Banner Corp (BANR) 2021 Q3 法說會逐字稿

Good morning, and welcome to the Banner Corporation Third Quarter 2021 Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Mark Grescovich, President and CEO. Please go ahead.

Thank you, Kate, and good morning, everyone. I would also like to welcome you to the Third Quarter 2021 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, forecast of financial or other performance measures and statements about Banner's general outlook for economic and other conditions. We also may make other forward-looking statements in the question-and-answer period following management's discussion.

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, 2021. Forward-looking statements are effective only as of the date they are made, and Banner assumes no obligation to update information concerning its expectations. Mark?

Thank you, Rich. First of all, I hope you and your families are well as we all continue to battle the COVID virus, its variants and its effects on our communities and the economy. Today, we will cover 4 primary items with you. First, I will provide you with 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 overview of a strategic initiative we are calling Banner Forward that we believe will accelerate our performance through 2023 and beyond. The focus of Banner Forward is to accelerate growth in commercial banking, deepen relationships with retail clients, advance technology strategies, and streamline our back office.

I want to begin by thanking all of my 2,000 colleagues in our company that have helped develop Banner Forward and are working extremely hard to assist our clients and communities during these very difficult times. Banner has lived our core values, summed up as doing the right thing, for 131 years. It is critically important that we continue to do the right thing for our clients, our communities, our colleagues, our company and our shareholders to provide a consistent and reliable source of commerce and capital through all economic cycles and change events. I'm pleased to report to you that is exactly what we continue to do. I am very proud of the entire Banner team that are living our core values.

Now let me turn to an overview of our third quarter performance. As announced, Banner Corporation reported a net profit available to common shareholders of $49.9 million or $1.44 per diluted share for the quarter ended September 30, 2021. This compared to a net profit to common shareholders of $1.56 per share for the second quarter of 2021 and $1.03 per share for the third quarter of 2020. This quarter's earnings were impacted by the allowance for credit losses recaptured, a continued inflow of liquidity coupled with very low interest rates, our strategy to maintain a moderate risk profile, continued good mortgage banking revenue and the acceleration of deferred loan fee income associated with the SBA loan forgiveness of Paycheck Protection loans. Peter will discuss these items in more detail shortly.

Directing your attention to pretax pre-provision earnings and excluding the impact of merger and acquisition expenses, COVID expenses, gains and losses on the sale of securities, Banner Forward expenses, elevated professional fees and changes in fair value of financial instruments, earnings were $59.1 million for the third quarter of 2021 compared to $59.2 million in the previous quarter. This measure, I believe, is helpful for illustrating the core earnings power of Banner.

Third quarter 2021 revenue from core operations increased 3% to $153.6 million compared to $149.8 million in the second quarter of 2021. We benefited from a larger earning asset mix, a good net interest margin, solid mortgage banking fee revenue, good core expense control and the previously mentioned acceleration of deferred loan fees associated with PPP loans. Overall, this resulted in a return on average assets of 1.2% for the quarter and a 5% increase in tangible common shareholders' equity per share compared to the third quarter of 2020.

Once again, our core performance this quarter reflects continued execution on our super community bank strategy, even with the challenges of the pandemic. That strategy 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 18% compared to September 30, 2020, and represent 94% of total deposits. Further, we continued our strong organic generation of new client relationships in the quarter.

Reflective of this solid performance, coupled with our strong tangible common equity ratio, we issued a dividend of $0.41 per share in the quarter and repurchased 300,000 shares of our common stock. Our branches continue to be fully operational. And given the recent increases in COVID-19 cases, we have temporarily suspended our return to the workplace policies for other office personnel to ensure their safety and the safety of our clients.

To provide support for our clients through this crisis, we made available several assistance programs. Banner has provided SBA Payroll Protection funds totaling more than $1.6 billion for over 13,000 clients. We made an important $1.5 million commitment to support minority-owned businesses in our footprint, a $1 million equity investment in Broadway Federal Bank, which is now City First Bank, the largest Black-led depository financial institution in the United States; significant contributions to local and regional nonprofits; and we have provided financial support for emergency and basic needs in our footprint. Also, Banner received an outstanding rating on our most recent Community Reinvestment Act performance evaluation.

