Q3 2021 Banner Corp Earnings Call
Good morning, and welcome to the banner corporations third quarter, 2021 conference call and webcast.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please.
Press Star then two.
Please note. This event is being recorded I would now like to turn the conference over to Mark gross Covid President and CEO. Please go ahead.
Thank you, Jason and good morning, everyone.
I would also like to welcome you to the third quarter of 2021 earnings call for Banner Corporation.
As is customary joining me on the call today is Peter Conner, our 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.
Sure Mark.
Our presentation today.
And discusses banner's business outlook and will include forward looking statements.
Those statements include descriptions of management's plans objectives or goals for future operations products or services forecast of financial or other performance measures and statements about banner's general outlook for economic and other conditions. We also may make other forward.
The statements in the question and answer period following management's discussion these four.
We're 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 most.
Most recently filed Form 10-Q for the quarter ended June 32021.
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.
Thank you rich first of all I hope.
Looking at your families are well as we all continue to battle. The Covid virus is variance and its effects on our communities and the economy.
Today, we will cover four primary items with you.
First I will provide you a high level comments on banner's third quarter performance.
The actions banner continues.
News 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, Peter Conner will provide more detail on our operating performance for the quarter and an overview.
View of our strategic initiative, we're calling banner forward that we believe will accelerate our performance through 2023 and beyond.
The focus of banner forward is to accelerate growth in commercial banking.
Deepen relationships with retail clients <unk>.
Advanced technology strategies.
Inline our back office.
I want to begin by thanking all of my 2000 colleagues in our company that have helped develop banner forward and are working extremely hard to assist our clients and communities. During these very difficult times.
<unk> has lived our core values summed up is doing the right thing.
<unk> 131 years this is Chris.
Critically important that we continue to do the right thing for our clients our communities our colleagues our company and our shareholders to provide a consistent and reliable source of commerce in capital through all economic cycles and change events.
I am pleased to report to you that is exactly what we continue to do.
I am very proud of the entire banner team that are living our core values.
Now, let me turn to an overview of our third quarter performance.
As announced banner Corporation reported a net profit available to common shareholders of.
$49 9 million or $1 44 per diluted share for the quarter ended September 32021.
This compared to a net profit to common shareholders of $1 56 per share for the second quarter of 2021 and $1 three per share for the third.
2020.
This quarter's earnings were impacted by the allowance for credit losses recapture.
<unk> inflow of liquidity, coupled with very low interest rates.
Our strategy to maintain a moderate risk profile.
Continued good mortgage banking revenue.
And the.
The acceleration of deferred loan fee income associated with the SBA loan forgiveness of paycheck protection loans.
Peter will discuss these items in more detail shortly.
Directing your attention to pre tax pre provision earnings and excluding the impact of merger and acquisition expenses.
As COVID-19 expenses gains and losses on the sale of securities.
Our forward expenses elevated professional fees and changes in fair value of financial instruments earnings were $59 1 million for the third quarter of 2021 compared to $59 2 million.
In the previous quarter.
This measure I believe it is helpful for illustrating the core earnings power of banner.
Third quarter 2021 revenue from core operations increased 3% to $153 6 million <unk>.
Compared to a $149 8 million.
In the second quarter of 2021.
We benefited from a larger earning asset mix a good net interest margin.
Solid mortgage banking fee revenue.
Good core expense control and the previously mentioned acceleration of deferred loan fees associated with PPP loans.
Overall this resulted in a return on average assets of one 2% for the quarter and a 5% increase in tangible common shareholders equity per share compared to the third quarter of 2020.
Once again, our core performance this quarter reflects continued execution on our super.
Community Bank strategy, even with the challenges of the pandemic.
That strategy is growing new client relationships, adding to our core funding position by growing core deposits and promoting client loyalty and advocacy through our responsive service model.
To that point our core.
Super to increased 18% compared to September 32020, and represent 94% of total deposits.
Further we continued our strong organic generation of new client relationships in the quarter.
Reflective of this solid performance, coupled with our strong tangible common equity ratio.
We issued a dividend of <unk> 41 per share in the quarter and repurchased 300000 shares of our common stock.
Our branches continue to be fully operational and given the recent increases in COVID-19 cases, we have temporarily suspended our return to the workplace policies.
<unk> for other office personnel to ensure their safety and the safety of our clients.
To provide support for our clients through this crisis, we made available several assistance programs.
<unk> has provided SBA payroll protection funds totaling more than $1 6 billion.
For over 13000 clients.
We made an important $1 $5 million commitment to support minority owned businesses in our footprint.
A $1 million equity investment and Broadway Federal Bank, which is now city first bank the largest black led depository financial institutions.
