, and are down 3% when compared to September 30, 2022. Given the expectation of a sustained interest rate and increased rate environment and the impact of overall market dynamics, we continue to anticipate muted commercial real estate loan growth in the near term. That said, it is important to note that the portfolio continues to perform well, and similar to last quarter, less than 1.5% of the total CRE portfolio is adversely classified at this time. There has been negligible change in our office portfolio performance. It continues to be granular in size, diversified in geographic location, and overall credit performance has been solid. In line with prior disclosures and as reflected in the investor presentation, the office portfolio currently represents 6.3% of total loans and is split roughly 50-50 between investor CRE and owner occupied, and adversely classified loans in this asset class are limited to $1.2 million. It is worth noting that there has been no meaningful change in the portfolio of loans secured by office properties within the major metropolitan areas across our geographic footprint. Multifamily real estate loans were up 9.5% in the quarter as multiple affordable housing projects completed construction and were moved into the permanent bucket. In total, the multifamily portfolio was split approximately 55% affordable housing and 45% market rate And as I have commented before, the average loan size is less than $1 million with balances spread across our footprint. Construction and development loan balances declined by $6 million in the quarter or 40 basis points. The decline in residential construction outstandings continued in the quarter as sales of completed residential starts continued to outpace new takedowns, down 2% in the quarter and down nearly 20% when compared to September 2022. Commercial construction loans were also down in the quarter, primarily due to the expected refinancing of various projects upon completion. These declines were partially offset by increased outstandings on the multifamily construction projects underway. Multifamily construction outstandings are up 64% year over year, a reflection of the strong origination of affordable housing projects, as well as a modest level of origination of market rate middle income projects for strong sponsors. When compared to September of 2022, in total, construction and land development loans reflect an increase of 4%, driven primarily by the growth in the multifamily construction portfolio and to a much lesser extent to growth in the land development book. As discussed last quarter, the pace of residential construction starts continues to be slower than historical norms. Builders remain proactive in moving completed product, and while they continue to benefit from the general lack of resale housing inventory on the market, They remain cautious with the level of inventory under construction. In total, residential construction exposure remains acceptable at 5% of the portfolio, flat with last quarter, and of that, 45% is comprised of our custom 1 to 4 family residential mortgage loan product. When you include multifamily commercial construction and land, the total construction exposure remains at 14% of total loans. and as is customary, the portfolio continues to be diversified both in product mix and price point with start spread across our geography. In short, the portfolio continues to perform well. As expected, agricultural loan balances increased again this quarter due to operating line usage up 8% when compared to the linked quarter. Balances are up 12% year over year. And lastly, as noted in the earnings release, we again reported growth in the consumer mortgage portfolio up 7% in the quarter 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 our super community bank model continues to serve our clients well. And I will reiterate a theme that has been consistent of late, which is that our credit quality metrics should not be expected to get better than they currently are. We will not be immune to credit deterioration that emerges as we move through this cycle. Still, the credit culture that runs throughout Banner is a source of strength. So too are the solid reserves for loan losses and capital base, all of which position as well for the future. With that, I'll turn the microphone over to Rob for his comments. Rob?
