Banner Corp (BANR) 2023 Q4 法說會逐字稿

Yes, good morning, everyone, and welcome to the Banner Corporation fourth-quarter 2023 conference call and webcast. (Operator Instructions) I would now like to turn this conference call over to our host, Mark Grescovich, President and CEO of Banner Corporation. Please go ahead.

Thank you, Candice, and good morning and happy new year, everyone. I would also like to welcome you to the fourth-quarter and full year 2023 earnings call for Banner Corporation. Joining me on the call today is Rob Butterfield, Banner Corporation's 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 in the earnings press release that was released yesterday and our recently filed Form 10-Q for the quarter ended September 30, 2023. 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.

As is customary today, we will cover four primary items with you.

First, I will provide you high-level comments on Banner's fourth quarter and full year 2023 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, Rob Butterfield will provide more detail on our operating performance for the quarter, as well as comments on our balance sheet.

Before I get started, I want to again thank all of my 2000 colleagues in our company 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 133 years our overarching goal continues to be do the right thing for our clients, our communities, our colleagues, our company and our shareholders, and to provide a consistent and reliable source of commerce and capital through all economic cycles and change events. 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 a $42.6 million or $1.24 per diluted share for the quarter ended December 31, 2023. This compares to a net profit to common shareholders of $1.58 per share for the fourth quarter of 2022, and $1.33 per share for the third quarter of 2023.

For the full year ended December 31, 2023, Banner reported net income to common shareholders of $183.6 million compared to $195.4 million for the full year 2022. The earnings comparison is primarily impacted by the provision for credit losses and the increase in funding costs.

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

To illustrate the core earnings power of Banner, I would direct your attention to pretax pre-provision earnings, excluding gains and losses on the sale of securities, Banner Forward expenses, gains on the sale of branches, loss on the extinguishment of debt, and changes in fair value of financial instruments.

Our full year 2023 core earnings were $262.7 million compared to $251.9 million for the full year 2022. Banner's fourth quarter 2023 revenue from core operations was $157.1 million compared to $157.7 million for the third quarter of 2023. For the full year 2023, revenue from core operations increased 3% to $643.9 million when compared to the full year of 2022.

We continue to benefit from strong core deposit -- a strong core deposit base that has proved to be resilient and loyal to Banner in the wake of a highly competitive environment, a very good net interest margin and core expense control. Overall, this resulted in a return on average assets of 1.09% for the fourth quarter of 2023.

Once again, our core performance reflects continued execution on our super-community bank strategy 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.

At that point, our core deposits represent 89% of total deposits. Further, we continued our strong organic generation of new relationships and our loans increased 7% over the same period last year.

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 18% from the same period last year. We announced a core dividend of $0.48 per common share.

As I mentioned on previous calls, Banner published our environmental, social and governance highlights report last December and published our inaugural ESG report earlier this summer. Both of these documents reflect 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.

Finally, I'm pleased to say that we continue to receive marketplace recognition and validation of our business model and our value proposition. Banner was again named one of America's 100 best banks and one of the best banks in the world by Forbes. Newsweek named Banner, one of the most trustworthy companies in America, and just recently named Banner one of the best regional banks in the country. S&P Global Market Intelligence rank Banner's financial performance among the top 50 public banks with more than $1 billion or $10 billion in assets and a digital banking provider Q2 Holdings awarded banner their Bank of the Year of excellence. Additionally, as we have 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 scale.

Thank you, Mark and good morning, everyone.

As reflected in our release, Banner's credit metrics continue to remain solid. Delinquent loans ended the quarter at 0.40% and compared to 0.27% as of the linked quarter and 0.32% as of year-end 2022.

Adversely classified loans remained relatively flat at 1.16% of total loans and are down from 1.35% as of December 31, 2022.

Banners nonperforming assets increased to $3 million in the quarter, continued to be centered in nonperforming loans and now total $30 million, representing a modest net 0.19% of total assets.

The net provision for credit losses for the quarter was $2.5 million, which included a $3.8 million provision for loan losses, offset in part by a release of $526,000 in the reserve for unfunded loan commitments as well as a release of $750,000 of the provision recorded in the second quarter related to financial institutions subordinated debt held within the investment portfolio.

