Q2 2023 Banner Corporation Earnings Call

Speaker 2: Hello everyone and welcome to Banner Corporation's 2nd Quarter 23 Conference Call and Webcast. My name is Daisy and I'll be coordinating your call today.

Speaker 2: If you would like to register a question, please press star followed by one on your telephone keypad. I would now like to hand it over to your host, President and Chief Executive Officer of Fana Corporation, Mark Briskovich to begin. So Mark, please go ahead.

Speaker 3: Thank you, Daisy, and good morning, everyone. I would also like to welcome you to the second quarter of the 2023 earnings call for Banner Corporation.

Speaker 3: Joining me on the call today is Peter Conner, Banner Corporation's Chief Financial Officer.

Speaker 3: Joe Rice, our Chief Credit Officer.

Speaker 3: Rob Butterfield, our Chief Financial Officer of Banner Bank, and Rich Arnold, our Head of Investor Relations.

Speaker 3: 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.

Speaker 3: Those statements include descriptions of management's plans, objectives or goals for future operations, products or services, forecasts of financial or other performance measures, and statements about banners, 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. Thank you for your attention.

Speaker 3: These 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 in the earnings press release that was released yesterday.

Speaker 3: and a recently filed Form 10Q for the quarter ended March 31st.

Speaker 3: 2023.

Speaker 3: Forward-looking statements are effective only as of the date they are made and then assumes no obligation to update information concerning its expectations. Mark?

Speaker 3: Thank you, Rich. 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 second quarter 2023 performance.

Speaker 3: 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 4: 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 4: Before I get started, I want to again thank all of my 2,000 colleagues in our company who are working extremely hard to assist our clients and communities.

Speaker 4: Banner has lived our core values, summed up as doing the right thing, for the past 133 years.

Speaker 4: Our overarching goal continues to be to 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. I am pleased to report again to you that is exactly what we...

Speaker 4: of $39.6 million or $1.15 per diluted share for the quarter ended June 30, 2023.

Speaker 4: This compares to a net profit to common shareholders of $1.39 per share for the second quarter of 2022, and $1.61 per share for the first quarter of 2023.

Speaker 4: The earnings comparison is primarily impacted by the provision for credit losses and the increase in funding costs.

Speaker 4: Our strategy to maintain a moderate risk profile and the investments we have made during our Banner Forward program to improve our operating performance have positioned the company well to weather recent market headwinds. Peter and Rob will discuss these items in more detail shortly.

Speaker 4: 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.

Speaker 4: gains on the sale of branches, and changes in fair value of financial instruments.

Speaker 4: Our second quarter core earnings were $63.4 million compared to $57.8 million for the second quarter of 2022.

Speaker 4: In her second quarter of 2023, revenue from core operations increased 7% to $158.6 million compared to $148.3 million for the second quarter of 2022.

Speaker 4: We continue to benefit from a strong core deposit base that has proved to be resilient and loyal to Banner in the wake of a very competitive interest rate environment.

Speaker 4: a very good net interest margin, and core expense control.

Speaker 4: Overall, this resulted in a return on average assets of 1.02% for the second quarter of 2023.

Speaker 4: Once again, our core performance reflects continued execution on our Super Community Bank strategy.

Speaker 4: That is, growing new client relationships, maintaining our core funding position, promoting client loyalty and advocacy through our responsive service model, and demonstrating our safety and soundness through all economic cycles and change events.

Speaker 4: To that point, our core deposits represent 90% of total deposits.

Speaker 4: Further, we continued our strong organic generation of new relationships and our loans increased 11% over the same period last year.

Speaker 4: Reflective of the solid performance, coupled with our strong regulatory capital ratios, and the fact that we increased our tangible common equity per share by 5% from the same period last year, we announced a core dividend of $0.48 per common share.

Speaker 4: As I've mentioned on previous calls, the

Speaker 4: Banner published our Environmental, Social, and Governance Highlights report last December , which I hope you have had an opportunity to review.