spk02: Great. Thank you, Jill. So today we reported $1.33 per diluted share for the second quarter compared to $1.15 per diluted share for the prior quarter. The $0.18 increase in earnings per share was primarily due to lower provision for credit losses, lower losses on the sales securities, and lower negative fair value adjustments on financial instruments carried at fair value. Core revenue, excluding the losses on sales securities and changes in investments carried at fair value, decreased $883,000 from the prior quarter, primarily due to higher deposit costs leading to a decline in net interest income. Total loans increased $133 million during the quarter. with an increase of $139 million for portfolio loans, partially offset by a decrease of $6 million in held-for-sale loans. The increase was primarily due to 1-4 family real estate loans increasing $99 million and multifamily loans increasing $67 million, partially offset by a $49 million decline in business loans. Total securities declined $195 million. The decline was due to the sale of $57 million of available for sale securities and normal portfolio cash flows, and also a decrease in the fair value of available for sale securities due to an increase in interest rates. Any additional security sales during the fourth quarter will be dependent upon market conditions. Deposits increased $75 million during the quarter due to a $143 million increase in retail time deposits, partially offset by a $41 million decline in brokered CDs, and a $26 million decrease in core deposits. We have not increased the rates on our deposit rate special since the end of May. Banner's liquidity and capital profile continue to remain strong with all capital ratios in excess of regulatory well-capitalized levels, and we continue to maintain significant off-balance borrowing capacity. Advances from the Federal Home Loan Bank decreased $130 million during the quarter, ending the quarter at $140 million. Net interest income was essentially flat, with a decrease of $752,000 from the prior quarter due to an increase in funding costs, offsetting the increase in earning asset balances and yields. Compared to the prior quarter, average loan balances increased $242 million, while loan yields increased 14 basis points due to floating and adjustable rate loans repricing, as well as new production coming on at higher interest rates. Total average interest bearing cash and investment balances declined by 219 million from the prior quarter, while the average yield on the combined cash and investment balances increased two basis points. Total cost of funds increased 22 basis points to 108 basis points due to increases in rates paid on deposits and borrowings. The 22 basis point increase in funding cost was lower than the 46 basis points increase in funding costs we experienced in the second quarter. The total cost of deposits increased 30 basis points to 94 basis points, reflecting both increases in the rates paid on interest bearing deposits, as well as a shift in the mix of deposits, with a portion of non-interest bearing deposits moving into CDs and other interest bearing deposits. I will note the pace of movement out of non-interest bearing slowed compared to the prior quarter, with non-interest bearing deposits remaining robust at 39% of total deposits. The average cost for brokered CDS this quarter was 5.29%. These added seven basis points to the cost of deposits for the quarter. Net interest margin decreased seven basis points to 3.93% on a tax equivalent basis. The decrease was driven by increases in funding costs on interest bearing liabilities, outpacing the increase in yield on earning assets. We expect the net interest margin will see some additional moderate compression during the fourth quarter, contingent on market conditions. Total non-interest income increased $4.2 million from the prior quarter due to lower losses on the sale of securities and lower negative fair value adjustments. The current quarter included a $2.7 million loss on the sale of securities. The payback on these trades averaged two and a third years. In addition, we recorded a $700,000 negative fair value adjustment on investments held for trading as market rates increased. Core non-interest income, excluding the loss on sale of securities and changes in investments carried at fair value, decreased $131,000 due to declines in bank-owned life insurance and miscellaneous income, offsetting increases in deposit fees and mortgage banking income. Deposit fees and other service charges increased $316,000 as lower expenses on debit card transactions offset the reduction in NSF fees due to the discontinuation of charging returned item fees implemented in June. Income from mortgage banking operations increased $363,000 due to a lower negative fair value adjustment on multifamily loans held for sale. Year-to-date, we have recorded $831,000 in losses on the multifamily loans held for sale. This business line has been effectively shut down for all of 2023 due to the lack of an active secondary market with year-to-date originations for this group being less than $1 million. As such, during the quarter we made the decision to formally discontinue the multifamily origination for sale business line. Income from residential mortgage operations was slapped for the quarter. Miscellaneous income decreased $486,000 primarily due to a loss of $276,000 on the disposition of assets related to two branch consolidations. Total non-interest expense increased $486,000 from the prior quarter. The expense for the quarter includes $623,000 of expenses associated with the discontinuation of the multifamily origination for sale business line. Compensation expense decreased by $881,000 as declines in salaries and payroll taxes offset an increase in seven related expenses. Advertising and marketing expenses increased due to summer marketing campaigns. Professional and consulting expenses increased due to normal timing of annual audit expenses. REO expenses declined due to a gain on the sale of an REO property. Despite the competitive deposit rate environment, retail deposit balances increased during the quarter as our teams remain focused on delivering on our value proposition of being connected, knowledgeable, and responsive. The strength of the company's balance sheet positions as well for being able to take advantage of the ongoing market disruption. This concludes my prepared comments, and now I will turn it back to Mark. Mark?
