Banner [BANR] Conference call transcript for 2022 q4
2023-01-20 15:50:03
Fiscal: 2022 q4
Operator: Hello, everyone, and welcome to today's conference, Banner Corporation Fourth Quarter 2022 Conference Call and Webcast. My name is Bruno, and I will be coordinating your call today. I will now hand over to your host, Mark Grescovich, President and CEO of Banner Corporation. Mark, please go ahead.
Mark Grescovich: Thank you, Bruno, and good morning, and Happy New Year, everyone. I would also like to welcome you to the fourth quarter and full year 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?
Rich Arnold: Sure, Mark. Good morning. Our presentation today discusses Banner's business outlook and will include forward-looking statements. So, 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 September 30, 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?
Mark Grescovich: Thank you, Rich. 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 2022 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, as well as provide 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, 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 on 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 $54.4 million or $1.58 per diluted share for the quarter ended December 31, 2022. This compares to a net profit to common shareholders of $1.44 per share for the fourth quarter of 2021 and $1.43 per share for the third quarter of 2022. For the full year ended December 31, 2022, Banner Corporation reported a net income available to common shareholders of $195.4 million compared to $201 million for the full year 2021. The earnings comparison is impacted by: the provision or recapture of credit losses; excess liquidity, coupled with a rapid change in interest rates; our strategy to maintain a moderate risk profile; a gain on 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. To illustrate the core earnings power of Banner, I would direct 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, full year 2022 earnings were $251.9 million compared to $223.1 million for the full year of 2021. Banner's fourth quarter 2022 revenue from core operations increased 9% to $175.7 million compared to $161.5 million for the third quarter of 2022, and $143.4 million in the fourth quarter a year ago. For the full year 2022, revenue from core operations increased 6% to $623.1 million when compared to the full year 2021. We continue to benefit from strong core deposit base and improving net interest margin and good core expense control. Overall, this resulted in a return-on-average assets of 1.34% for the fourth 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 represent 95% of total deposits. Further, we continued our strong organic generation of new relationships, and our loans outside of PPP loans increased 13% over the same period last year. Reflective of the solid performance, coupled with our strong regulatory capital ratios, we announced a core dividend of $0.48 per common share, up 9% from our last dividend. As noted in the release, Banner published our inaugural Environmental, Social and Governance Highlights Report in December. This report addresses many of the ways in which we are striving to do the right thing to support our clients, our communities and our colleagues. And while it covers many of the items I have mentioned before, including providing SBA payroll protection funds, totaling more than $1.6 billion for approximately 13,000 clients, as well as the $1.5 million commitment to support minority-owned businesses in our footprint, a $1 million equity investment in City First Bank, the largest Black-lead depository financial institution in the United States. It goes much further in outlining the level of commitment Banner has to the many communities in which we serve. If you haven't yet, I encourage you to take a few moments to review it. Finally, I'm pleased to say that we continue to receive marketplace recognition and validation of our business model and our value proposition. J.D. 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?
Jill Rice: Thank you, Mark, and good morning, everyone. As was detailed within our fourth quarter press release, Banner's credit metrics remain strong. Delinquent loans as of December 31 remained low at 0.32% of total loans, up 10 basis points when compared to the prior quarter and compared to 0.21% as of December 31, 2021. Adversely classified loans represent 1.35% of total loans, down from 1.39% as of the linked quarter and compared to 2.18% as of December 31, 2021. Nonperforming assets remained modest at 0.15% of total assets, but as noted in the press release, increased $7.8 million in the quarter and now total $23.4 million. Nonperforming assets are comprised primarily of nonperforming loans totaling $23 million. Given another quarter of strong loan growth and coupled with the continued negative economic sentiment, we posted a $6 