Loan losses in the quarter totaled $1.7 million and were offset in part by recoveries of $531,000. With net losses for the year totaling a nominal three basis points of average total loans. The provision for loan losses this quarter provided for continued loan growth, after which our ACL reserve totaled $149.6 million or 1.38% of total loans as of December 31. This coverage level is identical to that reported in the linked quarter compares to 1.39% coverage as of December 31, 2022, and currently provides 506% coverage of our nonperforming loans.

As anticipated, loan originations declined modestly again this quarter. Still, loan outstandings grew by $199 million or 2% for the quarter and grew by 7% year over year, while C&I line utilization was up 1% in the quarter, balances were down modestly and were down 2.2% year over year. Small business originations offset these paydowns such that year over year on a combined basis, commercial and small business scored loans are up 2.1%. Owner-occupied commercial real estate production was also positive up 8.3% year over year, all of which reflects the success of our super-community relationship banking business model.

As we anticipated growth in the investor CRE portfolio, excluding multifamily was muted in the quarter and reflects a modest decline in balances year over year. Given the expectation of the increased rate environment holding in the near term, we continue to anticipate muted commercial real estate loan growth over the next few quarters.

Repeating what I've said before, our office portfolio remains well diversified, both in size and in geographic location and overall credit performance has been solid to date. It remains balanced between investor CRE, and owner-occupied represents 6% of our loan book, and there has been no meaningful change in the portfolio of loans secured by our office properties within the major metropolitan areas across our geographic footprint.

We downgraded two small office secured loans this quarter. Adversely classified loans secured by office properties are currently limited to four loans totaling $7.2 million, with only two loans totaling approximately $500,000 currently past due. Multifamily real estate loans were up $45 million or 6% in the quarter, almost exclusively related to converting the balance of multifamily loans that were originated for sale into the portfolio after eliminating that business line in Q3. This portfolio has grown 26% year over year and remains split approximately 55% affordable housing and 45% middle income market rate housing and remains granular in size with balances spread across our footprint.

Growth in the construction and development loan balances during the quarter was found almost entirely in the multifamily construction portfolio, up $51 million or 11% in the quarter. This portfolio grew by 55% year over year, primarily due to our continued emphasis on financing, affordable housing projects throughout our footprint.

Commercial construction outstandings increased a modest 1% in the quarter and ended the year 8% lower than that reported as of December 31, 2022, as there has been less demand for new projects in this higher rate environment.

Residential construction exposure remains acceptable at 5% of the portfolio, flat with last quarter and is now split approximately 60% for-sale housing and 40% are custom one to four-family residential mortgage loan products.

Outstanding balances continued their declining trend again this quarter, down 2% and are down 19% year over year. As I have discussed throughout the year, sales of completed start continued to outpace new takedowns with builders remaining cautious in relation to their unsold inventory. Additionally, production of new custom construction one-to-four family mortgage originations has declined with commitments down 33% year over year.

In total, construction and land development loan balances increased 3% year over year driven primarily by the growth in the multifamily construction portfolio. When you include multifamily, commercial construction, and land, the total construction exposure remained at an acceptable 14% of total loan.

As expected, agricultural loan balances began their seasonal decline with balances down 1% from the linked quarter. When compared to December 2022 balances increased 12% as we both expanded existing and added new relationships during the last growing season.

And lastly, we again reported growth in the consumer mortgage portfolio, up 6% in the quarter and 29% year over year, continuing the trend of retaining completed all-in-one custom construction loans on balance sheet,

I will close in the same way I started, noting that Banner's credit metrics continue to be strong and are reflective of a credit culture that is designed for success through all business cycles. Our consistent underwriting remains a source of strength, as does our solid reserve for loan losses and robust capital base. Given the continued economic uncertainty, I will again note that our credit quality metrics should not be expected to improve. Still, we remain well positioned to navigate the balance of this economic cycle.

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

Great. Thank you, Jill.

We reported $1.24 per diluted share for the fourth quarter, compared to $1.33 per diluted share for the prior quarter. The $0.09 decrease in earnings per share was primarily due to lower net interest income and higher losses on the sale of securities, partially offset by a gain recorded on multi-family loans moved from held for sale to held for investment.

