Banner Corporation Q1 2023 Earnings Call
Speaker 2: Good morning and thank you for attending today's first quarter 2023 earnings call for Banner Corporation. My name is Jason and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call for an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad.
Speaker 2: I would now like to pass the conference over to our host, Mark Gretzkiewicz, President and CEO .
Speaker 3: Thank you, Jason. And good morning, everyone. I would also like to welcome you to the first quarter of 2023 earnings call for Banner Corporation.
Speaker 3: Joining me on the call today is Peter Conner, Banner Corporation's Chief Financial Officer, Joe Rice, our Chief Credit Officer, and Rich Arnold, our Head of Investor Relations.
Speaker 3: Also joining our call today is Rob Butterfield, our recently announced Chief Financial Officer of Banner Bank. Rich, would you please read our forward-looking Safe Harbor Statement?
Speaker 3: 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, or services, forecasts of financial or other performance measures, and
Speaker 3: and statements about Banner's general outlook for economic and other conditions. We also may make other forward-looking statements in the question-and-answer period following management's discussion. These forward-looking statements are subject to a number of risks and uncertainties. Your results may differ materially from those discussed today.
Speaker 3: Information on the risk factors of actual results are available from our earnings press release that was released yesterday and have recently filed Form 10-K for the year ended December 31, 2022.
Speaker 3: Forward-looking statements are effective only as of the date they are made and Banner assumes no obligation to update information concerning its expectations.
Speaker 3: date they are made and Banner assumes no obligation to update information concerning its expectations. Mark. Broadcast New Media
Speaker 4: Thank you, Rich.
Speaker 3: As is customary, today we will cover four primary items with you.
Speaker 3: First, I will provide you high-level comments on Banner's first quarter 2023 performance.
Speaker 5: Second, the actions Banner continues to take to support all of our stakeholders, including our Banner team, our clients, our communities, and our shareholders.
Speaker 5: Third, Joe Rice will provide comments on the current status of our loan portfolio. And finally, Peter Conner and Rob Butterfield will provide more detail on our operating performance for the quarter, as well as comments on our balance sheet.
Speaker 5: Before I get started, I want to again thank all of my 2,000 colleagues in our company that continue implementing our Banner Forward initiatives and who are working extremely hard to assist our clients and communities.
Speaker 5: Vener has lived our core values, summed up as doing the right thing, for the past 133 years.
Speaker 5: Our overarching goal continues to be do the right thing for our clients, our communities, our colleagues, our company, and our shareholders, and to provide a consistent and reliable source of commerce and capital through all economic cycles and change events.
Speaker 5: I am pleased to report again to you that is exactly what we continue to do.
Speaker 5: I am very proud of the entire Banner team that are living our core values.
Speaker 5: Now let me turn to an overview of our performance.
Speaker 5: As announced, Banner Corporation reported a net profit available to common shareholders of $55.6 million or $1.61 per diluted share for the quarter ended March 31, 2023.
Speaker 5: This compares to a net profit to common shareholders of $1.27 per share for the first quarter of 2022 and $1.58 per share for the fourth quarter of 2022. The earnings comparison is impacted by the provision or recapture of credit losses.
Speaker 5: This compares to a net profit to common shareholders of $1.27 per share for the first quarter of 2022 and $1.58 per share for the fourth quarter of 2022. The earnings comparison is impacted by the provision or recapture of credit losses, the rapid change in interest rates.
Speaker 5: our strategy to maintain a moderate risk profile, and the performance improvement resolving from our Banner Forward initiatives that we started in the third quarter of 2021.
Speaker 5: Peter and Rob will discuss these items in more detail shortly.
Speaker 5: To illustrate the core earnings power of Banner, I would direct your attention to pre-tax, pre-provision earnings, excluding gains and losses on the sale of securities, Banner forward expenses, loss on the extinguishment of debt, and changes in fair value of financial instruments.
Speaker 5: First quarter 2023 core earnings were $75.9 million compared to $49.7 million for the first quarter of 2022.
Speaker 5: Banner's first quarter of 2023 revenue from core operations increased 24% to $170.4 million compared to $137.6 million for the first quarter of 2022.
Speaker 5: We continue to benefit from a strong core deposit base in improving net interest margin and core expense control.