And in the United States.
Significant contributions to local and regional nonprofits.
And we have provided financial support for emergency and basic needs in our footprint.
Also banner received an outstanding rating on our most recent community Reinvestment Act performance evaluation.
Let me now turn the call over to Jill to discuss trends in our loan portfolio in her comments on banner's credit quality Joe.
Thank you Mark and good morning, everyone continuing the theme from last quarter Banner's credit quality metrics remained stable and we continue to report improvement in adversely classified assets.
Banner's delinquent loans as of September 30th represent 0.20% of total loans, a decrease of four basis points from the prior quarter and compared to 0.37% as of September 32020.
Nonperforming assets are consistent with the linked quarter and are comprised of nonperforming loans of $28 9 million.
And Oreo and other assets of 869000, representing a nominal 0.18% of total assets.
Adversely classified loans represent 245% of total loans as of September 30th down from 283% in the linked quarter and compared to $4 one 6% as.
December 30, <unk> 2020, the improvement in adversely classified loans in the quarter, which were centered in investor and owner occupied commercial real estate reflects continued risk rating upgrades based upon sustained improvement in operating performance.
<unk> posted a net recovery of 756000 for the quarter gross loan.
In the quarter were negligible at 660000 and were offset by recoveries at $1.4 million.
Similar to last quarter based upon the continued improvement in asset quality and economic indicators, we released $8 9 million of our reserve for credit losses as of September 30th and provided 218000 to our reserve.
Losses for unfunded loan commitments. This follows a combined release of $10 3 million as of the prior quarter.
After the release, our ACL reserve totaled $139 9 million or 152% of total loans as of September 30th down one basis point from June 30, and compares to a reserve of one.
165% of total loans as of September 32020.
Excluding loans held for sale in the Paycheck protection loans are current ACL reserve continues to be robust providing coverage of 157% of total loans, 485% coverage of nonperforming loans and 751%.
Reserved of delinquent loans.
As noted in the release, we continue to report strong loan originations across all business lines and are again reporting another quarter of core loan growth up $79 million or three 6% on an annualized basis. When you exclude the PPP loan pay offs.
Additionally, our commercial.
And commercial real estate pipelines remained strong nonetheless line utilization and borrowing for capital expenditures continues to be hampered by the excess on balance sheet liquidity as well as supply chain and labor shortage issues.
Looking at specific product lines, and excluding the PPP loans C&I loan totals in the current quarter.
<unk> are down $85 million or seven 5% the.
The decline in this category is largely tied to two larger commercial clients, who use their on balance sheet liquidity to zero outlines in term debt at quarter end as well as three larger relationships, who moved for loose looser terms and or lower interest rates as we have discussed.
Before.
I do think it's important to point out that C&I utilization did increase another 1% in the third quarter now at 60% a level that remains 4% lower than the average pre pandemic utilization rate.
The uptick in agricultural loans 14, 9% for the quarter and 59% on an app.
Annualized basis net of PPP balances is seasonal in nature.
Owner occupied CRE is up five 3% or 21% on an annualized basis.
Investor CRE totals are up one, 5% or 6% on an annualized basis and our multifamily real estate totals are up five 6% for the quarter.
Our 22% on an annualized basis.
As discussed last quarter. The decline that is reflected in both the commercial construction and multifamily construction totals is a function of conversion from construction to permanent status.
Commercial construction is down six 9% and multifamily is down five 9%.
<unk> over quarter.
The residential agency portfolio declined in the quarter down five 4% or 21% on an annualized basis. This reflects the continued robust new home sales activity across our footprint.
As I have noted previously the housing market continues to be very strong in the markets, we serve with demand.
Quarter stripping supply in most areas, including multifamily commercial and land our total construction exposure remains within acceptable concentration levels.
Briefly touching on asset quality loans rated substandard declined this quarter by $47 million or 17%, which compares to a decline of $39 million in the linked.
<unk>.
Overall adversely classified assets are down 47% since the pandemic induced high of $423 million reported as of September 32020.
As would be expected the current adversely classified assets are primarily primarily located in the at risk segments with nearly 55%.
Quarter to the hospitality of recreation industry.
While we cannot ignore the rapid spread of the Delta variant and the impact of the various resulting government mandates have or will have on businesses to date, our clients have adjusted to the ever changing operating conditions and are performing well.
I will wrap up by reiterating what you've heard from me.
Before our credit metrics continue to be strong reserves for credit losses remained robust and capital levels continue significantly in excess of regulatory requirements banner remains well positioned for the future with that I will hand, the microphone over to Peter for his comments Peter.