Core revenue, excluding loss loans sale securities and changes in investments carried at fair value decreased $607,000 from the prior quarter, primarily due to higher funding costs, leading to a decline in net interest income.

Total loans increased $156 million during the quarter, with an increase of $199 million in held for investment loans, partially offset by a decrease of $43 million in held-for-sale loans as $43 million of multifamily loans previously held for sale, we're transferred to held for investment. The increase in total loans was primarily due to one-to-four family real estate loans increasing $79 million and multifamily construction loans increasing $51 million due to advances on affordable housing projects.

Total securities increased $37 million. The recent decline in interest rates led to an increase in the fair value of available-for-sale securities, which was partially offset by the sale of $34 million of build for sale securities and normal portfolio cash flows. Any additional securities sales during the first quarter will be dependent upon market conditions.

Deposits decreased by $145 million during the quarter due to a $90 million decrease in retail deposits and a $55 million decline in brokered CDs.

Core deposits ended the quarter at 89% of total deposits. Banner's liquidity and capital profile continue to remain strong with a robust core funding base, a low reliance on wholesale borrowings, and significant off-balance sheet borrowings with all capital ratios being in excess of well capitalized levels.

Net interest income decreased $3.4 million from the prior quarter due to the increase in funding costs offsetting the increase in earning asset balances and yields. Compared to the prior quarter average loan balances increased $152 million or $142 million, and loan yields increased 12 basis points due to adjustable-rate loans repricing as well as new production coming on at higher interest rates.

The average rate paid on new production for the quarter was 8.59%. Total interest-bearing cash and investment balances declined $100 million from the prior quarter, while the average yield on the combined cash and investment balances increased one basis points the total cost of funds increased 23 basis points to 131 basis points due to increases in the rates paid on deposits and borrowings. The total cost of deposits increased 24 basis points to 118 basis points, reflecting both increases in the rates paid on interest-bearing deposits as well as a shift in the mix of deposits with a portion of noninterest-bearing deposits moving into interest-bearing deposits.

The decline in non interest bearing deposits during the quarter was largely concentrated in the month of November, where we saw some client event driven activity. Non-interest bearing deposits ended the quarter at 37% of total deposits. On a tax equivalent basis net interest margin decreased 10 basis points to 3.83%. The decrease was driven by increases in funding costs on interest-bearing liabilities, outpacing the increase in yields on earning assets. We expect net interest margin will experience some additional moderate compression during the first quarter, depending on Fed actions and market conditions.

Total noninterest income increased $1.4 million from the prior quarter, primarily due to higher mortgage banking income, partially offset by higher losses on the sale of securities. The current quarter included a $4.8 million loss on the sale of securities. The average payback on these trades was under three years.

Core noninterest income, excluding the lfoss on the sale of securities and changes in investments carried at fair value increased $2.8 million. due to a $3.5 million gain recorded on the multifamily loans moved from held for sale to held for investment as well as increased income from bank-owned life insurance, partially offset by lower deposit fees.

Deposit fees and other service charges decreased $1.4 million due to higher costs on debit card transactions and card replacement related expenses.

Income from residential mortgage operations declined $568,000 due to normal seasonality.

Total noninterest expense increased $730,000 from the prior quarter. The increase reflected a higher payment and card processing expense due to higher fraud losses, higher occupancy and equipment expense due to seasonal building maintenance and lower capitalized loan costs. These increases were partially offset by lower compensation expense due to lower severance costs and lower legal expense.

Despite the continued economic uncertainty route. we remain focused on the long term in 2024 Banner will be making strategic investments to expand its loan production capacity by adding talented relationship managers in key market and investing initiatives to grow its non-interest income.

This concludes my prepared comments. Now I'll turn it back over to Mark Mark, thank you.

Thank you, Jill, and Rob, for your comments. That concludes our prepared remarks and Candice will now open the call and welcome questions.

(Operator Instructions) Jeff Rulis, D.A. Davidson.

