Q4 2021 Banner Corp Earnings Call
Okay.
Hello, everybody and thank you for joining banner corporations fourth quarter 2021 earnings call. My name is Bethany and I'll be your greatest accrued today.
If you would like to register a question Q&A. Please press star followed by one on your telephone keypad.
I will now hand, the call over to your host Mark Congrats Kovich, President and CEO of Banner Corporation Mark over to you.
Thank you Bethany and good morning, everyone.
I would also like to welcome you to the fourth quarter and full year 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 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 forecast of financial or other performance measures and statements about banner's general outlook for economic and other <unk>.
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.
Formation on the risk factors that could cause actual results to differ are available in the earnings press release that was released yesterday and a recently filed Form 10-Q for the quarter ended September 32021 certain of these risk factors may be particularly acute as a result of the rapid implementation of.
With changes and strategic projects related to banner forward.
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.
Yeah.
Thank you rich first of all I Hope you and 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 fourth quarter and full year 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.
Joe Wright, who 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 full year.
And an update on our strategic initiative, we're calling banner forward that we outlined last quarter.
The focus of banner forward is to accelerate growth in commercial banking.
<unk> relationships with retail clients advanced technology strategies, and streamline our back office.
I want to begin by thanking all of my 2000 colleagues in our company that have helped develop and our forward and are working extremely hard to assist our clients and communities. During these difficult times.
Bayer has lived our core values summed up is doing the right thing for 131 years.
It is 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 them.
I am 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 $49 9 million.
Or $1 44 per diluted share for the quarter ended December 31 2021.
This compared to net income to common shareholders of $1 44 per share for the third quarter of 2021, and $1 10 per share for the fourth quarter of 2020.
For the full year ended December 31, 2021 Banner Corporation reported record net income available to common shareholders of $201 million.
Compared to $115 9 million for the full year of 2020.
The full year performance was impacted by the allowance for.
For credit losses, recapture a continued inflow of liquidity, coupled with very low interest rates.
Our strategy to maintain a moderate risk profile.
Good mortgage banking revenue and the acceleration of deferred loan fee income associated with the SBA loan forgiveness of paycheck protection loans Peter.
Peter will discuss these items in more detail shortly.
Directing your attention to pre tax pre provision earnings and excluding the impact of gains and losses on the sale of securities <unk>.
<unk> and fair value of financial instruments.
Roger and acquisition expenses Covid expenses being our forward expenses and the loss on debt extinguishment earnings were $223 $1 million for the full year 2021, compared to $215 $5 million for the full year of 2020.
An increase of three 5%.
This measure I believe it is helpful for illustrating the core earnings power of banner.
<unk> full year 2021 revenue from core operations increased two 3% to $593 3 million compared to $579 9 million for the full year of 2020.
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 the acceleration of deferred loan fees associated with PPP loans.
Overall this resulted in a return on average assets of $1 two 4% for 2021, and a 5% increase in tangible common shareholder equity per share compared to the fourth quarter of 2020.
Once again, our core performance reflects continued execution on our community Bank Super community Bank strategy, even with the challenges of the pandemic.
That 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 deposits increased 16% compared to December 31, 2020, and represent 94% of total deposits.
Further we continued our strong organic generation of new relationships.
Reflective of this solid performance coupled with our strong tangible common equity ratio, we increased our core dividend, 7% in the quarter to <unk> 44 per share and authorized the repurchase of approximately 5% of our common stock.
Our branches continue to be fully operational and given the recent COVID-19 cases, we have temporarily suspended our return to the workplace policies for other office personnel to ensure the safety of our employees and our clients.
To provide support for our clients through this crisis, we made available several assistance programs banner has provided SBA payroll protection funds totaling more than $1 6 billion.
For approximately 13000 clients.
Also 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 sitting first bank the largest black led depository financial institution in the United States.
Significant contributions to local and regional nonprofits and it provided financial support for emergency and basic needs in our footprint, including interest free consumer loans to support our Pacific northwest clients impacted by the significant flooding in early December .
Let me now turn the call over to Jill to discuss trends in our loan portfolio in her comments on banner's credit quality Jill. Thank you Mark and good morning, everyone. It while there is no denying that loan growth continues to be hampered by the impacts of COVID-19, I am pleased to report that credit quality remains strong and the level and trend of adversely.
