Good morning or good afternoon. Welcome to Banner Corporation's Third Quarter 2022 Conference Call and Webcast. My name is Adam, and I will be your operator today. I will now pass it over to Mark Grescovich, President and CEO, to start the remarks. Please proceed when you are ready.

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

Sure, Mark. Good morning. Our presentation today discusses Banner's business outlook and will include forward-looking statements. Those statements include descriptions of management's plans, objectives, or goals for future operations, products, or services, forecasts of financial or other performance measures, and statements about Banner's general outlook for economic and other conditions. We also may make other forward-looking statements in the question-and-answer period, following management's discussion. These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ is available from the earnings press release that was released yesterday and the most recently filed Form 10-Q for the quarter ended June 30, 2022. Forward-looking statements are effective only as of the date they're 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 third-quarter performance. Second, the actions Banner continues to take to support all of our stakeholders, including our Banner team, our clients, our communities, and our shareholders. Third, Jill Rice will provide comments on the current status of our loan portfolio. And finally, Peter Conner will provide more detail on our operating performance for the quarter, and an update on our strategic initiative called Banner Forward. As a reminder, the focus of Banner Forward is to accelerate growth in commercial banking, deepen relationships with retail clients, advance technology strategies, and streamline our back office. Before I get started, I want to again thank all of my 2,000 colleagues in our company that continue implementing our Banner Forward initiatives and who are working extremely hard to assist our clients and communities. Banner has lived our core values summed up as doing the right thing for the past 132 years. Our overarching goal continues to be to do the right thing for our clients, our communities, our colleagues, our company, and our shareholders, and to provide a consistent and reliable source of commerce and capital through all economic cycles and change events. I am pleased to report again to you that is exactly what we continue to do. I'm very proud of the entire Banner team that are living our core values. Now let me turn to an overview of our performance. As announced, Banner Corporation reported that net profit available to common shareholders of $49.1 million, or $1.43 per diluted share for the quarter ended September 30, 2022. This compared to a net profit to common shareholders of $1.44 per share for the third quarter of 2021 and $1.39 per share for the second quarter of 2022. The earnings comparison is impacted by the provision or recapture for credit losses. Excess liquidity coupled with a rapid change in interest rates, our strategy to maintain a moderate risk profile, a gain on 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 pretax pre-provision earnings, and excluding the impact of merger and acquisition expenses, COVID expenses, gains and losses on the sale of securities, Banner Forward expenses, changes in fair value of financial instruments, and the gain on the sale of branches. Earnings were $66.9 million for the third quarter of 2022 compared to $57.8 million for the second quarter of 2022. This measure I believe is helpful for illustrating the core earnings power of Banner. Banner's third quarter 2022 revenue from core operations increased 9% to $161.5 million, compared to $148.2 million for the second quarter of 2022 and $153.6 million compared to the third quarter a year ago. We continue to benefit from a large earning asset mix and improving net interest margin and good core expense control. Overall, this resulted in a return on average assets of 1.18% for the third quarter of 2022. Once again, our core performance reflects continued execution on our Super Community Bank strategy that is growing new client relationships, adding to our core funding position by growing core deposits, and promoting client loyalty and advocacy through our responsive service model. To that point, our core deposits increased 1.5% compared to September 30, 2021, and represent 95% of total deposits. Further, we continue our strong organic generation of new client relationships, and our loans outside of PPP loans increased 10% over the same period last year, reflective of the solid performance, coupled with our strong regulatory capital ratios. We announced a quarter dividend in the quarter of $0.44 per share. To provide support for our clients through this volatile cycle, we made available several assistance programs. Banner is closing our program of providing SBA payroll protection funds, totaling more than $1.6 billion for approximately 13,000 clients. Also, we made an important $1.5 million commitment to support minority-owned businesses in our footprint, a $1 million equity investment in City First Bank, the largest black-led depository financial institution in the United States, significant contributions to local and regional nonprofits, and it provided financial support for emergencies and basic needs in our footprint. Finally, I'm pleased to say that we continue to receive marketplace recognition and validation of our business model and our value proposition. JD Power and Associates ranked Banner the number one 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 received an outstanding CRA rating in our most recent CRA examination. Let me now turn the call over to Jill to discuss trends in our loan portfolio and her comments on Banner's credit quality. Jill?

