Q4 2019 Earnings Call
Due to the hard work of our employees throughout the company. We are successfully executing on our strategies and priorities to deliver sustainable profitability and revenue growth to Banner. Our core operating performance continued to reflect the success of our proven client acquisition strategies, which are producing strong for revenue and we are benefiting from the successful operation of our recent acquisitions.
our full
Year 2019 for Revenue reached a record $551 in increased 7% compared to the full year 2018 demonstrating that our strategic plan is effective and continuing to build shareholder value.
We benefited from a larger and improved earning asset mix a strong and interest margin and good fee income over all this resulted in a return on average assets of 1.2% for the year.
Once again, our performance is quarter and for the full year reflects continued execution on our super Community Bank strategy that is growing new client relationships impacting our core funding position by growing core deposits and promoting client loyalty and advocacy through our response of service model while augmenting our growth with opportunistic acquisition.
To that point park or deposits increased 10% compared to December 31st, 2018 and represent 89% of total deposits further. We continue to serve organic generation of new client relationships.
reflective
With a solid performance coupled with our strong tangible common equity ratio of 9.77% We use you to Accord dividend a $0.41 per share and a special dividend off of a dollar per share in the quarter and repurchased 1 million shares of common stock in 2019 in a few moments Peter Connor will discuss our operating performance in more detail.
Why we have been effectively executing on our strategies to protect our net interest margin grow client relationships deliver sustainable profitability and prudently invest our Capital. We have also focused on maintaining the improved risk profile Banner again, this quarter our credit Quality quality metrics reflect our moderators profile at the end of the month order our ratio of allowance for loan and Lease losses to Total loans was 1.08% in a moment Rick Barton. Our chief credit officer will discuss the credit metrics of the company the increase in non-performing loans associated with a single credit and provide some context around the loan portfolio in our continued success at maintaining a moderate credit risk profile in the quarter and throughout the preceding nine years. We continue to invest in our franchise. We have added talented commercial and Retail banking Personnel to our company.
And we have invested in.
Further developing and integrating all our Bankers into banners proven credit and sales culture.
We also have made in our continuing to make significant investments in enhancing our digital and physical delivery platforms positioning the company for continued growth and scale off. All these Investments have increased our core operating expenses. They have resulted in core Revenue growth strong customer acquisition year-over-year growth in the loan portfolio and strong feeling.
Further is that noted before we have received Marketplace recognition of our progress in our value proposition as JD Power and Associates this year again ranked Banner Bank, the number one Bank in the Northwest for client satisfaction the fifth year. We have won this award the small business administration name Banner Bank Community lender of the year for the Seattle Spokane District for two consecutive years, and this year name Banner Bank Regional lender of the year for the fifth consecutive year and money magazine named Banner Bank the best bank in the Pacific region. Again this year. Also Banner was ranked in the Forbes 2019 best banks in America for the third consecutive year.
before
Turn the call over to Rick Barton to discuss Trends in our loan portfolio. I want to again recognize our new colleagues and clients from Alta Pacific Bank that joined Banner in November . We're extremely pleased with this opportunity to expand our super Community Bank model and enhance our density in California. I'll now turn the call over to Rick Barton to discuss Trends in our loan portfolio off.
Thanks, Mark.
Eight year in 2019 the credit landscape it Banner includes the Alta Pacific bank loan portfolio. As you have read in our press release and heard this morning. I crave metrics remain stable and the fourth quarter except for an increase in non-performing loans. This change was centered in a single Commercial Business credit relationship that is in County Jail headwinds driven by Marketplace changes beyond their control, the challenges faced in this relationship are not present elsewhere in the battery portfolio.
the broader
File with the company's loan portfolio is a tribute to the continuing hard work of banners Bankers the compatible credit culture at Alta Pacific and the effort and spirit of cooperation by all involved in planning the integration of alta's loan portfolio and Loan operations into banners.
My remaining remarks this morning will be brief and concentrate on the company's credit metrics and our loan portfolios moderate risk profile.