Thanks. Good morning. Just a follow on to kind of Rob's commentary on the non-interest bearing balances and then in the release, I think market got comments about. It's still a customer's request for higher rates that non-interest bearing balance as a percent of deposits down to 37%. You get a sense. And maybe, Rob, you said it was November heavy, but I guess what are you talking internally about where you think that that troughs at or stabilizes and any read on that agenda morning.

Yes, thanks. Thanks for the question. I'll turn it over to Rob.

Okay, Jeff?

Yes, I mean, as you point out, I mean, our non-interest bearing deposits are which is a little perspective, 39% was pre-COVID, but the interest rate environment was completely different back then on. But the 37% continues to hold up very well compared to peer banks at this point. And it's hard to say where that trough is at. I mean, I think the crystal ball is a little cloudy there. And at this point I guess we'll work. We still expect that we're going to hold up better than most in this category, but calling the actual trough is a little difficult. We certainly expect that we'll see some additional rotation out during the first quarter. And at this point, I would say we're taking a quarter by quarter. We want to see that point where we're seeing that continuing trend down in the amount that's rotating out each quarter. And then once we can see that trend kind of holding, then I think we'll have better visibility there. Certainly could be some help in the second half of the year when when and if the Fed starts to bring down rates, that could take some pressure off. But at this point, we're just taking it a quarter at a time.

Okay.

Yes, I should have alluded to the fact that in the mid 30s, that's it a pretty high number versus peers. I guess if we transition to the margin, Rob, you mentioned additional compression that the decline linked quarter in the fourth quarter was actually larger than the prior quarter. Trying to get a sense for magnitude. So so one margin in the first quarter, do we see some moderating compression kind of discussion? And then the second part of the margin question would be you still screen pretty asset-sensitive. What would be the outcome if it were, say, three cuts this year versus maybe six on any? And I read on where you think margin goes from there?

Sure. Sure, Jeff. So maybe first, if we if we think look at the loan side, so the I would say, the asset size little more predictable in this in this equation right now.

So if we look at the loan side, if the Fed is on pause, we would expect loan yields to continue to increase similar to what we saw this quarter kind of in that in that 10 basis point range because we still have a large block of adjustable-rate loans that have not repriced through this cycle at this point. And then also as fixed rate loan loans are maturing, they're coming on a much higher interest rates. So absent anything else throughout the year, each quarter, we would expect kind of that 10 basis points of yield pickup quarter over quarter and once the Fed starts to decrease. So the floating rate loans, which are about 26% of our book, those would reprice down and instantaneously with the with the decline in Fed funds. And so if that comes at a gradual pace, if there's a couple of like two cuts this year, if there's a one cut in the quarter. We think that the adjustable rate loans repricing will will offset any impact of the decline related to the floating rate loans coming down, where it becomes more challenging is if the Fed becomes more aggressive, Fed becomes more aggressive and we don't think those adjustable rate, that 10 basis points a quarter, we don't think that's going to be able to offset a larger cut of 75 basis points in a particular quarter.

On the other side of the equation, the deposits that's a little more cloudy obviously on that on what that looks like and going forward. But we do think that we're going to continue to see deposit and funding cost increases probably through the first half of the year. Once the Fed no action on that, there will be a little bit of even some flattening in funding deposit cost. And then on as we and at some point, we'll actually once they start cutting, we'll be able to see some relief and deposit cost coming down. But I think there'll be some lag there just because of the overall market liquidity right now.

Okay.

So Rob, any moves you're making to kind of make it make the bank more rate neutral or I don't know about hedges, I guess you kind of have a natural revenue hedge with the mortgage unit. I would guess we get aggressive cuts that kick in, but any management of the balance sheet and really trying to get a little more neutral or at this point and any kind of adjustments for sure.

I mean that, as you said, I mean, the residential mortgage business is a natural hedge against that. So, you know, I mean that operation is still up and operating. And if the rate environment changes, we'll see some very quickly be able to take take advantage of that in that in that unit. And we have put had we do have floors on our loans. A large percentage of our loans do have floors on them so that that will help in that environment. But as far as being able to artificially hedge the portfolio, that's not really an option because we do have those floors in place and hedges don't play well with floors on the loans.