Speaker 5: Overall, this resulted in a return on average assets of 1.44% for the first quarter of 2023. Once again, our core performance reflects continued execution on our Super Community Bank strategy. But for now, that echoes praise to The
Speaker 5: That is growing new client relationships, maintaining our core funding position.
Speaker 5: promoting client loyalty and advocacy through our Responsive Service Model, and demonstrating our safety and soundness through all economic cycles and change events.
Speaker 5: To that point, our four deposits represent 93% of total deposits.
Speaker 5: Further, we continued our strong organic generation of new relationships and our loans increased 11% over the same period last year.
Speaker 5: Reflective of the solid performance, coupled with our strong regulatory capital ratios, we announced a core dividend of 48 cents per common share.
Speaker 5: As announced last quarter, BINNER published our inaugural Environmental, Social, and Governance Highlights Report in December , which I hope you had an opportunity to review.
Speaker 5: This report reflects the many ways in which we continually strive to do the right thing in support of our clients, our communities, and our colleagues, and provides an outline of the level of commitment Banner has to the many communities it serves.
Speaker 5: Finally, I'm pleased to say that we continue to receive marketplace recognition and validation of our business model and our value proposition.
Speaker 5: Banner was again named one of America's 100 best banks and one of the best banks in the world by fours.
Speaker 5: Newsweek named Banner one of the most trustworthy companies in America.
Speaker 5: and S&P Global Market Intelligence ranked Banner's financial performance among the top 50 public banks with more than $10 billion in assets.
Speaker 5: Additionally, as we've noted previously, Banner Bank received an outstanding CRA rating in our most recent CRA examination.
Speaker 5: Let me now turn the call over to Jill to discuss the trends in our loan portfolio and her comments on Banner's credit following. Jill?
Speaker 6: Thank you, Mark, and good morning, everyone. Given the continued negative economic sentiment and the recent market volatility, I am pleased to be able to report that Banner's credit metrics remain healthy.
Speaker 6: Delinquent loans as of March 31st remain low at 0.37% of total loans, up 5 basis points when compared to the prior quarter, and compared to 0.21% as of March 31st, 2022. Adversely classified loans represent 1.46% of total loans, up slightly from 1.35% to
modest at 0.17% of total assets and continue to be comprised almost exclusively of non-performing loans totaling $27 million. Loan losses in the quarter totaled $1.5 million and were offset in part by recoveries of $698,000. We posted a modest provision for loan losses of $774,000.
was offset in large part by continued strong portfolio metrics with the provision for credit losses in essence covering net charge-offs. After the provision, our ACL reserve totals $141.5 million, or 1.39% of total loans as of March 31st. Flat with the linked quarter and compares to coverage of 1.37% as of March 31st, 2022.
The Reserve currently provides 528% coverage of our non-performing loans.
A review of the loan activity reflects origination volumes were down when compared to the linked quarter with portfolio loan balances essentially flat when compared to year-end and up 11% when compared to March 31, 2022.
CNI line utilization was down 1% from the linked quarter and the overall muted CNI activity in the quarter reflects the general negative economic sentiment in the market.
This, coupled with a reaction to the higher interest rates, have many clients pausing on capital expenditures and prior expansion plans.
Still, commercial business loans are up 14% year over year. I will note that we did not see any unusual line activity as a result of the financial institution failures that occurred late in the quarter.
Excluding multifamily, our commercial real estate balances declined 2% in the quarter and are down 4% when compared to March 31, 2022, primarily in the non-owner-occupied investment property category.
Given the current rate environment, the changing economic conditions, and general market dynamics, I will provide a little more color on two of the asset classes in the CRE portfolio that are currently getting a lot of press.
However, before I do, I will start by saying that the entire CRE portfolio continues to perform well with less than 2% of the total adversely classified at this time.
Looking at office properties specifically, the office portfolio continues to perform well. As noted in prior calls, this segment is relatively small at 7% of the entire loan book.
The geographic distribution of the portfolio aligns very closely to that of our entire loan book as detailed in the earnings release and the granularity of the loans limits our exposure. Drilling specifically to the metropolitan areas.