Delinquent loans increased 11:00 basis point from the linked quarter to four 1% of total loans this change in delinquent loans faith in the pattern of recent quarters and should not be unexpected when total delinquent loans are at the current low level a year ago delinquencies were four or five percent of the company's level of the first flea classified assets remains. Well below historic Norms non-performing assets as noted increased in the fourth quarter of 2019, 2.32% of total assets up from 5% in the linked quarter at December 31st, 2018 home. Performing assets were .16%
Not performing assets were split between non-performing loans of forty million dollars and REO and other foreclosed assets of 1 million dollars the increase in REO came from a specific portfolio not reflected in these totals or non-performing loans of seven million dollars from acquired portfolios, which are not reportable under purchase accounting rules. If we were to include the acquired non-performing loans at our non-performing asset totals. The ratio of non-performing assets to total assets would still be a modest 38 basis points.
Performing trouble debt restructures of six point five million dollars were level with linked quarter.
For the quarter the company recorded net loan charge-offs of 1.2 million dollars gross charge-offs for the quarter or 1.9 million dollars down from that point two million dollars in the third quarter of the year for all of 2019 net charge-offs for 5.9 million dollars or a nominal 7 basis points while gross and net charge-offs were up from 2018. We still consider charge-offs at this level to be low when compared to his Direct Orange and those that charge off recoveries were abnormally high in 2018 further. We have not observed any meaningful pattern of correlation in charge of Taken during the past two years.
after
Fourth-quarter provision of four million dollars and net charge-offs of 1.2 million dollars the allowance for loan and Lease losses for the company totals $101 million dollars wage and it's 1.08% of total loans compared to 1.11% for both the linked quarter and December 31st, 2018, the fourth quarter decrease in this metric reflects, the Alta Pacific acquisition and good organic loan growth. If the Altima Civic loans are excluded from the 8,000 calculation the a triple A Legacy batter loans is 1.10% coverage of non-performing assets is 250% off lower than in past quarters because of the addition to non-performing loans.
The two million dollar increase in our fourth quarter provision is tied both to the change and non-performing loans and Loan growth.
Accounting Mark against acquired loans is $25 million dollars which provides an additional level of protection against loan losses. It's worth noting that the company's preparation and model or the transition to see solar complete has noted in our press release based on our portfolio as of December 31st. The combined allowance for credit loss on loans and unfunded commitments under Cecil would increase between ten and 20% over our existing combined reserves for loans and unfunded commitments.
Fourth-quarter held for investment loan growth includes Alta Pacific loans at 332 million dollars without adjusting for the acquisition been a sport folio Brew four by four hundred and seventy million dollars after adjusting for the purchase organic growth in the fourth quarter was 138 million dollars off or 6% on an annualized basis.
after me
Seeing the same adjustment for the full year loans grew by 288 million dollars or 3.3% for all of 2019 growth in the historic Banner portfolio was most concentrate concentrated in the cni portfolio that increased by 13% spread across. Our footprint wage is also important to note that banners construction loan portfolios remaining acceptable concentration levels, including the Alta Pacific loans in these segments wage residential construction exposure including land loans is 7.5% of total loans with both multi-family and commercial construction loans and commercial landolt was your added into this calculation. Our total a D&C exposure is 12.6% of total loans. These concentrations were 7.4% off.
12.3%
Respectively in the linked quarter total multi family loans Construction Plus permanent at your end where 7.6% of total loans compared to 7% at September 30th, 2019 the markets in which we make residential construction loans including the new Alta Pacific markets are experiencing continued ROM sales driven by both lower interest rates and strong economic activity market dynamics are consistent with more affordable housing segments under supplies and some inventory build-up noted in luxury homes. The pace of lease up activity is multi-family project remained steady with a continuing moderation wage growth in the rate of growth rate of rats the permanent loan market for a new stabilizing multifamily projects is still strong.