Okay. Thank you. I'll step back.

Thanks, Jeff.

Eric Spector, Raymond James.

Hey, good morning, everybody. This is Eric on the line for David Feaster. Thanks for taking the questions. And starting on the credit front, just given the uncertain backdrop. I know you're very conservative on the credit front, but just curious how maybe you're stressing the book and how you're approaching upcoming maturities and the process for modifications now but TDR rules have changed.

Yes, Eric, thanks for the question. And we are regularly stress-testing our portfolio. So we take a look at reviewing income and debt service coverage. We stress vacancy levels as to the real estate loans and the impact to the net operating income, debt serviceability, look at changes in cap rates based on the interest rate now and what that does to the collateral coverages. And when you think about our commercial real estate portfolio, that has about 15% of that will have a rate reset over the next 24 months, and our most recent review reflects no significant concerns with regards to the repayment ability based on the current yield curve and their current most recent operating statements. Additionally, because the portfolio is so lowly leveraged on an average basis where the properties are generally well positioned to sustain those changes in asset values. So we have not seen to date any issues with people to need to refinance, whether it's off-balance sheet or in our portfolio.

Yes, that's helpful.

And it may be just outside of the margin. I'm just curious how you think about the impacts of declining rates on the balance sheet and income statement, would you expect to see additional loan growth potentially from that? What level would you expect to see in what segments would you think you'd see a person? I'm just curious how you think about your ability to reprice deposits and drive additional core deposit flows if rates begin coming down.

So I'll take a stab at our loan growth and then let Rob talk about the deposit side of the equation. But going into 2024, we are expecting a low to mid single digit growth rate. As the as the rates come down, we would expect activity to pick up both in commercial real estate and I would say construction as well will get into will just get more activity that has been on pause. Some of that will be offset by what I would anticipate to be a higher refinance on the residential mortgage book as they refinance down. So those combined together, even in a shifting rate environment is what leads me to say low to mid-single digit growth rates?

Yes.

And on the on the deposit side, I guess what I'd say there is that clearly in the current environment with the rate environment right now, it doesn't doesn't really pay to tried to go after deposits right now other than through full relationship. So I think as part of that loan growth that Jill's talking about there is as rates start to come down, we're focusing that loan growth either on existing clients or clients that are bringing in a full relationship with them, meaning that they're bringing in their primary deposit accounts with them as well so there certainly could be some opportunities there. Rates start to come down.

Okay. That's helpful. And then just maybe just touching on capital. It was great to see there over the phone on TC. given lower rates. Just curious your thoughts on capital just more broadly and capital priorities are at this point, whether capital returns in the cards at all just on scarcity, your ideal method for capital performance for sure.

So I mean, just to reminder, kind of our capital priorities. First and foremost, is a core dividend, which we kept at $0.48 for the quarter as we have been paying. And then beyond that, I mean, historically, we have done share repurchases and occasionally and some type of special dividend and beyond that. I mean, of course, we're always interested in M&A activity, if it's the right opportunity at the right price and the capital has continued to build. So we haven't repurchased shares for and all of last year at this point. So capital levels continue to build. And we think in this current environment with a bit of economic uncertainty, it makes sense to be building that capital currently. And so I wouldn't expect in the near term that we would change any of our priorities or change the capital actions that you've seen really over the last year. Once we get into maybe the second half of the year, maybe there's better economic certainty out there. And then we can look at new changes in our capital Action's at that point in time.

Yeah, thanks for taking my questions, and I'll step back.

Thanks, Eric.

Andrew Liesch, Piper Sandler.

Thanks.

So hi, good morning, everyone. Just a question on some of the last prepared comments. You mentioned expanding loan production capacity by adding new bankers and then investing in initiatives to grow fee income? And any more details you can provide on that, just what sort of like hiring plans you may have, what locations and what some of these initiatives may be?

