Banner (NASDAQ:BANR) Q2 2022 Earnings Call

0:00 Thank you all and welcome to Banner Corporation second quarter 2022 conference call and webcast. My name is Brita and I'll be today's event specialist. There will be a question and answer session today and if you wish to ask a question you may press start followed by one on your telephone keypad. If you change your mind at any time press start two and for operator assistance press start zero. Your host for today's call will be Mark Grescovich, President and CEO for Banner Corporations. So, Mark, please go ahead when you're ready.

0:36 Thank you, Brica, and good morning, everyone. I would also like to welcome you to the second quarter of 2022 earnings call for Banner Corporation. As is customary, joining me on the call today is Peter Connor, 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?

1:02 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 the 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 10Q for the quarter ended March 31st, 2022.

1:53 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.

2:05 Thank you, Rich. Today we will cover four primary items with you. First, I will provide you high-level comments on Banner's second quarter performance. Second, the actions Banner continues to take to support all of our stakeholders, including our Banner team, our clients, our communities, and our shareholders. Third, Jill Rice will provide comments on the current status of our loan portfolio. And finally, Peter Connor will provide more detail on our operating performance for the quarter in 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, advanced technology strategies, and streamline our back office.

2:57 I want to begin by thanking all of my 2,000 colleagues in our company that have helped develop Banner forward and are working extremely hard to assist our clients and communities. Banner has lived our core values summed up as doing the right thing for 131 years. Our overarching goal is to do the right thing for our clients our communities, our colleagues, our company, and our shareholders to provide a consistent and reliable source of commerce and capital through all economic cycles and change events. I am pleased to report that is exactly what we continue to do. I'm very proud of the entire Banner team that are living our core values.

3:42 Now let me turn to an overview of our performance. As announced, Banner Corporation reported a net profit available to common shareholders of $48 million or $1.39 per diluted share for the quarter ended June 30th, 2022. This compared to a net profit to common shareholders of $1.56 per share for the second quarter of 2021 and $1.27 per share for the first quarter of 2022. The earnings comparison is impacted by the provision or recapture for credit losses, excess liquidity coupled with a rapid changing interest rate, our strategy to maintain a moderate risk profile, continued good mortgage banking revenue, a gain on the sale of four branches, and the acceleration of deferred loan fee income associated with the SBA loan forgiveness of paycheck protection loans.

4:44 Peter will discuss these items in more detail shortly. Directing your attention to pre-tax, pre-provision earnings and excluding the impact of merger and acquisition expenses, COVID expenses, gains and losses on the sale of securities, banner forward expenses, changes in fair value of financial instruments, and the gain on the sale of branches, earnings were $57.8 million for the second quarter of 2022 compared to $49.7 million for the first quarter of 2022. This measure I believe is helpful for illustrating the core earnings power of Banner. Banner's second quarter 2022 revenue from core operations increased 8% to $148.3 million compared to $137.6 million for the first quarter of 2022 and down slightly compared to the second quarter a year ago.

5:46 We continue to benefit from a larger earning asset mix and improving net interest margin, solid mortgage banking fee revenue and good core expense control. Overall, this resulted in a return on average assets of 1.16% for the second quarter of 2022. Once again, Our core performance reflects continued execution on our super community bank strategy, that is, growing new client relationships, adding to our core funding position by growing core deposits, and promoting client loyalty and advocacy through our responsive service model. To that point, our core deposits increased 5% compared to June 30, 2021, and represent 95% of total deposits.

6:36 Further, we continued our strong organic generation of new client relationships and our loans outside of PP loans increased 5% over the same period last year. Reflective of this solid performance, coupled with our strong tangible common equity ratio, we announced a core dividend in the quarter of 44 cents per share. Our branches continue to be fully operational and we have reinstated our return to the workplace policies. To provide support for our clients through this crisis, we made available several assistance programs. Banner has provided SBA payroll protection funds totaling more than $1.6 billion for approximately 13,000 clients.

7:25 Also, we made an important $1.5 million commitment to support minority-owned businesses in our footprint a $1 million equity investment in Citi First Bank, the largest black-led depository financial institution in the United States, significant contributions to local and regional nonprofits, and have provided financial support for emergency and basic needs in our footprint. Finally, we continue to receive marketplace recognition and validation of our business model and our value proposition. J.D. Power & 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 has received an outstanding CRA rating.

8:18 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.

