Q1 2022 Banner Corp Earnings Call
Yes.
Yeah.
[music].
Good morning, ladies and gentlemen, thank you for joining and being present at the banner Corporation's first quarter 2022 conference call. In fact gosh. My name is Irene and I will be coordinating today's call.
If you would like to ask a question during the presentation you may do so by pressing star one on your telephone keypad.
In case, you have joined US online you have the possibility to press the flag icon on your bet, Brian , but and to ask a question.
I will now hand, you over to your host Mark Graff skilled each president and CEO to begin Marc. Please go ahead.
Thank you Irene and good morning, everyone.
I'd also like to welcome you to the first quarter 2022 earnings call for Banner Corporation.
As is customary joining me on the call today is Peter Conner, our Chief Financial Officer.
Joe Wright, our Chief Credit Officer.
Rich Arnold our head of Investor Relations.
Rich would you please read our forward looking safe Harbor statement.
Sure Mark.
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 conditions. We also may.
Make other forward looking statements in the question and answer period following management's discussion.
Additionally, we provided an investor presentation that can be found in the Investor Relations section of our website banner Bank Dot com.
Forward looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those discussed today.
Information on the risk factors that could cause actual results to differ are available from the earnings press release that was released yesterday and a recently filed Form 10-K for the year ended December 31, 2021 forward looking statements are effective only as of the date. They are made and banner assumes no obligation to update information concerning.
Its expectations back to you Mark.
Thank you rich.
Today, we will cover four primary items with you.
First I will provide you a high level comments on banners first quarter performance.
Second the actions banner continues to take to support all of our stakeholders, including our banner team our clients our communities and our shareholders.
Third Joe Rice will provide comments on the current status of our loan portfolio.
And finally, Peter Conner will provide more detail on our operating performance for the quarter.
And an update on our strategic initiative, we're calling banner forward.
As a reminder, the focus of banner forward is to accelerate growth in commercial banking.
Deepen 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 has helped develop banner board and are working extremely hard to assist our clients and communities.
Banner 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 your bonds.
I am pleased to report that is exactly what we continue to do.
I am very proud of the entire banner teams 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 $44 million or $1 27 per diluted share for the quarter ended March 31 2022.
This compared to a net profit common shareholders of $1 33 per share for the first quarter of 2021 and $1 44 per share for the fourth quarter of 2021.
The earnings comparison is impacted by the allowance for credit losses recaptured.
The inflow of liquidity, coupled with very low interest rates.
Our strategy to maintain a moderate risk profile.
Continued good mortgage banking revenue.
And 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 pretax pre provision earnings and excluding the impact of merger and acquisition expenses Covid expenses gains and losses on the sale of Securities banner forward expenses and changes in fair value of financial instruments earnings were $49 $7 million.
For the first quarter of 2022 in line with the first quarter of 2021 at $49 $5 million.
This measure I believe it is helpful for illustrating the core earnings power of banner.
<unk> first quarter 2022 revenue from core operations decreased 3% to $137 $6 million compared to $141 $4 million for the first quarter of 2021, primarily due to the increase in mortgage banking revenues, which were down.
$6 $9 million when compared to the same period last year.
We continue to benefit from a larger earning asset banks.
A good net interest margin solid mortgage banking fee revenue.
And good core expense control.
Overall this resulted in a return on average assets of 1.06% for the first quarter of 2022.
Once again, our core performance reflects continued execution on our Super community Bank strategy.
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 9% compared to March 31, 2021, and represent 94% of total deposits.
Further we continued our strong organic generation of new relationships and our loans outside of PPP loans increased 5% over the same period last year.
Reflective of this solid performance coupled with our strong tangible common equity ratio, we announced the core dividend in the quarter of <unk> 44 per share.
Our branches continue to be fully operational and given the recent release of mass mandates in our region. We have reinstated a return to the workplace policies.
To provide support for our clients through this crisis, we made available several assistance programs banner.
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.
$1 million equity investment in city burst bank, the largest black led depository financial institution in the United States <unk>.
Significant contributions to local and regional nonprofits and it provided financial support for emergency and basic needs in our footprint.
Finally, we continue to receive marketplace recognition and validation of our business model and our and our value proposition.
J D power and associates announced this quarter that Dave again ranked banner the number one bank in the northwest for client satisfaction for the sixth time.
Banner has been named one of the top performing U S public banks of 2021 by S&P Global market intelligence.
We have been recognized by Forbes as one of America's 100, Best Banks and again banner recently was named one of the world's best banks in 2022 by Forbes and finally banner Bank has received an outstanding CRA rating.
Let me now turn the call over to Jill to discuss the trends in our loan portfolio in her comments on banner's credit quality Jill.