Thank you, Mark. And good morning, everyone. As detailed within our third quarter press release, Banner's credit metrics continue to be strong. Delinquent loans as of September 30 remain nominal at 0.22% of total amount, up three basis points when compared to the prior quarter and compared to 0.20% as of September 30, 2021. Adversely classified loans represent 1.39% of total loans, down from 1.63% as of the linked quarter, and compared to 2.45% as of September 30, 2021. Nonperforming assets declined by $3.5 million and now total $15.6 million or 0.10% of total assets and are comprised primarily of nonperforming loans totaling $15.2 million. And very briefly touching on asset quality, adversely classified loans continued to decline, reducing by $18 million in the quarter and are down $89 million or 40% year-over-year. Due to continued strong loan growth in the third quarter as well as the impact of increased economic uncertainty, we posted a $6.3 million provision for loan losses and released $205,000 of the reserve for unfunded commitments. Loan losses continue to be modest and we're once again more than offset by recoveries. After the provision, our ACL reserve totaled $135.9 million or 1.38% of total loans as of September 30, an increase of two basis points from the linked quarter and compares to a reserve of 1.52% as of September 30, 2021. The reserve currently provides 895% coverage of our nonperforming loans. Looking at the loan portfolio, we again reported strong loan originations, core portfolio loan growth, excluding PPP loans was $388 million or 4.1% for the quarter, and 16.3% on an annualized basis. If we exclude the growth in one- to four-family portfolios, the annualized growth rate remains strong at 10.7%. C&I activity remains healthy in the third quarter in spite of the rising rate environment. Commercial loans excluding PPP grew by nearly 5% or $53 million in the quarter, which has an annualized rate of 18%, and balances are now 18% higher than those reported as of September 2021. Additionally, there was strong growth in the small business scored portfolio, up 5% or $41 million quarter-over-quarter. Balances have increased 17% over the past 12 months. C&I utilization is up 2% in the quarter and compares to levels not seen since mid-2020. A review of the new volume confirms that exposures continue to be modest in size as much of it is to existing clients and diversified both by industry and geographic location. Commercial Real Estate balances were relatively flat, the reduction within the investor CRE portfolio was due to expected payoffs. And the increase in the owner-occupied CRE portfolio was a mix of new property acquisitions, as well as rate and term refinances for existing clients. The growth in the multifamily portfolio represents both new term loans as well as the conversion of completed multifamily construction projects. And I will remind you that our multifamily portfolio is split approximately 55% affordable housing and 45% market rate and remains granular and diversified within the footprint. Construction and development loan balances grew by 3% in the quarter, primarily due to the continued draws on residential and multifamily construction projects. This is in spite of significant residential payoffs that continued in the quarter at project completion. As I've said before, we do expect that the increasing mortgage rates will have an impact on the velocity of home sales within our residential spec portfolio. However, through the third quarter, our residential builder clients have been continuing to move completed homes; report of cancellations on presales to date have not been material. In reaction to the rising rate environment, we are beginning to see them slow new starts. Our total residential construction exposure remains acceptable at 6.8% of the portfolio, with nearly 40% of that comprised of our custom one-to four-family residential mortgage loan product. When you include multifamily, commercial construction, and land, the total construction exposure remains at 14.7% of total loans. The growth in agricultural loans continues to reflect the seasonal drop on lines of credit through September 30, with balances of 8% year-over-year excluding PPP loans. And as noted in the earnings release, we again reported significant growth in the consumer mortgage portfolio. This was primarily the result of holding completed construction mortgage loans on the balance sheet, many of which would have previously been refinanced for a lower rate and sold into the secondary market upon completion. Reflecting the success of the summer home equity loan promotion, HELOC balances also added materially to the growth of $39 million or 8% again this quarter compared to growth of $36 million in the linked quarter. Lastly, the growth in the consumer loans is in other consumer loans is the result of purchasing a small portfolio of consumer pleasure boat loans within our footprint that was completed in the quarter. With that, I will wrap up my comments noting that the economic environment continues to be uncertain and evermore pessimistic. Still, as I said last quarter, Banner's credit culture is one that is designed for success through all business cycles. You've heard us say many times before that our credit quality metrics can't get any better than they currently are. And that is certainly true again today. If or I should probably say when the effects of a recession begin to emerge, we will not be immune. But our consistent underwriting will be to our benefit, as well as our solid reserve for loan losses and robust capital base. We continue to be well positioned to move through the next phase of this economic cycle. With that, I'll turn the microphone over to Peter for his comments. Peter?