8:26 Thank you, Mark, and good morning, everyone. I am pleased to be able to report solid credit metrics this morning once again. Banner's delinquent loans as of June 30th remain nominal at 0.19% of total loans down from 0.21% when compared to the prior quarter and down from 0.24% as of June 30th, 2021. Adversely classified loans represent 1.63% of total loans down from 1.95% as of the linked quarter and compare to 2.83% as of June 30th, 2021. Non-performing assets remain low at 19.1 million and include non-performing loans of 18.7 million and REO and other assets of 357,000. This represents 0.12% of total assets and compares to 0.19% as of June 30th, 2021.

9:13 Due to strong loan growth in the quarter, and coupled with the increasing economic uncertainty as we look to the balance of 2022 and into 2023, we posted a $3.1 million provision for loan losses as well as an additional $1.4 million provision for unfunded commitments. Losses in the quarter were again offset by recoveries and after the provision, our ACL reserve totaled $128.7 million or 1.36% of total loans as of June 30th down one basis point from the linked quarter and compares to a reserve of 1.53% as of June 30th, 2021. The reserve currently provides 688% coverage of our non-performing loans.

10:03 Looking at the loan portfolio, we again reported strong loan originations with solid growth across many of the business lines this quarter. We reported core portfolio loan growth excluding PPP loans of $338 million or 3.7% for the quarter and 14.9% on an annualized basis. If we exclude the growth in the one-to-four family portfolio, the annualized growth rate remains strong at 8.3%. And I will note that this loan growth was not the result of loosening underwriting standards. Further, our commercial and commercial real estate pipelines remain healthy, although as would be expected, there has been a recent slowdown in activity as clients react to the increasing interest rate environment. Looking at specific product lines, C&I activity remained robust in the second quarter.

10:50 Commercial loans, excluding PPP, grew by nearly 9% or $94 million in the quarter, which is an annualized rate of 35% and balances are now 5% higher than reported as of June 2021. Additionally, there was strong growth in the small business scored portfolio up 6% or 49 million due to the successful small business campaign that rolled out in the second quarter.

11:13 Balances are 16% higher than that reported a year ago.

11:17 It is also worth mentioning that while overall C&I utilization inched up 1% in the quarter, it remains 6% below historical norms. A review of the new volumes reflected that exposures continue to be modest in size and continue to be diversified by industry as well as across our footprint. As noted last quarter, commercial real estate totals continue to be hindered by payoffs despite solid originations and are down 41 million in a quarter or 4% annualized. The investor CRE portfolio reduced by 43 million quarter over quarter and the owner-occupied CRE portfolio declined by another 28 million in a quarter. The payouts during the quarter totaled nearly $90 million within the investor and owner-occupied CRE portfolios.

12:03 These reductions were offset in part by an increase in small balance CRE totals of $30 million, also the result of the successful small business campaign during the quarter. The multifamily portfolio reduced by 4% quarter-over-quarter but is up 23% when compared to June 30, 2021. This portfolio has split approximately 55% affordable housing and 45% market rate and remains granular in exposure and geographically diversified within our footprint. Construction and development loan balances continue to reflect strong production even as we continue to experience rapid payoffs within the residential spec portfolio as construction is completed. Commercial construction balances grew by 14 million or 8% in the quarter and one to four family construction loans grew by 43 million or 7% in the quarter.

12:53 This was in part offset by reductions in the multifamily construction portfolio of 17 million or 6% quarter over quarter. Slightly over half of this reduction was due to a single anticipated secondary market refinance at completion. I will reiterate what I noted last quarter. We do expect that the increasing mortgage rates will have an impact on the velocity of home sales within our residential spec portfolio, although we have not seen that materialize to date. The housing markets in which we do business continue to be supply constrained with the inventory of completed and unsold homes remaining low. Consistent with prior periods, our total residential construction exposure remains acceptable at 6.6% of the portfolio with nearly 40% of that comprised of our custom one to four family residential mortgage loan portfolio.

13:42 When you include multifamily commercial construction and land, the total construction exposure remains at 14.8% of total loans. As anticipated, agricultural loans reflect the seasonal draws on lines of credit with balances of $38 million quarter over quarter or 16% and are up 17.5% year over year excluding PPP loans. As was noted in the earnings release, there was significant growth in the consumer mortgage portfolio. This was the result of a successful jumbo mortgage campaign in the second quarter as well as holding a portion of the completed custom construction mortgage loans in an effort to rebuild balances that ran off during 2021 and earlier this year. In total, balances grew by $150 million or 21% quarter over quarter and are now up 42% year over year. Lastly, home equity lines again added materially to the loan growth in the quarter, up $36 million or 8% from the linked quarter.