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

Thank you, Mark, and good morning, everyone. Continuing the theme from last quarter, Banner's credit quality metrics remain stable, and we continue to report improvement in adversely classified assets. Banner's delinquent loans as of September 30 represents 0.20% of total loans, a decrease of 4 basis points from the prior quarter and compared to 0.37% as of September 30, 2020. Nonperforming assets are consistent with the linked quarter and are comprised of nonperforming loans of $28.9 million and REO and other assets of $869,000, representing a nominal 0.18% of total assets. Adversely classified loans represent 2.45% of total loans as of September 30, down from 2.83% in the linked quarter and compared to 4.16% as of September 30, 2020. The improvement in adversely classified loans in the quarter, which were centered in investor and owner-occupied commercial real estate, reflects continued risk rating upgrades based upon sustained improvement in operating performance.

Banner posted a net recovery of $756,000 for the quarter. Gross loan losses in the quarter were negligible at $660,000 and were offset by recoveries of $1.4 million. Similar to last quarter, based upon the continued improvement in asset quality and economic indicators, we released $8.9 million of our reserve for credit losses as of September 30 and provided $218,000 to our reserve for unfunded loan commitments. This follows a combined release of $10.3 million as of the prior quarter.

After the release, our ACL reserve totaled $139.9 million or 1.52% of total loans as of September 30, down 1 basis point from June 30 and compares to a reserve of 1.65% of total loans as of September 30, 2020. Excluding loans held for sale and the paycheck protection loans, our current ACL reserve continues to be robust, providing coverage of 1.57% of total loans, 485% coverage of nonperforming loans and 751% coverage of delinquent loans.

As noted in the release, we continue to report strong loan originations across all business lines and are again reporting another quarter of core loan growth, up $79 million or 3.6% on an annualized basis when you exclude the PPP loan payoffs. Additionally, our commercial and commercial real estate pipelines remain strong. Nonetheless, line utilization and borrowing for capital expenditures continues to be hampered by the excess on balance sheet liquidity as well as supply chain and labor shortage issues.

Looking at specific product lines and excluding the PPP loans, C&I loan totals in the current quarter are down $85 million or 7.5%. The decline in this category is largely tied to 2 larger commercial clients who used their on-balance sheet liquidity to zero out lines in term debt at quarter end as well as 3 larger relationships who moved for looser terms and/or lower interest rates, as we have discussed before. I do think it's important to point out that C&I utilization did increase another 1% in the third quarter, now at 60%, a level that remains 4% lower than the average pre-pandemic utilization rate.

The uptick in agricultural loans, 14.9% for the quarter and 59% on an annualized basis net of PPP balances, is seasonal in nature. Owner-occupied CRE is up 5.3% or 21% on an annualized basis. Investor CRE totals are up 1.5% or 6% on an annualized basis. And our multifamily real estate totals are up 5.6% for the quarter or 22% on an annualized basis. As discussed last quarter, the decline that is reflected in both the commercial construction and multifamily construction totals is a function of conversion from construction to permanent status. Commercial construction is down 6.9% and multifamily is down 5.9% quarter-over-quarter.

The residential AD&C portfolio declined in the quarter, down 5.4% or 21% on an annualized basis. This reflects the continued robust new home sales activity across our footprint. As I have noted previously, the housing market continues to be very strong in the markets we serve, with demand outstripping supply in most areas. Including multifamily, commercial and land, our total construction exposure remains within acceptable concentration levels.

Briefly touching on asset quality. Loans rated substandard declined this quarter by $47 million or 17%, which compares to a decline of $39 million in the linked quarter. Overall, adverse and classified assets are down 47% since the pandemic-induced high of $423 million reported as of September 30, 2020. As would be expected, the current adversely classified assets are primarily located in the at-risk segment, with nearly 55% related to the hospitality or recreation industry. While we cannot ignore the rapid spread of the Delta variant and the impact of various resulting government mandates has or will have on businesses, to date, our clients have adjusted to the ever-changing operating conditions and are performing well.

I will wrap up by reiterating what you've heard from me before, our credit metrics continue to be strong, reserves for credit losses remain robust and capital levels continue significantly in excess of regulatory requirements. Banner remains well positioned for the future. With that, I will hand the microphone over to Peter for his comments. Peter?