Classified assets continued to reflect steady improvement.
As of December 31st represent a nominal zero to 1% of total load up one basis point.
Here quarter and compares to 0.37% as of December 31, 2020, nonperforming assets are down 6 million when compared to the linked quarter and now represent a nominal 014 percent of total assets. This is a 10 basis point improvement when compared to December 31, 2020 nonperforming assets include.
Nonperforming loans of $22 8 million and REO and other assets of 869000.
As mentioned earlier the level and trend of adversely classified assets have continued to improve as of December 31st our adversely classified loans totaled $2, one 8% of total loans down from $2 four 5% as of the linked quarter and compared to 345% of total loans as of December 31, 2020, 75%.
Of the reduction in classified loans due to the superior collection work in our special assets Department, which resulted in full loan pay off the bat.
The reduction is split evenly between risk rating upgrades that are primarily due to sustained operating performance and a normal principal reductions shifting to the reserve for credit losses and are again posted in that recovery. This quarter gross loan losses in the quarter were modest at eight.
100000, and were fully offset by recoveries of $1 1 million.
Full year net charge offs totaled a nominal $2 1 million or two basis points, excluding the calling guaranteed paycheck protection loan.
Based upon a muted loan growth and in light of the continued improvement in asset quality. We again released $8 1 million from our reserve for credit losses as of December 31.
Partially offset by an increase in our reserve for unfunded loan commitments of $2 3 million and an additional 579000 was provided to the reserve for credit loss of securities for a net release of $5 2 million.
After the release, our ACL reserve totaled $132 1 million or 145% of total loans as of December 31.
Around seven basis points from the linked quarter and compares to a reserve of $1 six 9% as of December 31 2020.
Excluding loans held for sale in the Paycheck protection loans are current ACL reserve provides coverage of one 8% of total long and 588% of nonperforming loans.
I started my comments by acknowledging that loan growth continues to be hampered by the continued impacts of the COVID-19 pandemic.
Third we again recorded strong loan originations and our commercial and commercial real estate pipelines remain robust as was reported in our release loan originations were strong and our business channels and were up 28% year over year, excluding PPP loans.
These new originations however have continued to be offset by payoffs and as we have discussed previously.
Excess liquidity as well as supply chain and labor shortages have delayed both line utilization as well as new borrowings core portfolio loan growth, excluding PPP loans credit Carter was $43 million or 2% on an annualized basis and for the full year reflected a one 4% increase in net of the PPP loan balances.
Looking at the full year 2021, commercial and multifamily real estate totals increased by $250 million or six 2% and were partially offset by declines in commercial and multifamily construction of $59 and $46 million respectively.
These construction declines represent both anticipated payoffs and conversion to permanent loans upon completion.
<unk> construction portfolio grew by $61 million and the land and land development portfolio grew by $64 million.
The growth in these portfolios is in spite of the accelerated pace of completed homes sales in subsequent loan pay off the <unk>.
Housing markets in which we do business continue to be strong with inventory of completed homes at all time lows and builders needing to restart our land and lot inventory for future construction projects. Our total residential construction exposure remains acceptable at six 3% of the portfolio of which approximately 40% is custom wonderful family residential.
Loan.
When you include multifamily commercial construction and land the total construction exposure as far as <unk>, 6% of total loans.
Offsetting the commercial real estate loan growth C&I loan totals, excluding PPP, we're down $94 million year over year, or 8% and agricultural loans were down $16 million year over year or 5% the year over year decline in C&I reflects significant pay downs at both lines of credit and term debt, resulting from excess client liquidity.
<unk> as well as from the payoff of a handful of significant relationships that hurdle in our structure and our lower rates over the past 12 months, all coupled with continued lower overall utilization down 2% from December 2020.
As I commented earlier this year the primary driver of the decline in our agricultural portfolio was due to do banking several underperforming borrowers as well as the strategic decision to not chase lease restructure and lower pricing on other large facilities.
When reviewing asset quality briefly loans rated substandard declined to $27 million for the quarter and declined $142 million or 42% year over year. This includes nearly $80 million in adversely classified loans that were paid off over the course of the year overall adversely classified loans are down 53% since the pandemic induced high recall.
In September of 2020, and continue to be centered in the hospitality and recreation industries.
