Banner Corp (BANR) 2022 Q3 法說會逐字稿

Good morning or good afternoon, and welcome to the Banner Corporation Third Quarter 2022 Conference Call and Webcast. My name is Adam, and I will be your operator today.

(Operator Instructions)

I will now hand over to Mark Grescovich, President and CEO to begin. So Mark, please go ahead when you were ready.

Thank you, Adam, and good morning, everyone. I would also like to welcome you to the third quarter 2022 earnings call for Banner Corporation. As is customary, joining me on the call today is Peter Conner, our Chief Financial Officer; Jill Rice, our Chief Credit Officer; and Rich Arnold, our Head of Investor Relations.

Rich, would you please read our forward-looking safe harbor statement.

Sure, Mark. Good morning. Our presentation today discusses Banner's business outlook and will include forward-looking statements. Those statements include descriptions of management's plans, objectives or goals for future operations, products or services, forecasts 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. 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 from the earnings press release that was released yesterday and the most recently filed Form 10-Q for the quarter ended June 30, 2022. Forward-looking statements are effective only as of the date they are made, and Banner assumes no obligation to update information concerning its expectations.

Mark?

Thank you, Rich.

Today, we will cover 4 primary items with you: First, I will provide you high-level comments on Banner's third 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, Jill 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 called Banner Forward.

As a reminder, the focus of Banner Forward is to accelerate growth in commercial banking, deepened relationships with retail clients, advanced technology strategies and streamline our back office.

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. Banner has lived our core values, summed up as doing the right thing for the past 132 years. 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 continue to do. I'm very proud of the entire Banner team that are living our core values.

Now let me turn to an overview of our performance. As announced, Banner Corporation reported a net profit available to common shareholders of $49.1 million or $1.43 per diluted share for the quarter ended September 30, 2022. This compared to a net profit to common shareholders of $1.44 per share for the third quarter of 2021 and $1.39 per share for the second quarter of 2022. The earnings comparison is impacted by the provision or recapture for credit losses, excess liquidity, coupled with a rapid change in interest rates, our strategy to maintain a moderate risk profile, a gain on sale of 4 branches 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, changes in fair value of financial instruments and the gain on the sale of branches, earnings were $66.9 million for the third quarter of 2022 compared to $57.8 million for the second quarter of 2022. This measure, I believe, is helpful for illustrating the core earnings power of Banner.

Banner's third quarter 2022 revenue from core operations increased 9% to $161.5 million compared to $148.2 million for the second quarter of 2022 and $153.6 million compared to the third quarter a year ago. We continue to benefit from a larger earning asset mix and improving net interest margin and good core expense control. Overall, this resulted in a return on average assets of 1.18% for the third 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 1.5% compared to September 30, 2021, and represent 95% of total deposits.

Further, we continued our strong organic generation of new client relationships and our loans outside of PPP loans increased 10% over the same period last year. Reflective of the solid performance, coupled with our strong regulatory capital ratios, we announced a core dividend in the quarter of $0.44 per share. To provide support for our clients through this volatile cycle, we made available several assistance programs.

Banner is closing our program of providing SBA payroll protection funds totaling more than $1.6 billion for approximately 13,000 clients. Also, we made an important $1.5 million commitment to support minority-owned businesses in our footprint, a $1 million equity investment in City First Bank, the largest black-led depository financial institution in the United States, significant contributions to local and regional nonprofits and have provided financial support for emergency and basic needs in our footprint.

Finally, I'm pleased to say that we continue to receive marketplace recognition and validation of our business model and our value proposition. J.D. Power and Associates ranked Banner the #1 bank in the Northwest for client satisfaction for the 6th time. Banner has been named 1 of America's 100 Best Banks by Forbes and Banner Bank received an outstanding CRA rating in our most recent CRA examination.

Let me now turn the call over to Jill to discuss trends in our loan portfolio and her comments on Banner's credit quality. Jill?

Thank you, Mark, and good morning, everyone. As was detailed within our third quarter press release, Banner's credit metrics continue to be strong. Delinquent loans as of September 30 remained nominal at 0.22% of total loans, up 3 basis points when compared to the prior quarter and compared to 0.20% as of September 30, 2021. Adversely classified loans represent 1.39% of total loans, down from 1.63% as of the linked quarter and compared to 2.45% as of September 30, 2021.