Thank you Joe and.
Good morning, everyone.
As Scott previously and as announced in our earnings release, we reported net income of $49 9 million.
Our $1 44 per diluted share for the third quarter compared to $54 4 million or $1.56 per diluted share in the prior quarter.
The 12% decrease in <unk>.
It was primarily the result of an increase in professional services expense, partially offset by higher net interest income and noninterest income revenues.
Core revenue, excluding gains and losses on securities and changes in fair value of financial instruments carried at fair value increased $3 $9 million from the prior quarter.
Primarily as a result of an increase in loan interest income and higher gains on loan sales.
Core expenses, which exclude banner forward M&A and Covid related expenses increased $3 8 million due primarily to an accrual for pending litigation and fraud losses.
Turning to the balance sheet total loans decreased.
Quarter $444 million from the prior quarter and as a result of a $515 million decline in SBA PPP loans, partially offset by an increase in core loans held for investment.
Excluding PPP loans in held for sale loans portfolio loans increased $79 million, reflecting continuation of strong.
Decreased production levels from the prior quarter.
Ending core deposits increased $550 million from the prior quarter end due to growth in the level of client deposit liquidity.
Im deposit balances declined by $22 million from the prior quarter and ending at $851 million as higher cost Cds are rolling over at lower retention.
Tension lasers.
Net interest income increased by $2 6 million due to higher interest income on commercial real estate and construction loans.
Along with growth in the investment securities portfolio, partially offset by a decline in SBA PPP loan interest income.
Compared to the prior quarter loan yields increased 18.
Basis points due to an acceleration of unamortized loan processing fees on the declining SBA PPP loan portfolio.
Excluding the impact of PPP loan forgiveness prepayment penalties interest recoveries in acquired loan accretion the average loan coupon increased 11 basis points from the prior quarter due to a smaller.
Mahler balance of low yielding 1% coupon SBA PPP loans.
Total average interest bearing cash and investment balances increased by $707 million for the prior quarter funded by deposit growth and PPP loan pay offs, while the average yield on the combined cash and investment balances declined 13 basis points due to a larger.
It's invested in overnight funds.
Low rates, along with lower reinvestment rates on new security purchases.
Total cost of funds declined one basis point to 16 basis points as a result of lower deposit costs. The total cost of deposits declined from nine to eight basis points in the third quarter due to declines in interest bearing retail deposit.
Rates and ongoing repricing of the CD book.
The ratio of core deposits to total deposits was 94% in the third quarter same as the previous quarter.
The net interest margin declined five basis points to 347% on a tax equivalent basis. The decline was driven by growth in excess of deposit liquidity invested.
Vested in overnight and lower yielding securities.
In the coming quarter, we anticipate a significant decline in PPP loan income is all but a small portion of the portfolio will have been paid off by year end.
In the near term, we anticipate core loan growth will remain on an upward trajectory as a function of improving economic conditions loosening.
And COVID-19 restrictions and implementation of banner forward initiatives.
Full replacement of the Pvp interest income and a corresponding positive impact on loan yields. The company has enjoyed in recent quarters will take time.
We have guided in the previous quarters, we anticipate lottery the excess deposit liquidity into the securities portfolio at.
At a measured pace, while remaining flexible to shifts in loan demand and the yield curve.
Yeah.
Total noninterest income increased $3 million from the prior quarter core noninterest income excluding gains on the sale of the securities.
And changes in securities carried at fair value increased $1 3 million.
Deposit fees increased.
<unk> thousand due to an increase in higher service charges on deposit accounts and increased transaction volume.
Total mortgage banking income increased $2 3 million due to increases in both residential mortgage and multifamily gains on sale.
Mortgage income benefited from a larger than normal gain on an interest rate lock hedge.
700 within residential mortgage production the percentage of refinance volume declined to 32% of total production down from 34% in the prior quarter.
Multifamily loan gain on sale income was up 700000 from the previous quarter as a result of high buyer demand and strong secondary market execution.
Going into the fourth.
We anticipate gains on sale of both of our loan origination business has to come down as pipelines are replenished and residential loan demand ebbs in the winter months.
Miscellaneous fee income declined $1 $7 million, primarily due to gains on sale of closed branch locations recognized in the previous quarter.
Total noninterest.
Quarter, we expense increased $9 5 million from the prior quarter, principally as a result of banner forward related implementation costs and legal expenses.
Excluding banner forward M&A and pandemic specific operating costs core noninterest expense increased $3 8 million.
Salary and benefits expense declined by $2.
Noninterest income primarily due to staff reductions, partially offset by an increase in severance expense.
Payment and card processing expense increased $1 2 million, primarily due to a single fraud loss.