Approximately 10% of the office book is located within the City of Seattle, however only 1% is within the core business district. The average loan size in the City of Seattle is $2.6 million, dropping to less than $1.5 million within the business district.
6% of the office portfolio is located in Sacramento with less than 1% in the core business district. The average loan size in this market is 3.59.
2% of the office book is located in Bellevue with an average loan size of under $2 million.
1% is in Los Angeles with an average loan size of $1.5 million. Less than 1% of the portfolio is located in Portland, Oregon with an average loan size of under $1 million. We currently have only one office property in San Francisco with a balance of under $1.5 million.
Approximately 10% of the office book will have a rate reset within the next 24 months.
Our review of loans to a de minimis of $1 million reflects no significant concerns with repayment ability based on the most recent operating statements if rates were to reset at today's rate.
Additionally, we have not become aware of any material vacancy or shadow vacancy issues within the investor office portfolio.
Additionally, we have not become aware of any material vacancy or shadow vacancy issues within the investor office portfolio.
Shifting to retail properties, the retail portfolio is also performing well. Retail commercial real estate represents approximately 10% of the loan book, is well distributed geographically and very granular in nature with an average loan size of under 1 million.
Similar to the office portfolio, roughly 10% of the retail CRE book will have a rate reset in the next 24 months, and we again note no meaningful concerns at this time as to our client's ability to service debt if they were to reprice today.
Moving to multifamily, we again reported solid growth in the multifamily portfolio, which is up 8% over the prior quarter and 16% year over year.
The growth this quarter was split roughly 70% new originations and 30% conversion of completed construction projects. In total, the multifamily portfolio continues to be approximately 50% affordable housing and 50% market rate. As I have commented before, the average loan size is less than 1.5 million with balances spread across our footprint.
a function of continued sales of completed residential construction projects, coupled with a slowdown of replacement starts within this product line as mentioned last quarter.
When compared to March of 2022, construction and land development loans reflect an increase of 8%, driven primarily by the growth in the multifamily construction portfolio, up 32% year-over-year, and to a lesser extent commercial construction as well as land development loans up 6% and 4% respectively.
Of the multifamily construction portfolio, nearly 75% is currently associated with affordable housing projects, the vast majority currently located in various California submarkets.
While the volume of residential construction starts to slow and we acknowledge the slowing of home sales across our footprint, I continue to be pleased with our portfolio performance. The portfolio remains diversified both in product mix and price point, starts to spread across our geography.
and completed homes are still being sold and closed in spite of the rising rain environment. As I reported last quarter, we have remained consistent in our underwriting and our land exposure continues to be limited to our strongest sponsors. Acknowledging that we are beginning to see completed homes taking longer to be sold and moved off balance sheet, although still within historical norms,
We continue to see our builders being proactive with concessions, upgrades, and rate buy downs in order to keep their finished products moving. Most importantly, they remain well capitalized and prepared to absorb the longer sale cycle.
In total, residential construction exposure remains acceptable at 6% of the portfolio, with a slightly over 40% consisting of our custom 1-4 family residential mortgage loan product.
When you include multifamily, commercial construction, and land, the total construction exposure is 14% of total loans, down 1% from the linked quarter. Agricultural loans, down 8% from the linked quarter, reflect normal seasonal declines that are to be anticipated. Balances are up 11% year-over-year.
And, as noted in the earnings release, we again reported growth in the consumer mortgage portfolio up 7% in the quarter, continuing the trend of moving completed all-in-one custom construction loans on balance sheet.
I will close by recapping one of our strategic pillars, which is to maintain a moderate risk profile. As I have said before, our credit culture is designed for success through all business cycles.
Our consistent underwriting and robust portfolio review process remains a source of strength and stability in these turbulent times.
So, too, does our solid reserve for loan losses and capital base. Our credit metrics remain strong and our moderate risk profile remains intact, positioning us well to navigate whatever this economic cycle brings. With that, I'll turn the microphone over to Peter for his comments.
Thank you, Jill. This quarter I'm happy to introduce Rob Butterfield, the CFO of Banner Bank, as part of our previously announced transition. I'm Rob Butterfield, the CFO of Banner Bank, as part of our previously announced transition.
Rob and I will share prepared commentary on the company's financial performance for the first quarter.