Thanks, Jill. As discussed previously, and as announced in our earnings release, we reported net income of $49 million or $1.43 per diluted share for the third quarter, compared to $48 million or $1.39 per diluted share for the second quarter. The $0.04 increase in earnings per share was due to an increase in net interest income, partially offset by lower noninterest income, higher noninterest expense, and a larger provision for loan losses this quarter. Core revenue excluding gains and losses on securities, changes in fair value of financial instruments carried at fair value, and gains on the sale of sold branches increased $13.2 million from the prior quarter, due to an increase in net interest income partially offset by a decline in mortgage-related noninterest income. Noninterest expenses excluding Banner Forward increased $4.1 million, due primarily to lower capitalized loan origination costs along with increased bonus, commission, and marketing expense. Turning to the balance sheet, total loans increased $385 million from the prior quarter end as a result of increases in health portfolio loans, partially offset by an $18 million decline in PPP loans, excluding PPP loans and held for sale loans, portfolio loans increased $388 million or 16.3% on an annualized basis. One- to four-family real estate loans grew $157 million in the current quarter as a result of directing residential custom construction and jumbo mortgage loans onto the portfolio. We anticipate a slower pace of on-balance sheet mortgage production in coming quarters. Ending core deposits increased $56 million from the prior quarter end due to normal seasonal factors, partially offset with outflows and rate-sensitive balances. Time deposit balances declined by $34 million from the prior quarter end driven by higher class CDs continuing to rollover at lower retention rates. Net interest income increased by $17.4 million from the prior quarter due to an expansion of the net interest margin, coupled with growth in average loans outstanding and lower balances of lower yielding overnight interest-bearing cash. Compared to the prior quarter, loan yields increased 28 basis points due to increases on 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 33 basis points from the prior quarter due to increases in floating and adjustable-rate loans and higher yields on new fixed-rate term loans. Total average interest-bearing cash and investment balances declined $340 million from the prior quarter while the average yield on the combined cash and investment balances increased 52 basis points due to a lower mix of overnight funds and higher yields on both the securities portfolio and overnight funds driven by higher market rates. Total cost of funds increased two basis points to 13 basis points due to modest increases in deposit rates and repricing of junior subordinated debentures. The total cost of deposits increased one basis point to seven basis points, reflecting small increases in money market rates. The ratio of core deposits to total deposits remained steady at 95%, the same as the last quarter. The net interest margin increased 41 basis points to 3.85% on a tax-equivalent basis. The increase was driven by higher yields on securities, overnight cash, and loans coupled with a larger mix of loans and a lower mix of overnight cash within the earning asset base. In the coming quarters, we anticipate a slowdown in the pace of margin expansion as price-sensitive deposits move off balance sheet, loan growth moderates, overnight cash levels decline, and deposit rate increases accelerate. Excess overnight cash is anticipated to decline in coming quarters to fund both continued loan growth and deposit outflows. Total noninterest income declined $11.6 million from the prior quarter. The prior quarter benefited from a $7.8 million gain on the sale of four branches. Core noninterest income excluding gains on the sale of securities, and gains on the sale of the branches, and changes in investments carried at fair value declined $4.2 million. Total deposit fees increased $450,000, while mortgage banking income declined $3.9 million due to declining residential mortgage production, coupled with the fair value write-down of multifamily loans held for sale. Total Residential Mortgage production, including both loans held for investment and those held for sale, declined 9% from the prior quarter. Held for sale on production declined 33% from the prior quarter, reflecting the headwinds of higher rates and a slowdown in home sales. Within Residential Mortgage production, the percentage of refinance volume continued to decline as a function of rising rates, dropping to 12% of total production down from 18% in the prior quarter. Multifamily loan production ramped up modestly in the third quarter. However, the fair value of the loans held for sale was negatively impacted by the rise in the long end of the yield curve during the quarter, resulting in a $2.2 million write-down. Miscellaneous fee income decreased $362,000 due to lower swap and SBA related fees. Total noninterest expense increased $3 million from the prior quarter, primarily due to lower deductions for capitalized loan origination costs, increased compensation, marketing, and deposit insurance costs while Banner Forward implementation costs declined $1.1 million to $400,000 in the current quarter; excluding Banner Forward, noninterest expense increased $4.1 million. Capitalized loan origination costs decreased due to lower construction, one-to-four residential mortgage, and HELOC loan production in the third quarter. Compensation expense increased by $800,000 due to increases in bonus and loan production related commission expense. Occupancy and equipment costs declined due to facility extra costs in the prior quarter. Advertising and marketing costs increased as a result of new promotions and seasonal increases in CRA contributions. Deposit Insurance increased due to asset mix rate factor adjustments. Banner Forward remains on track. We just completed the fifth consecutive quarter of implementation, and approximately 82% of the initiatives from a program value perspective have been executed and are reflected in the current quarter run rate. We are now seeing lift from revenue-related initiatives reflected in the form of a higher pace of loan growth and an increase in deposit service charges. A portion of the elevated expenses this quarter was tied to loan production related variable costs that are anticipated to reduce in coming quarters. And we anticipate further improvement in the company's core efficiency ratio. In closing, the company continues to benefit from rising rates as evidenced by further margin expansion this quarter, stable low-cost deposit days, and strong diversity of loan growth.