Professional and legal expenses increased $8 million due to a combination of banner forward related consulting fees and a $4 million accrual for pending litigation.
In addition, as part of ongoing capital management, the company repurchased 300000 shares during the quarter.
And lastly, we are particularly excited to announce banner forward team of 80 current and future leaders of the company was put together to identify and implement a series of initiatives that improved client responsiveness and experience.
One melts through investments in technology process automation.
And product enhancement, while running a leaner organization that further leverages, our digital channels for sales and service.
We anticipate generating revenue through deepening distinct consumer relationships.
Celebrating the acquisition of new small business and commercial clients.
As described in this quarter's investor presentation banner forward reduces the Companys core operating expense.
Accelerating low loan and fee income growth.
Interflora initiatives that reduce operating expense will be complete by the fourth quarter of next year for those initiatives to generate increased loan and fee income growth will ramp up over.
Over the course of 2022 and 'twenty three.
In closing the company remains well positioned for rising rates with a low cost granular core deposit base with ample on balance sheet liquidity to support renewed loan demand.
This concludes my prepared remarks Mark.
Thank you Peter.
Yale for your comments that concludes our prepared remarks, and Kate we will now open the call and welcome your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
The first question is from Jeff <unk> of D. A Davidson. Please go ahead.
Thanks, Good morning.
Jeff.
A question on the I appreciate the details on the banner.
I guess looking at slide.
<unk>.
Wanted to make sure I get the expense kind of read through.
Would you say kind of core expenses in the third quarter around $94 million.
Base.
Yeah, Jeff This is Peter Yeah, the 94 million would be a good start.
Good point.
As discussed in the prepared remarks that also encompassed.
And accrual for some litigation as well, but yeah. If you could you could start with that number.
And then make adjustments accordingly.
Okay. So if I started there and think about.
Starting I guess 4 million annual well on a quarterly basis savings by the end of 'twenty, two and then an additional call. It six in 'twenty three what's the underlying kind of.
Just standard cost growth.
In terms of investments and other.
These cost savings that you sign.
Yes, I think that was one way to frame it is too.
Think about the quarterly core expense run rate.
You know after implementation of the banner forward initiatives and accommodating normal.
Cost of living increases for wages.
We anticipate running in the mid to high $80 million range whenever when all the dust settled on completing the initiatives and that would be a good kind of baseline.
That we anticipate getting in getting to by the end of 2022.
Okay.
So the.
Again mid to high $80 million is inclusive of any offsetting growth from cost of living et cetera.
Correct.
Okay and then the.
The high single digit loan growth.
Timing of how that's.
Kind of impacts.
The hires do we assume that's.
Essentially a guide for 'twenty, two loan growth or does that take a while to sort of feather in.
Yeah, I'll I'll ask Joe to comment as well.
You know the the revenue related initiatives ramp up prospectively.
Prospectively over over.
The nominees to you in 23, including the alarm related banner forward initiatives. So what we anticipate is that.
We will see an acceleration of loan growth as we get further into 'twenty, two and 23 to get to the high single digit range, but it won't happen immediately out of the gate in 'twenty two.
Yes, Jeff This is Jill I mean, Peter covered that well I think as we look into 'twenty. Two we are considering the strong loan production numbers. The new client acquisition are good pipelines, we have a lot of reasons to be optimistic optimistic about that loan growth.
Driver's.
Driver's going to be watching that excess liquidity.
That needs to be absorbed in the supply chain and labor supply issues that our clients are experiencing so we do expect that as that clears out and we layer in the banner forward initiatives and there'll be a ramp up over 22, so that at the end of 'twenty. Two we are at that mid to high.
Growth rate okay.
Yeah, Thanks for that Joe and while I have you the.
I think you tried to loosely pegged loan growth.
In 'twenty, one so by year end to sort of offset TPP declines and maybe I don't know if PPP declines have accelerated versus your view, but.
In terms of how would you reframe or if at all the expectation kind of year end loan balances for 'twenty one.
So there is no doubt that my 2021 Crystal ball is cloudy in terms of how quickly the PPP would be paying off so yes in terms of.
Of Reframing 2021, I guess, what I would say is that our core loan growth. Excluding PPP loans will continue in that mid single digit growth rate on an annualized basis.
Okay got it great. Thank you and then maybe just one last one on the on the mortgage side.
Peter you had mentioned.
Mentioned seasonal slowing in the fourth quarter any early indication of of what you think about in 'twenty two revenue from that line and maybe that is a good proxy just simply kind of MBA forecast on on what you'd expect in 'twenty two.
Yes, I think I think kind of industry.