Thank you Mark and good morning, everyone I am pleased to be able to once again report strong and improving credit metrics. This morning banners delinquent loans as of March 31st remain nominal 0.21% of total loans flat when compared to the prior quarter and down from 0.43% as of March 30 <unk>.
<unk> 2021 adversely classified loans totaled 196% of total down from 2.18% as of the linked quarter and compared to 3.13% of total loans as of March 31, 2021 nonperforming assets remain low at $19 1 million and included Nonperformer.
Loans of $18 6 million in Oreo and other assets of 446000.
This represents 0.11% of total assets down three basis points from the linked quarter and 12 basis points when compared to March 31 2021.
Housebound, rather than a quarter were nominal and were more than offset by recoveries of prior charge offs with a net recovery of 748000 posted as of March 31.
Based on the continued improvement in asset quality, we released an additional seven 4 million from our reserve for credit losses as of March 31st.
This was partially offset by an increase in our reserve for unfunded loan commitments of 428000 for a net release of seven nine.
After the release, our ACL reserve totaled $125 5 million or 1.38% of total loans as of March 31 down seven basis points from the linked quarter.
Compares to a reserve at 1.57% as of March 31st 2021, The reserve provides 674% coverage of our nonperforming loans.
Looking at the loan portfolio, we again reported strong loan originations are commercial and commercial real estate pipelines are solid and further Carter, we recorded carpark core portfolio loan growth, excluding PPP loans of 109, or one 2% for the quarter and four 6% on an annualized basis.
At specific product lines C&I activity was strong in the first quarter, while the utilization rate within this category remains approximately seven basis points lower than historical norms.
<unk> balances Nonetheless increased by 68 million $3, 7% quarter over quarter or 15% on an annualized basis, and our 5% higher than that recorded as of March 31, 2020, why this growth was spread across the footprint endless diversified and product type as well as by industry.
In spite of solid originations commercial real estate totals continued to be hampered by property sales as well as refinancing and are down 14, nine in the quarter or 1% on an annualized basis.
On a year over year basis, However, commercial real estate totals are up 5%. The majority of the decline in the quarter is located within the small balance CRE totals down $120 million or 9% much of this decline was offset by increases in the multifamily portfolio.
<unk> grew by $68 million in the quarter in part due to retaining a small number of the for sale originations closed within our footprint.
Additionally, owner occupied CRE balances grew by $41 million in the first quarter.
Construction and development loan balances also reflected strong production, especially when considered in light of the continued rapid pay off of our residential construction.
Commercial construction balances grew by 12 million or 7% in the quarter and multifamily construction balances grew by $15 million or 6% in the quarter. The residential construction outstandings declined by $12 million or 2% in the quarter.
The year over year changes in these portfolio detailed in the release reflect anticipated pay offs and the expected conversion to permanent loan status upon construction completion as well as the replenishment Atlanta inventory within our residential builder portfolio.
While we anticipate that the recent increase in mortgage rates will have an impact on the velocity of home sales within our residential spec portfolio I will reiterate what you have heard from them heard for the past several quarters. The housing markets in which we do business continued to be very strong in the inventory of completed unsold homes, we named it all.
<unk> day.
Demand continues to outstrip supply in many areas and affordable housing continues to be under supplied across footprint consistent with prior periods. Our total residential construction exposure remains acceptable at six 1% of the portfolio and add that nearly 40% is the balance outstanding within our costs down one to four family residential.
Mortgage loan portfolio.
When you include multifamily commercial construction and land. The total construction exposure remains at 14, 6% of total loans.
The decline in agricultural loans down 35 million quarter over quarter, or 12, 4% as seasonal in nature and to be expected.
When compared to the prior year AG loan balances were up 11, 5%, reflecting both new and expanding relationships.
Consumer mortgage and home equity lines also added to the growth in the quarter up $63 million or 6%, which reflects increased mortgage loan production was held in the portfolio as well as the result of a successful home equity campaign to replace those balances that were paid off at home refinances over the course of 2021.
Looking at asset quality briefly.
Adversely classified loans declined $20 million in the quarter and are down $133 million or 43% year over year. This includes nearly $85 million in adversely classified loans that were paid off over the past 12 months overall adversely classified loans are down 58% since the pandemic induced high reported in.
September of 2020.
And continue to be centered in the recreation and hospitality industries.
I noted last quarter that our clients have adjusted to the ever changing operating conditions and are continuing to perform well that remains true today.
I'm not yet ready to declare the credit cycle over rather in addition to any lingering impacts from Covid variance that may impact our clients over the next several months. We are also closely monitoring the impact of sustained inflation commodity price increases supply chain disruption and labor shortages as well as the.
Is that the Ukraine crisis may have on the overall economy now.