That concludes my prepared remarks. And Adam, we will now open the call and welcome your questions.

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

Thanks. Good morning. I have a quick question regarding expenses. You've mentioned the efficiencies from the Banner Forward initiatives. Will those be mostly realized in the fourth quarter? Can you discuss any additional costs associated with the initiative in the fourth quarter and provide some insights into the expense run rate? I'm also curious about the factors affecting this quarter's expenses in the mid-90s range and what the growth rate may look like for 2023, considering that the efficiencies from Banner Forward will be mostly implemented by the year's end?

Yes. Hi, Jeff. It's Peter. Yes. In terms of the first part of your question, we don't anticipate any material additional Banner Forward restructuring costs going forward. We, there are some modest remaining efficiencies to be captured here over the next two to three quarters around some facilities optimization, and to a much lesser extent, some staff efficiencies in a couple of remaining areas, but they're very modest. So we, the comment I made earlier about kind of our variable costs in the commission. And compensation line items are really a function of, there's a bit of a mismatch between loan production and recognition of the expense to generate that production this quarter, that I expect to moderate down in the fourth quarter. That being said, we know we're experiencing some wage inflation and some general inflation and the cost of running our operations that continues to impact our core run rate. So at this stage, we're looking at a low 90s core run rate going into '23 given the inflationary pressures and some of the wage inflation that we've seen, that's being moderated somewhat by some of the remaining efficiencies that will be recognized next year, but the majority of our efficiency initiatives are behind us at this point.

