Banner Corp Q4 FY2024 Earnings Call

Hello, everyone, and welcome to the Banner Corporation's Fourth Quarter 2024 Conference Call and Webcast. My name is Marie, and I will be operating your call today. I will now hand over to your host, Mark Grescovich, the President and CEO of Banner Corporation. Please go ahead.

Thank you, Marie, and good morning and happy new year, everyone. I would also like to welcome you to the fourth quarter and full year 2024 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, forecast of financial or other performance measures and statements about Banner's general outlook for economic and other conditions. We also may make other forward-looking statements in the question-and-answer period following management's discussion. These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ are available from the earnings press release that was released yesterday and our recently filed Form 10-Q for the quarter ended September 30, 2024. 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 2024 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, we want to recognize the devastation that is the result of the California wildfires, and our thoughts and prayers are with all of those impacted. And I want to thank all of my 2,000 colleagues in our company who are working extremely hard to assist our clients and our communities. Banner has lived our core values, summed up as doing the right thing, for the past 134 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'm pleased to report again to you that is exactly what we continue to do. I'm very proud of the entire Banner team that are living our core values. Now let me turn to an overview of our performance. As announced, Banner Corporation reported a net profit available to common shareholders of $46.4 million or $1.34 per diluted share for the quarter ended December 31, 2024. This compares to a net profit to common shareholders of $1.24 per share for the fourth quarter of 2023 and $1.30 per share for the third quarter of 2024. For the full year ended December 31, 2024, Banner reported net income available to common shareholders of $168.9 million. Our strategy to maintain a moderate risk profile and the investments we have made and continue to make to improve the operating performance have positioned the company well for the future. Rob will discuss these details 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, and changes in fair value of financial instruments. Our full year 2024 core earnings were $223.2 million. Banner's fourth quarter 2024 revenue from core operations was $160 million compared to $154 million for the third quarter of 2024. For the full year 2024, revenue from core operations was $615 million. We continue to benefit from a strong core deposit base that has proved to be resilient and loyal to Banner, a very good net interest margin and core expense control. Overall, this resulted in a return on average assets of 1.15% for the fourth quarter of 2024. 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. To that point, our core deposits continue to represent 89% of total deposits. Further, we continued our strong organic generation of new relationships, and our loans increased 5% and our core deposits increased 4% 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 9% from the same period last year, we announced a core dividend of $0.48 per common share. We have published our environmental, social and governance report, which reflects the continued maturation of our approach to ESG. Banner has always been committed to doing the right thing in support of our clients, the many communities we serve and our colleagues. The accomplishments highlighted in this report are meant to reflect the deep connection we have with all of our stakeholders and our commitment to creating positive change in the communities we serve. Finally, I'm pleased to say that we continue to receive marketplace recognition and validation of our business model and our value proposition. Banner again was 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 the world again this year and just recently named Banner one of the Best Regional Banks in the country. S&P Global Market Intelligence rated Banner's financial performance among the top 50 public banks with more than $10 billion in assets, and the digital banking provider Q2 Holdings awarded Banner Bank their Bank of the Year for Excellence. Additionally, the Kroll Bond Rating Agency affirmed all of Banner's investment-grade debt and deposit ratings, and as we've 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 trends in our loan portfolio and her comments on Banner's credit quality. Jill?