million provision for loan losses and provided an additional $680,000 to the reserve for unfunded commitments. Net loan losses continued to be modest, and for the full year, Banner reported a net recovery of $1.2 million due to the strong collection work within our Special Assets department. After the provision, our ACL reserve totals $141.5 million or 1.39% of total loans as of December 31, an increase of 1 basis point from the linked quarter and compares to a reserve of 1.45% as of December 31, 2021. The reserve currently provides 615% coverage of our nonperforming loans. Looking at the loan portfolio. Origination volumes continue to be robust in the fourth quarter, with portfolio loan growth of $320 million in the quarter or 13% on an annualized basis. Excluding the growth in the one- to four-family portfolio, the annualized growth rate remained strong at 8%. C&I activity remained strong in the fourth quarter. For the full year, we reported commercial loan growth of $238 million plus an additional $155 million in the small business scored loans, which on a combined basis, equates to growth of 21% in the commercial lending arena. This growth is in spite of nearly $270 million in payoffs over the course of the past 12 months. The new loan originations continue to be modest in size, much of it to existing clients and is diversified both by industry and geographic location. C&I utilization is flat when compared to last quarter, however, it has increased 3% year-over-year. Commercial real estate balances declined $152 million or 4% year-over-year, a function of the significant CRE payoffs experienced this past year. Over the past four quarters, commercial real estate payoffs totaled nearly $500 million due to rate and term refinances, property sales and adversely classified relationship exits. As reported in prior quarters, the growth in the multifamily portfolio represents both new term loans as well as the conversion of completed multifamily construction projects, up 26% year-over-year. With the transfer of multifamily held-for-sale loans to the portfolio this quarter, the multifamily portfolio is now approximately 50% affordable housing and 50% market rate, and as noted before, remains granular in exposure and geographically diversified. Construction and development loan balances grew by 3% in the quarter due to draws on commercial and multifamily construction projects. As anticipated, the volume of one- to four-family residential construction projects has slowed significantly, which is reflected in the reduction in outstanding balances quarter-over-quarter. In total, construction and land development loans reflect an increase of 14% year-over-year, driven primarily by the multifamily construction portfolio. While the volume of residential construction starts has slowed, I am pleased to report that the portfolio continues to perform well and is diversified both in product mix and across our geography. Additionally, our underwriting standards have remained consistent and our land exposure is limited to our strongest sponsors. We expect that we will begin to carry completed homes longer as we move through this next year and anticipate seeing more builder concessions as clients work to keep their finished product moving. Still, our builders remain well capitalized and prepared to absorb the anticipated slower sales activity. Our total residential construction exposure remains acceptable at 6% of the portfolio. And consistent with prior reporting periods, nearly 40% of that is our custom one- to four-family residential mortgage loan products. When you include multifamily commercial construction and land, the total construction exposure remains at 15% of total loans, consistent with last quarter. And as noted in the earnings release, we again reported solid growth in the consumer mortgage portfolio. Again, a function of moving completed all-in-one custom construction loans on balance sheet. We reported a modest increase quarter-over-quarter in HELOC balances, up 4%, with solid growth of 24% year-over-year due to a very successful home equity campaign recorded in prior quarters. Lastly, the growth in other consumer loans year-over-year was the result of a small consumer pleasure boat portfolio located within footprint that was completed in the third quarter. I will wrap up my comments as I have the last few quarters noting that the continued overhang of pessimism as it relates to the economic environment we are facing. Still, Banner's credit culture is designed for success through all business cycles. Our consistent underwriting remains a source of strength, as does our solid reserve for loan losses and robust capital base. Banner's credit metrics remain strong and our moderate risk profile remains intact, positioning us well to navigate whatever the next phase of this economic cycle brings. With that, I'll turn the microphone over to Peter for his comments. Peter?