14:41 Very briefly, touching on asset quality, adversely classified loans continue to decline, reducing $24 million in the quarter and are down $118 million, or 43% year over year. Overall, adversely classified loans are down 64% since the pandemic-induced high reported in September of 2020. With that, I will wrap up my comments, noting that the uncertain economic environment has only gotten more pessimistic over the past few months. Still, Banner's credit culture is one that is designed for success through all business cycles. Our underwriting has remained consistent even through the last extended economic expansion. Our loan portfolio continues to be diversified by both product type and geography and is granular in nature. We continue to have a solid reserve for loan losses and robust capital. And most importantly, our clients have continued to perform well as reflected in our credit metrics. In short, we are well positioned to move through the next phase of this economic cycle. With that, I'll turn the microphone over to Peter for his comment.

15:43 Peter?

15:46 Thank you, Jill, and good morning, everyone. As discussed previously and as announced in our earnings release, we reported net income of $48 million or $1.39 per diluted share for the second quarter, compared to $44 million or $1.27 per diluted share for the first quarter. The 12 cent increase in earnings per share was due to an increase in net interest income and non-interest income, partially offset by provision expenses quarter. Core revenue, excluding gains and losses on securities, changes in fair value financial instruments carried at fair value, and gains on the sale of sold branches increased $10.7 million from the prior quarter due to an increase in net interest income. Core non-interest expenses, which exclude Banner Forward, debt extinguishment, and M&A-related expenses, increased $2.5 million due to higher compensation, fraud losses, and professional services expense.

16:41 Turning to the balance sheet, total loans increased $315 million from the prior quarter end as a result of increases in health portfolio loans, partially offset by a $28 million decline in PPP loans. Excluding PPP loans and held for sale loans, portfolio loans increased $338 million or 14.9% on an annualized basis. One to four family real estate loans grew $150 million in the current quarter as a result of redirecting a portion of residential custom construction loans previously earmarked for sale at completion on the portfolio with an increase in jumbo mortgage production. We anticipate a similar pace of one to four mortgage loans held for investment growth in the coming quarter. Ending core deposits decreased $267 million from the prior quarter end as a result of the sale of four branches that closed in late June, accounting for $170 million of the decrease. The remaining decrease in deposits reflects a combination of seasonal outflows associated with tax payments, along with exits of rate-sensitive deposit balances seeking higher yields. Time deposit balances declined $44 million from the prior quarter end, of which $8 million were due to the aforementioned branch sale and the remaining $36 million declined driven by higher-cost CEs continuing to roll over at lower retention rates.

18:03 Net interest income increased by $10.4 million from the prior quarter due to an expansion of the net interest margin coupled with growth in average loan upstandings and lower balances of lower-yielding overnight interest-bearing cash. Compared to the prior quarter, loan yields increased four 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 11 basis points from the prior quarter due to increases in floating and adjustable rate loans. Total average interest-bearing cash and investment balances declined $275 million from the prior quarter, while the average yield on the combined cash and investment balances increased 46 basis points due to a lower mix of overnight funds and higher yields on both the securities portfolio and overnight funds driven by higher rates, higher market rates.

19:07 Total cost of funds declined one basis point to 11 basis points as a result of lower borrowing costs. The total cost of deposits remained flat at six basis points in the second quarter as the bank did not raise posted deposit rates during the quarter, while borrowing costs declined due to the payoff of a higher cost FHLB advance in the prior quarter. The ratio of core deposits to total deposits was 95% in the second quarter, the same as the previous quarter. The net interest margin increased 26 basis points to 3.44% on a tax equivalent basis. The increase was driven by higher yields on securities, overnight cash, and loans, coupled with a larger mix of loans and a lower mix of overnight cash within the earning asset base. In the third quarter, we anticipate a commensurate pace of margin expansion, followed by a slowdown in future quarters as price-sensitive deposits move off balance sheet, loan growth continues, overnight cash levels decline, and deposit rates accelerate.

20:09 Excess overnight cash is anticipated to decline at a more accelerated pace in coming quarters to fund both continued loan growth and deposit outflows. Total non-interest income increased $7.7 million from the prior quarter. The current quarter benefited from a $7.8 million gain on the sale of four branches. Core non-interest income excluding gains on the sales of securities, gain on the sale of branches, and changes in investments carried at fair value increased $325,000. Total deposit fees are flat, while mortgage banking income declined $500,000 due to declining refinance activity and lower gain on sales spreads. While overall residential mortgage production increased 16% from the prior quarter, a larger share of production was directed on balance sheet, while production held for sale declined 43% from the prior quarter.