Thank you, Mark, and good morning, everyone. Before I discuss Banner's credit metrics and loan portfolio as of year-end, I, too, want to acknowledge the large-scale devastation that has affected the Greater Los Angeles community from the recent wildfires. Banner's exposure from the Palisades and Eaton fires is limited to roughly $1 million in HELOC commitments as of the most recent updates. However, the personal losses experienced by these clients, their family and their entire neighborhood is nothing short of heartbreaking. Recognizing that the road to recovery and rebuilding will be long and arduous, it is important to say that we will look for ways in which we can support our clients and the communities we serve in those efforts. Now turning to the loan portfolio. Delinquent loans ended the quarter at 0.49%, up 9 basis points when compared to both the linked quarter and to the year ending 2023. Adversely classified loans increased $42 million in the quarter and now total 1.69% of total loans compared to 1.34% as of the linked quarter and 1.16% as of year-end 2023. It is important to note that the increase in adversely classified loans is not concentrated in any one business line or industry, and similar to the rise in delinquencies, is reflective of the impact the current economic environment has had on certain borrowers. Nonperforming assets declined $6 million in the quarter and represent 0.24% of total assets, consisting of $37 million in nonperforming loans, $2.4 million in REO and $300,000 in other repossessed assets. While elevated in comparison to recent years, these credit metrics remain modest in light of Banner's loan loss reserve and capital position and are indicative of our culture of early and proactive portfolio management. The net provision for credit losses for the quarter was $3 million, including a $3.2 million provision for loan losses and a release of $200,000 related to unfunded loan commitments. Loan losses in the quarter totaled $4 million and were offset in part by recoveries totaling $1.8 million. For the year, net losses totaled a nominal 2 basis points of average total loans. The provision is the result of the increase in adversely classified loans as well as the moderate loan growth experienced this quarter and now provides coverage of 1.37% of total loans. This compares to coverage of 1.38% as of both the linked quarter and as of year-end 2023. Loan originations declined moderately when compared to the linked quarter, largely due to muted construction and development loan closings and further impacted by reduced consumer demand in the quarter. Loan outstandings, however, grew by $130 million in the quarter and were up $544 million year-over-year, representing 5% growth. I am pleased to note that during the quarter, our commercial lending teams were successful in bringing previous clients back to Banner as well as closing new and expanding existing relationships. This included several new commercial real estate loans reflected in the growth of both owner and investor CRE totals. Together with small balance CRE, commercial real estate totals were up $72 million or 8% on an annualized basis. Similar growth is reflected in the commercial and small business loan totals, up $37 million and $16 million, respectively, quarter-over-quarter. C&I utilization is up 1% this quarter, and year-over-year commercial balances grew by 5%, with small business loans growing another 8%. The reduction in multifamily construction quarter-over-quarter reflects the payoff of affordable housing projects upon completion of construction and receipt of the various term funding sources. Year-over-year, however, the multifamily construction portfolio is up 2% as we continue to support both affordable housing projects and to a lesser extent, middle-income projects to strong developers across the footprint. The residential construction portfolio, at 5% of total loans, continues to perform well. The for-sale product is still benefiting from a reduced level of resale inventory in this higher interest rate environment, and while modestly increasing, the level of completed and unsold starts remains below historical norms. The percentage of all-in-one custom construction projects have continued to decline over the past year, with commitments down approximately 30% as the higher rate environment has muted demand for this product. Land and land development loans were basically flat in the quarter, but have increased by 10% year-over-year as builders seek to replenish lot inventories that will be necessary in the coming years. Together, when you consider residential, commercial and multifamily construction along with land and land development, the total construction exposure remains at an acceptable 14% of total loans. As expected, the agricultural loans began their seasonal decline, with balances down $6 million or 2% in comparison to the linked quarter. And lastly, we reported modest growth of $16 million or 1% in the consumer mortgage portfolio in the quarter, moderated in large part by the $35 million pooled portfolio sale during the fourth quarter. I will close by reiterating that our credit metrics remain solid and reflective of our moderate risk profile. We continue our long history of robust quarterly portfolio reviews, and the level of adversely classified assets remains modest as a percentage of total loans. At the close of 2023, I mentioned that our credit quality metrics should not be expected to further improve given the economic uncertainty at the time. That statement proved true, as did my follow-up, that we remain well positioned to navigate the balance of the economic cycle. We were and we are well positioned to navigate this cycle with a granular loan portfolio that is supported by a strong balance sheet, a robust reserve for credit losses and capital levels well in excess of regulatory requirements. With that, I will hand the microphone over to Rob for his comments. Rob?