I will begin with commentary on the balance sheet, capital, and liquidity, and Rob will follow with remarks on earnings and profitability before handing it back to Mark.
Turning to the balance sheet, total loans increased $6 million from the prior quarter end as a result of increases in held portfolio loans partially offset by an $8 million decline in held for sale loans.
excluding PPP loans and held for sale loans.
portfolio loans increase 16 million or just under 1% on an annualized basis.
One to four family real estate loans grew $79 million, primarily as a result of residential custom construction loans that originated last year, converting to conventional one to four mortgage loans this quarter upon completion.
1 to 4 family real estate loans grew to $79 million, primarily as a result of residential custom construction loans that originated last year, converting to conventional 1 to 4 mortgage loans this quarter upon completion.
The client and CRE construction and ag loan outstandings partially offset the growth in one to four mortgage loan outstandings.
We anticipate a slower pace of balance sheet mortgage production in the coming quarters as market rates on new originations begin to shift the economics towards more sales and less portfolio retention.
Ending core deposits decreased $692 million from the prior quarter end due to outflows of rape sensitive balances.
The decline in core deposits was partially offset by a $226 million increase in CD balances, resulting in a total deposit decline of $466 million, or 3.4%, from the prior quarter.
The declines in core balances were primarily driven by clients moving non-operating balances to off-balance sheet treasury and money market fund investments.
The bank's use of exception pricing and selective CD deposit rate specials was effective in retaining a portion of the core deposit outflow on balance sheet within the bank's total deposit balance.
It is relevant to note that the bank's total deposit decline in the first quarter was $148 million less than the previous quarter, despite higher market rates and recent industry turmoil that occurred in early March.
We anticipate further declines in core deposit balances, partially offset with growth and time deposits in coming quarters, as a function of both seasonal deposit declines the bank normally experiences in the second quarter and the timing and magnitude of future Fed fund monetary actions.
As noted in our earnings release, with a 77% loan-to-deposit ratio, Banner's liquidity and capital profile remain robust as evidenced by the significant off-balance sheet borrowing capacity.
liquidity coverage of our uninsured deposits, the granular nature of our deposit portfolio, resilience of the bank's diversified deposit base, and increased in the net interest margin this quarter.
With that, I turn the call over to Rob who will discuss the company's earnings and profitability outlook. Thank you Phil.
Thank you, Peter. As announced in our earnings release, we reported $1.61 per diluted share for the first quarter, compared to $1.58 per diluted share for the prior quarter. The 3-cent increase in earnings per share was due to a lower provision for credit losses and lower non-interest expense partially offset by lower net interest income and lower non-interest expense.
Core revenue, excluding losses on the sale of securities and changes in investments carried at fair value, decreased $5.3 million from the prior quarter due to a decrease in net interest income. Non-interest expense decreased $4.4 million primarily due to lower legal expense and lower occupancy and equipment expense.
Net interest income decreased $5.8 million from the prior quarter due to an increase in funding costs and a decline in average interest earning assets.
Compared to the prior quarter, loan yields increased 24 basis points due to increases on floating and adjustable rate loans.
well as new production coming on at higher interest rates.
The average interest bearing cash and investment balances declined $506 million from the prior quarter, while the yield on the combined cash and investment balances increased 18 basis points due to higher yields on both the security portfolio and overnight funds driven by higher market rates.
The total cost of funds increased 22 basis points to 40 basis points due to increases in deposit rates and borrowing costs.
The total cost of deposits increased 18 basis points to 28 basis points, reflecting increases in CD and money market rates, as well as a shift in the mix of deposits, with some non-interest bearing deposits moving into CDs and other interest bearing accounts.
Net interest margin increased 7 basis points to 4.30% on a tactical loan basis.
The increase was driven by higher yields on earning assets coupled with a larger mix of loans and a lower mix of overnight cash and investments.
Going forward, the pace of yield increases on earning assets is not anticipated to outpace the increase in the cost of funds. We anticipate the margin to be range bound by deposit flows, the trajectory of market rates, and the competitive environment. Looking forward, we anticipate loan growth and deposit outflows.
will be funded by a combination of maturing investments and security sales as well as borrowing. The total non-interest income declined $3.8 million from the prior quarter. The current quarter included a $7.3 million loss on the sale of securities.