Peter Conner: Thank you, Jill. And as discussed previously and as announced in our earnings release, we reported net income of $54 million or $1.58 per diluted share for the fourth quarter compared to $49 million or $1.43 per diluted share for the third quarter. The $0.15 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 $14.2 million from the prior quarter due to an increase in net interest income and noninterest income. Noninterest expenses, excluding Banner Forward, increased $3.6 million, due primarily to an accrual for a specific litigation matter, increases in occupancy expense and lower capitalized loan origination costs. Turning to the balance sheet. Total loans increased $292 million from the prior quarter-end as a result of increases in held-for-portfolio loans, partially offset by a $27 million decline in held-for-sale loans. Excluding PPP loans and held-for-sale loans, portfolio loans increased $325 million or 13.1% on an annualized basis. One- to four-family real estate loans grew $148 million in the current quarter as a result of directing potential custom construction mortgage loans on the portfolio. We anticipate a slower pace of on-balance sheet mortgage production in the coming quarters. Ending-core deposits decreased $616 million from the prior quarter-end due to outflows of rate-sensitive balances. The long-term decline in time deposit balances pivoted and increased $2 million from the prior quarter-end for the first time in this rate cycle, as existing clients transferred funds from their core deposit accounts to higher-yielding CDs. We anticipate further declines in core deposit balances, partially offset with growth in time deposits in coming quarters, albeit at a slower pace than we experienced in the fourth quarter, commensurate with the anticipated slowdown in the pace of Fed fund hikes. The loan-to-deposit ratio at the end of the quarter remained at a moderate at 74.5%. Net interest income increased $12.6 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 32 basis points, excluding the impact of PPP loan forgiveness, prepayment penalties, interest recoveries and acquired loan accretion. The average loan coupon increased 37 basis points from the prior quarter due to increases in floating and adjustable-rate loans and higher yields on new fixed rate term loans. The average interest-bearing cash and investment balances declined $571 million from the prior quarter, while the average yield on the combined cash and interest balances increased 41 basis points due to higher yields on both the securities portfolio and overnight funds, driven by higher market rates. Total cost of funds increased 5 basis points to 18 basis points due to increases in deposit rates and borrowing costs. The total cost of deposits increased 3 basis points to 10 basis points, reflecting modest increases in money market rates and CDs. The ratio of core deposits to total deposits remained steady at 95%, the same as last quarter. The net interest margin increased 38 basis points to 4.23% on a tax equivalent basis. The increase was driven by higher yield on loans, securities and overnight cash, 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 rate-sensitive deposits move off the balance sheet, the pace of loan yield increase slows, overnight interest-bearing cash levels decline and deposit rates increase. Going forward, we anticipate loan growth and deposit outflows will be funded primarily with security sales and secondarily with borrowings. Total noninterest income declined $2.5 million from the prior quarter. The current quarter was impacted by a $3.7 million loss on the sale of securities. Core noninterest income, excluding the gains on sales of the securities, gain on the sale of branches and changes in investments carried at fair value, increased $1.6 million. Total deposit fees decreased $628,000 while mortgage banking income increased $2.2 million due to an increase in the fair value of multifamily loans held for sale, partially offset by a decline in residential mortgage gain on sale income. Total residential mortgage production, including both loans held for investment and those held for sale, declined 49% from the prior quarter, reflecting the continued 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 10% of total production, down from 12% in the prior quarter. Multifamily loan production remained even with the prior quarter and the fair value of the held-for-sale portfolio improved as a function of higher yields on recently originated loans and a decline in market rates. Miscellaneous fee income decreased due to gains on nonperforming loans taken in the prior quarter. Total noninterest expense increased $4 million from the prior quarter, due to an accrual for an anticipated settlement of a previously disclosed litigation matter, lower deduction for capitalized loan origination costs and an increase in Banner Forward-related occupancy exit costs. Excluding the litigation settlement accrual and Banner Forward, noninterest expense was flat to the prior quarter. Capitalized loan origination costs decreased due to lower construction one- to four-residential mortgage and HELOC loan production compared to the prior quarter. Compensation expense declined by $1.3 million, due to declines in mortgage loan commission and medical claims expense. Occupancy expense -- occupancy and equipment costs increased $1.5 million due to Banner Forward-related facility exit costs and weather-related building maintenance expense. Professional and legal expense increased $3.7 million due to the aforementioned anticipated settlement of an outstanding litigation matter. Majority of the Banner Forward program initiatives were in place as of the current quarter. We anticipate the remaining run rate in Banner Forward-related performance improvements to occur over the course of 2023 as additional administrative building space is consolidated along with anticipated increases in selected deposit product service charges and continued acquisition of small business and middle market relationships. In closing, the company continues to benefit from rising rates, along with the improved operating leverage put in place by Banner Forward as evidenced by the significant improvement in the company's core ROA and efficiency ratio. This concludes my prepared remarks. Mark?
Mark Grescovich: Thank you, Peter and Jill, for your comments. That concludes our prepared remarks. And Bruno, we will now open the call and welcome your questions.
Operator: Perfect. Thank you, Mark. Our first question is from Jeff Rulis from D.A. Davidson. Jeff, please go ahead. Your line is now open.