As I said at the outset of my remarks after considering the fourth quarter increase non-performing loans the overall risk profile of banners credit portfolio remain moderate position as well for the future.
but that's
So I will pass the microphone to Peter Connor for his comments Peter. Thank you Rick and good morning, everybody as discussed previously and has announced in our earnings release. We report income of 33.7 million or $0.95 per diluted share for the fourth quarter compared to 39.6 million or $1.15 per diluted share in the prior quarter off despite that wins affecting the net interest. Margin the fourth quarter results benefited from organic growth both in core deposits and portfolio loans Strong Mortgage Loan Production as well as Revenue agent left from the Ulta Pacific acquisition closed on November 1st, the $0.20 decline appreciate earnings from the prior quarter was primarily the result of increased non-interest expect is related to acquisition costs associated with Alta Pacific increased provision for loan losses and to a lesser extent to decline in net interest margin.
Total loans increased $470 from the prior quarter end as a result of the of the acquisition of Alta Pacific in solid organic portfolio loan growth organic portfolio loan growth, excluding loans contributed 238 million to year-end loan outstandings help for sale loans declined by 34 million as bulk sales out of the multifamily portfolio exceeded production during my order.
Engine core deposits increased $480 million from prior prior quarter end due to both the Alta Pacific acquisition and strong organic growth during the quarter organic quarter-page during the fourth quarter, excluding Alta Pacific contributed a hundred and thirteen million a year in total to the year in total and on a linked quarter annualized basis through 5.2% off.
Time deposits declined 98 million due to a decline in brokered CDs and modest run off of the retail CD portfolio offset by eight million dollars required with the altar Pacific Aqueduct fhlb borrowings increased $68 million do to re mixing away from brokered CDs during the quarter.
That interesting, increase 2.9 Million from the prior quarter as earning assets increased as a result of the ultimate Civic acquisition and organic growth and loans and deposits.
Compared to the prior quarter loan yields decreased 7 basis points principally due to declines and Prime and library and excellent yields partially offset by higher levels of loan accretion monthly payment related interest income.
The average long coupon rate decline 13 basis points, which was partially offset by an increase in the creation related interest income of 4 basis points and an increase in deferred loan origination down payment and interest penalty related fees, totaling 2 basis points total cost of funds declined five basis points to 52 basis points as a result of lower deposit of us and wholesale funding costs.
The total cost of deposits declined from 42 to 40 basis points in the fourth quarter due to declines and Retail deposit costs brokered CDs accounted for five basis points of total deposit cost same level as in the prior quarter.
The composition of non-interest bearing deposits to Total deposits held study got 40% of total deposits and the ratio of deposits to Total deposits increased to 89% in the fourth quarter impact due to the acquisition of all the Pacific the net interest margin declined five basis points to 4.20% as a result of lower Market rates principally due to the decline of public funds and labor rates coupled with the lack and deposit repricing partially offsetting margin compression in the fourth quarter was a higher impact of acquired lot of creation as a result of the Pacific Ocean blonde accretion contributed 8 basis points to the margin in the fourth quarter up 2 basis points from the six basis points of one equation contributed to the margin in the third quarter off.
The bank continued to adjust deposit rates down during the quarter and into January and we anticipate seeing a continued decline in average deposit cost carry through into the first quarter wage also worth noting that during the fourth quarter the bank prepaid a portion of a tire cost will be longer term borrowings and replace them with lower costs and shorter duration fhlb borrowings to reduce the company's assets sensitivity.
total non-interest income declined model
And repricing deposits when the market rates decline, you know, we're guiding to a mid-single-digit decline in margin in the first quarter, you know, given those moving parts. We we'd expect, you know, a a similar mid-single-digit decline in cost of funds as well for the company in part. I do too, you know ongoing declines in reprising of our retail deposit products, but also some benefit from prepaying some of the term Advanced fhlb power lines that we did in the fourth quarter. We you know prepaid approximately a hundred million dollars of longer-term to R-rated fhlb dances and and move those into overnight or very short fhlb borrowings by the end of the year.
Okay, and just hoping for some color on the the large commercial relationship is that one single lone a bucket of loans, if you could talk about kind of any type and color and then and then potentially kind of been expected workout timeline. Okay, Jeff be happy to address that it is a single loan and it's not uncommon for things to be very lumpy in the commercial world one credit events happen. It's agribusiness credit that may have been monitoring for quite some time and have had it in our classified loan totals. We have scoured the portfolio and I've come to the conclusion that this issue with this particular relationship is isolated to that relationship and not found in other credits individual.