Speaker 4: 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 4: Finally, I am pleased to say that we continue to receive marketplace recognition and validation of our business model and our value proposition.

Speaker 4: Banner was again named one of America's 100 best banks and one of the best banks in the world by Forbes.

Speaker 4: Newsweek named Banner one of the most trustworthy companies in America.

Speaker 4: S&P Global Market Intelligence ranked Banner's financial performance among the top 50 public banks with more than $10 billion in assets.

Speaker 4: and the digital banking provider Q2 Holdings awarded Banner their Bank of the Year for Excellence.

Speaker 4: Additionally, as we've noted previously, Banner Bank received an outstanding CRA rating in our most recent CRA examination. Let me now turn the call over to Jill to discuss the trends in our loan portfolio and her comments on Banner's credit quality. Jill?

Speaker 4: Additionally, as we've noted previously, Banner Bank received an outstanding CRA rating in our most recent CRA examination. Let me now turn the call over to Jill to discuss the trends in our loan portfolio and her comments on Banner's credit quality. Jill? Thank you, Mark, and good morning, everyone.

Speaker 5: Banner's credit metrics continue to be strong and our super community bank model continues to serve our clients well. Delinquent loans as of June 30 were 0.28% of total loans. A reduction from 0.37% of total loans reported as of March 31 and compared to 0.19% as of June 30, 2022.

Speaker 5: Adversely classified loans represent 1.38% of total loans, down from 1.46% as of the linked quarter and compared to 1.63% as of June 30, 2022. Net loan losses continue to be negligible at $336,000 for the three months ending June 30.

Speaker 5: and Banner's non-performing assets remain modest at 0.18% of total assets.

Speaker 5: As a result of the loan growth reported in the quarter, coupled with further deterioration in the economic forecast, we posted a provision for loan losses of $3.6 million as well as a $1.2 million reserve for unfunded loan commitments resulting in a net provision for loan losses of $4.8 million.

Speaker 5: In addition, we recorded a $2 million provision for securities available for sale in conjunction with ratings downgrades on financial institutions' subordinated debt held within the investment

Speaker 5: In total, the provision for credit losses for the quarter was $6.8 million.

Speaker 5: After the provision, our ACL reserve totals $144.7 million or 1.38% of total loans as of June 30th.

Speaker 5: This is a reduction of one basis point when compared to the linked quarter and compares to coverage of 1.36% as of June 30, 2022. The reserve currently provides 513% coverage of our non-performing loans.

A review of the loan activity reflects increased loan origination volumes when compared to the prior quarter with loan totals increasing $312 million or 12% on an annualized basis. Excluding the growth in 1-4 family residential loans, the annualized growth rate is 9%. CNI line utilization increased 1% in the quarter.

increased 2% in the quarter, primarily related to expanding relationships with existing clients who either acquired new properties or who moved additional loans to Banner as they refinanced properties held in their portfolios.

Balances are down 1% when compared to June 30, 2022, and as discussed last quarter, the current interest rate environment coupled with the changing economic environment is expected to further mute growth in commercial real estate loans in the near term.

The portfolio continues to perform well and similar to last quarter, less than 2% of the total CRE portfolio is adversely classified at this time.

Our office portfolio remains stable in size as well as credit quality. In line with prior disclosures and as reflected in the investor presentation, the office portfolio currently represents 6.5% of total loans.

remains very granular in size, geographically diversified, and is split roughly 50-50 between investor CRE and owner occupied.

There has been negligible change in the composition of the office portfolio since the report out last quarter.

Still, I will provide a quick review related to the Metropolitan Area Office Statistics.

We have less than $60 million of office loans in the City of Seattle and of that less than $10 million of exposure in the Central Business District with an average loan size of $1.4 million. In Sacramento, we have slightly over $40 million of office secured loans, of which only two are located in the Central Business District with an aggregate exposure of less than $5 million.

We have less than 15 million of exposure in the city of Bellevue, Washington, with an average loan size of less than 1.5 million.

We have less than 15 million in exposure in the City of Portland, Oregon with an average loan size of less than 1 million.