Nonperforming assets declined by $3.5 million and now totaled $15.6 million or 0.10% of total assets and are comprised primarily of nonperforming loans totaling $15.2 million. And very briefly, touching on asset quality, adversely classified loans continued to decline, reducing by $18 million in the quarter and are down $89 million or 40% year-over-year.

Due to continued strong loan growth in the third quarter as well as the impact of increased economic uncertainty, we posted a $6.3 million provision for loan losses and released $205,000 of the reserve for unfunded commitments. Loan losses continue to be modest and were once again more than offset by recoveries. After the provision, our ACL reserve totaled $135.9 million or 1.38% of total loans as of September 30, an increase of 2 basis points from the linked quarter and compares to a reserve of 1.52% as of September 30, 2021.

The reserve currently provides 895% coverage of our nonperforming loans. Looking at the loan portfolio, we again reported strong loan origination. Core portfolio loan growth, excluding PPP loans, was $388 million or 4.1% for the quarter and 16.3% on an annualized basis. If we exclude the growth in the 1-4 family portfolio, the annualized growth rate remained strong at 10.7%. C&I activity remained healthy in the third quarter in spite of the rising rate environment.

Commercial loans, excluding PPP, grew by nearly 5% or $53 million in the quarter, which is an annualized rate of 18% and balances are now 18% higher than that reported as of September 2021. Additionally, there was strong growth in the small business score portfolio, up 5% or $41 million quarter-over-quarter. Balances have increased 17% over the past 12 months. C&I utilization is up 2% in the quarter and compares to levels not seen since mid-2020.

A review of the new volume confirms that exposures continue to be modest in size, much of it to existing clients and diversified both by industry and geographic location. Commercial real estate balances were relatively flat. The reduction within the investor CRE portfolio was due to expected payoffs and the increase in the owner-occupied CRE portfolio was a mix of new property acquisitions as well as rate and term refinances for existing clients. The growth in the multifamily portfolio represents both new term loans as well as the conversion of completed multifamily construction projects. And I will remind you that our multifamily portfolio is split approximately 55% affordable housing and 45% market rate and remains granular in exposure and geographically diversified within the footprint.

Construction and development loan balances grew by 3% in the quarter, primarily due to the continued drag on residential and multifamily construction projects. This is in spite of significant residential payoffs that continued in the quarter at project completion. As I have said before, we do expect that the increasing mortgage rates will have an impact on the velocity of home sales within our residential spec portfolio.

However, through the third quarter, our residential builder clients have been continuing to move completed homes, report the cancellations on presales to date have not been material and in reaction to the rising rate environment, we are beginning to see them slow new starts. Our total residential construction exposure remains acceptable at 6.8% of the portfolio with nearly 40% of that comprised of our custom 1-4 family residential mortgage loan product.

When you include multifamily commercial construction and land, the total construction exposure remains at 14.7% of total loans. The growth in the agricultural loans continues to reflect the seasonal draws on lines of credit through September 30, with balances up 8% year-over-year, excluding PPP loans. And as noted in the earnings release, we again reported significant growth in the consumer mortgage portfolio.

This was primarily the result of holding completed construction mortgage loans on balance sheet many of which would have previously been refinanced for a lower rate and sold into the secondary market upon completion. Reflecting the success of the summer home equity loan promotion, HELOC balances also added materially to the growth up $39 million or 8% again this quarter compared to growth of $36 million in the linked quarter.

Lastly, the growth in the consumer loans is -- in other consumer loans is the result of purchasing a small portfolio of consumer pleasure boat loans within our footprint that was completed in the quarter. With that, I will wrap up my comments noting that the economic environment continues to be uncertain and ever more pessimistic. Still, as I said last quarter, Banner's credit culture is one that is designed for success through all business cycles. You've heard us say many times before that our credit quality metrics can't get any better than they currently are, and that is certainly true again today. If, or I should probably say when, the effects of a recession begin to emerge, we will not be immune, but our consistent underwriting will be to our benefit as well our solid reserve for loan losses and robust capital base. We continue to be well positioned to move through the next phase of this economic cycle.