We're continuing to monitor the impact that the various COVID-19 variants are having on our client, especially with the exponential spread we are now seeing from the omicron variant across our footprint that said my comments from last quarter are no less true today to date, our clients have adjusted to the ever changing operating conditions and are continuing to perform well.
With that I will wrap up by saying, we have not changed our underwriting practices of the onset of the pandemic and are not now loosening our structure to drive loan growth as we remain committed to maintaining our moderate risk profile throughout all business cycles. Our credit metrics are strong we have a solid reserve for loan losses, especially in light of portfolio performance and our capital levels continue to.
Be well in excess of regulatory requirements banner continues to be well positioned for the future with that I'll turn the microphone over to Peter for his comments Peter.
Yes.
Thank you Jill as discussed previously and as in our earnings release, we reported net income of $49 9 million or $1 44 per diluted share for the fourth quarter equal to the results, we posted last quarter at $49 9 million and $1 44 per diluted share.
While there was no change in total per share earnings the composition of the results were affected by the offsetting effects of lower net interest income and lower noninterest expense core revenue, excluding gains and losses on securities and changes in fair value of financial instruments carried at fair value decreased $10 $2 million from the prior quarter, primarily as a result of the.
A decline in PPP loan forgiveness income.
And lower mortgage revenue.
Core expenses, which exclude banner forward debt extinguishment, M&A and Covid related expenses declined $6 million due primarily to lower compensation and legal costs.
Turning to the balance sheet total loans decreased to $101 million from the prior quarter and as a result of $176 million decline in SBA PPP loans, partially offset by an increase in core loans held for investment and loans held for sale.
Excluding PPP loans and held for sale loans portfolio loans increased $43 million.
Ending core deposits increased $175 million from the prior quarter end.
Continued, albeit slower growth and the level of client deposit liquidity.
Time deposit balances declined by $12 million in the prior quarter and ending at $839 million as higher cost Cds continue to rollover, but lower.
Net interest income declined by $8 6 million due to a decline in SBA PPP loan forgiveness prepayment and interest recovery related interest income, partially offset by higher securities income and lower funding costs <unk>.
Compared to the prior quarter loan yields decreased 31 basis points on a tax adjusted basis due to a decline in PPP loan forgiveness processing fees.
Along with lower prepayment and interest recovery interest income.
Excluding the impact of PPP loan forgiveness prepayment penalties and interest recoveries in acquired loan accretion the average loan coupon increased 10 basis points from the prior quarter, primarily due to a smaller balance of low yielding 1% coupon SBA PPP loans.
Total average interest bearing cash and investment balances increased by $750 million over the prior quarter.
Ended by PPP loan payoffs and deposit growth, while the average yield on the combined cash and investment balances declined three basis points due to a larger mix invested in overnight funds at low rates, partially offset by an increase in average portfolio security yields.
Yes.
Total cost of funds declined three basis points to 13 basis points as a result of lower deposit and borrowing costs.
The total cost of deposits declined from 8% to seven basis points in the fourth quarter due to declines in interest bearing retail deposit rates and ongoing repricing of the CD book.
While borrowing cost declined due to the maturity of an <unk> fixed rate advance.
The ratio of core deposits to total deposits was 94% in the fourth quarter the same as the previous quarter.
The net interest margin declined 30 basis points to three 7% on a tax equivalent basis.
The decline was driven by a decline in the pace of SBA PPP loan forgiveness activity, along with continued albeit slower growth in excess deposit liquidity invested in overnight interest bearing cash.
Partially offsetting the decline with lower funding costs and the increase in average security yield.
In the coming quarters, we anticipate the pace of margin compression to slow and then begin to expand as a function of excess deposit liquidity core loan growth and increasing market rates.
As we have guided in previous quarters, we anticipate ladder and the excess deposit liquidity into the securities portfolio at a measured pace, while remaining flexible to shifts in loan demand and the yield curve.
Total noninterest income decreased $860000 from the prior quarter. The current quarter benefited from a $2 $6 million fair value gain on our Fintech investment.
Partially offset by a decline on the gain on trust preferred security investments.
Core noninterest income excluding gains on the sale of securities and changes in investment Securities Fair value decreased $1 6 million.
The fees were down modestly by 100000, while mortgage banking income declined $4 million due to zero sales in multifamily loans in the current quarter and a decline in average gain on sales spreads in residential mortgage.