In Los Angeles, our aggregate office exposure is less than 10 million and the average loan size is under 1 million. We currently have only one office property in San Francisco with a balance of under 1.4 million and importantly within these metropolitan areas we currently have only two office properties adversely classified with an aggregate balance of less than 1.5 million.

Multifamily real estate loans were flat in the quarter but are up 22% year over year. In total, the multifamily portfolio continues to be approximately 50% affordable housing and 50% market rate. And as I have commented before, the average loan size is less than $1.5 million with balances spread across our footprint.

Construction and development loan balances declined by 3% in the quarter, reflecting a continued decline in residential construction projects as sales of completed residential starts continue to outpace replacements within this product line.

When compared to June of 2022, construction and land development loans reflect an increase of 8%, driven primarily by the growth in the multifamily construction portfolio and to a much lesser extent to growth in the land development book. Multifamily construction loans have increased nearly 70% year over year with over two-thirds of the dollars related to affordable housing.

both in product mix and price point, start to spread across our geography, and I continue to be pleased with the portfolio's performance.

And it bears repeating that we have remained consistent in our underwriting and our land exposure continues to be limited to our strongest sponsors.

As noted last quarter, builders have been proactive in marketing their product to keep completed homes moving, they are being selective in adding new starts, and they remain well capitalized and able to absorb a longer sales cycle and reduce profit margins.

In total, residential construction exposure remains acceptable at 5% of the portfolio, down 1%, and of that 45% is comprised of our custom 1-4 family residential mortgage product.

When you include multifamily, commercial construction and land, the total construction exposure remains at 14% of total loans.

As expected, agricultural loan balances increased in the quarter due to operating line usage up 14% when compared to the linked quarter. Those are up 9% year over year.

And lastly, as noted in the earnings release, we again reported growth in the consumer mortgage portfolio up 7% in the quarter, continuing the trend of retaining completed all-in-one custom construction loans on balance sheet.

I will close on the same way I started, noting that BANA's credit metrics continue to be strong and our super community bank model continues to serve our clients well. As I said last quarter, our credit culture is designed for success through all business cycles, and our moderate risk profile with consistent underwriting and robust review processes is a source of strength, as is our solid reserve for loan losses and capital base. Certainly, the economic environment continues to be uncertain.

and when the effects of a recession begin to emerge, we will not be immune. That said, we remain well positioned to navigate whatever this economic cycle brings.

With that, I'll turn the microphone over to Peter for his comments. Peter? Thank you, Jill, and good morning, everyone. This will be my last earnings call after nearly eight years as CFO since the company's acquisition of American West Bank.

Having served the company through a unique period of economic volatility, I am proud to leave the company better than I found it.

The strength of our balance sheet, the level of our operating performance, the depth of our executive management team, and the client-centric culture our colleagues deliver every day are among the very best of Banner's peer group. I want to thank Mark and the board for the opportunity that they allowed me to play in the company's success in building long-term franchise value.

With that, I hand the job of discussing our financial results over to Rob. Thank you, Peter. We reported $1.15 per diluted share for the second quarter, compared to $1.61 per diluted share for the prior quarter. The $0.46 decrease in earnings per share was primarily due to lower net interest income.

$24 million during the quarter with a $312 million increase in health for sale.

health for portfolio loans and a $12 million increase in health for sale loans.

1-4 family real estate loans increased $88 million, commercial business loans increased $69 million, and commercial real estate loans increased $60 million. Total security balances declined $202 million. The decline was primarily due to the sale of $127 million available for sale of securities.

with changes in fair value and normal portfolio cash flows also contributing to the decline. We will consider a similar level of security sales during the third quarter. Further sales could be contemplated depending on market conditions.

Ending core deposits decreased $462 million from the prior quarter.

due to seasonal tax payments and outflows of rate-sensitive non-operating balances.

The decrease in core deposits was primarily isolated to the month of April , as we experienced an increase in core deposits during the second half of the quarter.