With that, I'll turn the microphone over to Peter for his comments. Peter?

As discussed previously and as announced in our earnings release, we reported net income of $49 million or $1.43 per diluted share for the third quarter compared to $48 million or $1.39 per diluted share for the second quarter. The $0.04 increase in earnings per share was due to an increase in net interest income, partially offset by lower noninterest income, higher noninterest expense and a larger provision for loan losses this quarter. Core revenue, excluding gains and losses on securities, changes in fair value of financial instruments carried at fair value and gains on the sale of sold branches increased $13.2 million from the prior quarter due to an increase in net interest income, partially offset by a decline in mortgage-related noninterest income.

Noninterest expenses, excluding Banner Forward, increased $4.1 million due primarily to lower capitalized loan origination costs, along with increased bonus, commission and marketing expense.

Turning to the balance sheet. Total loans increased $385 million from the prior quarter end as a result of increases in held-for-portfolio loans, partially offset by an $18 million decline in PPP loans. Excluding PPP loans and held-for-sale loans, portfolio loans increased $388 million or 16.3% on an annualized basis. 1-4 family real estate loans grew $157 million in the current quarter as a result of directing residential custom construction and jumbo mortgage loans on to portfolio. We anticipate a slower pace of on-balance sheet mortgage production in coming quarters.

Ending core deposits increased $56 million from the prior quarter end due to normal seasonal factors, partially offset with outflows of rate-sensitive balances. Time deposit balances declined by $34 million from the prior quarter end, driven by higher cost CDs continuing to roll over at lower retention rates. Net interest income increased by $17.4 million from the prior quarter due to an expansion of the net interest margin, coupled with growth in average loan outstandings and lower balances of lower-yielding overnight interest-bearing cash.

Compared to the prior quarter, loan yields increased 28 basis points due to increases in floating and adjusted rate loans, partially offset by a decline in PPP loan forgiveness processing fees. Excluding the impact of PPP loan forgiveness, prepayment tunnel fees, interest recoveries and acquired loan accretion, the average loan coupon increased 33 basis points from the prior quarter due to increases in floating and adjustable rate loans and higher yields on new fixed rate term loans.

Total average interest-bearing cash and investment balances declined $340 million from the prior quarter, while the average yield on the combined cash and investment balances increased 52 basis points due to a lower mix of overnight funds and higher yields on both the securities portfolio and overnight funds, driven by higher market rates. Total cost of funds increased 2 basis points to 13 basis points due to modest increases in deposit rates and repricing of junior subordinated debentures.

The total cost of deposits increased 1 basis point to 7 basis points, reflecting small increases in money market rates. The ratio of core deposits to total deposits remained steady at 95%, the same as the last quarter. The net interest margin increased 41 basis points to 3.85% on a tax equivalent basis. The increase was driven by higher yields on securities, overnight cash and loans, coupled with a larger mix of loans and a lower mix of overnight cash within the earning asset base.

In the coming quarters, we anticipate a slowdown in the pace of margin expansion as price-sensitive deposits move off balance sheet, loan growth moderates, overnight cash levels decline and deposit rate increases accelerate. Excess overnight cash is anticipated to decline in coming quarters to fund both continued loan growth and deposit outflows.

Total noninterest income declined $11.6 million from the prior quarter. The prior quarter benefited from a $7.8 million gain on the sale of 4 branches. Core noninterest income, excluding gains on the sale of securities, gain on the sale of the branches and changes in investments carried at fair value declined $4.2 million. Total deposit fees increased $450,000, while mortgage banking income declined $3.9 million due to declining residential mortgage production, coupled with a fair value write-down of multifamily loans held for sale.