The payback on these trades is estimated to be two and a quarter years. Core non-interest income, excluding loss on the sale of securities and changes in investments carried at fair value, increased $447,000 primarily due to a $380,000 increase in mortgage banking income due to an increase in residential mortgage...
slow down home cells.
Purchases accounted for 88% of the mortgage loan production.
The current quarter benefited from an increase in interest rate locked commitments towards the end of the quarter as mortgage rates pulled back. We sold eight million dollars of multifamily help for sale loans during the quarter. Production of these loans was muted during the quarter as demand is limited at the current rate.
Lastly, miscellaneous income increased $258,000 due to an increase in the fair value of SBA servicing rights.
Total non-interest expense decreased $4 million from the prior quarter due to lower legal expense and lower occupancy and equipment expense, partially offset by higher salary and benefit expense, and a lower deduction for capitalized loan origination costs. The $4.2 million reduction in professional legal expense was primarily due to the prior quarter, including an accrual for the pending settlement of a legal matter. The $1.5 million decline in occupancy and equipment expense was largely due to the prior quarter, which was the current year. The total non-interest expense decreased $4.5 million from the prior quarter to the previous
was the result of increased facilities exit costs and weather-related building maintenance in the prior quarter. Compensation expense increased by $1 million due to normal annual salary and wage adjustments, increased medical insurance expense, and normal higher payroll taxes during the first quarter of the year.
partially offset by lower incentive approvals. Capitalized loan origination costs decreased by 1.5 million due to lower loan production compared to the prior quarter. This decrease was partially offset by lower commission and other variable loan production expenses.
We continue to benefit from our granular diversified low-cost deposit base that has and will continue to support a strong net interest margin throughout the rate cycle. This concludes my prepared comments. I will turn it back to Mark.
Thank you, Jill, Peter, and Rob for your comments. That concludes our prepared remarks and Jason, we will now open the call and we welcome your questions.
If you would like to ask a question, please press star followed by one on your mouse and keypad. If for any reason you'd like to remove that question, please press star followed by two. Again, to ask a question, it is star one.
Our first question is from David Feaster with Raymond James. Your line is now open. Hey, good morning everybody.
Morning David. Maybe just starting on the deposit side I was hoping to walk through some of the flows that you saw in the quarter and just help us think about you know how much was from seasonality maybe with tax payments versus customers just utilizing cash to pay down to higher cost floating rate debt.
you know, some of migration to higher cost accounts and how much was actually, do you think, from the turmoil, the bank failures, and then just on the NIB side, have you seen balances stabilized yet here in the second quarter, or are you still seeing pressures there?
Hi, David. This is Peter. I'll answer that. Yeah, so we – I guess the first thing to note is our deposit decline in Q1 was $148 million and actually less than we saw in Q4. A lot of the drivers of the decline we saw in Q1 were very similar to what we saw in the prior quarter, which were $148 million.
primarily non-operating balances with clients, especially our small business and some of our commercial clients moving those excess balances off balance sheet into higher yielding treasuries or money market funds, but retaining that primary relationship and operating business with the enter. And a lot of that, we saw that similar behavior again this quarter.
So we really aren't seeing any change in the pattern of the drivers of the deposit outflow. This quarter, we didn't see any material impacts from the bank failures in early March affect our client deposit behavior. And I think we have ICS and CDARS, those reciprocal deposit products for clients that wanted to
keeping insured balance with the bank, but we don't lose any deposits using that reciprocal product. So we didn't see any material outflows related to the safety and soundness questions that emerged after the bank failures. What we continue to see is that there's non-operating balances.
They'll continue to be some rate sensitive outflows and we do have our response has been what it's been all the way through this rate cycle, which is a mix of exception pricing for clients that want a higher rate, but we can retain them with a negotiated deposit rate at banner.
along with a few selected CD specials that are good rates, but they're not top of market. And one of the things we've noticed and observed is that we don't need to offer the highest rate in the market to generate not only good deposit retention, but bring new money in on those CD products. So we'll continue to do that. What you won't see us do is chase deposits to end with the highest rate.
but it'll be more of a function of where the yield curve goes, the remaining tightening of the Fed. But as we've guided through the past, a lot of the rate sensitive money moved early and often in this rate cycle, and we expect the rate driven outflows to diminish sequentially as we go forward through the rest of the year, with one exception, which is Q2. Normally, in a normal year, which we haven't had in three years given the pandemic, we normally experience...