Our residential mortgage loan spreads compress modestly in the current quarter loan production remained robust in the fourth quarter declining only <unk>, 5% from the third quarter.
Within residential mortgage production the percentage of refinance volume increased to 36% of total production up from 32% in the prior quarter.
While demand for our multifamily loan product remains side no sales were consummated this quarter.
The held for sale loan inventory was in process of being replenished after a large bulk sale at the end of the last quarter.
Miscellaneous fee income increased $2 5 million, primarily due to gains on sale the sale of close branch locations and an accounting adjustment related to increase in the value of the Companys SBA servicing assets.
Turning to noninterest expense.
Total noninterest expense decreased $10 3 million from the prior quarter, principally due to declines in banner forward related implementation costs.
And legal expenses from the prior quarter.
This quarter's noninterest expense included a $2 $3 million loss on the redemption of certain junior subordinated debt liabilities carried at fair value.
Banner forward implementation costs declined $1 2 million to $1 2 million from $7 6 million in the prior quarter.
Excluding banner forward debt extinguishment, M&A and pandemic specific operating costs core noninterest expense declined $6 million.
Salary and benefit expense declined by $2 million, primarily due to staff reductions and lower severance expense.
Payment and card processing expense declined $1 1 million, primarily due to a single fraud loss in the third quarter.
Professional and legal expenses declined to $10 1 million due to banner forward related consulting fees and a $4 million accrual for pending litigation in the prior quarter.
Miscellaneous expense declined $1 $4 million, primarily due to lower credit card losses, and lower loan production related costs.
In addition, as part of ongoing capital management. The company began redeeming a portion of its outstanding Trups Junior subordinated debentures.
Increasing bally holding and increasing its core shareholder dividend by 7% to <unk> 44 per share.
We anticipate redeeming a total of $57 million in floating rate trups debt by the end of the first quarter.
Lastly, we posted a DTA adjustment, which reduced reported tax expense in the current quarter.
Based on our current mix of tax exempt revenues and state tax in excess weightings, our effective tax rate guidance going forward is 19, 5%.
And finally banner, Florida is on track and completed its second full quarter of implementation.
Approximately 25% of the initiatives from our program value perspective have been executed and are reflected in the current quarter run rate core run rate.
With the majority of those now in place driving expense efficiency.
As we discussed previously the remaining efficiency related initiatives are anticipated to be implemented.
<unk> over the next three quarters with implementation of the revenue initiatives ramping up.
In the second half of the year and into 2023.
We continue to guide towards a core expense quarterly run rate in the mid to high $80 million range before the effects of wage or vendor cost inflation.
Above our recent experience that could affect the anticipated results.
In closing the company remains well positioned for rising rates with a low cost granular core deposit base.
Ample on balance sheet liquidity to support renewed loan demand.
This concludes my prepared remarks Mark.
Yes.
Thank you Peter and Jill for your comments that concludes our prepared remarks, and Bethany, We will now open the call and we welcome your questions.
Okay.
Thank you to ask a question. Please press star followed by one on your telephone keypad. If you change your mind you can press star two.
Our first question comes from Jeffrey Willis at D. A Davidson your line is open.
Thank you. This is Andrew speaking on behalf of Jetblue is at da Davidson Mark maybe one for you. There are a lot of large mergers occurring in your footprint are you seeing any changes in your customer base or hiring as a result of those pending mergers.
Yes, good morning, Andrew and thank you for joining and thank you for the question.
If you look at the history of banner over the course of the last 12 years.
Have been incredibly successful with taking market share and growing our client base.
And as we've seen organically, we have grown our client base without acquisitions more than a 120% over that period of time.
A lot of that has to do with our delivery channel and our business model.
Product suite, but it also a lot of it had to do with market disruption that was occurring through M&A.
Other financial institutions or business models that we're shifting from from the banks.
That is exactly what's going on right now so we're excited to be in a position, especially with the implementation of banner forward that we're going to be in a position to take advantage of the market disruption from every angle client perspective community involvement perspective, as well as adding talent to.
Our organization and filling out some of the density of our footprint.
This is a great time for our organization and we're going to be in a position to take advantage of the market disruption thats occurring.
It hasnt occurred yet it tends to.