Total residential mortgage production, including both loans held for investment and those held for sale declined 9% from the prior quarter. Held-for-sale loan production declined 33% from the prior quarter, reflecting the headwind of higher rates and a slowdown in home sales. Within residential mortgage production, the percentage of refinance volume continued to decline as a function of rising rates dropping to 12% of the total production, down from 18% in the prior quarter. Multifamily loan production ramped up modestly in the third quarter. However, the fair value of the loans held for sale was negatively impacted by the rise in the long end of the yield curve during the quarter, resulting in a $2.2 million write-down. Miscellaneous fee income decreased $362,000 due to lower swap and SBA-related fees. Total noninterest expense increased $3 million from the prior quarter, primarily due to lower deduction for capitalized loan origination costs, increased compensation, marketing and deposit insurance costs, while Banner Forward implementation costs declined $1.1 million to $400,000 in the current quarter.

Excluding Banner Forward, noninterest expense increased $4.1 million. Capitalized loan origination costs decreased due to lower construction, 1-4 residential mortgage and HELOC loan production in the third quarter. Compensation expense increased by $800,000 due to increases in bonus and loan production related commission expense. Occupancy and equipment costs declined due to facility exit costs in the prior quarter.

Advertising and marketing costs increased as a result of new promotions and seasonal increases in CRA contributions. Deposit insurance increased due to asset mix rate factor adjustments. Banner Forward remains on track. We just completed the 5th consecutive quarter of implementation and approximately 82% of the initiatives from a program value perspective have been executed and are reflected in the current quarter run rate. We are now seeing lift from revenue-related initiatives reflected in the form of a higher pace of loan growth and increase in deposit service charges.

A portion of the elevated expense this quarter was tied to loan production-related variable costs that are anticipated to reduce in coming quarters, and we anticipate further improvement in the company's core efficiency ratio.

In closing, the company continues to benefit from rising rates as evidenced by further margin expansion this quarter, a stable low-cost deposit base and strong diversified loan growth.

This concludes my prepared remarks. Mark?

Thank you, Jill and Peter, for your comments. That concludes our prepared remarks. And Adam, we will now open the call and welcome your questions.

(Operator Instructions)

And our first question today comes from Jeff Rulis from D.A. Davidson.

Question on the expense line. I think you sort of alluded to the Banner Forward efficiencies or those initiatives largely to be captured in this -- the fourth quarter. Could you speak to what you think any additional cost of the initiative maybe in the fourth quarter and then kind of narrowing into an expense run rate kind of the puts and takes of this quarter in the mid-90s as well as a '23 growth rate given that the Banner Forward efficiency initiatives are largely -- will be baked in by year-end.

Jeff, it's Peter. Yes, in terms of the first part of your question, we don't anticipate any material additional in our forward restructuring costs going forward. There are some modest remaining efficiencies to be captured here over the next 2 to 3 quarters around some facilities optimization and to a much lesser extent, some staff efficiencies in a couple of remaining areas, but they're very modest. So we -- the comment I made earlier about kind of our variable costs and the commission and compensation line items are really a function of -- there's a bit of a mismatch between loan production and recognition of the expense to generate that production this quarter that I expect to moderate down in the fourth quarter.

That being said, we are experiencing some wage inflation and some general inflation in the cost of running our operations that continues to impact our core run rate. So at this stage, we're looking at the low 90s core run rate going into '23, given the inflationary pressures and some of the wage inflation that we've seen that's being moderated somewhat by some of the remaining efficiencies that will be recognized next year. But the majority of our efficiency initiatives are behind us at this point.

Okay. Just to clarify, that's a sub-90 million quarterly expense run rate?

No, it would be low 90s. So we're...

Low 90s. Okay. Just wanted to touch on the core deposit -- maybe confidence. You see that maybe how you manage public funds maybe drifting lower, maintaining the core deposit base. I guess as we kind of get through this cycle, how do you view the core deposits? Is that more a hope to maintain balances or from what your visibility is? Could you continue to grow that into '23?

Yes, I think we -- what we're seeing is seeing more evidence of our peer bank and our peer bank group that we really price against in the market beginning to offer some rate specials and beginning to elevate some of the standard offering rates. So our expectation is we'll see some acceleration in our deposit beta. But part of our strategy is some of them are price-sensitive deposit balances are expected to run off a bit, albeit modest.