Jeff Rulis: Thanks. Good morning.
Mark Grescovich: Good morning, Jeff.
Jeff Rulis: Just a question on the non-accruals, it looks like the increases in the C&I and 1 to 4 family, could you offer any color as to -- is it timing or anything that you're seeing there? And just thoughts on overall, Jill, I appreciate the kind of the statistics of delinquency and other, but specifically those credits that were added and then just a general sense type of commentary.
Jill Rice: Yes, good morning, Jeff. So as to the change in the non-performing, you hit the categories, there isn't any one specific driver on the 1 to 4 family. Some of it is timing. December is month where people tend to put their cash into things other than their mortgage at times. But beyond that, we had a small modest SBA guaranteed loan put on non-accrual, while we work through the credit resolution process and then various small business loans, nothing that is tending to point to any one issue or any one industry or things like that at this point, Jeff?
Jeff Rulis: Okay. And maybe, Peter, on the expenses, I guess, core expenses in the, call it, the mid-90s. You mentioned there can be some probably some Banner Forward exit costs potentially if there's more consolidation. But just kind of getting a sense for kind of growth rate off of maybe that 95-ish base for '23. And if you can touch on your expectation on additional Banner Forward expenses, that would be helpful.
Peter Conner: Sure, Jeff. Yes, the -- so in terms of our guidance for '23, we continue to guide in the low to mid-90s in terms of core expense. For 2023, we have some ins and outs going into '23. We'll have some reductions in occupancy expense as those facilities are consolidated over the course of '23. We don't anticipate any material restructuring or exit costs. There might be a few modest amounts there, but nothing material for '23. And then we do anticipate the compensation line item to continue to run, albeit for first quarter where we have some payroll tax increases to run at or perhaps even a little bit lower than what we had in the fourth quarter because of some elevated bonus, incentive accruals that we are running in Q4. So, my guidance is we'll see something basically similar to that low to mid-90s throughout the course of 2023 with somewhat higher first quarter compensation costs. But overall, we don't see a large increase in the run rate of the expense base going into '23.
Jeff Rulis: Okay, I will step back. Thank you.
Mark Grescovich: Thanks, Jeff.
Operator: Perfect. Thank you, Jeff. Our next question is from David Feaster from Raymond James. David, your line is now open. Please go ahead.
David Feaster: Hey, good morning, everybody.
Mark Grescovich: Good morning, David.
David Feaster: I just wanted -- I wanted to touch base on kind of your thoughts on credit in some regard, you tend to have a very conservative approach and good insights. But curious as maybe as you look at your portfolio and you stress some of the floating rate borrowers that have seen their borrowing costs increased materially over the past 12-months. Have you seen any material changes in debt service coverage ratios? And as you look at the prospects for another 50 basis points of hikes or whatever, how do cash flows and collateral values change? And as some of these loans come up for renewal, just how are you thinking about it? And ultimately, how do you think about the impacts on credit quality? Do we see more restructurings? Or just curious how you think about it.
Jill Rice: Thank you, David. That was a wide-ranging question there as to thinking about credit. But as we go into each of these loans, I need to remind you first that we stress them at origination for a rising rate environment and for changes in collateral value. So we start with the collateral coverage that is strong going in and is prepared to cover us in the event of changes in that collateral value. Debt service coverages for the variable rate loans certainly are being impacted as rates go up, but we do not have a -- our portfolio has strong guarantors behind it with generally secondary sources to supplant anything that might impact the business. So we're watching it. We stress the portfolio. But again, going in, we're looking at it as if we will enter a rising rate environment as if collateral values can change and recognizing that, that very low interest rate environment couldn't last forever, even though it lasted for several years.
David Feaster: Okay. Okay. And then maybe just touching on the growth side. I mean you touched on some of the unique dynamics with mortgage and construction converting the perm and that potentially slowing or decelerating. If we look exclusive of that, loan growth was kind of in that 7% ballpark. I'm just curious how you think about loan growth going forward? You talked about slowing originations and some weaker demand in the market is kind of maybe a mid single-digit pace of growth realistic? Or I guess, even on the other side, what's your appetite for credit here, just given the market backdrop.