Or portfolio segments collectively. This is going to be a more extended workout. But we have are very capable special assets Department managing the credit and we'll be driving to a conclusion as soon as we can.
Thanks get back. Thank you Jeff. Her next question comes from Andrew lights from Piper Sandler, please go ahead with your question.
Hi, good morning, guys. It's actually Aaron dear on for Andrew this morning. Good morning, Erin. Just going back to the to the credit that that you're working out just it off. It sounds like unique situation curious. What what the nature of it that gives you confidence that it didn't look like you took any sort of provision against the credit in the office. So presumably the the Lost content is pretty small. Just wondering what you know, what's behind that.
Well, in fact we did increase our provision from the quarter from third quarter from 2 million to 4 million and the increase in wage provision was principally linked to the increase in non-performing loans and to a lesser extent to the organic loan growth in the portfolio page. And I'm sorry I misspoke. I meant to say that it didn't look like he'd taken any charge off against the credit that that that is correct. We're still going through the month. And if and when we identify the necessity to take a loss on the loan, we will do so long and then just wondered if you can give us a sense of where how the pipeline the stands today and any sort of guidance can give in terms of your outlook for growth and 2012.
The pipelines are still in decent condition. There are a lot of opportunities that are Bankers are looking at home. And you know, I think I'll defer to Peter to just to climb out on what we project loan growth collectively to be 420. Yeah. This Peter, you know, we we haven't changed our guidance on along growth. We you know, we we we're guiding to mid-single-digit continuation and growth of our portfolio loans and it well Diversified mix across our portfolio. If you know, you know in Rick's comments, you'll note that we continue to have stronger growth in the cni portfolio, then the series categories and we expect that pattern of more emphasis on growing the C and I book to continue into 2020.
and is that because of your if finding just a better pricing in that category or there's
this more opportunities
Aaron, this is Mark. I think what you're seeing is is confidence in the economy starts to improve whether that be with some of the trade pact that are getting passed you're finding the businesses are are looking to increase productivity because of the low unemployment rate. They're they're having to invest in capital investment or at least considering it. So we feel more confident that there is some growth in the cni portfolio that has been muted for a period of time because of lack of capital investment. Also, we're seeing an opportunities, you know, it's a focus of our organization to focus on seeing my growth as opposed to just following the commercial real estate market. It's encouraging good color and they just one question going back to the guidance give earlier on the margin. It's Thursday.
Sequential drop into the first quarter is that is that looking at the at the core margin X in the equation or the what would be the reported margin or on on the basis of both? That'd be that'd be the Gap margin parents. So that's the reporting. Margin. Very good. Yeah. And by the way, we think that margin, you know compression will taper off, you know, after the after the first quarter was still a bit of inertia running through in terms of loan pricing but you know absent and other fed cut we think you know that merging, uh, you know that Landing level stabilize him in part because deposit repricing will you know continue to benefit the margin, you know, even after the first quarter, right? So we'll we'll continue to see deposit prices catch up to some extent wage, um into the second and even third quarter got it. Okay, great. Thank you. I'll set back thank Sarah.
Our next question comes from Jackie Bowen from KBW, please go ahead with your question.
Excuse me. Hi. Good morning. Everyone morning Jackie.
If I heard you correctly I looking for maybe a mid-single-digit drop. Uh
Just a quick question again. Sorry to hop back into this non-accrual. It's just so unusual for you guys to have an uptick in that I was just curious as given that the factors are outside the borrowers control. So that strikes me as more of a macro event. How is it isolated to this specific borrower and not others. Does it have to deal with the type of agribusiness that the borrower involved in?