So our look forward would suggest we'll see some of that surge or excess balance, it's price-sensitive, run off the balance sheet, albeit very modest. At the same time, we're continuing to acquire new clients especially around our small business and commercial teams that generate new deposit growth for us that will mitigate some of that runoff. But I wouldn't anticipate material deposit growth in aggregate going into next year, given that 2 countervailing forces of some price-sensitive (inaudible) coupled with continued client acquisition on the small business and commercial side. So basically, our expectation is will tread water more or less, and that will be a function of the rate environment in the case of competitive deposit pricing across our footprint.

And the last one on the loan growth side, maybe for Jill. Really strong growth this quarter. There is, in your tone, a cautiousness as we can see sort of the economic projections. But I guess if you could translate that into kind of fourth quarter and into '23 expectations on a net growth, I mean either a number just broadly speaking, the pace of net growth really strong in the third quarter. What are expectations ahead?

Sure, Jeff. The way I would preface that or start that office, but certainly, the loan growth expectations can be negatively impacted by continued worsening economic environment. And the earnings release did show that originations slowed in the third quarter albeit loan growth picked up. So put those 2 things together, and I still feel good that we'll maintain a mid- to upper single-digit growth rate in the fourth quarter and as we're seeing increased utilization rates, I anticipate similar levels going into 2023, barring a significant economic downturn.

Next question comes from Andrew Liesch from Piper Sandler.

Just wanted to talk a little bit more on the margin guide here. I just guess where are new loans being added at during the quarter relative to the average?

Yes. Andrew, it's Peter. Yes, they're coming on in the mid-5s -- mid- to upper 5s range this quarter. Again, a lot of our floating rate loans are tied to prime or LIBOR, now SOFR spreads. And so we're seeing a lot of left here coming on the floating rate side. We're also seeing, to a lesser degree, some increased yields on the term fixed loans. There is a deposit beta effect, as you know, as rates move up, we don't fully capture all of that market increase in loan spreads, but we continue to see positive capture on the loan yields coming in the new quarter and they're accretive to our current loan portfolio yield.

And then just on the deposit beta, it's basically 0 so far. Where do you expect them to rise to? Or what is the modeling that you guys are incorporating into your outlook?

Yes. We -- they've been obviously very low so far. We expect the deposit betas will catch up on a cumulative basis as we get further into the rate cycle. And the deposit betas will look -- our expectation and modeling assumptions they'll look similar to what they looked like back in 2017 for Banner, right?

So if you were to look back at what Banner did and how we responded to the last rate cycle in terms of deposit betas and how we repriced our interest-bearing accounts, that would be a good model for what we expect going into this rate cycle, albeit with much longer lags, but we think the cumulative deposit beta will be similar.

I think from our perspective, we've never been a high-price payer on deposits, and we weren't in the last cycle. So to the extent there were any price-sensitive clients in our deposit base, most of them had lost in the last rate cycle. And so we expect a high level of resiliency in our deposit base.

And I'll remind you, we've got a very granular deposit base, and it's very geographically diversified between metro and rural markets. And so that works to our advantage. On top of that, we have a high level of noninterest-bearing balances that are linked to operating accounts of our small business and commercial clients that are really used for operations and not for yield.

So we think we've got a good position going into this one, but we're always going to be somewhat conservative in our guidance and assume that the beta experience will ultimately be similar at the end of the rate cycle as it was the last 1 for us.

Got it. All right. But that's really helpful. Good way to think about it. On the provision here, just curious how much of that was related to the growth? How much of that was from any sort of economic outlook? And are you seeing any changes in the CECL model, was any of it related to a qualitative factor for a potential recession?

Andrew. So as I always say, the drivers for provisioning are a function of the economic data, the portfolio growth and the overall mix. This quarter, it was certainly driven by our loan growth. In terms of qualitative factors on how those play into the modeling, we reviewed the qualitative factors quarterly with an eye towards changes in the general economic sentiment applied to the Moody's forecast that was recently published. And in light of our own current market data, we make changes here and there to those factors that are applied to different loan segments as we deem appropriate. But what I can say is that the overall impact of qualitative factors on the level of the reserve has been consistent over the past several quarters.

The next question is from Andrew Terrell from Stephens.

Maybe for Peter, just around kind of some of the balance sheet growth items. I guess, is it fair to think the bond book should continue to decline from these levels moving forward? And then can you just remind us what the quarterly cash flows look like from the bond book?

Sure, Andrew. Yes, yes, so we expect the bond portfolio to gradually amortize over time or not anticipating -- putting any more into the investment portfolio. It's been basically cash flowing about $75 million to $80 million a quarter right now given the current rate outlook. And then we have the option of liquidating some of it without any loss a portion of that portfolio. Is it shorter -- at the shorter end of the yield curve if we need to, down the road, but we still have sufficient overnight cash to support loan growth for quite a while and any potential deposit runoff. So in the near term, we don't expect any decline in the securities portfolio, say, for some modest cash flow amortization.

Okay. Understood. I appreciate it. And I wanted to ask on just the TCE ratio kind of in the low 6 territory, your regulatory capital is obviously in a fine position. I was curious if TCE played into kind of your thinking around execution of a buyback or any kind of capital actions. Just would love to hear kind of thoughts on TCE ratio where (inaudible).

Yes. We didn't repurchase any shares this quarter, in part due to some of the uncertainty, kind of heightened volatility in the economic and interstate outlook. And so we were looking for some period of more stability into '23 before we resume share repurchases. The TCE number, we model that on a regular basis under various rate scenarios and looking at the current rate outlook, the economic consensus in Bloomberg and from Moody's, the most recent one, if we apply that yield curve outlook into '23 and '24, we have -- our TCE ratio actually cures itself, right, through the diminishment of AOCI with the passage of time and the pace of retained earnings we're generating and effectively a moderation in asset growth.

All of that suggests that the TCE ratio will move up. Our TCE ratio is most -- our AOCI is most highly correlated with the 5-year treasury. It's inversely related to the 5-year treasury, so goes the 5-year and really drives the AOCI number. But outside of a real sharp increase in the 5 year, our expectation is the TCE #1 naturally grow and cure with the passage of time for the reasons I mentioned.

Understood. And last one for me. I apologize if I missed it, but did you provide a kind of fee income run rate heading into the fourth quarter? I know there were some moving parts in the 3Q numbers.

Yes. We -- with our fee income number, we had a mark on the multifamily loans held for sale this quarter, and that market is also correlated with the 5-year treasury. And what we expect going forward is mortgage will continue to have a soft landing here our residential mortgage business, albeit we don't anticipate a mark of the magnitude we had in the third quarter going forward. So we actually expect some rebound in our fee income going into Q4, really associated with the lack of having a mark of the size we had in Q3 on the multifamily portfolio.

The next question comes from Kelly Motta from KBW.

Thanks for the question and great quarter today. Most of my questions have been asked and answered, but I did want to circle back to the expense guidance that you provided. And just a clarification there. I believe you said low 90s, is that does that include or exclude the CDI amortization and the business and used taxes?

Yes, that would include it, Kelly.

Okay. So all in expenses around 90%?

Yes, low 90s all in.

Low 90s. Got it.

And there's seasonality there, too. As you know, we tend to run a little high in the first quarter due to payroll taxes and then it gradually declines, and then we had some seasonality on marketing and CRE-related costs typically increase in the second half. So just a little bit of input from a modeling perspective there.

Got it. And I apologize if you covered this already, but looking at your deposit base, you had some inflows of noninterest-bearing demand deposits. Just wondering if there's anything seasonal there anything unusual? And what's your outlook for kind of maintaining noninterest-bearing accounts at these levels?

Yes. We typically have a seasonal increase in noninterest-bearing deposits in the third quarter. We typically have a bit of an outflow in the second quarter, primarily due to tax payments, both business and personal. So we normally do experience an increase seasonally in noninterest-bearing deposits and core deposits in the third quarter. This quarter, we saw some of that was mitigated by some deposit outflows. Going forward, as I said earlier, we're sort of in a mode here of treading water on our total deposit balances subject to rate competition and some of the higher price sensitive deposits seeking higher yields going forward. So we normally -- in a normal year without the rate environment we're in today, we'd see a plateauing of our deposits. So we'd have an increase in Q3 and then plateauing of deposits in Q4. This in this cycle and for Q4, we expect potentially some moderation and potentially some modest outflow in Q4 given that we normally don't have any seasonal growth anyway. And we may see some outflows on the higher price sensitive deposits this coming quarter.