Sure, Andrew, this is Jill. I'll take that one. As we have discussed throughout the year, we have been adding new bankers and it has included not just commercial and commercial real estate lenders, but we've added business bankers, treasury management officers and other back office personnel as well. It's been across the footprint really and as to relationship managers more up and down the West Coast I-5 corridor, but not limited to. And we expect to see that continue into 2024. We're still having good conversations. We kind of hit it. Slight pause, I would say right here in the first quarter until people get their annual or quarterly bonuses, but the conversations are still going on, we would expect to continue to add. And I would throw in that these new team members and not just bring in new client relationships that they bring a level of enthusiasm about what banners able to serve that tend to lift the whole boat. So we anticipate more client disruption and more new bankers.

Got it.

And I think in the past you've mentioned these are coming from larger banks. Is that still the case?

It is nine large rate of

and then just got Got it. Just a cleanup question on the fee income side. So it sounds like maybe the deposits B and other service charge line, is that going to kind of snap back to the prior run rate? And then on bank-owned life insurance? Is this the new run rate to be looking at going forward?

Yes.

So first on the deposit and fee side, so I would say the run rate probably somewhere in between Q4 and Q3, what I would say not in run rate. And then on the bank-owned life insurance, there was a death claim in that area. So the current quarter was a bit higher than the run rate data.

Got you. All right, that's helpful. Thanks for taking the questions, I'll step back.

Thank you, Andrew.

Andrew Terrell, Stephen.

Hey, good morning.

Morning, Andrew.

I wanted to first kind of follow up on some of the commentary on the hiring. And just maybe first acknowledge you guys have done a really good job in managing the expense base with some of the banner Ford initiatives. But just as we look into 2024. It sounds like the pipeline for hiring still is solid today. Just want to maybe marry that with how you're thinking about just expense growth and the rate of expense growth in 2024?

Yes, Andrew, it's Rob. So so yes, we have been making those strategic investments. I mean, we want to keep our eye on the long term. And so if there's opportunity just to take advantage of the current market disruption by getting the right talent into the bank, we're willing to make those investments.

And just lastly, thinking about expenses overall for 24, we're expecting kind of a normal inflationary increase. So if you think about all of 23 Annual 23 compared to annual 24 something in that 3% range is probably what we're currently thinking at this point in time.

And just from a quarterly look, I mean, first quarter is always a bit high because all the payroll taxes reset. So we expect that Q1 will probably be the highest highest of the year. So we would expect it to be a bit higher than and the true run rate in the first quarter of the year.

Okay. That's helpful. I appreciate it.

If I could ask on the margin. Rob, do you have the spot cost of either interest-bearing or total deposits in the month of December.

And I don't have that in front of me here, but what I'd what I'd say, Andrew, is the cost of deposits for for Q4 was was essentially in line with probably just November cost of deposits. And so if you if you take the starting point and the point in the trajectory, I would think that December you can probably kind of interpolate where December would would have been out, but November and the cost to deposits average for the quarter were about the same in December is higher than that.

Got it. Okay. That makes sense. And I guess just overall on the margin kind of going into the first quarter, just given the noninterest-bearing decline and maybe a higher starting point on the deposit cost side. I mean, is it fair to think that the margin could could see more compression than that 10 basis points you saw in 4Q as we go into the first quarter?

Yes. I mean, I were a bit hesitant to put a number on it just because there's lot of cloudiness out there at this point in time. But you know, I think we're looking at the trends. So we know Q3 was seven basis points, Q4, 10 and middle. It certainly could be in that in that in that 10% or 10 basis points decline there compression in the first quarter. But what I what I would say too, is that historically Q1 has been a better deposit quarter for us compared to Q4. And then Q3, usually that the two best deposit quarters for us are actually Q2 Q. three in Q1 and Q3 behaved a lot better than Q4. So so I think while we could be a bit higher than 10 basis points, we certainly could be a bit lower than that as well.

Okay. And maybe last one for me. Just on the savings deposits, they were up really nicely this quarter. Just wanted to get a sense of I think it was up $230 million or so quarter on quarter number, for that deposit growth that you saw in the savings bucket specifically, do you have kind of what the incremental rate paid was for the new growth, and I'm not trying to get a sense of is just whether there's some kind of money coming on from like a new high-yield savings offering or just is it more kind of in line with the average deposit costs? Any color there would be helpful.