Jill Rice: So I'll start with the second half of that question first. Our appetite for credit, the answer to that thinks with the fact that we want to be open for business through all credit cycles. So we want to make loans certainly. We want to make good loans, and we anticipate doing so through the cycle. As to overall loan growth expectations, certainly, they've moderated given the continued economic pessimism, the increased and increasing rate environment and the overall general uncertainty as to market conditions. Pipeline volumes were down as of year-end, and they're rebuilding, but it's at a more measured pace. So with that, I anticipate continued increases in line utilization, the headwinds of the refinance activity have slowed, which will help in terms of loan growth. And with our super community bank model, I anticipate loan growth in the low single-digit range for 2023.
David Feaster: Okay. Okay. That's helpful. And then maybe could you just touch on some of the competitive dynamics on the deposit front and some of the trends you're seeing? It sounds like we're expecting some continued outflows, but just -- could you talk about some of the drivers of the flows that you're seeing? How much of it maybe is more of the surge deposits outflowing or some seasonal dynamics versus clients utilizing cash to either -- rather than -- to either pay down debt or pursue projects and not take on higher cost debt? Or is it more price-sensitive clients migrating to try and get higher rates? Just curious some of the competitive dynamics you're seeing. And if you could talk about how you think about your willingness to defend deposits and keep those on balance sheet versus letting more outflows accelerate?
Peter Conner: Yes, David, it's Peter. Yes, so to kind of address the deposit outflow composition. So in the fourth quarter, when we looked at the -- if we were to dive into the composition of that outflow, two-thirds of that decline came from business accounts. And those clients were reducing excess operating cash and/or paying down loans with their excess cash in the fourth quarter. And then we also saw some of the more rate-sensitive components of our existing consumer client deposit accounts move to online high rate offerings. But we think a lot of this kind of initial decline was some of the surgery excess balance an the most rate-sensitive clients moving early first. As we get further into '23, we think the pace of that outflow will decline as we get to the bedrock of our core deposit base and some of the surge buoyances have already moved. As we said, our deposit base is very diversified both from a geographic market perspective, both in rural metro markets, but it's also very granular. We have a lot of deposit accounts with a relatively low average balance, compared to our peers. And so we think that is going to create integrity and stickiness to our core deposit base through this rate cycle. In terms of our tactics around pricing, we tend to price right in the median of our peer bank and community bank competition market-by-market, and we continue to do that. And then we couple that with selected CD specials to retain some more rate-sensitive balances with Banner. And then finally, we have a delegated exception pricing model that goes down to our branch network that allow on a selected basis, exception pricing of certain clients for retention purposes without having to reprice the entire portfolio. and those tools worked effectively in the last rate cycle back in '17 or '18. We think they were going to be effective again in this rate cycle. That being said, we anticipate low low single-digit pace of core deposit outflow here for the next couple of quarters. Nothing that was unanticipated, and we'll see some of our CD balances actually go up over the same period of time, but we have ample liquidity to support some modest outflow of the higher rate-sensitive balance as we get through the cycle, but we do anticipate a continued slowdown in the pace of outflow as we get further into the rate cycle.
David Feaster: Okay. That's helpful. Thanks, everybody.
Mark Grescovich: Thank you, David.
Operator: Perfect. Thank you, David. Our next question is from Andrew Liesch from Piper Sandler. Andrew, please go ahead. Your line is now open.
Andrew Liesch: Thanks. Hi, good morning, everyone. So just given where liquidity now sits and some of these balance sheet trends that you're noting, do you think the margin has now peaked?
Peter Conner: Hi, Andrew, it's Peter. There's some more to run here in terms of upside. It's just -- it will be at a slower pace, and we have some confidence there in the form of the pace of loan yield repricing and to a lesser extent, in the aggregate securities portfolio continue to move up with the pace of Fed funds hikes and the lag effect of the loan book repricing based on prior increases in Fed funds. And you can see the loan mix reflects that in terms of our adjustable and floating rate book, but also higher yields coming in on the fixed rate side, all overall active. We put a chart in the investor deck this quarter that illustrates not just the production, but the average yield on new production. And if you look at that chart in the fourth quarter, the average yield on new loan originations was about 6.4%. So loans are coming in accretive to our existing portfolio yield, and there's a carrier lag effect that will continue to have a positive effect on average loan yields quarter-to-quarter for the next several quarters. And at the same time, the pace of funding costs will continue to be less than the increase in earning asset yield. It's just going to continue to slow down. We're not going to see the big pace we had in the last couple of quarters, but we do anticipate some room to run here before it peaks out, but it's likely it will peak out in the -- towards the second half of '23, assuming the Fed does another 50 basis points of short-term hikes that would likely peak sometime in the second half of '23.