Mirrored the consolidation phase of those institutions, but we are seeing opportunities start to present themselves in anticipation of what some of the fallout will be for those organizations hopefully that helps.
Thank you very much.
One other question.
I was hoping to get a little more color on the SBA evaluation and the gains on branch locations within miscellaneous income.
And thoughts on that recurring in the future.
Sure Andrew its Peter.
To give you some.
Numbers around those two items.
SBA asset.
Counting adjustment was $1 1 million and that related to.
Capturing the value of our SBA loans.
Yes.
For the SBA administration.
It's <unk>.
Gradually over the years and become a more significant item and so we decided to account for that servicing asset this quarter.
It's not an item that will go forward. However, we will continue to record.
Our regular SBA loan sales or <unk> sales program continues to be very active and that will continue to generate.
Fee income.
And the branch sales this quarter.
Generate about $800000 gain.
That's part of that miscellaneous fee income total.
Perfect. Thank you I'll step away. Thank you.
Thank you Andrew.
The next question comes from David Feaster, Raymond James David Your line is open.
Hey, good morning, everybody.
Good morning, David just one I just wanted to start on maybe the growth front I mean originations have remained very strong I mean payoffs and pay downs are offsetting some of that improvement, but just curious how you think about net growth as we look into next year I guess, just with the shift towards middle market potential deceleration in payoffs as rates.
Right, let's distractions from PPP, where do you think what do you think is a good loan growth run rate looking forward.
Good morning, David This is Joe So I'll, just say that we still feel really good about the loan growth going into 2022 and for all the reasons that we've discussed over the last few quarters were located in markets with really strong economic engines and as you noted we've had very strong loan originations over the course of the year our utilization.
Rates are slowly improving.
While we have lower than normal utilization in the commercial construction portfolio. That's a function of that new residential AMD and homestar. So those would be expected drop to dry up over the course of the year and Furthermore, with the strong pipelines. We just really believe that with the excess liquidity that gets absorbed and commercial utilization continues.
Ramps back to normal.
Coupled with the banner forward initiatives, we think we will get to that single upper single digit growth rate by the end of the year and it's going to be a ramp throughout 2022.
Okay. That's helpful.
And I guess, maybe we've talked about that shift towards middle market as part of the <unk> Board.
Could you just talk about where we are in that evolution.
And whether you think you have the capabilities internally.
Going to potentially bring in some new talent from some of the disruption that we just talked about.
Just curious where we are on that front.
Yes, so I think we touched on this a little bit last quarter, we do have the talent internally and we would look to expand that by talent acquisition from <unk>.
Disruption, if the right team or person it was available, but certainly we've got the talent.
In the in our organization right now and we expect it to go forward. It's just the shift in focus.
Okay.
And then maybe just touching on the asset sensitivity it looks like it declined a bit quarter over quarter, just curious how you're thinking about managing the sensitivity and what drove the decline and what kind of beta assumptions you have in there and then just maybe initial expectations for how the margin Mike Bennett.
From the first rate hike or two.
Yes.
Sure David It's Peter Yeah, we just to kind of give you a little bit of.
Overview of the.
Balance sheet, and the earning asset sensitivity so two.
Two thirds of our loan book are either adjustable are floating rate loans and about 60.
Percent of that that portion have floors on them with.
With some of those four is a pretty good portion of as far as being.
At their floor.
And then the rest of the book about one thirds fixed rate.
So as the short end moves up as we anticipate the short end and the fed beginning to tighten we'll see lift in the and the average loan yield on our floating and adjustable rate but.
Somewhat somewhat muted with some of the loan floor repricing in recapturing those loan floors.
And then on the funding side.
As we just discussed we're paying paying down $57 million of floating rate trups, which will help with asset sensitivity.
Is that sort of that won't reprice up won't be on our balance sheet and then our our deposit.
Deposit base is 45% and noninterest bearing.
And we did we looked at the data experience from the last tightening cycle in 2017 and 18.
And what happened last cycle was it took a full year for <unk> for <unk> in most of our peer banks actually raise rates. After the fed started lifting up we think there'll probably be a similar effect. This time and maybe even more prolonged given the fact, there's more liquidity in the system than there was three years ago.
And so it's.