Okay, that's extremely helpful. I appreciate that. And then maybe just curious your thoughts on the loan growth side and where you're still seeing good risk adjusted returns at this point in the cycle. Obviously construction has been strong as Jill you talked to and with the originations it's been a big driver. But I'm just curious your thoughts on loan growth.
demand in the market for growth at this point. And then, again, you talked, Rob, about funding that with some cash flows from the securities book. If you could just remind us of the cash flows that you're expecting.
demand in the market for growth at this point and then again you and you talked Rob about you know funding that with some cash flows from the securities book if you could just remind us of the cash flows that you're expecting off the securities book
So, yes, David, I'll start with the loan growth expectations. So as I indicated last quarter, our expectations have moderated given the economic pessimism and the increase in the increasing rate environment. And as noted in the release, our origination volumes dropped significantly. Offsetting that though towards the loan growth.
We are very optimistic regarding new client acquisition based on the current market disruption. We've seen a significant drop in the refinance activity, so that holds balances. We'll see our construction commitments continue to fund up. Our ag lines will continue to draw down over the course of the year, also increasing outstandings. And, you know, all of that, coupled with our super community bank model, which, again, I've said it before, but designed to remain open through all business cycles.
should keep us in that low single-digit growth rate through the year, even with the somewhat muted demand right now from commercial clients.
Yeah, as far as the cash flows from the investment portfolio, David, so we normally see about $25 million a month, so that would be $75 million for next quarter. In addition, we have that $150 million repo that's scheduled to mature in May and then June .
Beyond that, we would explore additional investment sales as long as we stayed within that three-year earnback period. Okay, that's helpful. And then, Mark, this may be a high-level question for you. You've been at the helm through several cycles here. I'm curious how this...
this current environment maybe feels from your perspective and maybe some of the past lessons you've learned and how that might be influencing how you're positioning the bank here now. Obviously you're very conservatively positioned but just
from your perspective and maybe some of the past lessons you've learned and how that might be influencing how you're positioning the bank here now. Obviously you're very conservatively positioned but just curious your thoughts.
Yeah, David, thank you. Thank you for the question and.
Yeah, I suppose that means I've just been here a long time. We've gone through so many cycles. I think the point is, you know, we instilled that strategic pillar in 2010 of having a moderate risk profile so that we can be successful through all economic cycles. And that's how we position the balance sheet. That's how we position our product offering and our delivery channels.
So the fact that we've entered this unprecedented speed of deposit flows and some of the bank failures, the speed with which they failed, really proves out our resiliency as an organization.
Coupled with our strong capital position, our very strong reserve methodology really positions us well to take advantage of the current market conditions going forward in terms of disruption that Joe mentioned, which there will continue to be.
I also believe that from this cycle what we're seeing, my view is that this is gonna have a longer tail to it than people realize. And that in and of itself, given our moderate risk profile, will present great opportunities for VANR going forward. So I think we're well positioned and we're actually excited to take advantage of some of this disruption.
so that we can continue to grow and thrive as an organization. Hopefully that's helpful to you. Yeah, no that was extremely helpful. I appreciate it. Thanks everybody.
and thrive as an organization. Hopefully that's helpful, David. Yeah, no, that was extremely helpful. I appreciate it. Thanks, everybody. Thanks, David.
And our next question is from Kelly Mota with KBW. Your line is now open.
Hi, thank you so much for the question. I apologize if anything is redundant. I had to join a little bit late. Just looking at your deposit costs, they accelerated, although at 51 basis points for interest bearing, it compares still pretty favorably to most banks out there.
Just wondering if there's any updated thoughts on how we should be thinking about deposit betas through the cycle. Yes, so Kelly, this is Rob. The deposit beta for the interest-bearing deposits was about 25% for the last rate cycle, and at this point we're expecting to...
experienced something similar to this cycle. And then as far as the changes in the cost of the POPS over the quarter, I would say it increased kind of pretty much the same rate throughout the quarter.