spk03: Thank you, Rob and Jill, for your comments on the quarter. That concludes our prepared remarks, and we will now open the call to your questions.
spk04: Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to withdraw your question, it's a star followed by two. Please remember, if you're using a speakerphone, to pick up your handset before asking your question. So our first question comes from the line of David Feaster of Raymond James. Your line is now open. Please go ahead.
spk03: Buddy? Good morning, David.
spk07: Maybe I was just hoping that we could dig into a bit some of the trends that you're seeing on the core funding side. You know, it looks a lot of the growth that we're seeing, we've seen the migration slow, which is great. A lot of the growth that we're seeing in the interest-bearing checking, high-yield savings, I'm just curious, some of the underlying trends that you're seeing, where are you seeing the most opportunity to drive core deposit growth and just how new core deposit pricing is kind of trending for those products?
spk02: Yeah, David, it's Rob. So I think you hit on some of it there. I mean, we saw the stabilization overall core deposits for the quarter. TAB, Mark McIntyre, We did see the mix continuing to move out of some of the non interest bearing and lower yielding products into the higher yield savings account that we're offering, but the pace did continue to slow throughout the quarter. TAB, Mark McIntyre, And and what we're what we're thinking now is is that you know we expect that pace even slow further into the fourth quarter, and then we have to go into 2024. We would expect that we would see the point in the first part of the year where we see stabilization there. As far as the growth that we're seeing is mainly in that high-yield savings account, and the rates on that range from 2% to 4% depending on the tier. The average cost in that account right now is around $350,000. You know, but if you're looking at time deposits, time deposits on average are probably coming in, you know, that 425 to 450 range for new retail time deposits.
spk07: Maybe just putting that together with kind of where new loan yields are, you know, just maybe stepping back too, just I'm curious how you think about some of the implications of a higher for longer rate environment. Maybe just on the margin and NII trajectory, As we look forward, I mean, just kind of given what you're talking about and where new loan yields are, the repricing of the earning asset base, it seems like margin might be closer to a trough here or at least nearing it. I'm just curious kind of how you think about the margin trajectory and, you know, any other impacts on the business if we do stay in a higher for longer environment.
spk02: OSBT, Curt Brown, Yeah, so, so, so, David on the on the margin expectations there. I mean, we are expecting to see some additional moderate compression probably for the fourth quarter of this year. OSBT, Curt Brown, Because we think the funding cost is going to, you know, while it's all the pace of increase is going to slow there. we do think that it's going to still outpace the increase in the yield on earning assets for the fourth quarter. But I would consider it moderate, call it mid-single digits, something in that range maybe. But then as we go into 2024, I mean, assuming those trends continue where we continue to see the slowdown in the funding cost and the yield on earning assets coming on at higher yields, we would expect in the first part of 2024 that we would start to see stabilization in the net interest margin. As we go through the quarter, we'll have a better visibility on our expectations for 2024.
spk07: Maybe just touching on the loan growth side, it's, again, great to see the increase in origination yields. I'm just curious, where are you still seeing an opportunity to bring good risk-adjusted returns with rates kind of in that low to mid-8% range? How's the pipeline? And then, obviously, construction and land has been a big driver of originations. It's still a big proportion of it. I'm just curious what you're seeing in that segment and how underwriting has changed it at all, and where are you still seeing projects pencil there?