The decline in core deposits was mostly offset by a 407 million increase in CDs, including 204 million of brokered CDs, resulting in a total deposit decline of 55 million, or 0.4% from the prior quarter.

The bank continues to use exception pricing and selective deposit rate specials on CDs and relationship savings accounts to offer clients fair, but not top of market rates. Banner's liquidity and capital profile continues to remain strong with all capital ratios in excess of the well capitalized levels and a significant off-balancing borrowing capacity.

as reflected in the low level of wholesale borrowings at the end of the quarter.

Net interest income decreased by 10.8 million from the prior quarter.

due to the increase in funding costs. Compared to the prior quarter, average loan balances increased $210 million, while yield on loans increased 13 basis points due to increases on floating and adjustable rate loans, as well as new production coming on at higher interest rates.

Total average interest bearing cash and investment balances declined $352 million from the prior quarter, while the average yield on the combined cash and investment balances decreased 5 basis points due to mortgage-backed securities representing a higher mix of the overall security portfolio.

Total cost of funds increased 46 basis points to 86 basis points due to increases in deposit rates and borrowing costs.

The total cost of deposits increased 36 basis points to 64 basis points, reflecting increases in the rates on interest-bearing deposits as well as a shift in the mix of deposits, with some non-interest-bearing deposits moving into CDs and other interest-bearing deposits.

The brokered CDs issued during the quarter added 3 basis points to the cost of deposits for the quarter. Net interest margin decreased 30 basis points to 4.00% on a tax equivalent basis.

The decrease was driven by higher funding costs on interest bearing deposits, partially opposite by higher yields on earning assets.

During the second half of the quarter, the pace of net interest margin compression slowed as core deposits levels stabilized and earning asset yields continued to increase. Looking forward, we expect net interest margin will experience some additional compression.

but at a slower pace than we experienced in the second quarter, contingent on the pace of further Fed Fund rate hikes. Total non-interest income declined $855,000 from the prior quarter. The current quarter included a $4.5 million loss on the sale of securities.

The payback on these trades averaged two years. In addition, we recorded a $3.2 million negative fair value adjustment on investments held for trading as spreads widened and market rates increased.

Core non-interest income, excluding the loss on the sale of securities and changes in investments carried at fair value, decreased $981,000, primarily due to a $1 million decline in mortgage banking income due to a negative fair value adjustment on multifamily loans held for sale. Total residential.

mortgage production, including both loans held for investment and those held for sale, increased 52% from the prior quarter.

Despite the large percentage increase from the prior quarter, volumes will remain well below the prior quarter due to lower refinance activity with purchases.

accounting for 93% of the mortgage loan production for the current year quarter.

During the month of June , Banner modified its NSF and Overdraft Fee program by no longer charging fees on returned items.

We anticipate this change will result in a quarter reduction in our deposit fees of approximately $750,000.

Lastly, miscellaneous income decreased $212,000 due to a decrease in the fair value of SBA servicing, right?

partially offset by higher swap fee income. Total non-interest expense increased $784,000 from the prior quarter, primarily due to increased deposit insurance expense and higher salary and benefit expense, partially offset by a higher deduction for capitalized loan origination costs.

Deposit insurance expense increased $949,000 due to an increase in the assessment rate. Compensation expense increased $583,000 due to the first full quarter of normal, annual salary and wage adjustments made towards the end of the first quarter, as well as higher commission expense partially offset by lower payroll taxes.

from net deposit account growth in our consumer and small business clients due to the success of our targeted deposit sales and marketing campaigns. The company continues to invest in technology to further streamline its deposits of opening and loan origination processes while enhancing the digital client experience and continues to take advantage of the ongoing market disruption.

with selective additions to the commercial and small business teams. This concludes my prepared comments. I will turn it back to Mark.

Thank you, Rob, Peter and Jill for your prepared comments. I would also like to recommend or remind everybody on the call that while this is Peter Conner's last earnings call for Banner Corporation. He is committed to be the CFO through the third quarter of this year 2023 and he will remain.