Notwithstanding these uncertain economic drivers our moderate risk profile remains intact, our credit metrics continue to be strong we have a solid reserve for loan losses, especially in light of the portfolio performance and our capital levels continue to be well in excess of regulatory requirements, we remain well positioned for the future with that I will turn to.
Microphone over to Peter for his comments Peter.
Thank you Jill and good morning, everyone.
As discussed previously and as announced in our earnings release, we reported net income of $44 million or $1 27.
Per diluted share for the first quarter compared to $49 9 million or $1.44 per diluted share for the fourth quarter.
The 17% decline in earnings per share was due to a decline in net interest income and lower noninterest income, partially offset by a larger provision release this quarter.
Core revenue, excluding gains and losses on securities and changes in fair value of financial instruments carried at fair value decreased $5 $8 million from the prior quarter due to the wind down of the PPP loan program lower miscellaneous income from gains on branch sales in the prior quarter.
Downs on close branches this quarter, along with lower mortgage gain on sale.
Core noninterest expenses, which exclude banner forward debt extinguishment, M&A and Covid related expenses declined 300000, due primarily to lower advertising and marketing costs.
Turning to the balance sheet.
Total loans increased $30 million from the prior quarter and as a result of increases in held for portfolio loans, partially offset by a $75 million decline in PPP loans.
Excluding PPP loans and held for sale lines portfolio loans increased 100 million or four 6% on an annualized basis.
Ending core deposits increased $235 million from the prior quarter end due to continued growth and the level of client deposit liquidity.
Time deposit balances declined by $38 million in the prior quarter and ending at 800 million as higher cost Cds continued to roll over at lower retention rates.
Turning to net interest income net interest income declined by $2 9 million from the prior quarter due to fewer calendar days decline in SBA PPP loan forgiveness.
Which were partially offset by higher securities income and lower funding costs.
Compared to the prior quarter loan yields decreased seven basis points due to a decline in PPP loan forgiveness processing fees.
Excluding the impact of the PPP loan forgiveness prepayment penalties interest recoveries.
And acquired loan accretion the average loan coupon increased three basis points from the prior quarter due to a smaller balance of low yielding 1% SBA PPP loans.
The average interest bearing cash and investment balances declined $44 million from the prior quarter, while the average yield on a combined cash and investment balances increased 10 basis points due to a lower mix invested in overnight funds.
And higher yield on both the securities portfolio and overnight funds.
Total cost of funds declined one basis point to 12 basis points.
As a result of lower deposit and borrowing costs.
The total cost of deposits declined from 7% to six basis points in the first quarter due to declines in interest bearing retail deposit rates and ongoing repricing of the CD book.
Borrowing cost declined due to the pay off of higher cost junior subordinated debentures.
Ratio of core deposits to total deposits was 94% in the first quarter the same as the previous quarter.
The net interest margin increased one basis point to 3.18% on a tax equivalent basis.
Increase was driven by better yields on securities and overnight cash and lower funding costs offsetting lower PPP loan forgiveness income.
The coming quarters, we anticipate the pace of margin expansion to increase.
Function of market interest rate increases loan growth and stabilization of excess deposit liquidity inflows.
As we have guided in previous quarters, we anticipate laterally the excess deposit liquidity into securities portfolio at a measured pace, while remaining flexible to shifts in loan demand and the yield curve.
Turning to noninterest income.
Noninterest income declined $5 million from the prior quarter the prior quarter benefited from a $2 $6 million fair gain on a fintech investment.
An accounting adjustment related to an increase in the value of the company's SBA servicing assets and gains on branch sales.
Core noninterest income excluding gains on the sale of securities changes in investments carried at fair value.
Decreased $2 9 million deposit fees increased modestly by 800000, while mortgage banking income declined by $1 2 million due to lower production and gain on sale spreads.
Residential mortgage loan spreads compressed in the current quarter with the Steepening yield curve, while loan production was down 18% from the fourth quarter.
Within residential mortgage production in the percentage of refinance volume remained steady at 36% of total production the same as the prior quarter.
Multifamily loan sales and gain on sale premiums were muted due to the steepening of the yield curve.
Miscellaneous fee income declined $3 million due to gains on sale of closed branch locations and an accounting adjustment related to the increase in value increasing the value of the company's SBA servicing asset in the prior quarter, along with modest declines in swap in SBA gain on sale of fee income in the current quarter.
Turning to noninterest expense.
Total noninterest expense decreased 600000 from the prior quarter.
Merely due to lower debt extinguishment costs and lower marketing expense.
Loss from the redemption of certain junior subordinated debt liabilities carried at fair value declined by $1 5 million to 800000 BOE banner forward implementation costs increased $1 3 million to $2 5 million in the current quarter.
Excluding banner forward debt extinguishment, M&A pandemic specific operating costs core noninterest expense declined 300000.