Thank you, Jill. We reported $1.34 per diluted share for the fourth quarter compared to $1.30 per diluted share for the prior quarter. The $0.04 increase in earnings per share was primarily due to increases in net interest income and noninterest income partially offset by higher expenses compared to the prior quarter. Total loans increased $83 million during the quarter, with portfolio loans increasing $130 million, partially offset by held-for-sale loans decreasing $47 million. The decrease in held-for-sale loans was primarily due to a pooled loan sale of $35 million. The loan-to-deposit ratio ended the quarter at 84%. Total securities decreased $146 million, primarily due to fair value decreases as a result of interest rates increasing during the quarter as well as normal portfolio cash flows. Deposits decreased by $24 million during the quarter due to time deposits decreasing $22 million, while core deposits were essentially flat. Core deposits ended the quarter at 89% of total deposits, the same as the prior quarter. Total borrowings increased $32 million during the quarter. Banner's liquidity and capital profile continue to remain strong with a robust core funding base, a low reliance on wholesale borrowing and significant off-balance sheet borrowing capacity. In addition, all of our capital ratios are in excess of regulatory well-capitalized levels. Net interest income increased $4.9 million from the prior quarter due to tax equivalent net interest margin increasing 10 basis points to 3.82% and average earning assets increasing $91 million. The 10 basis point increase in net interest margin was driven by the 13 basis point decrease in funding costs as a result of deposit costs decreasing 8 basis points and a larger percentage of funding coming from lower cost in deposits as a result of average borrowing balances declining $180 million. The current quarter also benefited from a balance sheet hedge with a negative carry maturing during the quarter, which added 4 basis points to margin. Noninterest-bearing deposits ended the quarter at 34% of total deposits. The increase in average earning assets was due to average loan balances increasing $112 million, partially offset by total average interest-bearing cash and investment balances decreasing $21 million. The yield on earning assets decreased 2 basis points, driven by loan yields decreasing 2 basis points and yields on investment and cash decreasing 5 basis points. The decrease in loan yields was a result of variable rate loans repricing down due to reductions in the Fed funds interest rate, partially offset by adjustable rate loans repricing higher as well as new production continuing to come on at interest rates above the overall portfolio yield and the benefit of the previously mentioned balance sheet hedge maturing. The average rate on new loan production for the quarter was 7.56%. Total noninterest income increased $2 million from the prior quarter, primarily due to a gain of $735,000 on the sale of a nonperforming loan and a gain of $508,000 on the previously mentioned pooled loan sale. Total noninterest expense increased $3.2 million from the prior quarter. The increase reflected higher professional fees and marketing expenses as well as the prior quarter benefiting from a payroll tax rate fund of $800,000. Our capital and liquidity position gives us the capacity to grow the balance sheet in 2025. This concludes my prepared comments. Now I'll turn it back to Mark.

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

Our first question is from Jeff Rulis of D.A. Davidson. Please go ahead.

Thank you. Good morning.

Good morning, Jeff.

Quick question for Rob on the margin. Were there any recoveries in the quarter that helped the margin or were there none?

Yes, there was nothing unusual, Jeff. The surprise was mainly due to the funding cost. We observed a decline in deposit costs of 8 basis points, but funding costs dropped by 13 basis points because our average outstanding FHLB advances were almost zero for the quarter. This situation improved the spread between funding and deposit costs. Additionally, the balance sheet hedge I referenced earlier rolled off around the middle of the quarter and had a negative carry, contributing an extra 4 basis points to the margin.

On the hedge, we see it as not just a one-time occurrence. The benefit was, but I'm trying to understand the core margin. There's nothing artificial in the 3.82%, which is what I'm getting at.

Yes, that's correct. Yes. Now the balance sheet hedge has rolled off, we'll continue to get that benefit each quarter going forward. So the 3.82% was a pure number.

And Rob, do you have the December average on margin?

Yes. It was a few basis points higher than the quarterly. Deposit costs were 3 basis points lower, so deposit costs were 1.50% compared to 1.53% for the quarter. So call it 2 or 3 basis points higher for December compared to the quarter.

As you look ahead to 2025 regarding interest rate positioning, it seems we may be nearing the end of rate cuts; you might expect a couple more. Is there any general sensitivity going forward? It appears you're making progress on deposit costs, which could positively impact your margins, but I wanted to get your perspective on 2025.

Sure. Yes. If we first look at the first quarter of the year, given the rate cut that we saw in December, I would expect NIM to be relatively flat in Q1 as loan yields will be down a few basis points as the 29% of our portfolio that are floating were repriced down within 30 days, and this will be partially offset by adjustable rate loans continuing to reprice up. On the funding side, I would expect to see some decline in deposit costs in the first quarter, but we'll likely see an increase in some of the wholesale borrowing just because Q4 was so unusually low. So I think this will result in the funding cost seeing a smaller reduction in the first quarter compared to deposit costs. If I just think about the rest of the year, in general, I would expect NIM to be flat to down in a quarter following a rate cut. Assuming no rate cut, I would expect that margin to be up a few basis points each quarter.

I appreciate that. That's really helpful. Mark, I wanted to check in on the mortgage business. A competitor in the region recently announced their exit from the single-family mortgage origination business. Do you see any opportunity there, considering your platform and expertise in that area?

Yes. Thanks for the question, Jeff. Look, I think mortgage banking has been a strength of this organization for 134 years. That's what we were founded on. We have focused our mortgage banking business in conjunction with our community bank and retail banking platform, and we continue to see great opportunity in the mortgage operation. And I think as more people exit, I think we have a core competency that we'll be able to take advantage of quite a bit of the market disruption that's occurring. Now we need some cooperation, obviously, with interest rates. And hopefully, with some pressure from the regulatory agencies to reduce some of the burden to get projects to build, I think we're going to have some good opportunity in the mortgage banking business.

Great. And one quick last one. Jill, 5% growth in 2024, you thinking similar levels in 2025 as you sit today?