The next question is from David Feaster from Raymond James.

Maybe touching on the originations again. Just looking at the slowdown that you guys had, most of it in that construction and consumer bucket. My gut says it's probably somewhat strategic, but I'm just curious how much of the deceleration in originations is strategic versus just slowing demand and higher rates impacting projects and maybe more of these deals falling out of the pipeline?

I don't know that I can quantify it exactly for you, David, but starting first with the consumer book. That was, if you remember, we ran a special in the summer for home equity loans that really drove up the utilization. And then -- so that was -- that stuff that was anticipated. And what we're still seeing the growth from the utilization on the lines that we booked, but actual loan origination slowed. On the residential construction side, certainly, it's a mix. The builders themselves are choosing to slow takedowns, and we're slowing as well. But no stopping, no design to pull out of that at this stage.

Okay. And then we've talked in the past about a lot of the disruption around you from several larger M&A deals. Just curious whether you've started to see any opportunities to benefit from those and whether you're seeing more opportunity on the client acquisition perspective or the hiring front? And just any thoughts on hiring overall.

On the client acquisition, we are seeing some. It's a slow process, certainly. People don't move quickly and we have to wait for some more of that disruption to occur when they actually close and then do the system conversions and things like that. But we have had client acquisition just from the what is felt to be lack of responsiveness because of distractions at the institutions in terms of employees. A little bit of that and it's not necessarily from the banks that you would be thinking about in our market.

We're getting good client employee acquisition from the larger banks both in the California market, here in the local market, we've really had some good new employees joining our team. I don't know if you...

David, this is Mark. The only thing I'd add is -- from a personnel standpoint, we've had some very attractive hires for the organization in terms of revenue producers, but also some of the back office. As you already know, some of the larger institutions in our footprint certainly, U.S. Bank with the Union Bank combination, along with Bank of America to some degree, have repositioned their delivery channels, and that's really presented some great opportunity for us and really the markets across our footprint.

So we've been able to have some fantastic hires. And as you know, when that occurs, it becomes a self-fulfilling prophecy once it gets out and people know who the good bankers are and the good bankers are joining Banner it becomes well known, and we get other opportunities along the way of additional hires. So it's actually been very beneficial.

Yes. Good people follow good people. And then -- that's helpful. And then just any thoughts on how you're thinking about managing your rate sensitivity. Obviously, just seeing your -- the rate shock analysis, rate sensitivity has come down some. But I'm just curious how you think about managing that and whether there's any appetite to decrease sensitivity or just overall, how you think about managing sensitivity?

Sure, David. It's Peter. Yes. So to your question, yes, our expectation and our actions are to gradually reduce the bank's asset sensitivity as we get towards the top of the rate cycle and that happens organically through more of the loan originations being fixed or longer-term adjustable loans and then continued use of our excess cash. It's today floating overnight with the Fed into that additional loan production. So we'll see kind of an extension duration, if you will, of our earning assets, as we get towards the top of the rate cycle, that will reduce the asset sensitivity sequentially as we go quarter-to-quarter.

At the same time, we'll continue to generate new deposit growth, core deposit growth in older noninterest-bearing base and limit some of the downside effects of having a higher duration on our liabilities or deposits. So we are managing that organically and what we expect to be less and less asset sensitive as we go through the next year, and you'll see that show up in those disclosures. We also have -- we have -- as a practice, we put loan floors in all of our floating tons. So we haven't an embedded hedge there at a borrower level as we go as well that provides additional benefit on the downside.

(Operator Instructions)

As we have no further questions, I'll hand back to the President and CEO, Mark Grescovich for concluding remarks.

Thanks, Adam. As I stated, we're very proud of the Banner team and our solid third quarter performance. Thank you for your interest in Banner and joining our call today. We look forward to reporting our results to you again in the future. Have a great day, everyone.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.