Compensation expense increased by $1 7 million due to higher severance costs elevated payroll taxes and medical claims expense, partially offset by a lower salary driven by FTE reductions under banner forward.
The credit for capitalized loan origination expense declined by $1 3 million due to lower held for sale residential mortgage and multi family loan production.
Advertising and marketing expense declined due to seasonal declines in charitable contributions direct mail web based advertising and printed media expense.
In addition, as part of ongoing capital management, the company redeemed an additional $49 million of its outstanding Trups Junior subordinated debentures.
Increased its boley holdings by $50 million and rolled off a 50 million dollar long term FHL be borrowing advance.
I am pleased to report continuing progress on banner forward. We just completed the third quarter of implementation and are seeing evidence of the results in lower core operating expense improving deposit fee income while setting the stage for continued improvement in core operating expense and accelerating revenue growth in the coming quarters.
Approximately 44% of the initiatives from our program value perspective have been executed and are reflected in the current quarter 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 sequentially over the next few 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 any effects of elevated wage or vendor cost inflation above historical norms.
That said our prospects for improved operating leverage remains strong as any elevated inflationary pressure on a reduced expense base.
It will be more than offset by a corresponding expansion and the bank's net interest margin.
In closing the company has begun to benefit from rising rates and we anticipate benefiting further from additional monetary tightening as we enter the current rate cycle.
This concludes my prepared remarks Mark.
Thank you Jill and Peter for your comments that concludes our prepared remarks and Irene.
I'll now open the call and welcome your questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please do not hesitate to press star followed by the number one on your telephone keypad now in case you changed your mind. Please press star followed by the number two also when preparing us to ask a question. Please make sure your phone is on mute.
With locally.
And now our first question comes from Jeff released from D. A Davidson.
Jeff Your line is open. Please go ahead.
Thank you good morning, everyone.
Good morning, Jeff.
Great.
Question on the.
Uh huh.
Maybe Peter.
What was the remaining upfront banner forward costs, I guess relative to the $2. Five we saw this quarter I can't remember what the original.
About was but is there some remaining there.
Yeah, Hi, Jeff Yeah, there's there's a where we're pretty much through the majority of the implementation costs and restructuring costs at this stage I would anticipate.
One to two more million dollars of implementation costs spread out over the next two.
Two quarters, but it's going to continue to decline as we go forward into the rest of 'twenty two.
Peter your core.
Expense down 300000, what is what is that exact level.
On a core rate in terms of.
Yeah in terms of the kind of what what are expectations for core <unk>.
Total expense run rate because that is that your question well well for yes for.
What was the core for this quarter and then I heard your commentary about kind of the mid to high.
$80 million range per quarter, but just what was the core of that this quarter.
Yes.
A good reference Jeff is actually at the last page of our earnings release, we disclosed our adjusted core expense, excluding the banner forward in <unk>.
Any other fair value or gain related impacts to the expense base.
If you looked at that schedule.
Excluding those items, we've been running right around the mid to high 80 range. So it's a we reported $85 $4 million.
And the way we define core expense that also excludes D&O tax of one one and a core deposit.
Intangible amortization of another one for me before I say you'd add those two back which are about two and a half million dollars. So we're right around $88 million on a core basis. The way we would normally define it in Q1.
Alright.
Thanks, Ed and maybe for Jill just wanted to get a sense for the.
Payoff activity linked quarter.
Out of the portfolio kind of the headwinds there and then.
And then if you could comment on kind of the pipeline or outlook on growth.
I think there is some seasonality this quarter, but just to kind of.
Color up the your.
Outlook for the it sounds fairly positive, but just wanted to kind of get a little more detail there.
Yeah, Jeff Good morning, so our expectations for loan growth continued to.
Feels good strong about reaching that upper single digit growth rate by the end of the year and as you called out some of the downward trend in that first quarter is seasonal in nature, especially in the AG portfolio. The pay offs, we would expect to slow down somewhat with the change in the rate environment.
And the reasons, we continue to feel positive about loan growth or that more in the strong markets strong economic engines. The business model's working the loan originations continue to be strong quarter over quarter had one of the best quarters. This quarter in terms of production.
Pipelines remain solid the AG utilization will pick back up the commercial real estate the spec construction in A&D utilization is way low as well because of the rebuilding of that portfolio. So that will draw down over the quarter I mean over the year as well so everything there.
[noise] bodes well for continued loan growth.
So Joe just to follow that up.
Pay offs linked quarter.
Up or down from the fourth quarter and then.
Given that outlook of returned to growth.
Could you comment on the provision level at all or do we expect to see.
A more modest.
And end of the.
Reverse provision.
Eventually have a positive provision or expense.
So pay up quarter to quarter, Jeff I'd have to get back to you for sure I don't have that off the top of my head they seem to be slowing but I could be missing that so let me shoot you a note on that to clear that up as to the reserve I'm going to start with what I say every time, we don't really guide to where we're going to end with <unk>.
Our reserve, but our approach has been to be as measured as we can be within the bounds of seasonal in terms of releasing reserves as we continue through what has been a good economic environment and continued improvement in asset quality.
I would anticipate that as loan growth continues we would begin to start provisioning again, and then what I would say in terms of coverage is that that ratio is going to really ultimately be dependent upon how the economic environment plays out now throughout 2022.
Okay alright, thank you.
Thank you Jeff.
Yeah.
Thank you ladies and gentlemen, our next question comes from Andrew Liesch from Piper Sandler Andrew Your line is open. Please go ahead.
Thanks, Good morning, everyone.
Joe just to follow up on some of the loan growth questions and loan growth outlook here.
I'm curious what drove the owner occupied CRE increased this quarter.
I can't just say exactly what we had.
New business activity expansion of activity, new property purchases, but it.
I can't tell you exactly where it was.
Okay got it.
And that just goes along the lines of kind of my next question is from C&I borrowers like what are they saying about about their demand and capex needs are they expanding.
Clearly, there's a lot of room for utilization to rise, but I'm, just kind of getting kind of get a sense of what what they're telling you and how they're feeling about their businesses.
There is certainly being impacted by the increased commodity prices and so that is driving that.
A little bit of increased utilization and demand so while we've got that.
Continued lower utilization rate, we have added lines of credit we have increased lines of credit were seeing you know the needs for larger lines to carry more inventory theyre trying to get more inventory and as the prices are rising to the best they can to counter the supply chain issues as well.
So yeah, we are seeing exist.
Existing borrowers borrow.
And at the same time increase the size of the line keeping that utilization down.
Got it Okay. That's helpful and then just.
Andrew Andrew Marc Let me just let me just add on to Joe's comments you know there's other factors at play here, obviously, you already know about which.
Energy prices continue to increase you've got.
Wage inflation and labor constraints.
That are also weighing in on our businesses in terms of inflation.
They they are the pipelines are considering capital expenditure expansion to try to improve productivity.
Having all of those factors.
One drawback or the thing that's weighing on their minds, though is obviously the political uncertainty as to where the economy goes from here. So there are positive forces for for C&I.
That theyre going to make additional investments, it's just going to be muted a bit in some of the uncertainty of me. So I just wanted to add that.
Got it that's very helpful.
And then just to follow up.
Construction demand it sounds like there was clearly some this quarter more projects are going to start to fund up.
We move into the summer months I.
I guess, what what's the pipeline look there for.
For new projects coming on line or new opportunities to extend our at least our construction line before those fund later this year.
The construction of the lines are refreshing and continuing the demand is strong for that.
I would say that we do anticipate that with the rising rates it could slow the Paul.
It could slow the homebuilder sales as they are building out an affordability continues to be a concern but the supply.
All homes remains low so there they are still coming in and building them and we're not seeing any.
Yeah.
Real disruption in terms of unsold inventory.
Low standing inventory and strong and climate conditions that make the market conditions remain good to continue that product.
Got it okay that all of that all makes sense. Thanks for taking the questions I'll step back.
Thank you Andrew.
The next <unk> next question comes from David Feaster Rain from Raymond James.
David Your line is open. Please go ahead.
Hey, good morning, everybody.
Good morning, David.
You know it's great to see you guys have made tremendous progress on the banner forward initiative and it sounds like the majority of the next steps are really on the revenue improvement side could you just maybe talk to some of the initiatives that are on the docket and the roadmap for those and then just how effective you've been at in.
And the growth that you generated this quarter, how much was from the new client growth and deepening relationships and maybe moving upstream is as part of this initiative that you guys laid out.
Yeah, Hi, David This is Peter I'll I'll.
Addressed as well.
Questions around banner forward.
As we've guided to the street.
Sequential nature of how being affordable begin impacting our performance.
As you mentioned was frontloaded around expense efficiencies first.
We do and we have recognized the benefits of some of the initial expense efficiency initiatives.
In the fourth and first quarter.
As you know we consolidated seven branch locations in the first quarter that was mid quarter. So we're not going to see the full benefit in the run rate of those consolidations until the second quarter due to severance and exit costs and so forth that we're still in the first quarter numbers, we also announced the sale.
L. A for more branches in the second quarter that'll be executed towards the end of the second quarter that will reduce expenses. All those branches are ours are small relative to the rest of our portfolio of branch locations and will be accretive to.
To ROA when we execute them. In addition to that there is a series of smaller incremental expense saves.
As we implement some efficiency initiatives across some of the support units and some of the spans and layers related reductions across our retail and commercial functions again, those will continue to manifest into the second quarter and ultimately in the third quarter, where we really see our core base of the run rate post banner for it on the expense side.