Yes, we are aiming for mid-single-digit growth rates for 2025, Jeff. Our commercial pipelines were strong at the end of the year, even with the significant pull-through. However, I want to note that my outlook on loan growth is affected by the interest rate environment, potential immigration reform, and tariffs. These factors could lead to some pullback, but for now, we are targeting mid-single digits.

Thanks, Jeff.

And the next question is from Andrew Terrell of Stephens. Please go ahead.

Hey, good morning.

Hi, Andrew.

I appreciate the insights on the margin and the loan growth. Regarding expenses, how should we approach expense growth in 2025? Could you also mention any specific investments you plan to make that year?

Sure. Thanks, Andrew. It's Rob. So yes, I mean, in general, what I would say for expenses is that I would start with Q4 as kind of a current run rate, and then I would expect to see an increase from that in 2025, just based on normal inflationary increases, normal wage increases, that type of stuff. As far as investments that we're making right now, I mean, we've talked about the new loan and deposit origination system that's expected to go live in Q2 this year. Initially, I would expect that will add to expenses initially as we get it fully rolled out. But once that's fully rolled out, I would expect it to start to create some efficiencies within the organization and add to the scalability of the organization as we continue to grow the balance sheet.

Got it. Okay. And if I could just ask a follow-up on the margin. I guess I'm trying to better understand if the margin was up 10 basis points in the quarter, I get that four of that was related to the hedge benefit, but that carries forward. And it sounds like you're at a pretty decent kind of starting point in December so far. I'm curious as to how the margin could maybe not go up in the first quarter. Is it really just lagged kind of floating asset repricing down and you don't have as much benefit on the deposit cost side? Or can you just expand on the 1Q margin dynamics a bit?

Yes, I believe you made a good point. We have a guaranteed reduction on the variable rate product that we expect. However, the other aspect, which is the deposit cost, is currently less predictable. From what we've observed, during the initial 50 basis point increase, the industry and competitors experienced a higher deposit beta. For the subsequent 225 basis point cuts, with the possibility of prolonged rate cuts from the Fed, it appears that some competitors have begun to slow down the rate at which they are adjusting their deposit costs. Thus, I'm factoring in that we may not achieve as much from the December 25 basis point cut concerning deposit costs.

Got it. Understood. That makes a lot of sense. Okay. Thank you for taking the questions.

Thanks, Andrew.

We have a question from David Feaster of Raymond James. Please go ahead.

Hi. Good morning, everybody.

Good morning, David.

I wanted to follow up on loan growth. Can you share insights on the current sentiment of your clients? With the new year and election, what feedback are you receiving? Additionally, there has been a noticeable increase in C&I originations. Where do you see opportunities and what factors contributed to this growth?

Thanks, David. So as I initially said, there's a level of optimism among the clients, but it's tempered with a kind of wait and see what really happens with some of these other activities with the change in the administration. But the C&I loan growth, as we've talked about before, it takes a long time to pull that through. That's been in the pipeline for some time, and it is across the market. So we saw C&I growth. If you were looking at the loan portfolio growth, California, we saw C&I growth there. We saw C&I growth in Washington. And then in the growth you're seeing in Washington and California, it's really owner occupied and nonowner occupied as well, more in the nonowner investor real estate in the California market, owner-occupied in Washington. But our opportunities are still diversified across the footprint in both product and geography.

Okay. Perfect. And then again, you guys have done a great job working on reducing deposit costs. And you alluded to some of the dynamics in the prepared remarks about deposit balances and interest-bearing movement, all that kind of stuff. But I'm just curious, as you have these conversations with your clients to reduce deposit costs, you guys have done a great job doing it earlier with less lag. Have you seen any attrition? Have you had any pushback at all? And just how do you think about your ability to further reduce deposit costs? And also on the other side, continue driving core deposit growth?

Yes, David. So what I would say there is that the conversations that we have directly with the clients are more tied to the exception price clients, and they tend to be some of our larger business clients that are more sophisticated in nature. And so I think they've been receptive to the reductions that we've done there to this point just because they understand the interest rate environment and that all interest rates are going down from a market standpoint. So I think as long as we remain competitive in the interest rates that we're paying them, which we are, then we haven't seen much pushback there necessarily. And I can't say there's been any real exiting of our clients or changing related to the reductions that we've done to this point. These clients are long-term loyal clients to Banner. We've been obviously there to support their business growth over the years, and we're paying them competitive rates.

And David, this is Mark. Let me just add that we do put in the release that we actually increased the number of accounts that we had at the end of the year compared to the last quarter. But the average balance has stayed the same. So even though we've had some rate reductions, we really haven't seen a shift away from our clients closing accounts or moving.