spk01: So David, this is Jill. There was a lot in that question, so hopefully I'll hit it all. Pipelines are currently about 20% lower than they were at this time last year, but we continue to see good opportunities across the footprint and it really is important at this time because of the increased opportunities due to liquidity issues at other institutions that we just maintain our moderate risk profile. Our underwriting has not changed over the course of this cycle or really any in the past. We have been pretty stable in our method of underwriting. The construction book, as I indicated, performs really well. We are seeing some land development rebuilding with our stronger developers because they need that lot you know finished lot inventory when we come out of this say in the end of 2025 and into 2026 they're just trying to make sure that you know they have that to go forward so so we will see some of that um i feel like i'm missing one piece of your question david well david this is how you got most of it yeah let me just add i think you you're i think you were getting at the question the implication of hire for longer what's that going to do to um
spk03: potential loan growth. And clearly, if you're hired for longer, you're going to have muted economic activity. I mean, businesses have done a very good job of managing their balance sheets. They've utilized excess cash to help reduce their borrowings. Some of the capital investment areas that businesses were contemplating may be put on hold, not terminated, but put on hold. So Higher for longer will definitely have an impact of muted loan growth from an economic standpoint, even in the high growth regions that we have on the West Coast. That being said, there's a lot of market disruption out there that provides us great opportunity to take market share. And Banner's balance sheet and our liquidity position put us in a great position to take advantage of that market disruption.
spk04: Thank you. Our next question comes from the line of Andrew Leach of Piper Sandler. Your line is now open. Please go ahead.
spk09: Good morning. Good morning, Andrew. Back to the margin here. If the Fed hikes one more time, I guess, how would you expect the margin to
spk02: uh react to that and then if we get a series of cuts later next year and into 25 how do you think the uh how do you expect the margin to react to that dynamic yeah andrew it's it's rob so i guess first on the on the rate hike um in general we have about 30 of our loans that are variable and so i would expect those to reprice you know essentially instantaneously with with the rate hike there And then the other piece of it is that I don't think, you know, from what we're seeing right now, peer banks, competitors are not reacting to one additional 25 basis point increase in Fed funds as far as reacting, increasing rate specials. Throughout the quarter, I'd say the rate specials that we're seeing out there are from what I call peer banks, have been pretty steady and there haven't been a lot of increases in rate specials out there. You know, there are a few outliers always out there, you know, credit unions, something like that, but not true competitors for us necessarily. So I think it's advantageous probably for another 25 basis point increase for us in our margin. On the other side of it, as rates go down, so We have a number of the adjustable rate loans. Those are the loans that reprice over, you know, they don't reprice instantaneously. They reprice, you know, anywhere from 30 days up to five years. And there's a number of those loans that haven't repriced through this cycle yet. And so under a kind of a flat rate, flat balance sheet cycle, we would expect that our loan yields would increase about eight basis points per quarter. And I think any initial decline in the Fed funds, I think what will initially happen is those variable rate loans, that 30% bucket will reprice down. But I think you're going to see some continued repricing of those adjustable rate loans. And then I think you're also going to see... fixed rate loans that are at a much lower yield as they mature and refinance, I think you're going to see those come out of higher yields too. So I think initially there's going to be a little bit of protection on the downside from a loan yield standpoint.
spk09: Got it. That was kind of leading in my next question. Do you have the percentage of loans that have yet to benefit and reprice higher from the Fed rate hikes over the last year plus?
spk02: So just on the adjustable rate loans, I don't know the complete makeup of the fixed rate loans, but I would say about $2 billion of adjustable rate loans. Haven't repriced since the beginning of 2022. Got it.
spk09: Great. That's really helpful. Thanks for taking the questions. I'll step back here.
spk03: Thank you, Andrew.
spk04: Thank you. Our next question comes from the line of Kelly Motta of KBW. Your line is now open. Please go ahead.
spk05: Hi, good morning. Thanks for the question. Maybe keeping along the lines of margin and what happens with rate cuts, just thinking about the other side of the balance sheet with deposits. There's a lot of banks out there that still are to need a lot more liquidity than you do at this point. So when we do get these rate cuts, how do you expect deposit pricing to react? Would you expect some stickiness and kind of a slower beta on the way down, given kind of how other banks are positioned?