Yes, sure. So I mean, our data deposit specials, we haven't changed those since since May. And really we have because of our strong liquidity position that we have and the strong core funding base we have had to chase the market completely all the way up but the rate on our savings right now, the standard rate, it's a tiered, but the top tier is 4% currently on that. But we are willing to make some exception pricing for our very best clients in that particular product. And we probably have exception priced up into that 5% range. But the average cost on that particular high yield savings account right now is running right around 361 is where we are at on average on that account.

Got it. Okay, those are all the questions I had. I appreciate you guys making time for me today.

Thank you, Andrew.

(Operator Instructions) Kelly Mota KBW.

Good morning.

Thanks for the question.

I wanted to follow up on that

Good morning.

I wanted to follow up on the deposit side.

I think, Rob, you made a comment in the Q&A that it doesn't necessarily make sense to chase deposits here. I'm just wondering, I saw in 4Q with deposits down, you kind of backfilled funding with FHLB and just how we should be thinking about the funding of growth in the use of wholesale funding as we look ahead with kind of that low to mid single digit loan growth anticipated?

Yes, Kelly, I mean, our we did see an uptick in our FHLB advances but I will point out our reliance on wholesale funding is very, very small, but we did see that uptick. And I mean, if you look at the activity, we saw that about $90 million decline in retail deposits, and some of that was event-driven activity, so not necessarily and something we expect to continue there. And then we also led $55 million of brokered CDs runoff as well. And so I would look at part of the increase in FHLB advances as essentially covering the brokered CDs that we let roll off there.

And our brokered CDs, I mean, are also very small at this point at $108 million. But as we let those roll off, if the deposit activity overall dozens retail deposit activity doesn't cover. It will have to cover those with the FHLB advances. But the advantage of the FHLB advances is we're staying short on those. So it's essentially overnight. So we're able to pay those down as deposit activity comes in. And then clearly, if rates start to come down later in the year, then it will give us the opportunity to pay those down very quickly. But I think from a loan growth standpoint, we're looking at the roll-off of the security. So we're getting about $60 million of cash flows off our security portfolio. So part of it will come from that and we could consider some additional security sales similar to what we have been doing here, although given the current rate environment and everything that's going on, I mean, we continue to kind of evaluate all options there. But other than that, I think I think it would come kind of the last bucket that we'd use as infill as those FHLB advances?

Yes, you mentioned about bond yields and the yield. I'm not sure if there's maybe one or one or two cuts, but it would be more draconian or more punitive if we potentially follow the forward curve. Is that is that how to think about it with the margin that you might see some rate relief on margin with some modest rate cuts, but there would still be greater downward pressure, at least initially if rates follow the forward curve just trying to kind of shift where expectations are relative to what the market is pricing in versus what KBW we have internally on our rate expectation side.

Sure. Sure. Yes, no, no, I think that's accurate. I mean, I think we're well positioned for kind of a gradual decline in interest rates because I think we're going to the adjustable rate loans that have a repricing cycle. I think they're going to benefit us if you see 25 basis points at a time, if you see two or three cuts in the second half of the year. I think the adjustable rates will cover that. But if the Fed got more aggressive than that and then I think temporarily you'd see more impact on margin. But again, it's those adjustable rate loans as time goes by will continue to reprice up unless rates really come down, it will more rapidly or helpful.

Maybe last question for me and then maybe for Jill, it looks like there was obviously a very small base, but a little bit of an uptick on early-stage delinquencies. Just wondering if there's anything you're seeing there a later payment that around the holiday season. I'm just wondering if you could provide any color on.

Yes, Kelly, that's exactly what it is year end holidays and just normal delinquencies. I think what I would emphasize is that when the credit metrics are as clean as may have been any little change moves the dial. So 0.4% delinquency is still very strong.

Absolutely. Thank you so much. I'll step back.

Thank you, Kelly.

Timothy Coffey, Janney.

Very Thank you. Good morning, everybody. A question I guess for Mark and Rob, I just want to look at the type of depositors that are still chasing rate, are you seeing a difference between your urban customers and your more rural depositors?

It came at firm?