Thank you. If anyone would like to ask a question, please press star followed by one on your telephone keypad. When it's your turn to speak, please make sure you are unmuted locally. And if you would like to withdraw your question, please press star followed by two. So that's star followed by one on your telephone keypad to register a question. And our first question...

through the cycle with the accelerating deposit costs this quarter.

Good morning, Andrew. This is Mark and welcome. Very good question and I'll turn it over to Rob. All right. Thanks, Mark. Hey, Andrew. Yeah, so to this point, we have been modeling our deposit beta similar to the last rate cycle, which was 25%, excluding broker deposit. And at this point, we think it could creep beyond that.

but we expect to continue to perform well on a relative basis compared to the industry average.

And the other thing I'll note on that is, you know, as far as our deposit specials that we've been running, the last increase in our deposit special we experienced was the beginning of May. So there hasn't been any really change in our deposit specials. I think ultimately...

going to be based more on the shift that we see between deposits. Got it. Thank you. And then just one more question on deposits. It looks like non-interest bearing has fallen to about 39% of total deposits and...

Just wondering how much of that runoff stems from seasonal health flows this quarter. Yeah, so I guess my numbers might be a bit different than yours, but I'm showing 41%. Last cycle we were at 39% or pre-COVID we were at 39% as far as our non-interest bearing. And we're expecting that they'll kind of...

From a seasonality standpoint, we do experience seasonal tax outflows in April , which is why we had the decline in April there. Also, we do see some ag borrowers that earlier in the quarter fund their operations with cash before they start drawing down their lines.

I will step away. Thank you.

Got it, I'll step away. Thank you. Thank you, Andrews.

Thank you. Our next question is from Kelly Mota from KBW. Kelly, please go ahead, your line is open.

Hi, good morning. Thanks for the question. I think maybe starting on the loan growth, I know it's your intention to be open through cycles to support your borrowers, but I was surprised to see how strong the growth was at the end of the year.

just given how much rates have risen, have you seen a pullback in demand at all? And what should we be thinking about ahead as you look to the pipelines? Any color about that would be helpful.

Hi Kelly, good morning.

Certainly we've seen a slowdown in

I don't want to use the word demand, but in the pipelines refilling. Our pipelines are filling back up, but you will find them running 15 to 20 percent lower than they were at this time last year. The loan growth, if we think back to last quarter with the construction draws as

as the residential construction builds out, the affordable housing builds out, the ag draws, all of that impacted the loan growth this quarter. And so, you know, the continued economic pessimism increased rate environment, overall uncertainty is going to.

we believe continue to mute loan growth going forward. And I would still suggest that we'll target a low single-digit growth rate going forward.

Understood, appreciate that. Also wondering Jill, if you could, obviously the markets in the West have received a lot of attention. I was hoping you could provide kind of an overview by market of where you're still seeing the most opportunities versus which markets might be lagging more within your footprint.

I don't really see a difference, Kelly, across our footprint. I mean the West Coast is pretty much operating in the same vein up and down the coast. The sea is flowing.

across the area. Let me just add Kelly that we've had some excellent experience in our small business banking.

group in Northern California and all the way up and down the coast. So actually the business activity from the small business standpoint has been pretty good for us.

Understood. Appreciate that. Maybe circling to the margin, obviously deposit costs.

have heated up at this stage and caused some compression ahead. Just hoping to get some color on where new loan production is coming on, as well as is this 30 basis point of margin compression? Do you expect a similar level this quarter as we look ahead?

moderate going forward and we even saw that in the second quarter. So the second half of the quarter we actually saw a slower compression. The NIM for the month of June and May were within a basis point or two of each other. So our expectation is that we could see some additional compression here, but it will moderate quite a bit from what we saw in the second quarter.