<unk>.
On the revenue side, we began implementing some of the fee related initiatives mid first quarter. So we're not seeing the full carry of those deposit fee initiatives.
So up yet well see them show up.
More in the second quarter, and then even more in the third quarter to two or three initiatives that are being implemented.
Over the course of the second quarter that we'll see the benefits from.
The full third and fourth quarter or the second half of this year.
And then on the and then there's a series of marketing and digital <unk>.
<unk> related initiatives in terms of customer and account acquisition that we expect to result in an acceleration of.
Loan growth are new new client acquisition that will ramp up prospectively over the over the second half of this year and then there are some additional.
Growth on the commercial and CRE side that we're beginning to see just the very beginnings of in the first quarter.
Related to some.
A higher hold on that's some focus on our metro in higher growth markets middle market.
And we expect those to really show up in the second half of this year and carry into 'twenty. Three so again, it's going to be an expense efficiency first.
Followed by revenue acceleration second.
On track with where we'd expect it to be in banner forward.
And we will continue to report our progress as we go quarter to quarter.
That's helpful. I appreciate that and then I appreciate your commentary to in the prepared remarks talking about the rate sensitivity and expectations for margin expansion.
Spansion just in light of the rising rates.
And you know looking at the slide you talked you've talked in the past about.
Half of your the impact of floors in that half of your floors are at the floors. Just curious how far before you get could you just remind us where those floors are and how far before you get through the majority of those and start seeing the more full impact from rising rates.
Yeah, Yeah. So in terms of the as we disclose in our investor deck.
A little over 60% of our loan book.
As our floating and adjustable and about a little over 60% of those loans floating adjustable have floors on them if.
If we look at the weighted average.
Strike to strike to index spread on those loans with floors.
We're down to about 30 basis points of remaining spread recapture.
On a weighted balance basis, so theres still some additional you know.
Short end rate movement, we need to fully repriced those loans going forward that being said.
Based on our current balance sheet mix.
And a kind of a static mix going forward.
The way to think about our margin.
<unk> shipped two to interest rates is about one third of the change in the yield curve, assuming a parallel shift shows up is the increase to our margin. So in other words.
For each 25 basis points of fed funds hike.
We expect about seven to eight basis points of margin improvement right, all things equal and assuming our current balance sheet mix of securities cash and loans. So that kind of gives you a sense. Once we cross the 100 basis point threshold with fed funds or are loan yields improvement will accelerate because we'll have cleared all the floors and we actually.
To see loan yields move up at a faster pace once all of those floors are cleared during the first 100 basis points of tightening.
That's extremely helpful. Thank.
Thank you for that and then maybe just switching gears to touch touch on credit.
More broadly asset quality, you guys do a phenomenal job.
A very conservative approach to credit, but just kind of hearing the commentary it sounds like you're still a bit cautious on maybe the more macro economy. Just curious what keeps you up at night, what you're watching closely as you manage credit in and whether the macro environment. The inflationary trends that you saw.
Talked about has that led to you know Eddie.
Tightening of the credit box at all.
It hasn't led to a tightening of the credit box I think the way I would summarize the way banner has worked in my 20 year career here is to try to be as stable through all economic cycles. As we can be we don't try to shift with.
The wind necessarily and or the.
The broader economy and it comes down to the sound underwriting going in so certainly we stress credits and anticipate in a rising rate environment. How we're stressing these credits at origination is just.
With a higher rate to make sure that they can work through the cycle.
So in terms of what keeps me up at night.
Isn't our loan portfolio. It is just what's going on in the world today, and you know and how that ultimately is going to impact all of us, but I feel good about our borrowers and our credit quality.
Okay. Thank you.
Thank you David.
Our next question comes from Andrew <unk> from Stephens.
Your line is open. Please go ahead.
Thank you and good morning.
Good morning, Andrew.
Peter I wanted to go back to just the rate sensitivity discussion I'm looking at slide 17 of the presentation.
The first 100 basis points, you disclosed plus 7% NII.
The second 100 basis, the second hundred basis points 200 basis points scenario.
11, 6% I heard your commentary on just working Paas the loan floors and you should become more asset sensitive after you kind of with the second 100 basis points I guess.
The disclosure here wouldn't suggest that those so I'm just trying to get a sense of like do you assume higher deposit betas for the second 100 basis point assumption.
Just any color there would be helpful.
Yeah, I know that your your intuition is correct. So yeah. My comments were around the loan yield itself on on the funding side.
We have accelerated.
Accelerated our betas increase as rates move further up the curve.
So we are.
Our expectation is that deposit betas will be very low in the first 100 of tightening, but they begin to accelerate in the second 100, it tightening so our funding costs.
Again to move up at a much higher pace proportionate to the first 100.
As rates tightened and.