Spectation on mortgage volume or are relevant for banner, However, I would say.
Some of our being a Florida niches also include enhanced.
<unk> revenue as well so we expect to do better than the MBA statistics given.
One the success of our team.
And to the some.
Some of the banner forward initiatives that are specific to generating additional.
Mortgage revenue opportunities that we expect to come into play over the course of 'twenty two.
That being said you know Q4 is always.
Always been dampened quarter, given the winter months and.
<unk> lack the decline in home purchased that typically occurs in our markets, especially up here in the Pacific Northwest. So we anticipate that normal seasonal decline.
To exist again this quarter last year was very much an anomaly and we're seeing things kind of come back into the normal cyclicality of the mortgage business.
Okay. Thank you I'll step back thanks.
Thanks, Jeff.
The next question is from Andrew Liesch of Piper Sandler. Please go ahead.
Hi, good morning, everyone.
Good morning, Andrew.
So just wanted to talk about the security.
These purchases in the lateral and how that could affect the margin here with the steepening of the yield curve are there better opportunities now and I'm just curious what the what you've been looking at buying and what yields that you're getting.
Yeah, Andrew it's Peter Yeah, we.
As we said we've been measured in our pace of deploying.
The excess deposit liquidity.
In the recent quarter, we focused more on the shorter end of the.
Investment security.
Purchases focusing on floating rate securities with less emphasis on longer duration securities. So you know.
Better to be lucky than good so we were fortunate and focusing.
Sing on floating rate.
Purchases this last quarter when the when the old curve a dip down.
Now that it's steepened again, we're focused a bit further out on the yield curve to take advantage of some of the higher yield that exists out there.
The <unk>.
The average coupon.
Again as is going to be dependent.
The the mix that we purchased in a given quarter.
But you know anywhere from one and a half to one 8% would be a good barometer of the range.
And then we continue to deploy.
Three $300 million range, maybe pushing at 400 million range a quarter.
<unk> and deploying that excess deposits, but of course were being <unk>.
Sensitive to changes in liquidity liquidity outflow in loan demand at the same time. So that number is always going to be the last decision in terms of investing cash into earning assets, but it's been running at about that pace in terms of the deployment quarter to quarter given the.
Excess liquidity and as we've said so far the PPP loan payoffs.
Have not resulted in deposit outflows. The P. P. P clients have elected to keep their their loan proceeds with banner in the form of a deposit even after loans forgiven. So we are we are enjoying a substantial amount of liquidity to work with and we continue.
<unk> collateral in prospectively, but we're not we're not moving at all in at once.
And then.
Obviously loan production was pretty strong ahead, the elevated payoffs, but what what's the blended yield on the new production and I guess, it's kind of stripping out the PPP effect on the core loan portfolio.
How does that compare to the portfolio average in the third quarter.
Yeah, the new the new loan yields are coming in in the in the high.
Threes low fours.
Right now in terms of if we looked at the last quarter.
The coupon on the entire.
Portfolio, we took out but if we take out the PPP portfolio, which that coupon is very low at 1% and so as that portfolio pays down it actually increases the average coupon, but if you take out the PPP portfolio effect are the average loan coupon excluding loan accretion and interest penalty.
Prepayment related interest declined about six basis points from Q2 to Q3, so there's still some downward repricing on the book as loans mature.
As we as we go into the quarter, but that kind of gives you a sense.
What happened in prior quarters, that's been two or three.
And at this point so any.
In any given quarter is not a exact parameter of the pace of repricing, but I'd characterize it is.
In the two to four basis point range, assuming there's no further steepening of the yield curve if yield curves steepens or the fed lifts off of course, we will see that Cooper.
<unk>.
But that would be my guidance today based on the shape of the yield curve as it exists right now.
Yes.
Got it that's very helpful. Thanks for taking the questions I'll step back.
Thank you Andrew.
The next question is from David Feaster of Raymond James. Please go ahead.
Hey, good morning, everybody.
Morning, David.
Maybe just at a high level I'd like to touch on this banner forward initiatives. Obviously this is a big undertaking right you guys identified 50 initiatives clearly the branch reduction is a big driver of the cost reductions.
Yeah.
And it's easy for us to get excited about some of the major financial impacts, but just maybe as you step back as the leadership and the operators of the company and look at these initiatives maybe more than just the financial impacts what are you. Most excited about with this banner forward initiative and where do you see the biggest benefit. So is it the technology is at the new org structure.
During the product expansion just curious maybe at a high level, what you're excited about with this.
Well David Thank you for the question this is mark.
All add some comments and then ask Peter to to follow up look I think if you take a step back and look at the organization.