Andrew Liesch: Okay. That's really helpful. A little bit longer than I would have thought. And then just you also mentioned funding some of the deposit outflows or loan growth with security sales or borrowings. I guess, how do you balance that? Because I would imagine a lot of the securities would result -- sales would result in additional losses, but then the funding might be higher rate on the borrowing side. So how do you balance that decision?
Peter Conner: Yes. We've got -- our securities book is we've characterized it as a barbell in nature in the past with a component of short-duration security along with some more traditional long-duration MBS and CMO securities. There's an adequate amount of liquidity available in the securities portfolio at modest fair value losses that we have -- we're planning to use to fund both loan growth and deposit outflows without any inordinate realized losses as we sell it. So, securities will be the primary source of liquidity. Secondarily, we'll look to the FHLB, but that will be very much of a secondary need. We don't expect a lot of leverage or FHLB borrowings to support both additional deposit outflows or loan fundings here, and we expect very modest losses on any security sales that we need to generate to support that.
Andrew Liesch: Got you. And then can you just remind us what the monthly or quarterly cash flows off the securities book are?
Peter Conner: Yes. I think we've said in the past that the run rate amortization on the securities book (ph) about $25 million a month. So, I think about $75 million to maybe $80 million a quarter and just natural amortization and prepayment activity on the securities book.
Andrew Liesch: Got it. Got it. All right. Thank you for taking the questions. I'll step back.
Mark Grescovich: Thank you, Andrew.
Operator: Perfect. Thank you, Andrew. Our next question is from Andrew Terrell from Stephens. Andrew, your line is now open. Please go ahead.
Andrew Terrell: Hey, good morning.
Mark Grescovich: Good morning, Andrew.
Andrew Terrell: I wanted to go back to some of the discussion on just like the fixed and adjustable loans. I think both are 36% of total and just the repricing dynamics there and maybe some margin tailwinds longer term there. I was hoping, I guess, do you have a breakout of roughly per year, how much in fixed and adjustable rate loans either reprice or mature? .
Peter Conner: Yes, I don't have any exact number for you, Andrew. The duration on our fixed rate loan book is somewhere between 12 and 18 months on a weighted average basis. So you can kind of think about those loans repricing around that level of frequency. We have -- obviously, we're taking a bit more duration overall on the loan book and encouraging our bankers to do that. We've been doing that since the beginning of the rate cycle as to get more duration as we hit the top of the rate cycle. And so, we're seeing some of that effect in the extended duration in the loan book as we get further into the rate cycle by design. The addressable loans are typically FHLB or treasury index loans that reprice between three months and five years. So they have a -- there's a bit of an increase that's still to carry there as we price off of higher baseline indices that have yet to run through the repricing process. And so to remind you, we have floors, we have a floor mandate on all floating rate and adjusted weight loans, and I would characterize on the floating rate book, we have a higher percentage of floors on that subsection of loans that are LIBOR or SOFR overnight price loans, that's closer to 80% of those floating rate loans we have a floor on them, that's within a reasonable strike price of the actual loan yield. So we feel pretty good about the embedded optionality we've got in our loan book without having to go out and put a big portfolio floors in the book. we've got it naturally embedded in our loan portfolio as it is. So we'll have some nicer symmetry when rates come down in the future, given the floors that we've been putting in on the way up.
Andrew Terrell: Okay, I appreciate it. And maybe one for Jill on the construction portfolio. I think a lot of investors kind of focused on dynamics within construction books right now. I was hoping maybe you could just spend a little bit of time talking about, kind of, specific credit metrics that you underwrite to in this book of business? And then maybe any trends you're seeing within the permanent financing market?
Jill Rice: Yes, Andrew. So on the construction portfolio, I don't want to get too specific as to our credit underwriting metrics, but we do require cash equity in on those projects. We have a pretty strong book of builders in there. The market, as we've talked about, they continue to be undersupplied in terms of available homes, and so we're still seeing good movement in that product. As to the underwriting, the permanent mortgage loans, was that the first part -- second part of your question, Andrew?