Okay. That's helpful. And then just touching on credit broadly. I mean, credit, you guys do a very good job proactively and aggressively managing credit, quick to downgrade, slow to upgrade and all that. Curious, is there anything that you're seeing broadly that's causing you any concern? Or just curious what you're seeing on the credit side? And then just specifically within the ag segment, just looking at the reserve allocation that you guys provide, you continue to increase the allocation to ag. Curious what you're seeing there, and is there anything that you're specifically worried about on that front?

The lower commodity prices have definitely affected some borrowers in the agricultural portfolio, which may increase pressure on smaller borrowers in the near future. Regarding reserves, we had a downgrade to substandard in the agricultural portfolio last quarter. This quarter, we also downgraded two additional agricultural credits in the Northern California market. That’s why we are seeing an increase in reserves for that portfolio. It’s worth noting that the agricultural portfolio constitutes only 3% of the total loan book, so it is relatively small overall. However, we are closely monitoring the agricultural market due to the changes in commodity prices and the costs associated with operations. Aside from that, I anticipate that any further credit deterioration will be more specific to individual cases, but the higher interest rate environment is particularly impacting the consumer and small business sectors. We are continuing to pay attention to those areas.

Okay. That’s helpful. Thanks, everybody.

Thank you, David.

We have a question from Andrew Liesch of Piper Sandler. Please go ahead.

Thanks. Good morning, everyone.

Good morning, Andrew.

We've heard quite a bit of optimism from your peers for the M&A environment for 2025. Mark, how has been the cadence and the pace of your conversations with prospective targets?

Thank you for the question, Andrew. I would say it has remained consistent with what we've seen over the past several quarters. Everyone acknowledges that the environment is still competitive. Despite having some supportive factors, competition will persist. We need to continue investing in technology, and scalability will be important. Therefore, I would describe the discussions as positive and more grounded in the realities of what must be accomplished in the coming years. Achieving scale will enable us to reinvest in our business and either grow or maintain our market share through these investments, which requires scale. So, overall, the conversations have been positive.

Got it. You’ve covered all my other questions. I’ll step back. Thanks.

Thank you, Andrew.

We have a question from Kelly Motta of KBW. Please go ahead.

Hi, good morning. Thank you for the questions. I apologize if this has already been discussed; I joined a bit late. Looking at your four-state footprint, you are positioned in some excellent markets. Are there areas within your footprint where you are aiming to increase scale or density, or add teams? Additionally, where do you see the best growth opportunities right now—are they driven more by the economic conditions of that MSA or by market share gains?

Thank you, Kelly. This is Mark. I think you summed it up very, very well, which is we are in some very excellent markets that we feel excited about in terms of growth and what may happen over the next several years in terms of economic prosperity in our regions. So I wouldn't characterize one particular market outside of any other in our footprint. What I would concentrate on is I don't see a reason for us to try and expand outside of our current footprint. We feel very good where we're at. We're creating brands in all of our markets. And with the amount of market disruption that's occurring and continues to occur, quite frankly, we've been very good at hiring and adding additional bankers in our footprint that fit the Banner culture and will help us continue to build the brand. So I think there's going to be continued opportunity as most professional bankers want to associate themselves with an organization that is secure, safe, sound and can deliver consistent performance through all economic cycles. And that's exactly what Banner is doing. And we're gaining attention and being the employer of choice in many cases.

Got it. That's helpful. And then maybe just one more follow-up question on the loan growth outlook. It feels like many of our banks are getting more optimistic about their loan growth prospects. You guys grew loans 5% this year, and I think you reiterated mid-single digits again. Is that number conservative? And what could be the factors that could drive you above that growth rate? Or are you really trying to stay balanced on growth? I'm just wondering if there's potential upside to that growth number and how that could look and play out?

I believe that market disruption could present significant opportunities for growth. However, I also have to consider the potential downsides, such as the uncertainty surrounding the interest rate environment, which suggests that rates may remain high for an extended period. Additionally, immigration reform could greatly affect some of our clients and their ability to expand, and tariffs in our marketplace will certainly have an impact as well. Therefore, I must take a balanced approach since there are both positive and negative factors at play. That’s why we are aiming for mid-single-digit growth.

Got it. Fair enough. Thank you, Jill. I’ll step back. Thank you, Marie. As I've stated, we're very proud of the Banner team and our 2024 performance. Thank you for your interest in Banner and for joining our call today. We look forward to reporting our results to you again next quarter. Have a great day, everyone. Thank you.

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