Okay, just to clarify, that's a sub $90 million quarterly expense run rate.

It would be low 90s.

Low 90s.

Yes.

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

We are observing that our peer banks are starting to offer promotional rates and are increasing some of their standard rates. Therefore, we expect to see a slight increase in our deposit data. Some of our price-sensitive deposits may decrease modestly, but we anticipate this will be minimal. We expect some of the excess balances that are price-sensitive will leave our balance sheet, although again, only to a small extent. Meanwhile, we are still gaining new clients, particularly in our small business and commercial sectors, which will help offset some of that decrease. However, I do not foresee significant overall deposit growth heading into next year due to the competing factors of some pricing declines and ongoing client acquisition. Essentially, we expect to remain stable, which will depend on the interest rate landscape and the competitive deposit pricing in our market.

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

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

The next question comes from Andrew Liesch from Piper Sandler.

Hi, thanks for taking the questions. I just want to talk a little bit more on the margin guide here. And I guess where a new loan being added at during the quarter relative to the average.

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

Got it. And then just on the deposit beta is basically zero so far, where do you expect them to rise to or what is the modeling that you guys are incorporating into your outlook?

Yes, I'd say they've been obviously very low so far, we expect the deposit betas will catch up on a cumulative basis as we get further into the rate cycle. And the deposit betas will look, our expectation and modeling assumptions, they look similar to what they looked like back in 2017 for Banner right. So if you were to look back at what Banner did and how we responded to the last rate cycle, in terms of deposit betas and how we repriced our interest-bearing accounts, that would be a good model for what we expect going into this rate cycle, albeit with much longer lags. But we think the cumulative deposit beta will be similar. I think, from our perspective, we've never been a high price payer on deposits. And we weren't in the last cycle. So to the extent there were any price-sensitive clients in our deposit base, most of them had left in the last rate cycle. And so we expect a high level of resiliency in our deposit base, and I'll remind you, we've got a very granular deposit base, and it's very geographically diversified between metro and rural markets. And so that works to our advantage. On top of that, we have a high level of noninterest-bearing balances that are linked to operating accounts of our small business and commercial clients that are really used for operations and not for yield. So we think we've got a good position going into this one. But we're always going to be somewhat conservative in our guidance and assume that the beta experience will ultimately be similar at the end of the rate cycle as it was the last one for us.

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

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

The next question is from Andrew Terrel from Stephens.

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

Sure, Andrew. We anticipate that the bond portfolio will gradually decrease over time and do not plan to add more to this investment portfolio. Currently, it is generating approximately $75 million to $80 million in cash flow each quarter, given the current rate outlook. We also have the option to liquidate a portion of it without incurring any loss, particularly from the shorter end of the yield curve if necessary in the future. However, we currently have enough overnight cash to support loan growth for a significant period, as well as to manage any potential deposit outflows. In the near term, we do not expect any decline in the securities portfolio, except for some minor cash flow amortization.

Okay, understood, I appreciate it. And I wanted to ask just on the TC ratio kind of in a below six territory and your regulatory capital is obviously in a fine position. I was curious if TC played into kind of your thinking around execution of a buyback or any kind of capital actions, just love to hear kind of thoughts on TC ratio worth here.

We did not repurchase any shares this quarter, primarily due to the uncertainty and increased volatility in the economic and trade outlook. We are waiting for a more stable period in 2023 before resuming share repurchases. We frequently model the TC number under various rate scenarios and, based on the current rate outlook and economic consensus from sources like Bloomberg and Moody's, we see that our TC ratio tends to improve as AOCI diminishes over time and we continue to generate retained earnings while asset growth moderates. This indicates that the TC ratio will increase, as our AOCI is closely linked to the five-year treasury, which has an inverse relationship with it. Unless there is a sharp rise in five-year treasury rates, we expect the TC number to grow naturally over time for the reasons stated.

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

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

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

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

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