That's Rob. Thanks for the question. Yes, I mean, I think it's I think we are seeing a little bit of a different behavior there from in general, I would say are our rural clients fund out is probably as more consumer it type deposits, not that there's not a number of commercial clients there as well, but on average and then Metro probably has a higher percentage of of business. And so I would say rather than rural versus urban, I would probably characterize consumer versus commercial. And I think the we're seeing that consumers are probably even more rate sensitive than some of our commercial clients and so we're probably seeing more more movement there. I mean, clearly, commercial clients are managing their balance sheet at this point and moving stuff back and forth. But they also have to maintain a certain level in their non-interest bearing checking accounts just for normal operations and stuff. And so I think that activity probably happened a while ago, but we're continuing to see sensitivity on the consumer clients.

Okay, that's helpful. Thank you. And then a question for Jill. As kind of the credit metrics start to somewhat normalize towards pre-COVID levels on the leisure. What is your outlook for the economy and within Banner's footprint? Is it for a soft landing or something harder?

Well, Tim, I wish I had a crystal ball. I'm leaning to a soft landing. And it's really because of the markets that we're serving. I feel really good about me on the West Coast and how strong it has held up. But at the end of the day, we're well positioned to deal with whatever is thrown our way. And we're and we're just going to keep on doing what we do.

Okay. All right, Thank you. Those are my questions.

Thanks, Tim.

Jeff Rulis of D.A. Davidson.

Thanks, just another quick one on credit and kind of splitting hairs a little bit. But the C&I, the increase in C&I nonaccruals linked quarter, I mean, overall NPAs to assets under 20 basis points a small number, but just I'm just trying to get any read on what that commercial nonaccrual increase was, if that was and any but I don't know if it's granular by segment that you saw?

It was granular, Jeff. I mean, actually, we've had a little bit of movement out and movement in, but it's not industry specific or anything that points to a larger concern.

Fair enough that I thought I'd check. And then just one of the last one is on the mortgage side. Just trying to get a read on that it looked like a benefit on the move within the multifamily investment. I mean, it's a little bump in the mortgage banking line at where could you see that kind of in 24 relative to 23, do you think it shapes up as a slightly better year from mortgage banking overall? If we look at year over year?

Yes, it's a it's so it's Rob. So yes, yes, I think I think it's it's obviously heavy heavily interest rate environment driven, but we have seen a bit of a pullback in rates. So that should should help the activity. If we continue to see rates come down, our expectations is that 24 would look better than 23 still could be a challenging year for the industry, obviously. But but we do think that we will see some pickup in residential mortgage banking operations during 2024 compared to 23.

Rob, would you anticipate any more multi-family kind of moves that would bump that would be a benefit to that line item? Or was that kind of a Q4 heavy item?

Yes, it was a Q4 heavy item. I mean, we had been writing down as interest rates have been coming up. We had been writing down the multifamily loans, the fair value of those and all that was running through mortgage banking operations. So even during the first nine months of the year, we had written $800,000. So so part of that gain that we recorded in the fourth quarter was really a recapture of some loss that we had taken during the first nine months of the year. But then there was also some losses in prior years of write-downs that was recaptured. And so but now we've moved all of the multifamily loans out of held for sale. So we don't expect that to see that benefit anymore from. But on the other side of it, we did talk about making some strategic investments into some different areas. And then one of those is our SBA operations and we've made. We've hired a number of folks in the fourth quarter here as well as far as business and officers. So so what we're looking at is kind of growing our SBA business and growing our gain on sale related to SBA loans to kind of offset that historical gain on sale that we would have saw from multifamily during kind of a normal environment. So I can't give any specifics on what our expectations are from that SBA business for 24. But we do expect that we'll see some build of gain on loan sale throughout the year in that particular unit.

Great. Thank you for the color there. That's it for me, thanks.

Thanks, Jeff.

Thank you. As there are no additional questions waiting at this time, I'd like to hand the conference call back over to Banner Corporation's President and CEO, Mark Grescovich for closing remarks.

Thank you, Candice, and thank you all for your questions and your attention today. As I stated, we're very proud of the banner team and our 2023 performance in the wake of what is a very challenging environment for our industry. So 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 wonderful day, everyone. And again, Happy New Year and a kickoff to 2024.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines.