Banner Corp Q2 FY2022 Earnings Call

Thank you all, and welcome to Banner Corporation's Second Quarter 2022 Conference Call and Webcast. My name is Brika, and I'll be your event specialist today. Your host for this call will be Mark Grescovich, President and CEO of Banner Corporation. Mark, please proceed when you are ready.

Thank you, Brika, and good morning, everyone. I would also like to welcome you to the second 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 a recently filed Form 10-Q for the quarter ended March 31, 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 four primary items with you. First, I will provide you high-level comments on Banner's second 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, 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. Banner has lived our core values, summed up as doing the right thing for 131 years. Our overarching goal is 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 am pleased to report 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 $48 million or $1.39 per diluted share for the quarter ended June 30, 2022. This compared to a net profit to common shareholders of $1.56 per share for the second quarter of 2021 and $1.27 per share for the first 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 rate; our strategy to maintain a moderate risk profile; continued good mortgage banking revenue; a gain on the sale of four 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 pre-tax 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 $57.8 million for the second quarter of 2022 compared to $49.7 million for the first quarter of 2022. This measure, I believe, is helpful for illustrating the core earnings power of Banner. Banner's second quarter 2022 revenue from core operations increased 8% to $148.3 million compared to $137.6 million for the first quarter of 2022 and down slightly compared to the second quarter a year ago. We continue to benefit from a larger earning asset mix and improving net interest margin, solid mortgage banking fee revenue and good core expense control. Overall, this resulted in a return on average assets of 1.16% for the second 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 5% compared to June 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 5% over the same period last year. Reflective of the solid performance, coupled with our strong tangible common equity ratio, we announced a core dividend in the quarter of $0.44 per share. Our branches continue to be fully operational, and we have reinstated our return to the workplace policies. 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 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, 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 sixth time. Banner has been named one of America's 100 Best Banks by Forbes, and Banner Bank has received an outstanding CRA rating. 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. I am pleased to report solid credit metrics once again. Banner's delinquent loans as of June 30 remained low at 0.19% of total loans, down from 0.21% in the prior quarter and down from 0.24% as of June 30, 2021. Adversely classified loans represent 1.63% of total loans, down from 1.95% in the linked quarter and compared to 2.83% as of June 30, 2021. Nonperforming assets remained low at $19.1 million, including nonperforming loans of $18.7 million and REO and other assets of $357,000. This represents 0.12% of total assets, compared to 0.19% as of June 30, 2021. Due to strong loan growth in the quarter and increasing economic uncertainty as we move through 2022 and into 2023, we recorded a $3.1 million provision for loan losses as well as an additional $1.4 million provision for unfunded commitments. Losses in the quarter were offset by recoveries, resulting in our ACL reserve totaling $128.7 million or 1.36% of total loans as of June 30, down one basis point from the linked quarter and compared to a reserve of 1.53% as of June 30, 2021. The reserve currently provides 688% coverage of our nonperforming loans. In terms of our loan portfolio, we reported strong loan originations with solid growth across many business lines this quarter. We reported core portfolio loan growth, excluding PPP loans, of $338 million or 3.7% for the quarter and 14.9% on an annualized basis. If we exclude the growth in the one to four family portfolio, the annualized growth rate remains strong at 8.3%. It is important to note that this loan growth was not due to loosening underwriting standards. Additionally, our commercial and commercial real estate pipelines remain healthy, although there has been a recent slowdown in activity as clients respond to the increasing interest rate environment. Looking at specific product lines, C&I activity remained robust in the second quarter. Commercial loans, excluding PPP, grew by nearly 9% or $94 million in the quarter, which is an annualized rate of 35%, and balances are now 5% higher than reported as of June 2021. There was also strong growth in the small business scored portfolio, up 6% or $49 million due to a successful small business campaign that launched in the second quarter. Balances are 16% higher than reported a year ago. While overall C&I utilization inched up 1% in the quarter, it remains 6% below historical norms. A review of the new volumes showed that exposures continue to be modest in size and are diversified by industry as well as across our footprint. Commercial real estate totals continue to be hindered by payoffs despite solid originations, decreasing by $41 million in the quarter or 1%, 4% annualized. The investor CRE portfolio reduced by $43 million quarter-over-quarter, and the owner-occupied CRE portfolio declined by another $28 million in the quarter. Payoffs during the quarter totaled nearly $90 million within the investor and owner-occupied CRE portfolios, partially offset by a $30 million increase in small balance CRE, also a result of the small business campaign. The multifamily portfolio reduced by 4% quarter-over-quarter but is up 23% compared to June 30, 2021. This portfolio consists of about 55% affordable housing and 45% market rate and remains granular in exposure and geographically diversified within our footprint. Construction and development loan balances showed strong production even as we experience rapid payoffs within the residential spec portfolio as construction is completed. Commercial construction balances increased by $14 million or 8% in the quarter, while one to four family construction loans rose by $43 million or 7%. This was partially offset by a $17 million or 6% reduction in the multifamily construction portfolio. Slightly over half of this reduction was due to a single anticipated secondary market refinance at completion. We expect that increasing mortgage rates will impact the velocity of home sales within our residential spec portfolio, although we have not seen this materialize yet. The housing markets we operate in continue to be supply constrained, with low inventory of completed and unsold homes. Consistent with prior periods, our total residential construction exposure remains acceptable at 6.6% of the portfolio, with nearly 40% comprising our custom one to four family residential mortgage loan portfolio. Including multifamily, commercial construction, and land, the total construction exposure remains at 14.8% of total loans. Agricultural loans reflect seasonal draws on lines of credit with balances of $38 million quarter-over-quarter or 16% and are up 17.5% year-over-year, excluding PPP loans. There was significant growth in the consumer mortgage portfolio, attributed to a successful jumbo mortgage campaign in the second quarter and holding some completed custom construction mortgage loans to rebuild balances that had decreased during 2021 and earlier this year. Overall, balances increased by $150 million or 21% quarter-over-quarter and are now up 42% year-over-year. Lastly, home equity lines also contributed significantly to the loan growth in the quarter, increasing by $36 million or 8% from the linked quarter. On asset quality, adversely classified loans continued to decline, reducing by $24 million in the quarter and down $118 million or 43% year-over-year. Overall, adversely classified loans have decreased 64% since the pandemic-induced peak reported in September 2020. In conclusion, while the uncertain economic environment has become more pessimistic over the past few months, Banner's credit culture is designed for success through all business cycles. Our underwriting practices have remained consistent throughout the last extended economic expansion. Our loan portfolio continues to be diversified by both product type and geography and is granular in nature. We maintain a solid reserve for loan losses and strong capital, and most importantly, our clients continue to perform well, as indicated by our credit metrics. In short, we are well positioned to navigate the next phase of this economic cycle. I will now turn the microphone over to Peter for his comments.

Thank you, Jill, and good morning, everyone. As discussed previously and as announced in our earnings release, we reported net income of $48 million or $1.39 per diluted share for the second quarter compared to $44 million or $1.27 per diluted share for the first quarter. The $0.12 increase in earnings per share was due to an increase in net interest income and noninterest income, partially offset by provision expense 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 $10.7 million from the prior quarter due to an increase in net interest income. Core noninterest expenses, which exclude Banner Forward, debt extinguishment and M&A-related expenses increased $2.5 million due to higher compensation, fraud losses and professional services expense. Turning to the balance sheet. Total loans increased $315 million from the prior quarter-end as a result of increases in held-for-portfolio loans, partially offset by a $28 million decline in PPP loans. Excluding PPP loans and held-for-sale loans, portfolio loans increased $338 million and 14.9% on an annualized basis. One-to-four family real estate loans grew $150 million in the current quarter as a result of redirecting a portion of residential custom construction loans previously earmarked for sale at completion on the portfolio with an increase in jumbo mortgage production. We anticipate a similar pace of one to four mortgage loans held for investment growth in the coming quarter. Ending core deposits decreased $267 million from the prior quarter-end as a result of the sale of four branches that closed in late June, accounting for $170 million of decrease. The remaining decrease in deposits reflects a combination of seasonal outflows associated with tax payments along with exits of rate-sensitive deposit balances seeking higher yields. Time deposit balances declined $44 million from the prior quarter-end, of which $8 million were due to the aforementioned branch sale, and the remaining $36 million decline was driven by higher cost CDs continuing to roll over at lower retention rates. Net interest income increased by $10.4 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 four basis points due to increases in floating and adjustable-rate loans, partially offset by a decline in PPP loan forgiveness processing fees. 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 increases in floating and adjustable-rate loans. Total average interest-bearing cash and investment balances declined $275 million from the prior quarter, while the average yield on the combined cash and investment balances increased 46 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 declined one basis point to 11 basis points as a result of lower borrowing costs. The total cost of deposits remained flat at six basis points in the second quarter as the bank did not raise posted deposit rates during the quarter, while borrowing costs declined due to the payoff of a higher-cost FHLB advance in the prior quarter. The ratio of core deposits to total deposits was 95% in the second quarter, the same as the previous quarter. The net interest margin increased 26 basis points to 3.44% 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 third quarter, we anticipate a commensurate pace of margin expansion followed by a slowdown in future quarters as price-sensitive deposits move up the balance sheet, loan growth continues, overnight cash levels decline and deposit rates accelerate. Excess overnight cash is anticipated to decline at a more accelerated pace in coming quarters to fund both continued loan growth and deposit outflows. Total noninterest income increased $7.7 million from the prior quarter. The current quarter benefited from a $7.8 million gain on the sale of four branches. Core noninterest income, excluding gains on the sale of securities, gain on the sale of branches, and changes in investments carried at fair value increased $325,000. Total deposit fees are flat while mortgage banking income declined $500,000 due to declining refinance activity and lower gain on sales spreads. While overall residential mortgage production increased 16% from the prior quarter, a larger share of production was directed on balance sheet, while production held-for-sale declined 43% from the prior quarter. Despite the large decline in held-for-sale production, residential mortgage gain on sale declined only modestly by 10%, thanks to pipeline hedging gains during the quarter. Within residential mortgage production, the percentage of refinance volume declined as a function of rising rates, dropping to 18% of total production, down from 36% in the prior quarter. Multifamily loan production and gain on sale premiums remain muted due to the steepening of the yield curve and decline in refinance activity. Miscellaneous fee income increased $368,000 due to increased swap fee income and a loss on the sale of former branch facilities in the previous quarter. Total noninterest expense increased $858,000 from the prior quarter, primarily due to higher compensation costs, professional fees and fraud losses, while Banner Forward implementation costs declined $900,000 to $1.6 million in the current quarter. Excluding Banner Forward, debt extinguishment and M&A, core noninterest expense increased $2.5 million. Compensation expense increased by $1.3 million due to increases in salaries due to annual merit increases, along with increased production-related commission and bonus expense, partially offset by a decline in severance expense from the prior quarter. Check team-related fraud losses increased $1 million, reflected in the payment and card processing expense line item while professional services increased due to a combination of volume-driven outside contract client servicing activity and various legal expense items from the prior quarter related to lending, governance and settlement activities. In addition, as part of ongoing capital management, the company repurchased 200,000 shares during the quarter. I'm pleased to report that Banner Forward remains on track. We just completed the fourth consecutive quarter of implementation and approximately 71% of the initiatives from a program value perspective have been executed and are reflected in the current quarter run rate with the majority of the efficiency initiatives in place and revenue initiatives beginning to generate benefits in the form of accelerated loan growth and fee income generation. Due to the impact of wage inflation and sustained levels of core inflation, we are adjusting our core expense quarterly run rate guidance up modestly to run between the high 80s and low $90 million range. However, our expectations for improved operating leverage and lower core efficiency ratio remain strong as inflationary pressure on a reduced expense base is being more than offset by rate-driven expansion in the bank's net interest margin. In closing, the company is benefiting from rising rates as evidenced by significant margin expansion this quarter, stable low-cost core deposit base and strong diversified loan growth. This concludes my prepared remarks. Mark?

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

We have the first question on the phone line from Andrew Liesch of Piper Sandler. Andrew, your line is open.

Thanks. Good morning, everyone.

Good morning, Andrew.

Just want to touch on the loan growth outlook here. It sounds like you had a couple of campaigns going on in the second quarter on the small business side and residential mortgage side. Have those ended? Are those continuing? Just kind of curious about the pace and the mix of the growth going forward.

They are continuing, anticipated to end this month. So a little bit pulling into this quarter.

Got you. And I guess, what was the impetus to start these? It seems like they've been a pretty decent driver of growth.

Part of the Banner Forward initiative is to just expand the growth in all of the business lines, whether it's business banking or moving upstream, and so this was just one of the Banner Forward initiatives.

I understand. That's useful. Regarding the provisioning, it seems to be a bit higher than I expected. Looking at the $2.1 million for loan losses, how do you view the reserve ratio moving forward? Do you anticipate it will keep increasing? Will you continue to add to the provision at this level considering the macroeconomic concerns?

You mentioned the key factors that will contribute to it, Andrew. Provisioning is really influenced by loan growth, economic conditions, and our asset quality, and that has been our consistent message. We anticipated returning to provisioning alongside loan growth, which has occurred. My usual statement is that we don’t provide specific guidance on our reserves, but given the rising economic uncertainty as we look toward 2023, you can expect us to maintain a conservative approach regarding our reserve levels.

Got it. And just one last question. Regarding the size of the securities portfolio, what are the plans for its growth or using cash flows from it to support loan growth and manage deposit outflows?

Yes, Andrew, it's Peter. We are at a crucial turning point regarding the securities portfolio. Moving forward, we plan to utilize our excess liquidity to support loan growth and manage some deposit runoff or price-sensitive depositors, rather than significantly increasing the securities portfolio beyond what we achieved in the second quarter.

Got you. All right, well thank you for taking the questions. I'll step back.

Thank you, Andrew.

Thank you. The next question from the phone lines comes from Jeff Rulis of D.A. Davidson. Please go ahead when you're ready.

Thanks, good morning.

Good morning, Jeff.

I wanted to follow up on the deposit runoff behavior. You mentioned the impact of the branch sale and some seasonal effects. I'm particularly interested in the rate-sensitive group and your thoughts on how many people in your deposit base will pursue higher rates, as well as your approach to maintaining core relationships. Do you think this trend will continue? Have we moved past the rate-chasers, allowing you to stabilize with the remaining group? Any insights on deposit behavior would be appreciated.

Yes, Jeff, it's Peter. As we have discussed previously, our deposit base benefits from being granular and diversified both geographically and across business segments. A significant portion of our deposits are operating accounts for businesses that are less sensitive to price changes. I would highlight two points here. First, many of the price-sensitive deposits left during the last rate cycle because we did not chase rates at that time, nor did we run any deposit campaigns during the interim period. Therefore, we believe our deposit base has shown strong resiliency based on past behavior. That said, some outflows may occur for certain clients looking for higher rates, but we expect this to be a relatively small amount. We do not plan to lead with deposit rate specials or campaigns, and historically, we have priced in the 40th percentile of our peer group regarding posted rates. Overall, we feel we are in a solid position. While we do anticipate a modest amount of deposit runoff for those seeking higher rates, we do not believe it will be significant.

Okay. Great. Thanks. Was there a loan balance that went through on the branch sales as well?

No. It was a deposit only. We retained all of the loans with that sale.

Got it. Okay. And I guess just into the loan growth expectations, Jill or Peter, I think, Peter, you mentioned expectations for one to four family to have some continued momentum and as these small business and resi mortgage campaigns continue on through the end of the month, balancing that with rate increases and impacted customers, just a little more thought on the loan growth outlook. I know outside of guidance, but just your thoughts on second half type growth in the loan portfolio.

So I'll start and then if Peter wants to chime in as well. I guess I'll start by saying that we would expect over the second half of the year to maintain what we've been guiding to and that's that high single digits. Utilization rates are still affected, obviously, by the excess liquidity in the system, and we did see a little bit of a pullback right at the end of the quarter in activity with that hike in interest rates as borrowers become cautious and watch to see what happens. But the positives still are there, Jeff, located in markets with strong economic engine business model that's working strongly on origination and our utilization rates that have significant upside potential, our construction and AMD portfolio is off about 10% this quarter. Those will continue to fund up through the balance of the year. Ag picked back up, as I talked about. We have good commercial and commercial real estate pipeline. So all of the things indicate that we should hit our target even with the caution in the wind with the economic environment.

That's great. And Mark, maybe just a last one just on some pessimism out there and some price volatility, but any thoughts about M&A discussions and your appetite?

Thank you for the question, Jeff. It’s a valid one. As you've noticed, there has been a slowdown in merger and acquisition activity, particularly in the financial sector. However, this may be a temporary situation and is part of the typical cycle. Factors such as a decline in valuations and uncertainty in the economic environment can influence potential credit exposure for those looking to acquire. Traditionally, Banner has not maintained a strategy of frequently entering and exiting the market. Instead, we focus on building relationships, engaging in negotiated transactions, and collaborating with the Boards and executive teams of potential partners. When the timing aligns, and if an opportunity arises, we would consider a combination. Ongoing discussions are happening, and our relationships are developing. Ultimately, it depends on market conditions before certain companies feel ready to pursue a combination with Banner.

Thanks Mark.

Thank you, Jeff.

Thank you. We now have a question from Tim Coffey of Janney. Please go ahead when you're ready. I've opened your line.

Great. Thank you. Good morning, everybody. Thanks for the questions. I had a question about Banner Forward. And as you're kind of starting to get to the tail end of this project, I'm wondering how should we start thinking about kind of the revenue opportunities from this project? I mean, clearly, you're doing a couple of loan programs already. But as we get forward on this, no pun intended, how should we think about that?

Yes, our guidance on the trajectory and sequencing of Banner Forward remains unchanged. We expect the revenue initiatives within Banner Forward, which are starting to generate value in the second quarter, to continue into Q3, Q4, and beyond through sustained loan growth. The goal of the loan growth initiatives is to establish a consistent level of loan growth across business lines that produce loan output over time. It’s not a one-time effort; the focus is on achieving a durable improvement in loan production and productivity within those functions, leading to a gradual increase in loan outstandings. Regarding fee income, we initiated some fee income programs towards the end of the second quarter, and we expect to see more significant benefits from these in the upcoming quarters as we experience a full quarter's impact. Additional fee income initiatives will also be introduced late this year and in the first half of 2023, enhancing our core fee income line. We have not altered our guidance, and there remains potential for growth in revenue that has yet to be reflected in our performance.

Okay. And if I could just follow up there. If we just talk about the loan growth, the sustained loan growth over time, the way to think about that, it would take the Fed to target from the high single digits to maybe the low double digits for the total third quarter?

Yes, it's important to remember to account for the mortgage growth this quarter and what we anticipate for next quarter, which we don't expect to last in the long term. Nevertheless, the upper single-digit loan growth rate is something we aim to maintain moving forward, excluding the mortgage growth we experienced this quarter. Our main focus is to uphold that upper single-digit loan growth consistently while adhering to the diversified and conservative credit risk approach that Banner has always embraced.

Okay. So perhaps a good way to think about it is that you can sustain growth through individual vertical volatility there?

Yes, that's fair.

Okay. Okay. And then, Jill, just a question about the current state of just underwriting and portfolio maintenance. Has anything changed there? And not to suggest that credit quality is not improving because it is, but given the heightened economic uncertainty, have you started to kind of adjust or the underwriting or more frequent analysis of the portfolio?

We haven't made significant changes because we've kept a very conservative approach to portfolio management since the last major recession. We continuously monitor weaker credits and stress our portfolio from the beginning of the cycle to the end. The bank assesses underwriting rates and adjusts these as rates increase, maintaining our focus on an environment of rising rates, which has always been our approach. The goal of our underwriting is to remain consistent across all cycles, ensuring our clients know they can rely on us at all times. Therefore, we avoid making substantial changes to how we evaluate any specific business line at any given moment.

Okay. All right. Great. Those are my questions. Thank you very much.

Thanks Tim.

Thank you, Tim. We now have a question on the line from Kelly Motta with KBW. Please go ahead when you're ready.

Hi, good morning. Thank you for the question. I apologize if this sounds repetitive. I got disconnected during the prepared remarks. You mentioned in your remarks that you are open to letting some higher rate deposits go. At Banner, you have strong core deposits, so I wouldn't expect there would be a significant amount of that. However, could you clarify the portion of deposits you consider more transactional and would be willing to let go?

Yes, we are confident in our core deposit base and our clients, which has shown its resilience during past tightening cycles. In the earlier cycle in '17 and '18, we didn't pursue deposit growth by chasing higher rates, and we found that clients remained loyal. While there is a small portion of our balance that is sensitive to rates and may move as rates increase, we believe this segment is limited. We will not be chasing rates this time as well, and we expect our deposit base to remain stable. Most of our deposits come from operating accounts of businesses that prioritize service and products over high yields. While we anticipate some increase in deposit betas, we do not foresee being at the top of the market in rates nor do we expect significant deposit outflows. However, a modest outflow may occur, and though I can't provide a specific number, I expect some reductions in our deposit balances as we navigate through the next few quarters.

Got it. Thank you for all the color. And then on expenses, they came in a little higher than what you had guided for the past quarter of like the mid to high 80s. I was wondering if that was a function of the branch closures being end of the quarter weighted or if there's greater pressure being seen inflationary pressures and how to think about that as we look forward and balance out with the savings from Banner Forward?

We did not benefit from the branch consolidation this quarter since the sales were completed at the end of June. We expect to see the advantages from that sale reflected in full during Q3. Additionally, some initiatives related to occupancy will take effect in Q3 as well. However, we are experiencing wage inflation pressures. When we launched Banner Forward, wages were increasing by about 2% annually, but now they are rising around 5%. This wage inflation is impacting some of our initial financial projections, which anticipated mid to high $80 million in savings. Our updated guidance now reflects a neutral core expense run rate in the high 80s to low 90s. Looking ahead, as we move into 2023 and beyond, we plan to reinvest a portion of our expense savings into technology and workflow automation within our support and loan origination areas, which will provide scalability benefits as Banner grows both organically and through acquisitions over the long term. We are intentionally using some of these expense gains to invest in technology and process automation to ensure long-term success rather than just making temporary cuts. We have modestly adjusted our guidance due to the wage and core inflation pressures from our vendors that we are starting to see in certain areas.

Understood. Thanks. Maybe one last one for me is just wondering about your repurchase appetite. I saw you had a bit of repurchases during the quarter.

Yes, our guidance remains unchanged. We continue to be opportunistic with our capital deployment, making decisions on a quarterly basis. We are currently experiencing increased loan growth, which necessitates retaining capital to support this. While we don’t explicitly manage TC, we do monitor it, and our regulatory capital ratios are very strong. Decisions will be made each quarter, and our long-term perspective remains that share repurchases are an essential and effective part of our capital strategy. However, we do not have strong expectations regarding the pace of share repurchases, as it will also be based on opportunistic decisions on a quarterly basis moving forward.

Got it. Thank you so much for the time. I really appreciate it.

Thank you, Kelly.

Thank you, Kelly. We now have no further questions registered. So I'd like to hand it back to Mark for some closing.

Thank you, Brika. As I've stated, we're very proud of the Banner team and our second quarter performance. Thank you all for your interest in Banner and joining us on our call today. We look forward to reporting our results to you again in the future. Have a wonderful day, everyone. Bye now.

Thank you all. That does conclude today's call. Thank you again for joining. You may now disconnect your lines.