Thank you, Jill, and good morning, everyone. As discussed previously and as announced in our earnings release, we reported net income of $49.9 million or $1.44 per diluted share for the third quarter compared to $54.4 million or $1.56 per diluted share in the prior quarter. The $0.12 decrease in per share earnings was primarily the result of an increase in professional services expense, partially offset by higher net interest income and noninterest income revenues.

Core revenue, excluding gains and losses on securities and changes in fair value of financial instruments carried at fair value, increased $3.9 million from the prior quarter, primarily as a result of an increase in loan interest income and higher gains on loan sales. Core expenses, which exclude Banner Forward, M&A and COVID-related expenses, increased $3.8 million due primarily to an accrual for pending litigation and fraud losses.

Turning to the balance sheet. Total loans decreased $444 million from the prior quarter end as a result of a $515 million decline in SBA PPP loans, partially offset by an increase in core loans held for investment. Excluding PPP loans and held-for-sale loans, portfolio loans increased $79 million, reflecting continuation of strong loan production levels from the prior quarter. Ending core deposits increased $550 million from the prior quarter end due to growth in the level of client deposit liquidity. Time deposit balances declined by $22 million from the prior quarter end, ending at $851 million as higher cost CDs are rolling over at lower retention rates.

Net interest income increased by $2.6 million due to higher interest income on commercial real estate and construction loans, along with growth in the investment securities portfolio, partially offset by a decline in SBA PPP loan interest income. Compared to the prior quarter, loan yields increased 18 basis points due to an acceleration of unamortized loan processing fees on the declining SBA PPP loan portfolio.

Excluding the impact of PPP loan forgiveness, prepayment penalties, interest recoveries and acquired loan accretion, the average loan coupon increased 11 basis points from the prior quarter due to a smaller balance of low-yielding 1% coupon SBA PPP loans.

Total average interest-bearing cash and investment balances increased by $707 million over the prior quarter, funded by deposit growth and PPP loan payoffs. While the average yield on the combined cash and investment balances declined 13 basis points due to a larger mix invested in overnight funds at low rates, along with lower reinvestment rates on new security purchases. Total cost of funds declined 1 basis point to 16 basis points as a result of lower deposit costs. The total cost of deposits declined from 9 to 8 basis points in the third quarter due to declines in interest-bearing retail deposit rates and ongoing repricing of the CD book. The ratio of core deposits to total deposits was 94% in the third quarter, the same as the previous quarter.

The net interest margin declined 5 basis points to 3.47% on a tax-equivalent basis. The decline was driven by growth in excess deposit liquidity invested in overnight and lower-yielding securities. In the coming quarter, we anticipate a significant decline in PPP loan income as all but a small portion of the portfolio will have been paid off by year-end. In the near term, we anticipate core loan growth will remain on an upward trajectory as a function of improving economic conditions, loosening of existing COVID restrictions, and implementation of Banner Forward initiatives. Full replacement of the PPP interest income and the corresponding positive impact on loan yields the company has enjoyed in recent quarters will take time. As we have guided in previous quarters, we anticipate laddering the excess deposit liquidity into the securities portfolio at a measured pace, while remaining flexible to shifts in loan demand and the yield curve.

Total noninterest income increased $3 million from the prior quarter. Core noninterest income, excluding gains on the sale of securities and changes in securities secured at fair value, increased $1.3 million. Deposit fees increased $700,000 due to an increase in higher service charges on deposit accounts and increased transaction volume. Total mortgage banking income increased $2.3 million due to increases in both residential mortgage and multifamily gains on sale. Residential mortgage income benefited from a larger-than-normal gain on an interest rate lock hedge.

Within residential mortgage production, the percentage of refinance volume declined to 32% of total production, down from 34% in the prior quarter. Multifamily loan gain on sale income was up $700,000 from the previous quarter as a result of high buyer demand and strong secondary market execution. Going into the fourth quarter, we anticipate gains on sale of both of our loan origination businesses to come down as pipelines are replenished and residential loan demand ebbs in the winter months.

Miscellaneous fee income declined $1.7 million, primarily due to gains on sale of closed branch locations recognized in the previous quarter.