Likely that debate is we have which are based on the last cycles experience will be even lower the lag, especially will be even longer and so we think there's probably some conservatism in our in our disclosed asset sensitivity, because it's reflecting the last tightening cycle.
As opposed to what's likely to be a more prolonged.
<unk>.
Rate cycle rate increase cycle this time.
So that's and then the rest I think.
Quarter to quarter changes in asset sensitivity really a function of.
Putting a little more of the cash to work in the securities book it at longer duration, but.
Overall, we are still I would call us substantially asset sensitive.
Probably more so than what we are disclosing given the lags we expecting deposit rates this time.
That makes sense. Thank you.
Yes.
Thanks, David.
The next question comes from Andrew Charles Stevens, Andrew Your line is open.
Hey, good morning.
Good morning.
Hey, Peter.
It looks like there were some things.
Securities purchases this quarter still a lot of cash on the balance sheet because of the deposit growth.
I hear your comments on getting some of the liquidity deployed kind of measured over time is what it sounds like.
I guess are you inclined to kind of ramp up the securities build here in kind of the first quarter given some of the improvement we've seen in yields or should we still expect it to be kind of measured overtime.
Yes, it would be the latter we continue to be somewhat somewhat measured again, we don't want to.
As we've said in the past, where we think the.
The cost of.
Going a bit more slowly on deploying that cash.
In the in the near term, it's worth, whereas the optionality of taking advantage of a steeper.
Yield curve and higher rates.
In the future along with.
While we anticipate renewed and stronger loan demand going going into 'twenty two.
And so we want to retain some dry powder for.
Loan demand also the potential first in deposit liquidity runoff right as the yield curve Steepens, we think that's one of the catalysts there.
I will begin to move.
The systemic deposit liquidity out of the banking system. So we want to continue to be pragmatic and moderate at about the pace of investing that cash will continue to invest cash in the securities book, but where you are not going to see us invest all of it.
In one quarter its going to continue to be at this measured pace.
Okay.
I appreciate that and then I think I heard you that there was no kind of multifamily loans sold this quarter.
Are you planning to paying more moving forward or was it just kind of more nuanced this quarter and just overall kind of.
Outlook on mortgage banking operations heading into 2022.
Yeah sure Yeah.
Any plans to.
Pivot and move that multifamily.
Production on the portfolio.
The lack of loan sales was really just the success.
You've had in that business unit in the third quarter next year all through 'twenty one.
And selling and cleaning out the inventory.
Very quickly because of the high demand for our product.
The fourth quarter was spent replenishing the inventory and the held for sale.
In multifamily during the fourth quarter, and we anticipate resuming.
Quarterly sales going into the first quarter, it's always a little bit lumpy as we've described in the past that that business.
Does does ebb and flow based on the timing and production and consummation of the bulk sales, but we don't anticipate any change in the overall trajectory of that business and we still see very strong demand in our product given the underwriting and the reputation of our came out in the marketplace.
On the on the residential side.
We had a very strong another very strong quarter of residential mortgage loan production fourth quarter and as we said in the past typically we see a slowdown seasonally in the winter months.
Our markets, where folks don't tend to move or buy homes, but we didn't see much of a slowdown our production was only down 5% in Q4.
Compared to Q3, we did see a bit more a bit of margin compression on the gain on sale spreads.
And we actually saw it tick up a bit and refinance mix in the fourth quarter.
We really continue to see very robust demand for mortgages and homes across our markets. We have a broad geography, that's benefiting from a lot of this relocation.
<unk>.
Ex urban.
Gration into more suburban and rural markets, where we have a lot of presence and so we're benefiting from that along with our custom construction business, which is drilling.
<unk> for the demand to <unk>.
Lack of housing inventory by building.
The construction of a single family home so.
We're very happy with our business and the diversity and resilience of our business model and mortgage.
We really don't see a lot of change there then.
The potential for some refinance volume declines as a function of the steepening of the yield curve.
<unk>.
Yeah.
Great.
Really helpful. I appreciate all the color Peter.
Maybe if I can sneak one last one for Jill.
I think you mentioned some of the prepared remarks, just the commercial pay down some of it was due to lose their structure or better pricing I guess I was curious is it is it more related to pricing or more related to structure and then just on the structure point.
Our banks in your market stretching on credit structure for growth or is it other kind of non bank lenders and then can you just overall kind of expand on what exactly you're seeing other companies doing from just a structure standpoint that banner is not willing to do.
Sure. It primarily is more non banks in our market than banks, but it's.
It's a function of rate and rates are really low and so we're not chasing them to the bottom.
And then in terms of whether it's insurance companies or other longer terms longer interest only term lack of guarantees on credits that we made.
We would say we need personal guarantees on.
And so.
I guess those are the real big issues. There in terms of kind of what we're not willing to do when you think about the agricultural portfolio.
Farm credit and things like that that we just can't compete with the small business side, especially or competing with credit unions. They give extremely much longer terms as well as longer fixed rate term loans.
Okay, large banks small banks and nonbank lenders.
We're competing with.
Got it okay.
Thank you all for taking my questions.
Thank you Andrew.
The next question comes from Tim Coffey of Janney, Tim Your line is open.
Great. Thanks, good morning, everybody.
Peter if we could follow up on the.
The mortgage.
Questions.
What kind of impact do you think your footprint is going to see from the FHA.
FHFA, increasing the conforming loan limits for 2022.
Yes.
We do business in.
California, and Oregon, and Seattle Metro markets along with.
Eastern Washington, Columbia Basin, and some of the more rural Idaho market. So all of those.
Some lift from those.
Those increased <unk>.
Increased loan limits.
We do so we voice since jumbo loans as well, so I think where our expectation is we just kind of see some shifts some of the jumbo production. We did that was above those old conforming limits into the conforming limits. We have today, we think there'll be a modest lift, but we're not going to there's not a huge panacea for us because it's really just kind of cross.
<unk> the line from where jumbos began and where the conforming limit attended in the past, but theres, probably a modest benefit for us because we're in all that we are in the high cost markets and the low cost markets, where in all of them. So.
It's a good thing for us I think our lenders welcomed it.
Conventional loans are just more liquid and saleable.
And easier to underwrite.
Good thing for us, but I don't want to characterize it as a huge pivot in terms of.
Increased loan production.
Sure.
There's a handful of markets in the country that.
Benefiting from this higher rate or higher cap.
Captain and Youre in a lot of them so.
Joe when you look at construction concentration within our loan portfolio. What's the current cap I think you said it was 14% all of them, but I'm wondering what the what the highest level you'd be comfortable with.
So we're pretty much at that in terms of the overall construction and what we really want to focus on in that bucket is the spec construction and land in A&D and Thats, what we really try to keep it in the 6% to 8% maximum in terms of the loan book.
And then the rest of it.
It ebbs and flows, but we're really we're pretty close to where we want to be.
Okay.
Alright.
And then Peter if I can go back to you.
Should we be thinking about the costs associated with banner forward because if you look at the slide deck. It looks like there's a potential they could start ramping up the next couple of quarters.
Yes, we as we guided.
And therefore it is.
It's an expense efficiency, but also revenue.
Generation focused initiative as well as investments in systems and tools and additional revenue producing.
Positions in the company. So we're taking some of the savings.
We're harvesting on the expense side and reinvest in our company right in terms of.
Additional positions that are generating revenue and commercial and other areas and investment in systems and tools that will help improve automation and efficiency and some of the additional account acquisition across our digital channels and so as we've guided.
We expect to see core our core expenses.
Run in the mid to high $80 million range over the next four quarters well begin to see the lift in revenue towards the second half of 'twenty.
'twenty two.
The question comes up around inflation.
We have put through some.
Market equity.
<unk> in our in our salary base already.
And we did contemplate increasing wages in our in our guidance. However, there's always some risk weight inflation really moves up more quickly than we anticipated.
It has to.
Increase some of those costs to keep pace with market, but overall, where we are on track with banner forward in any real any real inflation increases, which should be offset by increased margin rate. So we think from a.
No.
P&L perspective, and a pretax income perspective.
Any inflation increase that we're not anticipating we're going to get back on the revenue side in any case, but we're right on track, we're happy with the progress so far.
And we have a.
Very tight governance, and oversight and management infrastructure on the entire project is working very well.
Okay do you expect I mean do you expect to see what we will see any kind of chunky nonrecurring expenses next couple of quarters.
We're past all the big costs, the only remaining restructuring costs our branch consolidation related.
A couple of.
Some minor asset write downs.
I expect somewhere between one and $2 million of remaining.
Banner forward restructuring costs in the next two quarters, so it'll be fairly small it's not going to have all of the major restructuring.
Restructuring costs are behind us at this point, except for maybe $1 million to $2 million.
Yes.
Okay. Okay. Thanks, that's very helpful.
And then.
Yes, I think that those are all my questions I. Appreciate your time. Thank you.
Thanks, Tim.
Yeah.
The next question comes from Andrew Liesch Piper Sandler Andrew Your line is open.
Thank you and good morning, everyone.
Just a follow up question on the asset sensitivity and I know you've got the.
Forward initiative here in some of the spending thats going along with that and the cost saves that are going to result, but.
Are there any other investments longer term that youre contemplating. So basically my question is with these rate hikes.
How much of that is going to fall to the bottom line versus reinvesting back into the company.
Yes, Andrew it's Peter Yeah, we.
Our guidance I'd be interflora contemplates a fairly substantial investment in a number of systems and tools.
To accelerate the acquisition of <unk>.
New business through our digital channels in the middle market and commercial banking.
And staffing up in some of the commercial.
Commercial banking Metro markets.
So we recognize some of those investments already in our guidance.
I think the real I think the expense.
Expense question is really one of.
Wage inflation right how much of that.
Increased.
Interest income will be necessary to go back into.
Market market related increases in wages that are over and above what we're contemplating.
I would characterize there's no other significant infrastructure investment in a company or a new product line that we haven't already disclosed.
In the outlook that we provided.
Yeah.
Got it okay.
That's really helpful.
And then.
Joe just on the reserve ratio still fairly.
We're pretty high above the day, one diesel level, where do you think it will get back down to that.
Does that level at some point after you've just seen a.
A couple of quarters of negative provisions.
Where do you think that will eventually settle in.
You're all probably going to be tired of hearing me start. This one we don't give specific guidance on reserving.
To that end I guess, what I, how I would characterize going forward as they age.
Yes.
And you could expect that there would be a decline in the coverage percentage in the current economic environment and that will begin provisioning again as we return to more normalized growth, but we're operating within the bounds of seasonal and we're going to continue to be conservative and maintain an upper quartile reserve.
Understood.
Very much for taking my questions.
Thanks, Andrew.
The next question comes from Kelly Motta at <unk> Kelly Your line is open.
Hi, good morning, Thanks for the question.
<unk>.
And answered already.
But I did want to ask about capital you raised the dividend and I. Thank.
Thank you also upped the buyback haven't have a new program assets.
Late December just wondering.
How youre approaching the buyback.
Capital return.
Yeah, Kelly, it's Peter Yeah, we continue to guide as we have in the past around or our.
Perspective on capital deployment.
We remain agnostic and opportunistic about which which form of deployment makes the most sense each quarter, whether that be share repurchases.
Special dividend or are there forms of <unk>.
Hi.
Debt retirement like we're doing now.
It's always a function of where our share prices.
And what we feel the best.
Churn for the shareholders are across those tools, but we have we remain agnostic last year. We were focused on share repurchases as we felt that was a better form of return.
To the shareholders, given our price and our prospects for future.
Future growth.
Currently we're focused on redeeming the $57 million of legacy Trups debt.
Thats all floating on LIBOR, which will re price up as the short end of the rate curve moves up.
And we also increased the core dividend because we disclosed earlier.
We also we also anticipate asset growth due to be in a forward with.
An increase in loan demand.
Going into 'twenty, two so we haven't changed our perspective.
Share repurchases are certainly going to be part of that that toolkit.
We anticipate in 'twenty two.
It'll just be a question of pace in amount depending on the circumstances each quarter.
Got it thank you.
Thank you Kelly.
We have no further questions in the case I'll hand, the call back to Mark any closing remarks.
Thank you again Daphne.
As I've stated, we're very proud of the banner team as we continue to do the right thing as we battle this COVID-19 virus and its variance.
Transitioning to our economy to normalization. Thank you all for your questions today, and your engagement and interest in banner.
Joining us for the call.
Hope everyone has a great day, and we look forward to reporting our results to you again next quarter.
Have a good day.
Okay.
This concludes today's conference call. Thank you for joining you may now disconnect your lines.
Okay.
Okay.
Yes.
Okay.
Yes.
Sure.