<unk> pre pandemic so.
Into 2019 through 2019 and into 2020, we were well positioned to have pretty significant positive operating leverage and a super community Bank business model was working very well and we were executing effectively.
Enter the pandemic and you have.
Really systemic changes that are occurring in our industry and our delivery channels right. So you had rapid adoption to mobile banking technology.
Had a remote work environment in which you had to adapt to certain technology. So that you could continue to service. Your clients you had to stand up a.
A new system and process to to facilitate one $6 billion in PPP loans.
He had a systemic change.
In what was going on in the delivery channel, let alone the economics of whatever the uncertainty was going to occur based.
The economic impact of the pandemic plus the significant inflow of liquidity into the system.
So that's one we decided we need to take a step back and say are these are systemic are these changes systemic and are going to affect us in our delivery of our Super community Bank business model.
And we had.
As Peter acknowledged 80 of our exact.
Come up with a development of a plan that says okay, we're going to adhere to our core values we.
We are going to continue to run a super community Bank business model, what does that look like for the future what it looks like is a more robust.
Based on delivery channel it for mobile technology, not just in retail banking and deposit gathering but also in the mortgage business also in your commercial line of business. So we found ourselves in a position where we can make some investments and leverage the investments we were already making in technology.
These new delivery channels.
So what what's the good news in all of this is when you look at these initiatives. It really is an acceleration of what we said we were going to do anyway and that is exactly what is transforming the adoption rate we've had with new client generation based.
To all of our mobile technology, improving our back office processes. So that we can be more responsive to our clients is really the driver of these initiatives and what's really exciting as you already mentioned is the fact that these are coming from our internal group right, they're the ones that develop.
<unk> initiatives that says here's how we're going to go to market more effectively here's how we're going to compete more effectively and here's how we're going to be more responsive.
Peter I don't know if you'd add any additional commentary.
Yeah, I think you've covered it covered it really well mark I'd just add in.
<unk> reinforce Mark's comments around the nature of being a floor. It is.
Far far more than.
Optimizing that some additional branches, it's much more about investment in technology that improve our processes, but more importantly, improve the client experience and responsiveness.
Cross all of our.
Our product line the backstop activities.
In addition to identifying new revenue opportunities that came as Mark said out of the internal team that was pulled together.
Kate it through a very rigorous diligence process.
And a very detailed planning.
Plant to implement all of these over the next 18 months.
So we're really excited about being a forward we've got a very good plan in place we've actually already implemented.
A portion of it being a Florida in terms of the economic benefits have already begun to be recognized in the third quarter and you can see that.
Some of the reduction in some of the core expense line items.
This quarter versus.
So.
We think.
As laid out here is.
There is high levels of execution achievement in everything we've discussed in the presentation and we've got very good buy in across the organization and very good focus on.
Implementing all of these initiatives.
<unk>.
Over the next 18 months.
That that is terrific color.
Maybe just digging into the shift upstream could you just elaborate a bit on what you know what youre going to be focused on in this do you have the teams in place do you think to shift to these more middle market client.
And the underwriting expertise or do you think that there might be some new hires or new lenders that you might need to add do you have the treasury management or other products in place to service. These larger clients and then just does this maybe.
Does this imply maybe an increased appetite for snacks, just any color on that move.
Client dream would be helpful too.
Yes, David so.
That was quite a lot in that question in terms of trade.
Treasury management moving upstream snacks staffing do we have the staff I would say, yes, we have some of the staff on board right now and would we add.
Move up should it teams if we found the right players certainly that's no different than how we operated in the past if we find the right person who can add to our delivery of products, we'll take them and add them to the team. So we're always looking for good talent.
As to the Treasury management products.
Clearly we've got those in place where you now at the upper end of the class in terms of what we can deliver right now so I think that meets what we need and we just aren't going to go to market better with it.
You asked one other question that is slipping my snacks and certainly we we have a little bit of that but it's not where we expect to grow it.
Certainly a lot of.
I'm, losing my words here, but in terms of value to the bank.
Well, we'll do them here and there, but it's not where we expect to grow we're going to be serving the clients in our market.
David.
Thank you for the question, let me just add to Joes comments that.
If you look at.
Over the course of the last 12 years for banner and its growth rate and its organic growth rate as well.
We really benefited when we were well positioned in terms of sales strategy product offering.
And market disruption, so it's pretty clear that.
That's what I'm seeing is we feel good about the first two pieces, we needed to augment it to new client expectations in terms of responsiveness.
Ladder piece of the market disruption is something we think we're going to have.
Benefit from tremendously.
I don't need to go over what those are but you.
In the West coast, there have been some significant shifts in some of the commercial banks and thats going to present, some real opportunity for banner.
Okay. That's that's great color. Thank you and then Jill just following up on your comments you talked about losing some C&I credits.
So maybe more aggressive terms or pricing.
Pricing at some competitors and I'm glad I'm glad to hear that youre staying in your ground on the standards, but I was hoping you could maybe elaborate a bit on what youre seeing there and the competitive landscape. In C&I are are you seeing more pressure on the structure.
And standards or the pricing side and maybe just similarly on the on the CRE, we hear more about nonrecourse.
Recourse and those types of things, but just curious about the competitive dynamics that you're seeing.
Yes, David it's as competitive out there as ever and from all angles, we're competing with the large banks community banks credit unions and it is pricing as well as structure more pricing driven than structure.
But certainly a nonrecourse is out there longer term interest only is out there and you know and the combination of the two and so you know what I would say is our usual as is our usual practice, we maintain our consistent underwriting discipline as we compete for the clients and the new loan opportunities and.
The retention.
Structure of existing opportunities right.
That's great. Thank you.
Again, if you have a question. Please press Star then one the next question is from Andrew <unk> of Stephens. Please go ahead.
Yeah.
Hey, good morning, good morning.
Tension.
Thanks for that.
Rail slides on banner for.
Maybe just to start there's a clear kind of organic focus and a big undertaking over the next kind of year.
Your your plus or so I was just curious does this preclude you from the M&A market over the near term.
Andrew.
Does it feel like M&A could still be on the table at some point over the next year or so.
Well look I think we haven't changed our posture on viewing M&A is.
And have a bolt on a scenario for the organization right.
We've done a number of conversions, while we haven't been execute.
Term or even before we've done a number of integrations, while we are executing on our strategies in the past.
Don't see any reason why we would not be in a position to take advantage of something if opportunistically. It presented itself our strategy all along has been to enter into negotiated transactions.
Not necessarily bid transactions.
And we're we will continue that philosophy it has to be the right partner.
And it has to be at the right time.
Which in which we would embark on something I don't.
Don't believe at this point that that would preclude us from doing any kind of combination in whatever form that may.
<unk> also.
Remember that there are other resources.
Institution can garner outside of internal staff.
To help with any any combination and typically speaking if there is.
Some type of M&A combination.
Hey, Ted that institution also has generally some very good integrators.
That we could take advantage of.
So I don't think it precludes us at all quite frankly, and hopefully it will position us to be.
In a position where we can get more aggressive in terms of growth.
Okay.
That's great color I appreciate it.
Yeah.
Peter maybe I guess, just with the backdrop of kind of improving or accelerating loan growth throughout 2022, and then kind of some of your commentary on liquidity deployment into the securities portfolio. If we exclude the PPP related income does it feel like the margin.
That has hit a floor in the third quarter and should begin to work higher from here.
I think that's it's let's say I'd I'd characterize that as a fair a fair perspective.
As you know we have a substantial amount of debt.
Deposit liquidity sitting with the Federal Reserve earnings 15 basis points right now.
Or in some other overnight investments that are yielding in the 20 to 35 basis point range.
That that's a higher position that we want to be in and so as we deploy that low yielding overnight liquidity into securities oriented loan growth well see some improvement in the earning asset yield that'll be partially offset by.
Margin has some some lower gradually lower loan yields, but that'll be a small offset to the improvement in over all earning asset yield by moving that excess liquidity the overnight liquidity into the securities book.
And to a lesser extent into loan growth.
And then on the funding side, we're getting near the bottom of.
Deposit rates, we have perhaps another basis point or me or maybe two but probably more like one basis point left to go in terms of.
Repricing down over the next couple of quarters.
And then we are evaluating some opportunities to.
Look at our capital stack.
Our cored up regulatory capital stack in terms of what we're carrying at the parent company.
In terms of some of the Trups that are outstanding. So we are evaluating an opportunity to.
Reevaluate them perhaps.
Pay off some of the eligible trups over the next couple of quarters no decisions, yet, but that's another source of.
Our funds reduction as well that can help bolster the margin.
Yeah.
Got it thanks, and then just a clarification point I think page three of the presentation notes 15 expected branch consolidations does that include the five that were closed in September and then.
Just from a modeling perspective do you have the amount of severance pay that was recognized during the third quarter.
Yeah. The in terms of the what's a reference.
On page three that's a that's an estimate so the exact number of branches has yet to be determined.
But those would be in.
In addition to what what's been done.
Cost here.
And so those would occur over the course of.
Next year.
So those would be in addition to what was done already in terms of severance.
We did incur some modest amount of severance.