And Kelly, this is Peter, I'll add a little more color to Rob's commentary around deposits. As Rob indicated, the last time we increased our posted rates on deposits was the very beginning of May, so it's been two months since we've actually posted an increase in our offer rates. www.wn

outside of some tenor adjustments on the CDEs. And really, the interesting data going forward is going to be a function of remixing the deposit base a bit more into CDEs away from core deposits, but not a function of increasing our offer rates.

going forward and that coupled with additional deleveraging on our wholesale funding costs, including FHLB, will really keep the margin compression limited going forward, as Rob indicated. So as well, we're seeing our CD specials generating...

net new growth about 50% of the growth in the CD specials is coming from new money to the bank with the rest of it coming from existing accounts so we're seeing success with the rates we've got and as Rob indicated earlier we're not top of market we're about 100 basis points below and seeing good good success with those rates

Thank you so much for all the color. I will step back. Peter, congrats on your retirement and Rob, looking forward to continuing to work with you. Thank you, Kelly.

Thank you. Our next question is from David Feaster from Raymond James. David, please go ahead to your line as they come.

Thank you. Our next question is from David Feaster from Raymond James. David, please go ahead, your line is open. Hey, good morning everybody.

Morning David. Just kind of read, staying on deposits and I don't want to kill this but you know kind of reading between the lines it sounds like deposit pressures have abated a bit that most of the the remix was really weighted towards the front of the quarter. I'm just curious what what...

you confidence that the deposit trends are stabilizing. Could you maybe talk about some of the competitive dynamics and then you know where you're seeing the most competition is it you know the larger banks, the smaller banks, non-banks and then just any thoughts on your strategy to drive core deposit growth? Where are you seeing the most opportunity?

to gain relationships, the deposit pipeline, and any, just any thoughts on that front as well.

I'll answer the question as probably as additional color. So in terms of the competition, what we saw at the beginning of the first quarter was really the outflow is going not to other banks or credit unions but to off balance sheet opportunities in treasuries or money market mutual funds with brokerages where

other community banks in the market, to a lesser extent some of the credit unions.

In terms of the specials, it's interesting that most of the banks that we compete with are all congregated around the same tenors of CDEs and we're all within 25 basis points of each other in terms of the offer rate. We've really stabilized the center point of where pricing and tenor is at this point. In terms of generating new business, as we heard from Mark and Jill and Rob, we've seen really good success in the small business space. We've seen a lot of success in the small business space.

the second quarter or first quarter, part of that's due to the success of the small business campaign, along with the success of some of our core deposit product specials that have been out there that require opening new accounts to bring your money in. So we're feeling pretty good about where we are at the end of the second quarter.

and the outlook going forward really seeing stabilization as deposits. And now we're seeing some net account growth on top of that, albeit at higher rates. And as we said earlier, really the interesting deposit beta for us is really a remixing function, not one of increasing rates on existing accounts. David, the only thing I'll add to Peter is I'll give a little more color maybe on the deposit.

during the month of June . In June , we saw an increase in core deposits as well as an increase in non-interest-bearing deposits. And then as we've moved into July , we've seen that stabilization continue. So it's not, you know, I mean, our confidence level might not be through the roof right now necessarily, but I think we're seeing some positive signs there.

what you're seeing on the construction side at that point. Is it more on the multifamily side? And then just again what are you seeing on the C&I front as well and you know what are you hearing from those clients and what's driving the increase in utilization there?

Yeah, David, so in that construction and land book, nearly 40% of the originations in the quarter were affordable housing construction starts. Very little of that would be drawn, but those are the, you know, so you'll see that fund up over the next 18 to 24 months. But we had significant growth as we neared quarter end and.

debt and it's mostly to our existing customers who, you know, they need to keep their businesses going and they're recognizing that rates are where they're at and they've just got to move and, you know.

It's mostly to our existing customers who, you know, they need to keep their businesses going and they're recognizing that rates are where they're at and they've just got to move and, you know, keep the doors going the way we're keeping our doors open.