So there wasn't any spikes in it necessarily. Got it. That's helpful. And kind of as we look ahead with deposit balances, I clearly have a lot of flexibility on balance sheets still, although this is the second quarter of declines.
How should we be thinking about the movement of deposits out to maybe wealth management or treasuries and when do you expect pressure from that to start to abate here?
Yeah, Kelly, this is Peter. As we mentioned earlier, our deposit outflows in Q1 were actually less than they were in the fourth quarter. And the drivers were very similar to what they were in the fourth quarter, which were outflows of non-operating balances primarily with the
small businesses and commercial clients moving some portion of their operating balance to treasuries or money marketer's people funds off balance sheet for higher yields while we retain the core relationship. Going forward we expect some continued outflows related to rate drivers, however we expect that the pace of outflows will decline as we get towards the bedrock of our core deposit base.
Which by the way is very granular or average deposit size twenty thousand dollars and our diversification of deposits across both Metro and rural markets along along with a very diversified client segmentation Gives us confidence that that you know that bedrock
floor on our core deposit is not that far out into the future. So again, we're not a bank that will chase deposits for the highest rate in the land, but we will offer fair rate to our clients as a function of our value proposition and client service model. And as you mentioned earlier, we have plenty of dry powder to fund any additional high rate sense of deposit outflows with our securities portfolio and some other on-site projects.
question is from Andrew Terrell with Stevens. The line is now open.
Hey, good morning. Morning, Andrew.
I wanted to start maybe just on the deposit front. I was hoping just to get a sense of deposit flows throughout the quarter.
Did you see any kind of acceleration in flows or outflows during the month of March? And then more specifically, can you just talk about how deposits have fared thus far in April , both for overall deposits? And then have you seen the cadence of non-interest-bearing compression slow quarter to date?
Yeah, Peter, so in terms of the quarter itself, we actually saw deposit flows higher in January than we did in the last two months of the quarter. So we didn't see any material effects from the bank failures or safety and soundness concerns in March at Banner, in part because all of our large deposit relationships were
In terms of what we expect going forward and since the non-interest bearing, as I mentioned earlier in our prepared comments, we typically see some seasonal outflows in Q2 related to tax payments that we're seeing here normally in a normal year without the fiscal stimulus impact. But overall we're not seeing any real material change.
in the cadence of outflows related to rate sensitive clients moving out of the balance sheet. The tactics we've employed to retain those deposits in terms of exception pricing and a couple of CD select, selective CD specials have been effective in retaining those deposits on balance sheet, maybe not in non-interest bearing or a lower yielding bearing account, but they're staying on balance sheet.
in some of those higher yielding products and we've been effective with that. And our clients are really just looking for a fair rate, they're not looking for the highest rate out there. Mm-hmm, okay. I appreciate that. And maybe just thinking on kind of margin topics, at kind of the onset of the Fed raising rates, I remember the way we talked about the margin and its response to higher rates was the.
way down, or do you think some of the Latin kind of asset repricing within those adjustable and fixed rate loan buckets could help to keep that kind of net margin beta lower on the way down than what you've experienced on the way up? Yeah, Andrew, as we've, you know...
Okay, to previously we know our goal to this rate cycle was to reduce our asset sensitivities We got towards the top of the rate cycle through a combination of organically migrating the loan portfolio for more duration and putting loan floors in on the floating and adjustable rate loans as we went up and we're in a good position now as we get towards what we presume is the top of the rate cycle.
but on the way down we're going to have a slower pace of re-pricing on the loan book when rates do begin to come down. And so we, our goal is to, you know, hold this, the range of our margin where it is with just, you know, little compression going forward given the fact that we put in this asymmetry into our asset sensitivity as rates have gone up.
organically. And so we feel pretty confident that that margin, that range of margin will hold here in the near term, even as the Fed stops tightening rates. And even if there's some additional inversion along into the yield curve because of all the organic work we've done, not just in Treasury, but all of our bankers and working with our clients to...
price and structure of the loans to preserve our margin on the way down. David, all right, Andrew, the only thing I would add to that, Peter's comment, is two-thirds of our loan book is variable and adjustable. About 60% of that is adjustable. That hasn't necessarily adjusted through this rate cycle at this point, so we will see some further, upper adjustments on those.