Total noninterest expense increased $9.5 million from the prior quarter, principally as a result of Banner Forward-related implementation costs and legal expenses. Excluding Banner Forward, M&A and pandemic-specific operating costs, core noninterest expense increased $3.8 million. Salary and benefits expense declined by $2.1 million, primarily due to staff reductions, partially offset by an increase in severance expense. Payment and card processing expense increased $1.2 million, primarily due to a single fraud loss. Professional and legal expenses increased $8 million due to a combination of Banner Forward-related consulting fees and a $4 million accrual for pending litigation. In addition, as part of ongoing capital management, the company repurchased 300,000 shares during the quarter.

And lastly, we are particularly excited to announce Banner Forward. A team of 80 current and future leaders of the company was pulled together to identify and implement a series of initiatives that improve client responsiveness and experience through investments in technology, process automation and product enhancement, while running a leaner organization that further leverages our digital channels for sales and service. We anticipate generating revenue through deepening existing consumer relationships while accelerating the acquisition of new small business and commercial clients.

As described in the quarter's investor presentation, Banner Forward reduces the company's core operating expense while accelerating loan and fee income growth. Banner Forward initiatives that reduce operating expense will be complete by the fourth quarter of next year, while those initiatives that generate increased loan and fee income growth will ramp up over the course of 2022 and '23.

In closing, the company remains well positioned for a rise in rates with a low-cost granular core deposit, but ample on-balance sheet liquidity to support renewed loan demand. This concludes my prepared remarks. Mark?

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

(Operator Instructions) The first question is from Jeff Rulis of D.A. Davidson.

Question on the -- I appreciate the details on the Banner Forward initiative. I guess looking at Slide 4, I wanted to make sure I get the expense kind of read through. Would you say kind of core expenses in the third quarter around $94 million as a base?

Yes, Jeff, this is Peter. Yes, the $94 million would be a good starting point. As discussed in the prepared remarks, that also encompassed an accrual for some litigation as well. But you could start with that number and then make adjustments accordingly.

Okay. So if I started there and think about, I guess, $4 million annual -- well, on a quarterly basis, savings by the end of '22, and then an additional, call it, $6 million in '23. What's the underlying kind of just standard cost growth in terms of investments and other against these cost savings that you'd assign?

Yes. I think the -- one way to frame it is we think about the quarterly core expense run rate after implementation of the Banner Forward initiatives and accommodating normal cost of living increases for wages, we anticipate running in the mid- to high $80 million range when all the dust settles on completing the initiatives. And that would be a good kind of baseline that we anticipate getting to by the end of 2022.

Okay. So the high -- mid- to high $80 million is inclusive of any offsetting growth from cost of living, et cetera.

Correct.

Okay. And then the high single-digit loan growth timing of how that kind of impacts the numbers, do we assume that's essentially a guide for '22 loan growth? Or does that take a while to sort of feather in?

Yes. I'll ask Jill to comment as well. The revenue-related initiatives ramp up prospectively over '22 and '23, including the loan-related Banner Ford initiative. So what we anticipate is that we'll see an acceleration of loan growth as we get further into '22 and '23 to get to the high single-digit range. But it won't happen immediately out of the gate in '22.

Yes, Jeff, this is Jill. I mean, Peter covered that well. I think as we look into '22, we are -- considering the strong loan production numbers, the new client acquisition, our good pipelines, we have a lot of reasons to be optimistic about that loan growth. The driver is going to be watching that excess liquidity that needs to be absorbed in the supply chain and labor supply issues that our clients are experiencing. So we do expect that as that clears out and we layer in the Banner Forward initiatives, that there'll be a ramp-up over '22 so that at the end of '22, we are at that mid to high growth rate.

Okay. And yes. And while I have you, I think you tried to loosely peg loan growth in '21. So by year-end, that sort of offset PPP declines. And maybe -- I don't know if PPP declines have accelerated versus your view. But in terms of how would you reframe, or if at all, the expectation of kind of year-end loan balances for '21?

So there is no doubt that my 2021 crystal ball was cloudy in terms of how quickly the PPP would be paying off. So yes, in terms of reframing 2021, I guess what I would say is that our core loan growth, excluding PPP loans, will continue in that mid-single-digit growth rate on an annualized basis.

Got it. Great. And maybe just one last one. On the mortgage side, Peter, you mentioned seasonal slowing in the fourth quarter. Any early indication of what you think about in '22 revenue from that line? And maybe the -- is a good proxy just simply kind of MBA forecast on what you'd expect in '22?

Yes. I think kind of industry expectations on mortgage volume are relevant for Banner. However, I would say that some of our Banner Forward initiatives also include enhanced mortgage revenue as well. So we expect to do better than the MBA statistics given, one, the success of our team, and two, the -- some of the Banner Forward initiatives that are specific to generating additional mortgage revenue opportunities that we expect to come into play over the course of '22.

That being said, Q4 has always been dampened quarter given the winter months and lack the decline in home purchase that typically occurs in our markets, especially up here in the Pacific Northwest. So we anticipate that normal seasonal decline to exist again this quarter. Last year was very much an anomaly, and we're seeing things kind of come back into normal cyclicality of the mortgage business.

The next question is from Andrew Liesch of Piper Sandler.

So I just wanted to talk about the securities purchases and the laddering and how that could affect the margin here. With the steepening of the yield curve, are there better opportunities now? And I'm just curious what you've been looking at buying and what yields are you getting.

Yes, Andrew, it's Peter. Yes. We -- as we've said, we've been measuring our pace of deploying the excess deposit liquidity. In the recent quarter, we focused more on the shorter end of the investment security purchases, focusing on floating rate securities with less emphasis on longer-durated securities. So better be lucky than good. So we were fortunate in focusing on floating rate purchases this last quarter when the oil curve had dipped down. Now that it's steepened again, we're focused a bit further out in the yield curve to take advantage of some of the higher yield that exists out there.

The average coupon, again, is going to be dependent on the mix that we purchase in a given quarter, but anywhere from 1.5% to 1.8% would be a good barometer range. And then we continue to deploy in the $300 million range, maybe pushing at $400 million range a quarter in deploying that excess deposits. But of course, we're being sensitive to changes in liquidity, liquidity outflow and loan demand at the same time. So that number is always going to be the last decision in terms of investing cash into earning assets. But it's been running at about that pace in terms of deployment quarter-to-quarter given the excess liquidity.

And as we've said, so far, the PPP loan payoffs have not resulted in deposit outflows. The PPP clients have elected to keep their loan proceeds with Banner in the form of a deposit even after loans forgiven. So we are enjoying a substantial amount of liquidity to work with, and we continue to ladder them prospectively. But we're not moving it all in at once.

Got it. And then, obviously, loan production was pretty strong. It had the elevated payoffs. But what's the blended yield on the new production? And I guess just kind of stripping out the PPP effect on the core loan portfolio, how does that compare to the portfolio average in the third quarter?

Yes. The new loan yields are coming in, in the high 3s, low 4s right now in terms of if we looked at the last quarter. The coupon on the entire portfolio, we took out -- if we take out the PPP portfolio, which that coupon is very low at 1%. And so as that portfolio pays down, it actually increases the average coupon.

But if you take out the PPP portfolio effect, the average loan coupon, excluding loan accretion and interest penalty and prepayment-related interest, declined about 6 basis points from Q2 to Q3. So there's still some downward repricing on the book as well as mature -- as we go into the quarter, but that kind of gives you a sense of what happened.

In prior quarters, that's been 2 or 3 basis points. So at any given quarter, it's not an exact barometer of the pace of repricing. But I'd characterize it as in the 2 to 4 basis point range, assuming there's no further steepening of the yield curve. If the yield curve steepens or the Fed goes up, of course, we'll see that coupon go up. But that would be my guidance today based on the shape of the yield curve as it exists right now.

The next question is from David Feaster of Raymond James.

Maybe just at a high level, I'd like to touch on this Banner Forward initiative. Obviously, this is a big undertaking right? You guys identified 50 initiatives. Clearly, the branch reduction is a big driver of the cost reductions. And it's easy for us to get excited about some of the major financial impacts.

But just maybe as you step back as the leadership and the operators of the company and look at these initiatives, maybe more than just the financial impacts, what are you most excited about with this Banner Forward initiative? And where do you see the biggest benefit? Is it the technology? Is it the new org structure or the product expansion? Just curious, maybe at a high level, what you're excited about with this.

David, thank you for the question. This is Mark. I'll add some comments and then ask Peter to follow up. Look, I think if you take a step back and look at the organization pre-pandemic, so going into 2019, through 2019 and into 2020, we were well positioned to have pretty significant positive operating leverage and the super community bank business model was working very well, and we were executing effectively.

Enter the pandemic and you have really systemic changes that are occurring in our industry and our delivery channels, right? So you had a rapid adoption to mobile banking technology. You had a remote work environment in which you had to adapt to certain technologies so that you could continue to service your clients. You had to stand up a new system and process to facilitate $1.6 billion in PPP loans. So you had a systemic change in what was going on in the delivery channel. Let alone the economics of whatever the uncertainty was going to occur based on economic impact of the pandemic, plus the significant inflow of liquidity into the system.

So that's when we decided we need to take a step back and say, are these systemic -- are these changes systemic and are going to affect us in our delivery of our super community bank business model? And we had, as Peter acknowledged, 80 of our execs come up with a development of a plan that says, okay, we're going to adhere to our core values. We are going to continue to run a super community bank business model. What does that look like for the future? What it looks like is a more robust delivery channel for mobile technology, not just in retail banking and deposit gathering, but also in the mortgage business, also in your commercial line of business. So we found ourselves in a position where we can make some investments and leverage the investments we were already making in technology to alter to these new delivery channels.

So what -- the good news in all of this is, when you look at these initiatives, it really is an acceleration of what we said we were going to do anyway. And that is exactly what is transforming. The adoption rate we've had with new client generation based on our mobile technology, improving our back-office processes so that we can be more responsive to our clients, is really the driver of these initiatives. And what's really exciting, as you already mentioned, is the fact that these are coming from our internal group, right? They're the ones that developed these initiatives that says, here's how we're going to go to market more effectively. Here's how we're going to compete more effectively, and here's how we're going to be more responsive. Peter, I don't know if you'd add any additional commentary.

Yes, I think you covered it really well, Mark. I'd just add and reinforce Mark's comments around the nature of Banner Forward is far more than optimizing some additional branches. It's much more about investments in technology that improve our processes, but more importantly, improve the client experience and responsiveness across all of our product lines and back shop activities, in addition to identifying new revenue opportunities that came, as Mark said, out of the internal team that was pulled together and adjudicated through a very rigorous diligence process and a very detailed planning plan to implement all of these over the next 18 months.

So again, we're really excited about Banner Forward. We've got a very good plan in place. We've actually already implemented a portion of Banner Forward in terms of the economic benefits have already begun to be recognized in the third quarter. And you can see that in some of the reduction and some of the core expense line items this quarter versus last.

So we think what we've laid out here is there's high levels of execution achievement in everything we've discussed in the presentation, and we've got very good buy in across the organization and a pretty good focus on implementing all these initiatives over the next 18 months.

That is terrific color. And maybe just digging into the shift upstream, could you just elaborate a bit on what you're going to be focused on in this? Do you have the teams in place, do you think, to shift to these more middle market clients and the underwriting expertise? Or do you think that there might be some new hires or new lenders that you might need to add? Do you have the treasury management or other products in place to service these larger clients? And then just does this maybe have -- does this imply maybe an increased appetite for SNCs? Just any color on that move upstream would be helpful, too.

Yes, David. So that was quite a lot in that question in terms of treasury management, moving upstream, SNCs staffing. Do we have the staff? I would say, yes, we have some of the staff on board right now. Would we add to the teams if we found the right players? Certainly. That's no different than how we operated in the past. If we find a right person who can add to our delivery of products, we'll take them and add them to the team. So we're always looking for good talent.

As to the treasury management products, certainly, we've got those in place. We're at the upper end of the class in terms of what we can deliver right now. So I think that meets what we need, and we just are going to go to market better with it.

You asked one other question that is slipping my -- SNCs. And certainly, we have a little bit of that, but it's not where we expect to grow. It doesn't add a lot of -- I'm losing my words here. But in terms of value to the bank, we'll do them here and there, but it's not where we expect to grow. We're going to be serving the clients in our market.

David, thank you for the question. Let me just add to Jill's comments that if you look at over the course of the last 12 years for Banner and its growth rate and its organic growth rate as well, we really benefited when we were well positioned in terms of sales strategy, product offering and market disruption.

So it's pretty clear that what you're seeing is we feel good about the first 2 pieces we needed to augmented to new client expectations in terms of responsiveness. But the latter piece, the market disruption is something we think we're going to have -- benefit from tremendously as -- I don't need to go over what those are, but you know on the West Coast, there have been some significant shifts in some of the commercial banks. And that's going to present some real opportunity for Banner.

Okay. That's great color. And then, Jill, just following up on your comments, you talked about losing some C&I credits to maybe more aggressive terms or pricing at some competitors. And I'm glad to hear that you're standing in your ground on the standards. But I was hoping you could maybe elaborate a bit on what you're seeing there in the competitive landscape in C&I. Are you seeing more pressure on the structure and standards or the pricing side? And maybe just similarly, on the CRE, we hear more about nonrecourse and those types of things, but just curious about the competitive dynamics that you're seeing.

Yes, David, it's as competitive out there as ever. And from all angles, we're competing with the large banks, the community banks, the credit unions, and it is pricing as well as structure. More pricing-driven than structure, but certainly nonrecourse is out there, longer terms, interest-only is out there and the combination of the 2. And so what I would say is our usual -- as is our usual practice, we maintain our consistent underwriting discipline as we compete for the clients and the new loan opportunities, and the retention of existing opportunities, right?

(Operator Instructions) The next question is from Andrew Terrell of Stephens.

Thanks for the detail on the slides on Banner Forward. Mark, maybe just to start, there's a clear kind of organic focus and a big undertaking over the next kind of year plus or so. I was just curious, does this preclude you from the M&A market over the near term? Or does it feel like M&A could still be on the table at some point over the next year or so?

Well, look, I think we haven't changed our posture on viewing M&A as kind of a bolt-on scenario for the organization, right? We've done a number of conversions while we've been executing before. We've done a number of integrations while we were executing on our strategies in the past. I don't see any reason why we would not be in a position to take advantage of something if opportunistically it presented itself. Our strategy all along has been to enter into negotiated transactions, not necessarily bid transactions. And we're -- we will continue that philosophy. It has to be the right partner and it has to be at the right time in which we would embark on something.

I don't believe at this point that, that would preclude us from doing any kind of combination in whatever form that may take. Also, remember that there are other resources that the institution can garner outside of internal staff to help with any combination. And typically speaking, if there is some type of M&A combination, remember, that institution also has generally some very good integrators that we could take advantage of.

So I don't think it precludes us at all, quite frankly. And hopefully, it will position us to be in a position where we can get more aggressive in terms of growth.

Yes. Okay. That's great color. I appreciate it. Peter, maybe I guess just with the backdrop of kind of improving or accelerating loan growth throughout 2022 and then kind of some of your commentary on liquidity deployment into the securities portfolio. If we exclude the PPP-related income, does it feel like the margin has hit a floor in the third quarter and should begin to work higher from here?

I think that's -- yes, I'd characterize that as a fair perspective. We have -- as you know, we have a substantial amount of deposit liquidity sitting with Federal Reserve earning 15 basis points right now or in some other overnight investments that are yielding in the 20 to 35 basis point range. That's a higher position than we want to be in. And so as we deploy that low-yielding overnight liquidity into securities or into loan growth, we'll see some improvement in the earning asset yield. That will be partially offset by some lower -- gradually lower loan yields, but that will be a small offset to the improvement over all earning asset yield by moving that excess liquidity, the overnight liquidity into the securities book, and to a lesser extent, into loan growth.

And then on the funding side, we're getting near the bottom of our core deposit rates. We have perhaps another basis point or maybe 2, but probably more like 1 basis point left to go in terms of repricing down over the next couple of quarters. And then we are evaluating some opportunities to look at our capital stack, our regulatory capital stack in terms of what we're carrying at the parent company, in terms of some of the TRUPs that are outstanding. So we're evaluating an opportunity to reevaluate and perhaps pay off some of the eligible TRUPs over the next couple of quarters. No decisions yet, but that's another source of cost of funds reduction as well that could help bolster the margin.

Got it. And then just a clarification point. I think Page 3 of the presentation Notes 15 expected branch consolidations. Does that include the 5 that were closed in September? And then just from a modeling perspective, do you have the amount of severance pay that was recognized during the third quarter?

Yes. The -- in terms of the -- what's referenced on Page 3, that's an estimate. So the exact number of branches is yet to be determined. But those would be in addition to what's been done this year. And so those would occur over the course of next year. So those would be in addition to what was done already.

In terms of severance, we did incur some modest amount of severance in Q3 more related to some staff alignments in the retail organization unrelated to branch closures. The severance for some of the branch closures that were just done at the end of the third quarter, some of that will fall into Q4. But the numbers are relatively small. They're less than $1 million in aggregate for both the staff reductions we did outside of branches and the branch-related reductions that were consummated at the very end of the third quarter. In many cases, we were able to solve for the reduced positions through attrition as opposed to outright severance. So that's why these numbers are relatively small.

The next question is from Tim Coffey of Janney.

As we talk about the Banner Forward initiative, one of the questions I have is on the Slide #3, there's comments about investing in new technologies but also with minimizing third-party spend. And so I'm wondering, is that a function of pulling funds and expenses from kind of old technology and investing in a new technology? Or do you plan to build the new technology yourself?

Yes, Tim, it's Peter. The third-party spend reference is focused in 2 areas. One is reduction of outside professional services spend, whether that be outside attorneys or other professional services that we have used historically and reducing spend there by bringing some of it inside or -- and being more diligent about the selection of the vendors we use to conduct those outside services. And then secondly, it's also a function of renegotiating some of our existing contracts with existing vendors. Not leaving those vendors, but getting better value out of the vendors we do use. And all of this, well, is inclusive of the incremental spend we have on some of the new technology as well. So even with some of the investments in new technology, we still expect to see a net reduction in outside services spend on those vendors across several line items, professional services, data processing, some of the IT-related expense line items, we would expect to see benefits across all of those.

Okay. That's super helpful. And Peter, if I can stick with you. You mentioned that you expect a significant decline in PPP income in forward quarters. And certainly, I mean, if you look at the average balance of the PPP loans outstanding in the quarter versus the period end, there has already been a substantial decline. Do you have any kind of estimate about forgiveness for this quarter in those loans?

Yes. It's we have -- we ended the quarter with about $300 million left in the portfolio. We expect -- as the forgiveness activity really starts slowing down, we expect to have a core remnant of that borrower base to not forgive and then they'll term out.

Right now, our estimate is we'd do about half of the remaining portfolio get forgiven between now and 12/31. And so you could, from a modeling perspective, take half of the remaining unamortized processing fee, which we disclosed in the investor statement and assume that will come into the income statement this quarter, and the rest of it will then be just amortized out on a term basis. We interstate out to 12/31, the pace of forgiveness is going to be just a trickle, and some of the clients have elected not to have their loan forgiven and just term out their PPP loan added to that.

Okay. Great. That's very helpful. And Jill, you talked about some of the C&I borrowers using their own liquidity. Did you see anything like that on the commercial real estate or any kind of the real estate investor type clients doing that?

No. On the commercial real estate that was paying off, it was really sale of assets.

Right. No, I guess my question is, do you see any of your real estate investor clients using their own liquidity to get off the bench and start putting some of that to work?

Certainly, we're seeing acquisitions of real estate by -- yes. Yes. The answer is yes.

Okay. And then also, Jill, looking at the allowance, would it be appropriate to refer to that as adequate?

I think I would refer to it as strong. I mean I think we've got good coverage based on our asset quality and that we will continue to keep our reserve in that upper quartile of reserving.

Okay. Great. And then, Mark, you alluded to it during the Q&A, but there is some moving of the chairs in your footprint. Are you doing -- is Banner doing anything promotion-wise to perhaps bring some new customers to the bank?

We always are, Tim. So as I've said before, we always have benefited from market disruption. When you have the right product mix, you have the right bankers in place and you layer on that market disruption, you can take advantage of it through what you would characterize as gorilla marketing tactics. For obvious reasons, I'm not going to get into specifics on what we're thinking about. But rest assured, we do that any time there's some disruption.

This concludes our question-and-answer session. I would like to turn the conference back over to Mark Grescovich for closing remarks.

Thanks, Kate. As I stated, we are very proud of the Banner team as we continue to do the right thing as we battle the COVID virus and its variants and transition our organization through Banner Forward. Thank you for your interest in our company and joining our call today. We look forward to reporting our results to you again in the future. Have a great day, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.