If you look back at what banner did in the last tightening cycle in 2017 and 18.
Banner Didnt change move its deposit rates up at all until the after the first 100 basis points of tightening the last time.
And we think that's a pretty good barometer for whats likely to happen in the cycle given that that's what we did last time and this time, we've got quite a bit more deposit liquidity going into the cycle than we had last time that being said we did see.
Our deposit rates began to move up more aggressively in the second 100, a tightening in the last cycle and we expect the same relationship to hold true. This time and so that's really what's causing the diminished.
No amount of net interest income growth as we go into the two and 300, we are accelerating betas and further up.
You go in the rate curve in our models and so that's what's causing some of the limited more limited growth in NII.
Yeah.
Okay very good that's really helpful. I appreciate it.
And then I heard your comments on kind of continuing to take a measured pace to ladder into liquidity into the bond book I know you. Obviously mentioned you monitor kind of the yield curve level and just overall loan demand at the bank as well when you're kind of making the consideration putting liquidity to work I guess just with the improvement.
Over the past few months on yields.
Does that make you more apt to get a bit more aggressive in terms of putting some liquidity to work or is it more about considering maybe the acceleration of loan demand that you might be expecting.
Yeah, I think look all things equal.
Given we still have an ample amount of cash sitting with the fed.
And last quarter, we ladder it in about $160 million of cash into the securities portfolio.
This quarter, we expect to have a higher number given the sharp increase in the.
Long end of the yield curve and we wanted to take advantage of that so you you could anticipate will be somewhat more aggressive this quarter than we were last quarter.
And ladder in some additional cash into the Securities book.
We have ample cash to support.
Accelerated bond demand.
And in a potential deposit liquidity run off although we're not seeing any any signs of a deposit outflow.
Yet with increased rates, but all things equal we expect to be a bit more aggressive than flattering cash into the securities book This quarter.
Yeah.
Got it Okay, and then relative to that two and a quarter yield is around two and a quarter maybe 222.
Or buying out in the first quarter.
Where are you buying out today, just from a yield perspective.
Yeah, we're we're closer to the three now so we're seeing we're looking at the securities on a basket of average basis in the.
Right.
Maybe 3% at this stage.
Okay.
Okay.
And if I can just sneak one more and I might have missed it but did you have the net dollars of expense saves you would expect from the announced branch sale.
Yeah, we didn't we didn't we didn't disclose the amount of expense saves we just for.
For reference those branches.
Hold a little over $200 million in deposits. So.
We will expect that balance to go out and as I said earlier these are.
Smaller branches relative to the rest of our footprint and so from a <unk>.
ROA, a pizza ROA accretion perspective, and an efficiency ratio perspective, it'll be a net benefit to.
So the go forward.
Stability metrics of the company once Theyre sold.
Okay understood.
Appreciate you taking my questions.
Thank you Andrew.
Our next question comes from Kelly Motta from K B W.
Kelly Your line is open. Please go ahead.
Thank you. Good morning, most of my questions have been answered, but I did want to touch on loan yields and I wanted to ask how new origination yields were coming in.
Seen a nice pick up there and you.
We've seen loan growth across your footprint pick up are you seeing any any competitors getting a bit more aggressive or extending a bit more on terms of standards in order to get some liquidity to work just interested in.
Kind of the competitive dynamics of what you're seeing there. Thanks.
Peter I'll start with the competition and then I'll, let you come back in with the loan yield.
Competition Kelly is as crazy as it has ever been in terms of pricing and structure, yes competition is stretching the amortization periods longer interest only period.
Low rate and it comes from everyone. Its community banks credit unions, it's insurance companies non bank lenders everyone out there is looking to put the quality assets on their balance sheet.
Yeah.
As to yields I'm going to throw it to Peter and I'm not sure. If there was something else in there that I forgot, but well circle back if I did.
Yeah, I think so.
Yeah.
Yeah, Kelly in terms of loan yields where we're seeing some modest improvements.
And the average loan yields of new product sucks right putting.
Starting in the low fours right now.
And we expect that to continue to improve right as yield curve continues to move up.
The loan yields that we're putting on now are accretive to the average portfolio yield so.
As we've always said we've ever made until.
And the Paas or we've got we remain disciplined on not just credit structure, but also pricing and so we are you know.
We have we have turned away deals for price.
And remained disciplined around that.
But we are we are seeing yields coming on that are accretive to the portfolio.
Okay.
That's super helpful and maybe just kind of a high level question about banner forward I know you won't you're working on expanding our customer base and penetration.
Penetration of existing customers.
And I was just wondering if you know.
That's led mostly with the credit side or the loan side or.
If we should expect to kind of.
Uh huh.
And deposits from that as well, which could potentially help mitigate them.
<unk>.