In Q3.
More related to some state.
Staff.
The alignment in the in the retail organization.
Unrelated to branch closures the <unk>.
<unk> for some of the branch closures that were just done at the end of the third quarter some of that will fall into.
Fall into Q4, but the numbers are relatively small they are less than a million dollars.
On this ship for both both the staff reductions we did outside of branches.
The branch related reductions.
That were consummated at the very end of the third quarter and in many cases, we were able to solve for the reduced positions through attrition.
As opposed to outright severance. So that's why these numbers are relatively small.
Okay.
Perfect I'll I'll step back thanks for taking my questions.
Thank you.
The next question is from Tim Coffey of Janney. Please go ahead, great. Thanks, Good morning, everybody.
As we talked about the banner forward initiative, one of the questions I had.
In aggregate is on the slide the slide number three.
Our comments about investing in new technologies, but also read minimizing third party spend and so I'm wondering is that a function of pooling funds and expenses from kind of old technology.
Technology and investing in new technology or do you plan to.
Build the new technology yourself.
Yeah Tim.
Tim It's Peter.
Yeah, the third party spend reference.
Is focused in two areas one is reduction of outside professional services spend whether that be outside attorneys or other professional.
Services that we have used historically.
<unk> spend there by bringing some of it inside or in being more diligent about the selection of the vendors we used to to conduct those outside services and then.
Secondly, it's also a function of renegotiating some of our existing contracts.
With existing vendors not leaving those vendors by getting better value out of the other vendors, we do use and all of this.
It will is inclusive of the incremental spend we have on some of the new technology as well so even with some of the investments in new technology, we still expect to see.
And that reduction.
Action and outside.
Services spend on those vendors that across several line items professional services data processing.
Some of the I T.
Related expense line items, we expect to see benefits across all of those.
Okay.
Okay, that's super helpful and Peter if I can stick with you.
You mentioned.
The do you expect a significant decline in PPP income in forward quarters.
And certainly I mean, if you look at the average balance of the PPP loans outstanding in the quarter versus the period end. There was been already been a substantial decline do you have any kind of estimate about forgiveness for this quarter and those those loans.
Yeah, it's we.
We.
We have we ended the quarter with about $300 million left in the portfolio. We expect as the forgiveness activity really start slowing down we expect to have a core remnant to that our borrower base to not forgive and then they'll term out right now our estimates as we'd see about half of.
Okay.
Portfolio get forgiven between now and 12 31.
And so you could from a modeling perspective take half of the remaining unamortized processing fee, which we disclosed in the investor statement and assume that will come into the income statement this quarter and the rest of it will then be just amortize out on a term basis.
The remaining anticipate after 12 31, the pace of forgiveness is going to be just a trickle and some of the clients have elected not to.
Have their own forgiving and just turn out for them out there P. P. P line.
Okay, great. Thanks, that's very helpful.
And Jill you talked about some of the C&I borrowers using their own liquidity.
Did you.
You see anything like that on the commercial real estate or any kind of a real estate investor type clients doing that.
No on the commercial real estate that was paying off it was really sale of <unk>.
Sale of assets.
Right No I guess my question is do you see any of your real estate investor clients using their own liquidity.
We get off the bench and start putting some of that to work.
Oh, certainly we're seeing acquisitions that real estate by yes, yes. The answer is yes.
Hey.
And then also Joe looking at the the allowance.
Would it be appropriate to refer to that as adequate.
Okay.
I think I would refer to it as strong I mean, I think we've got good coverage based on our asset quality and we will continue to keep our reserve in that upper quartile of reserving.
Okay.
Thank you and then Mark you.
You alluded to it during the Q&A, but there are some you know moved into the chairs.
And your footprint.
Are you doing it was banner doing anything promotion wise to perhaps bring some new customers to the bank.
We always are Tim so as I've said before we always have benefited from market disruption. When you have the right product mix you have the right bankers in place.
And as you layer on that market disruption you can take advantage of it through what you would characterize as guerilla marketing tactics.
For obvious reasons im not going to get into specifics on what we're thinking about but.
Rest assured we do that anytime there is some disruption.
Okay, Alright, well thank you very.
And my questions. Thanks, Dan.
This concludes our question and answer session I would like to turn the conference back over to Mark Kratz Covid for closing remarks.
Thanks Kate.
As I stated we are very proud of the banner team as we continue to do the right thing as we battle.
The COVID-19 virus and its variance and transition our organization through banner forward.
For your interest in our company and joining our call today, we look forward to reporting our results to you again in the future have a great day everyone.
The conference has now concluded thank you for attending today's.
So those patients you may now disconnect.