That's exactly right Jackie. Okay. Well that was easy and then in terms of cost savings on the conversion understand that you're looking to one Q conversion and there could be some cost savings trickling into two Q do you expect the majority of cost savings to come out in 2 Q or will you have a lot of those realized by the end of the first quarter with some trickle into two Q Jackie? It's Peter. Yeah, we where the conversion is actually mid mid quarter in terms of all the systems and Brake consolidation and any, you know remaining FTE displacement to go with that. So we anticipate recognizing, um, just about all of the synergies for the full second quarter and and we're still tracking down to what we had guided to when we announced the transaction back in at the end of July , but 45% expense energy just sounds like two Q. Yep.
18 and three Q should be a very clean.
Right. Yeah. Yeah, and there may be a little bit of you know, m&a expensive pumping through Q2, but it'll be fairly small but will we expect to see the majority of this month is reflected in second-quarter?
Okay, great. Thank you. Thank you Jackie. Once again, if you would like to ask a question, please press star and one our next question comes from Tim coffee from Jenny, please go ahead with your question. Thank you morning gentlemen morning Chuck. Hey given that the the the increased non-accrual loan was a commercial loan. Was there any corresponding deposit relationship with it?
We always have corresponding to deposit relationships with our major commercial exposures and you know off the top of my head. I don't know exactly what the size of the deposit relationship is, but it's a fraction of the credit exposure. Okay. Is it your estimation that that deposit relationship could be at risk? Oh well.
Independently, no, I don't think so. Okay, and then Peter looking at the the level of borrowing so you have on the balance sheet as a percentage of your total funding. It's a bit higher it has been historically is that a function of kind of The Limited organic organic deposit growth this quarter are is that something that you see increasing our own? No absolute balance of borrowings increasing as the funding base increases. Yeah. Um, can we actually you know, the one of the reasons we had a higher level of borrowings at your rent while there's a couple of years we had higher levels of our lives here in one. Um, we we carried over from the multi-family home for sale portfolio and some of the borrowings always used to fund that held for sale portfolio until it flashes cells. And so that that's one reason to be elevation to we actually were a bit cautious. I'm giving some of the disruption in the in the repo markets and the treasury side that we saw.
You know in the third quarter essentially repeat it you're in so we were as an abundance of caution. We we put some short-duration term fhlb Browning's over a year end to prevent any you know rid of disruption in the
Overnight market and so that was a just a tactical decision to increase the fhlb borrowing over your end. And then third we we did, you know roll down brokered CDs and and put the box back in fhlb Burns. And again as I mentioned in my prepared comments the court organic core deposit growth excluding. All Pacific was was very good in the in the fourth quarter Group by a hundred thirty-five million or 5.2% So we had you know, one of the best quarter to actually in terms of core deposit. We've seen all year or so my core deposit growth and it can't generation didn't diminish in the fourth quarter, but I you know, I'd summarize the comments and say it was really just a a tactic to to manage our wholesale funding base between brokered CDs and fhlb Barnes, but it's not a wage expect the borrowing levels to direct drop in the first quarter. Okay, and then looking at that specific deposit portfolio. Do you expect to move some of those deposits out or do you log
Anticipate will be kind of you know, the status quo going forward know. They actually the Ulta Pacific deposits were actually a couple basically slower than Banners at acquisition point so, we actually I mean we've replaced them to banners rates as we've gone through our mapping and so we actually don't expect to seeing you in flow in the Alta deposit base and wage. There's some benefit in bringing Banner products and service capability to the Alpha Pacific client base that will actually potentially create some upside on the income. Okay, great. Those are my choices. Thank you.
Once again, if you would like to ask a question, please press star.
And ladies and gentlemen at this time and showing the additional questions. I'd like to turn the conference call back over to management for closing remarks. Thanks Jamie. As I stated. We are pleased with our solid 2019 performance in a challenging interest rate environment and see it as evidence that we are making substantial and sustainable progress on our discipline strategic plan to build shareholder value by executing on our super Community Bank model by growing market share strengthening our deposit franchise improving our core operating performance maintaining amount of risk profile and prudently deploying excess capital. I would like to thank all my colleagues who are driving the solid performance for our company. Thank you for your interest in banner and for joining our call today. We look forward to reporting our results to you again in the future and hope everyone has a great day.
Ladies and gentlemen, that does conclude today's conference we do. Thank you for joining today's presentation. You may now disconnect your lines.