Okay, that makes sense. And then, you know, obviously there's been a lot of disruption around you over the past few months. You know, you got the failures, you got some M&A, there's a lot of opportunity. It seems like we're still in the early innings of capitalizing on this, but I'm just curious maybe as you step back, Mark, where are you seeing the most opportunity? Is it the client acquisition side? Is it new hires?

quite a bit of market disruption, and that's exactly what we have. We are actually capitalizing on every front you mentioned. We're bringing new talent into the organization.

at all levels of the company, including loan originators, and as well as credit folks. At the same time, we're being able to fill our pipelines up with opportunities as well, from the disruption that's occurring with a lot of the banks. That disruption is going to accelerate at a higher...

request or some form of disruption or change of the environment.

And we're just now starting to see that come about. And that's why Jill was optimistic about our pipelines actually starting to grow. And a lot of it's coming not from just business activity, but also the us capitalizing on market disruption. And then, you know, if you think about the final piece of all that disruption is.

bind verticals with some of the other institutions that failed, right? So we're being able to capitalize on our own core competency in certain lines of business that are gonna be very effective for us going forward in terms of taking market share. So thank you for the question.

So that's extremely, extremely helpful. And maybe just one quick modeling one if I can. You have an estimate for the...

the FDIC law share or just that, you know, that catch up? Yeah, yeah. So David, on that one, on that one, the assessment rate change that went affected in the earlier of the year, we weren't fully capturing that. And so we built it into our run rate for the remainder of the year.

is from Andrew Terrell from Stevens. Andrew, please go ahead, your line is open.

Hey, good morning. Morning, Andrew. Peter, real quick, I just want to say congratulations. It's been a pleasure working with you, and Rob, look forward to continuing working with you as well.

Maybe if I could start on.

Just one quick one on the margin on the the special rates you guys discussed a couple times in the call What special rates are you offering in the market right now? Is it just CD special rates or have you have you raised posted rates across the board and how it compares to your competitors?

Yes, Andrew, it's Rob. Yeah, the current deposit rate specials are running. We do have a CD special out there, a seven month one, which has a standard rate of 4% on it. And then we also have a high relationship savings account that we're currently offering. So on that one to get that rate, you have to also have a checking account so it requires a relationship.

And the rates on that range from 2% to 4%, depending on the tier. And I would say the average cost in that product right now is probably in the low 3s right now.

So Andrew, this is Mark. So Andrew, if you take into account Rob's commentary on the rates, you can see that we're certainly not top of market. Yep, for sure. Beef's

So I guess it seems like incremental funding.

putting those two together would be around 4% or sub 4%. So yeah, that definitely seems better than maybe market right now. On the securities portfolio, I know there were some sales this quarter, but I guess I'm looking at your capital position. It's really strong.

any interest in maybe getting a little more aggressive on the security's repositioning front and

If not, what do we need to see in order for that trade to become more attractive? Yeah, so Andrew, Rob again here. So yeah, I mean, we tend to not want to bet on any particular rate cycle. So I would expect Q3 to look very similar to what we saw in Q1 and Q2.

activity, I think we would need to see rates come down.

Okay, understood. And then last question, just updated thoughts on buyback appetite, I guess for the slower level of balance sheet growth. I mean, capital really should build quite nicely and you're already in a solid position. Any interest in a buyback at this point?

Yeah, so as you say, I mean capital position, we certainly have the capital capacities to do it and we are contemplating that for the second half of the year. And just as a reminder too, our most recent repurchase authorization expired in December .

And so I think before we started repurchasing, you'd likely see an announcement that we approved a new authorization.

I think before we started repurchasing, you'd likely see an announcement that we approved a new authorization. Understood. Okay. Thank you for taking the questions.

Thank you, Andrew. Thank you. Our next question is from Tim Cofee from Janey Montgomery Scott.

Tim, please go ahead, your line is open. Great, thank you. Morning, everybody. Rob, I apologize if I missed this, but did you provide any kind of thoughts on how we should think about non-interest expenses going forward?

Tim Buesinger Yeah, we haven't covered that yet, Tim. So yeah, I expect it to be very similar to what we've experienced in the first two quarters of the year within that range. Tim Buesinger Okay. So are we looking kind of more to the mid 90s, 90 millions right now?