Does the slower deposit crossed that we're all expecting with.
Liquidity getting put to work.
Yeah, I'll take the I'll take a.
<unk>, Canada.
As we talked about Theres, a many there's a number of initiatives that comprise being our forward.
And you've heard us discuss.
Several of those are in the car.
Banking and small business banking arena.
With an emphasis on accelerating new client acquisition and deepening our relationships in that line of business.
And as part of that we expect to bring in the entire relationship with the client which would be not just alone, but their operating accounts and including Treasury management needs, which would.
Bring with it some additional deposits and funding so those initiatives that are focused on accelerating.
Revenue in production and the and the commercial.
In the commercial side and small business banking will will bring with them deposits. Although I would tell you overall theres going to be more of a loan focus overall, so I would characterize that the loan to deposit ratio of that new business.
Has a more balanced loan to deposit mix than our existing portfolio. So we expect that the overall benefit will be to improve our earning asset mix.
Those initiatives and then there's a series of other initiatives on the retail and consumer side that also contemplate bringing in additional.
Accounts and clients that will bring both loan and deposits right through many of our digital.
In marketing initiatives that will bring in a full relationship as well, but again those are again focused on the loan side and we expect the mix of the overall business to be very balanced between loan and deposit growth across those new clients.
That's so helpful. Thank you so much.
Thank you Kelly.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please do not hesitate to press star followed by the number one on your telephone keypad now in case you changed your mind. Please press star followed by the number too.
We have a follow up question from Andrew <unk> from Stephens.
Your line is open. Please go ahead.
Hey, Thanks for taking the follow up.
Just wanted to ask there's been a lot of M&A really kind of across your footprint over the past year or so both completed and just announced.
Are you starting to see any kind of accelerated ability to Ah.
Attract either customers or a new talent to the bank just as a result of maybe some of the M&A disruption.
Okay.
Yes, Andrew this is mark I'll I'll answer that question.
And they ask others to follow and look I think at the end of the day, there's been enough uncertainty that's going on in some of the institutions that are combining.
Combining.
And it's created a large number of conversations as to what the next steps for bankers. Our clients are taking notice their clients are taking notice of what may be a transitioning decision, making and or relationship managers.
So it's it's at the beginning phase I would characterize us being able to take advantage of it we are doing so right now in terms of building pipelines, both talent pipelines as well as client pipelines.
But the real.
Just of us being able to take advantage of it is going to be around conversion dates and as new structures are rolled out decision making.
Bodies are changed that's when we're going to have the real opportunity as you would expect a lot of the institutions that are in the process of orchestrating a combination.
They have locked up some of the key players in terms of retention bonuses and and just waiting to see until those that conversion takes place or the structure of the new structure takes place I would expect that to accelerate for us the benefit to accelerate for us at exactly the right time that banner forward initiatives will take off.
All of which will be.
Nearing the second half of this year.
Understood Okay.
And then maybe just one one last one as well just kind of given some of those comments.
Maybe the organic kind of opportunity both from banner forward and then some maybe potential hiring or customer acquisition as well does that lead you to be I guess more inclined to focus organically at the franchise as opposed to.
Looking to do M&A.
Self or are you still do you still remain kind of open to M&A.
Yeah.
Look our M&A strategy has not changed hasn't changed through the cycle or coming out of the pandemic or.
Or right as of right now are we have always been opportunistic in how we've approached M&A. We've been very disciplined in how we look at the combination how that will affect our business model. It's clearly been successful through some of the outside recognition that you'll identify in our investor deck.
So the business model is working well, we don't want to do is do something that's gonna be fraught with execution risks that will jeopardize the momentum of that business model and where we are right now taking advantage of its not just through the call.
Combination of disruption that's occurring in our footprint. We're also taking Ben.
Hired some great talent from the larger institutions, the larger financial institutions, specifically in the California market. So.
I think all the way around we're looking at both a dual strategy of organic growth, adding additional talent that can accelerate our banner forward organic growth, but at the same time, we're very open to opportunistic combinations and we have as you'll recall, we do have a very talented integration team internally.
Yeah, obviously led by our executive Vice President Cindy per cell who's done over eight of our integrations. So we stand ready to do something should the opportunity arise.
Okay.
Good I really appreciate the color and thank you all for taking my questions.
You bet Andrew Thank you.
Currently we have no further questions. Therefore, I will now hand back to your host Marc <unk> for any closing remarks Mark. Please go ahead.
Thank you Irene and as Ive stated, we are very pleased and proud of the banner team and our solid first quarter performance.
Thank you very much for your interest in banner and joining us on our call today, we look forward to reporting our results to you again in the future. Thank you everyone and have a wonderful day.
Ladies and gentlemen. This concludes today's conference call. Thank you for being with US today have a lovely day ahead you may disconnect your lines now.
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