spk02: Rob Leibowitz, Yeah, Kelly. It's Rob again. And yeah, I think, I think that's accurate. I think, you know, over the cycle. I think we're going to see whatever deposit beta we see on the on the upside here. Rob Leibowitz, We think we'll see that deposit beta on the on the downside as well over the long term but but initially I think there could be a little bit of a lag there. I don't think Similar to what we're seeing on a rising rate of 25 basis points or something like that, we're not seeing much reaction from deposit pricing. And I think it will be similar on the down. So the initial rate cuts of, let's say, 25 basis points as they start, I think there's going to be a lag there, and you're not going to see a reaction just because other banks are more challenged from liquidity out there right now. I mean, eventually once you get to, let's say, 100 basis points of combined decrease, I think you'll start to see deposits come down, but there's probably going to be some lag there, I agree.
spk05: Got it. And can you remind us how much of cash flows are thrown off the securities book in the next quarter or two?
spk02: Yeah, it's running at about $65 million a quarter right now.
spk05: Okay, great. And then turning to expenses, I think, on the last call, you expected the second half of the year to be similar to the first half. Just wondering if that expectation still holds. And I know you mentioned you decided to just continue your multifamily sales operations. Wondering if there's any cost associated with that decision.
spk02: Yeah, I think for the fourth quarter, For the fourth quarter, I think the fourth quarter will look, you know, on a core basis, I think will look similar to the third quarter. And, you know, the multifamily origination for sale business line, just to give you a little perspective, the annual expenses running from that division were about $2.5 million a year. So I think we could see some benefit of that in 2024. I wouldn't expect necessarily see the benefits of that. in the fourth quarter. There could be some additional costs associated with exiting leases and other things in the fourth quarter potentially as non-core items. So I guess the way I look at that expense save in 2024, I look at it as something that could offset the normal inflationary increases that you would see in expenses. And so if I think about 2024, We're still going through our strategic planning process, so we're not finalized on anything. But in general, I think our expenses for 24 will likely be flat to maybe up in the low single digits is what I'm thinking right now.
spk05: Great. Thank you. Maybe last question for me, maybe for Mark, is potentially give us an update on just the pace of you know, M&A conversations and if there's been any change in that regard.
spk03: Yeah, thanks for the question, Kelly. Look, I think right now there's enough uncertainty out there, whether it's the regulatory environment, whether it's the credit marks or the interest rate marks, the accounting marks associated with the combination, I think everybody's just a bit cautious on trying to proceed with any meaningful combinations. But what I will say, though, is, as you might suspect, a company with as strong a balance sheet as Banner is with great core earnings power and a history of being a good partner, you would expect that Banner would be a natural for any types of combinations that come down the road as soon as the market gets a little bit more clarity.
spk05: Appreciate the caller. Thanks so much. I'll step back.
spk03: Thanks, Kelly.
spk04: Thank you. Our next question comes from the line of Andrew Terrell of Stevens. Your line is so open. Please go ahead.
spk11: Hey, good morning. Morning, Andrew. If I could start, Rob, I think last quarter we discussed this, but you mentioned potential for a buyback in the second half of the year. I know obviously there's a lot of moving pieces with the macro, but you guys have a really strong capital position and a really strong allowance as well. We'd love to hear just how you're thinking about the buyback or incremental capital return as we close the year and we move into 2024.
spk02: Yeah, sure, Andrew. So, yeah, as you know, I mean, we view share repurchases as one of our four options for capital deployment. Most important is obviously the core dividend that we have. Beyond that, we would consider share repurchases. M&A is opportunistic, so if that would come up, and we have done a special dividend in the past occasionally. The way we're thinking specifically about share repurchases is that I would think that we would not be contemplating starting share repurchases until 2024 at this point. We just want to see the macroeconomic environment play out a little bit here before we make any decisions around capital deployment beyond our core dividend right now.