Yeah, we haven't covered that yet, Tim. So yeah, I expect it to be very similar to what we've experienced in the first two quarters of the year within that range. Okay. So, are we looking kind of more to the mid-90s, 90 million right now? Yeah, I think that's accurate.

I just want to make sure I nailed that down. Jill, is there something that you are paying attention to in the credit portfolio? Because clearly you are not seeing many problems, but from other banks in the West, they have been just not concerned, but to keep an eye on debt coverage ratios.

in the current rate environment and subjecting those loans to higher scrutiny. Is there something that you're keeping an eye on? Yes, Tim. I mean, certainly we're monitoring debt service coverage ratios, and that's not because of the cycle we're in. That's basically one of the standard covenants that we would put on all of our loans to monitor performance on a CV''s chart.

going forward basis. You know, as I step back and watch what's happening, certainly we're watching Office like everyone else, and it's the repricing opportunities, or I guess that's not really the right word, but, you know, the repricing events that are going to happen to all of the borrowers as we move forward. So continuing to stay on top of that with a forward look towards debt service coverage. And Tim, as you know, we continue to stress the portfolio.

at various levels just to see exactly what's gonna happen if rates go up a little bit further. And right now we're not seeing any kind of stress level. Okay, speaking of stress though, are you seeing a different level of stress between your, to your commercial real estate in the central business districts versus your commercial real estate in the suburban markets?

At this point, we really aren't. And I think, you know, if you think back to the prepared comments and the loan sizes that we have in these areas, I mean, they're small enough that even if they were having trouble at the property level, the global debt service coverage available to our borrowers.

really would backfill it, but we're not. And that's reflected in the negligible class, adversely classified loans in the office book in those markets.

Okay, and then just on deposit pricing, I understand what you're saying about where you want to keep your deposit pricing at, but if the market that you raise deposits in continues to increase their cost of what they're willing to pay for deposits.

Are you concerned that that could lead to a higher deposit rate for Banner? Yes, Tim, it's Rob. So I mean we are certainly subject to the competitive rate environment and what happens there and so if the deposit rates within our market shifted dramatically then we might have to respond to that. But I think

I think we'll continue to kind of try to balance the deposit outflows with the cost of the deposits and decide where it's advantageous to defend those deposits or let those deposits go off balance sheet. Okay, this is Mark. As you know, we have an in-house exception system that allows us to protect our very best clients.

so that we can provide some exception pricing if needed. Right. Yeah. I remember we talked about loan deposit ratio kind of comfort levels last quarter. So okay. Great. I think those are my questions. Thank you very much. Thanks, Tim. All right.

Thank you. Before we take our next question, I'd just like to remind everyone to register a question, please press star flip by one on your telephone keypad.

Our next question is from Andrew Leach from Pub Samla. Andrew, please go ahead. Your line is open. Hey, good morning, everyone. Just one follow-up question here on credit quality. Just with the provisioning you mentioned a couple times or a few times now, the deterioration in the forecast model. I guess what...

What deterioration are you seeing or is it just when you look out at see what the leading economic indicators are saying?

So the economic indicators in the forecast model that are driving the deterioration are commercial real estate price index almost exclusively and that comes back and affects the model offset of course by the asset quality in the portfolio to some extent.

keeping it moderate. Andrew, the one thing I'll add there is, just one thing I'll add is, we use the Moody's forecast in the model, so it's not our internal forecast, we use the Moody's forecast for that.

I guess if you look at the provision of the quarter, it was the vast majority of it tied to the long growth.

It was. Long growth was the driver. Gotcha. Thank you. You've covered everything else. Have a great rest of your day.

Thanks Andrew.

Thank you. As one final reminder, if anyone would like to register a question, please press star followed by one on your telephone keypad now. We have no further questions, so I'd like to hand back to Mark for any questions.

of our deposit customers and the resiliency of our franchise.

Thank you again for your interest in Banner and for joining our call today. We look forward to reporting our results to you again in the future. Have a great day everyone.

Thank you everyone for joining today's call. You may now disconnect your lines and have a lovely day.

So.

I'll see you in the next video.