Andrew Terrell: Yes, that's right. Just as those construction loans go to the perm market.
Jill Rice: Yes. So the permanent loans, we're underwriting to the secondary market generally and then determining whether we want to keep it on balance sheet or not for loan growth. The custom all in one, we price that a little higher than the standard market rate so that theoretically, you would be able to float that down and sell it into the secondary market. The fact we would expect from the loans originated late '21 and into early '22, because of the rate environment at that time, those will still come on to balance sheet as the construction continues because of the low rate at that time. But the underwriting is generally set in that so that we will sell it in the secondary market upon completion.
Andrew Terrell: Okay. I appreciate you taking the questions.
Mark Grescovich: Thank you.
Operator: Thank you, Andrew. Our next question is from Kelly Motta from KBW. Kelly, your line is now open. Please go ahead.
Kelly Motta: Hi, good morning. Thanks for the questions. Congrats on a great quarter. Most of my questions have been asked and answered at this point. But just wondering, given the position you're in, in that you have a lot more liquidity so -- than some other banks that may be are having more issues. Just wondering if the pace or consistency of M&A discussions has picked up at all or any changes there in the last couple of months?
Mark Grescovich: Well, good morning, Kelly, this is Mark, and thank you for the question, and thank you for your compliment. We thought it was a very strong quarter as well. Look, I think the bank M&A environment right now is pretty stagnant just because of various things, not just interest rate sensitivity and a lot of institutions, but also the uncertainty with the credit environment or what you may potentially buy, be buying, along with accounting rules associated with an M&A transaction, so it's going to be fairly muted here. But our philosophy hasn't changed, our policies haven't changed. We continue to have a select group of companies that we admire and that we think would be great partners with Banner, and we continue to have that dialogue. And it's more important to have that dialogue now more than ever. as we get through this cycle as to where the opportunities might exist for combinations. If you think about our acquisition strategy and our combination strategy, it has always been opportunistic. And it has been -- transactions that have been nurtured over several years of understanding their company and their management team and our company and our management team. So I see that process continuing right now.
Kelly Motta: Thanks for all the color, Mark appreciate it. My next one is for Jill, we're just taking a deeper look. I think office is getting -- have continued to get a lot of attention. Can you refresh us on your exposures there? And any sort of LTVs or debt service coverage ratios for that portfolio that you can share with us as well as kind of a nature of that book?
Jill Rice: Sure, Kelly. Like everyone, we continue to watch the office market closely, and our portfolio is performing well. Limited exposure in total, it's 7% of the loan book and really important to think that we -- remember, we don't have or have very limited exposure to anything in the core business districts. Our office portfolio is relatively small at -- or as I already said that 7% of the loan book, but 50% of it is owner-occupied. The granularity adds to limiting the exposure average individual loan size of the investor portion of that portfolio is roughly $2 million. When you add in the owner-occupied portfolio, it drops pretty significantly from that. We've maintained consistent underwriting. I would say that over the course of the last, say post pandemic, our office portfolio has had roughly a 60% loan-to-value going in and a north of 150 debt service coverage going in.
Kelly Motta: Appreciate the color there Jill. That's really helpful. My last question for you all today is just -- I apologize if I missed it, but did you provide any guidance or outlook around fees for 2023?
Peter Conner: Or non-interest income, Kelly?
Kelly Motta: Correct. Yes.
Peter Conner: Yes, we didn't provide any guidance, but we think the fourth quarter is representative. It's a good baseline. It reflects the muted mortgage environment. We're seeing some green shoots in mortgage, given the drop in the 10-year, but our expectation is we're going to run at the lower levels we've seen in the last quarter or two in residential mortgage for the bulk of 2023. And we'll see some the deposit fees, while we have some selected deposit product fee changes coming in the second half of '23 as part of Banner Forward. We're seeing a little bit of offset with the ECR rate going up on our analysis fees as we hold those analysis deposits, we're giving more compensating credit in the ECR rates. So, our deposit fees are going to generally kind of trend neutral to what we've seen in the last quarter. So, all that being said, in multifamily, we think we'll have a better year than we did in '22. So, we should see some upside in multifamily given the marks that we took on it in '22. But overall, we think it will be very similar to '22 in terms of the aggregate core fee income trend in '23.
Kelly Motta: Thank you, Peter. I appreciate the color. I'll step back.
Mark Grescovich: Thank you, Kelly.
Operator: Thank you, Kelly. Our next question is from Tim Coffey from Janney Montgomery & Scott. Tim, your line is open. Please go ahead.
Tim Coffey: Great. Thanks, good morning, everybody and appreciate the opportunity to ask question here. Peter, as you look to sell securities this next year, do you have any -- have you ballparked what the cost of that would be or could be potentially, would it be anything like you saw in the fourth quarter?
Peter Conner: Yes. I think there's kind of a low single-digit loss on sale and liquidating secures that we need to sell the fund loan growth or deposit outflows. But we -- the securities portfolio is stratified with QSIPs that have no loss on them to those that have a more significant mark based on duration. And so, we're going to triage the securities portfolio in terms of sale based on balance, we're going to risk return and yield dilution decision. But there's -- just to remind you, right now, there's $300 million of overnight repos that come up for maturity here in the first and second quarter that have no mark on them and then we've got the remaining portfolio that have relatively low marks on it. So we have ample liquidity there without inordinate loss on sale to take advantage of to fund the company as we go through '23, so we don't think it will be a material number.
Tim Coffey: Okay, Great. That's great color. And then, Mark, you've got probably one of the best -- the best footprint of any West Coast bank. And I'm wondering, as you look across your geography, are you seeing certain markets performing better than others?
Mark Grescovich: Yes. I think -- thanks, Tim, for the question. And look, I think -- we still see very strong economic drivers long-term in the Pacific Northwest. And Northern California is a very stable market, I would characterize. It's where you start to see in Southern California, some of the out migration occurring, some headwinds to the business community associated with some political issues and tax issues. But for the most part, I think as we go through the cycle, all of these geographies are going to benefit very, very well from an economic rebound. Most of the markets in the Northwest are still experiencing population in migration. They're still experiencing per capita income growth, and we expect that trend to continue over time. Even with some of the headline press of some of the technology layoffs or layoffs associated with aerospace, the markets we're in are generally not going to be as impacted as greatly as the headline news. So we're very optimistic about the markets, and we're very optimistic about the trends -- the long-term trends continuing very favorably for us.
Tim Coffey: Okay. And then from -- just maybe a general comment of what you're seeing from your competition. Are there still irrational actors out there in the marketplace? Or are you starting to see people pulling back in a little bit?
Mark Grescovich: Yes, Tim, I'd like to term you've set me up well. People talk about irrational behavior coming from other institutions. I tend to look at it this way from our management team's perspective. We don't believe that other competitors act irrationally, we just simply don't understand the rationale of why they're doing what they're doing. So there are certain folks that I would characterize were much more aggressive in their behavior than then we would be previously. I think that has normalized now given some of the liquidity constraints of some of our competitors. And I think the marketplace is rationalizing because of the amount of uncertainty that's out there. So I think things have stabilized to a more fundamental underwriting and pricing behavior in the marketplace. That being said, when you flip -- that's on the credit and loan front, when you flip to the deposit side, remember, we have folks in our marketplace that -- such as credit unions and some financial institutions that need -- that are more than 100% loan-to-deposit ratios that are pricing deposit base are running certain CD campaigns that are significantly above ours. And we're simply not going to chase that or compete against that. So again, I don't know that that's a rational, but it's what they need to do as they see fit for their own business models. Hopefully, that's helpful. Jill, I don't know if you want to add anything further.
Jill Rice: No, I think you covered that one.
Tim Coffey: Great. All right, that's was all my questions. I appreciate it. Thank you.
Mark Grescovich: Thanks, Tim.
Operator: All right. Thank you, Tim. We currently have no further questions. I will now hand back to our speaker for final comments. Mark, please go ahead.
Mark Grescovich: Thank you, Bruno. As I stated, we are very proud of the Banner team and our fourth quarter and full-year 2022 performance. Thank you for your interest in Banner and joining us on the call today. We look forward to reporting our results to you again in the future. Have a wonderful day, everyone.
Operator: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.