spk11: Yep, makes sense. I appreciate it. And then, Jill, if I could ask, on the office loan portfolio, I appreciate that it's relatively minimal, I think about 6% of total loans. Do you have the reserve against the office portfolio, either dollars or percent?
spk01: Yeah, we don't break it out that way in the CECL analysis, so I don't. I could probably figure it out for you, but I don't have a number right now.
spk11: Okay, and then do you have the total dollar amount or percentage of the loan portfolio that's syndicated or SNICs?
spk01: Yeah, I do. We have limited exposure to shared national credits, less than 2.5% of the loan book. Our average loan balance is less than $10 million, and of that shared national credit portfolio, less than 30% of it would be considered leveraged lending. It's performing well, and we have one adversely classified SNIC at this time.
spk11: Okay, got it. I appreciate it. And then if I could ask one more on the 785 million of loan originations this quarter, do you have what the weighted average yield was on the originations?
spk02: It's 827.
spk11: 827, got it. Okay, thank you for taking the questions.
spk03: Thank you, Andrew.
spk04: Thank you. Our next question comes from the line of Tim Coffey of Jani. Your line is now open. Please go ahead.
spk08: Great. Thank you. Morning, Mark.
spk03: Morning, Tim.
spk08: Hey, so for Mark, for you and Jill, on the multifamily for sale business, can you kind of provide color on what's happening in the secondary market? Is it as simple as just the yield being offered on the loans for sale?
spk03: Yeah, Tim, thanks for the question. I think what is appropriate is to remind everybody on the call what our multifamily for origination unit actually was. So we had an operation that with several seasoned bankers who had been doing this for many, many years in the multifamily sector where they would do refinances and then remodeling and that type of financing, which we wanted to originate and then sell. And we would sell that to community banks. And that business model, as you know, became stressed last year with the rapid rise in interest rates to making transactions pencil out, number one. And then number two, the lack of liquidity in the system, because we were primarily selling to community-based banks. And once they stopped purchasing, obviously that entire business unit came under some stress and really wasn't driving the financial results that we were looking for. And we don't see that condition changing in the immediate term. So just like we do in any prudent business decision, we evaluate all of our products and our lines of business in terms of their return and profitability And we came to the conclusion that since that business model is probably going to be under stress for a while, that we would look to transition that business model out. But keep in mind, though, that we still have an origination business in an affordable housing unit that we do for on-balance sheet lending. So to your point, it's a combination of things. It's a combination of the rate environment, as well as the lack of liquidity in the secondary market for where we sold multifamily loans.
spk08: Okay, great. Thank you. And Jill, as you're doing appraisals or receiving appraisals on your commercial real estate portfolio, are you seeing any meaningful change in cap rates across the products?
spk01: They're ticking up, Tim, but I would not say meaningfully yet. We expect them to continue to migrate up, but it's not having a huge impact at this point.
spk08: Right. Okay. And then the outlook for the construction book, is it reasonable to expect that multifamily is going to lead the growth in that book? I heard you said about the well-heeled developers trying to clear out the loss, but I just want to get some clarification on that.
spk01: Could you say that again about the multifamily? I missed that.
spk08: Oh, yeah, sorry. So look at the construction book. We've seen most of the strength come out of the multifamily construction. Do you expect that trend to continue?
spk01: Yeah, for the short term, I mean, that's where we're going to see those dollars continue to fund up and our builders are being conservative in their takedown. So I would continue to see that outstrip in the immediate term in the affordable space. housing construction bucket primarily. We do do limited middle income market rate multifamily, but the real growth there is in the affordable housing, and we have lots of construction in that to fund up.
spk08: Okay, great. Those are my questions. Thank you for your time. Thanks, Sam.