I'll step back on the queue. Thanks for taking the questions. Thanks Andrew.
Our next question is from Andrew Leish with Piper Sandler. Your line is now open. Hey, good morning, everyone. You know, just a question here. I know you mentioned funding loans with cash flows from a securities portfolio or borrowings, but there's a couple quarters now where you've sold securities at a loss, I guess what's more important than nothing else is you spend your debt on multic Daniel is there for the credit on By
How are you looking at the securities portfolio and managing capital and the valuations of those securities are now improving. Should we see more security sales or is it really just going to be borrowings and maybe some core deposit growth or higher rates that you guys are offering to fund long growth? Yeah, Andrew, this is Rob.
So yeah, from a wholesale borrowing standpoint, we're planning on using that on a tactical basis, really as an infill for funding needs based on the level of loan growth and deposit outflows. So yeah, from a wholesale borrowing standpoint, we're planning on using that on a tactical basis.
As far as looking at the future investment sales, that's something that we'll continue to consider based on those similar deposit flows. Our criteria is the earned back, so as long as we have an earned back within three years and then we're willing to do that from a capital perspective. And then I think the other part of it is just the current quarter probably is, I would say going forward that might be similar levels or a little bit.
lower than that, but again, it's going to really depend on deposit flows. Got it. Okay, you know you've already covered that's my question. I'll step back. Thank you. Thanks Andrew. Our next question is from Andrew with Stevens.
can really depend on deposit flows. Got it, okay. You know, you've already covered that's my question. I'll step back, thank you. Thanks, Andrew. Our next question is from Andrew Terrell with Stevens. Your line is now open.
Thanks for the follow-up, and I apologize if I missed this. It looks like the 1Q expenses were in kind of squarely in that low to mid $90 million a quarter range that we talked about last quarter. I was just hoping to get updated kind of expectations for the expense base moving forward, and if that low to mid $90 million a quarter is still a good way to think about the expense run rate from here. Yeah, Andrew, this is Rob. So our guidance really hasn't changed much.
Our next question is from Tim Coffey with Jannie. Your line is now open.
Thanks. Morning, everybody. Morning, Tim. Mark, a question about your loan-to-deposit ratio. Is there a level at which you think you would feel comfortable with it getting up to? Because it seems like it's heading up towards 80% in probably mid-80s is what I'm thinking. But what are your thoughts there?
Yeah, Tim, as you might recall, since you've covered the company for quite a bit of time now, we did operate this company in that 90 to 95% loan to deposit ratio for a long time, maximizing our revenue lines.
So, I think it really depends on current market conditions and how sensitive liquidity is today. We're probably not going to get up there, but I could see our loan to deposit ratio gravitating up to the mid 80 range. Okay. And, this is kind of a high level question here. Can you describe in what way your business has changed since...
As you might suspect, given our client base, concentration in middle market and small business, as well as the consumers in our footprint, when you're a good corporate citizen and you behave in a very consistent and reliable manner, there is confidence in the bank itself.
That being said, I think I'll turn it over to Jill in terms of client sentiment, but there is certainly caution out there more around economic activity than it would be a safety and soundness concern for our organization.
Yeah, no, Mark covered it really well. The only thing I would add, and I touched on it a little bit earlier, was that after the bank failures, we've had more conversations with more potential new clients reaching out because of the safety and soundness and our propensity to be open through all business cycles.
All right, great. Those are my questions. Thank you very much for the time. Thanks, Tim. There are no further questions, so I'll pass the call back over to the management team for closing remarks.
All right, great. Those are my questions. Thank you very much for the time. Thanks, Tim. There are no further questions, so I'll pass the call back over to the management team for closing remarks. Thanks, Jason.
As I stated, we're very proud of the Banner team and our first quarter of 2023 performance. And I think our first quarter performance demonstrates the strength of our organization and how all of our colleagues are driving the performance of the company for the first quarter.
Thank you for your interest in joining in in Banner and joining our call. We look forward to talking to you next quarter. Have a great day everyone. That concludes the conference call. Thank you for your participation. You may now disconnect your lines.