spk04: Thank you. Our final question comes from the line of Jeff Ruliff of D.A. Davidson. Your line is now open. Please go ahead.
spk06: Thanks. Good morning. Good morning, Jim. Just a question maybe for Rob. I appreciate the expectation for margin. And despite, you know, maybe some compression, I guess we're getting closer to an NII bottom. And I guess if you want to frame up your expectations the possibility of NII growth, even if margin pulls in a bit here?
spk02: Yeah. So, so yeah, I think if we're thinking about margin growth, I think we're probably thinking about, you know, second half of 2024 and, and of course it's going to be influenced by what the fed does and their timing on, on when they might start to decrease rates there. But even under a flat rate cycle, you know, higher for longer, I would expect that we're going to get to this point probably in the second half of 2024 where loan yields are increasing faster than the cost of funding.
spk06: Okay. So if I – that's on the margin side, but is it, you know, given the balance sheet, could you scratch out NII growth from here? I guess, you know, link quarter, that's diminishing that decline and just wanted to see if that turn in NII is possible.
spk02: Yeah, so on that piece of it, Jeb, so I mean that business, so I would say our normal, let's call it our normal community banking fee income side of it, you know, that will remain steady from what you saw this quarter. The other piece of it, of course, is the one-to-four family business, which is heavily influenced by the market rate environment. And, you know, where tenure's at, to see meaningful growth in that, we're going to have to see some pullback in the tenure on that. But beyond that, we are looking at some strategic initiatives to enhance that. One of them is regarding SBA lending. We're looking at enhancing our origination capability in that business. And then we're also the FX foreign exchange income that we have is more of a convenience for some customers and not something we've gone after in the past. So we're looking at that. And then a longer term play is looking at some wealth management enhancing our capabilities there as well.
spk06: Okay. Thanks. And maybe one other one, kind of two part, if you will, looking at the and maybe for Mark, just your perception of competition, both loan and deposit pricing. You find that better or worse in the Northwest versus your Southern footprint. And the second piece of that is, where do you see more opportunity for talent dislocation and or nay in the Northwest versus the Southern area? So that's two part is competition. Second part is opportunity. Thanks.
spk03: Yeah, thanks for the question, Jeff. I think from a competitive standpoint, look, there's clearly some financial institutions that are under a bit of stress in terms of what they can do with their balance sheet as it relates to growth. So while there's still competitive forces out there in terms of pricing, we're finding some great opportunities and are able to compete effectively. So we're seeing a stabilization in terms of pricing as it relates up specifically in the Pacific Northwest. And you will see that continue and migrate down into California with some of the regional banks that we compete against. So we're seeing some good opportunities and we think that they're, you know, I don't view this as being a major price competitive market. into the course of the next 24 months, I think Banner's gonna have a real advantage from that standpoint to take market share. So that's, I think from a competitive standpoint, I think we stead pretty well. And a lot of it has to do with just general market conditions, but more importantly, the source of capital that some of the regional banks are gonna be able to deploy. That's gonna benefit us. In terms of talent, we've taken the same approach that we have in the past, which is much more of a rifle shot approach rather than hiring teams of bankers. And we have been extremely successful at hiring some very good talent in all of our markets from some of the regional and larger institutions. And we're going to continue to do so. We see some great opportunity with some of the market disruption that is adding some real talent to the organization. So thank you for the question.
spk00: Thanks, Mark.
spk04: Thank you. As there are no additional questions waiting at this time, I'd like to hand the conference call back over to Mark Grefovich for closing remarks.
spk03: Thank you, everyone. Thank you for your questions and your interest. As I stated, we are very proud of the Banner team in our third quarter performance, a very solid third quarter performance. Again, thank you for your interest in joining us on the call today. We look forward to reporting results to you in the future. Have a great day, everyone. Thanks again.
spk04: Ladies and gentlemen, thank you for joining today's call. Have a great day ahead. You may now disconnect your line.
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