21:02 Despite the large decline in health for sale production, residential mortgage gain and sale declined only modestly by 10% thanks to pipeline hedging gains during the quarter. Within residential mortgage production, the percentage of refinance volume declined as a function of rising rates, dropping to 18% of total production, down from 36% in the prior quarter. Multifamily loan production and gain on sale premiums remain muted due to the steepening of the yield curve and decline in refinance activity. Miscellaneous fee income increased $368,000 due to increased swap fee income and a loss in the sale of former branch facilities in the previous quarter. Total non-interest expense increased $858,000 from the prior quarter, primarily due to higher compensation costs, professional fees, and fraud losses, while Banner Forward implementation costs declined $900,000 to $1.6 million in the current quarter. Excluding Banner Forward, debt extinguishment, and M&A, Core non-interest expense increased $2.5 million.

22:08 Compensation expense increased by $1.3 million due to increases in salaries due to annual merit increases, along with increased production-related commission and bonus expense, partially offset by decline in severance expense from the prior quarter. Check payment-related fraud losses increased $1 million, reflected in the payment and card processing expense line item. while professional services increased due to a combination of volume-driven outside contract client servicing activity and various legal expense items from the prior quarter related to lending, governance, and settlement activities. In addition, as part of ongoing capital management, the company repurchased 200,000 shares during the quarter. And please report that Banner Ford remains on track We just completed the fourth consecutive quarter of implementation and approximately 71% of the initiatives from a program value perspective have been executed and are reflected in the current quarter run rate, with the majority of the efficiency initiatives in place and revenue initiatives beginning to generate benefits in the form of accelerated loan growth and fee income generation.

23:16 Due to the impact of wage inflation and sustained levels of core inflation, We are adjusting our core expense quarterly run rate guidance up modestly to run between the high 80s and low $90 million range. However, our expectations for improved operating leverage and lower core efficiency ratio remain strong as inflationary pressure on a reduced expense base is being more than offset by rate-driven expansion in the bank's net interest margin. In closing, the company is benefiting from rising rates as evidenced by significant margin expansion this quarter Thank you Peter and Jill for your comments.

24:00 That concludes our prepared remarks today and Brica, we will now open the call and welcome your questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star 1 on your telephone keypads. If you change your mind at any time, please press star 2. And when speaking, please ensure your line is unmuted locally. We have the first question on the phone line from Andrew Leach of Piper Sandler. Andrew, your line is open.

24:40 Thanks. Good morning, everyone. Good morning, Andrew. Just want to touch on the loan growth outlook here. Sounds like you had a couple campaigns going on in the second quarter on the small business side and residential mortgage side. Have those ended? Are those continuing? Just kind of curious about the pace of the pace and the mix of the growth going forward.

25:01 They are continuing anticipated to end this month. So a little bit pulling into this quarter.

25:09 Gotcha. I guess what was the impetus to start to start these? It seemed like they've been a pretty decent driver of growth.

25:17 Part of the Banner Forward initiative is to just expand the growth in all of the business lines, whether it's business banking or moving upstream. And so this was just one of the Banner Forward initiatives.

25:29 Got it. All right. That's helpful. And then on the You're just on the provisioning. That came in a little bit higher than I was expecting. So just looking at the $3.1 million for loan losses, how are you guys viewing the reserve ratio going forward? Do you think that's going to continue to build? Do you think you're going to continue to add to the provision around this level just given macroeconomic concerns?

25:57 So you hit on the things that are going to drive it there, Andrew. So provisioning is really, it's a function of the loan growth, it's a function of the economic conditions and our asset quality, and that's been our message all along. We would return to provisioning with loan growth, which we had, and then my standard line, we don't give guidance as to where we're actually going to have our reserve at, but given the increasing economic uncertainty as we look into 2023, You can't expect that we'll continue to be on the conservative side with regards to our level of reserves.

26:30 Got it. And then one last question. On the size of the securities portfolio, what's the plan? Any plans to grow it or use cash flows from that to also fund loan growth and deposit outflows?

26:45 Yeah, Andrew, it's Peter. We're basically at an inflection point with respect to the securities portfolio where we would anticipate going forward we're going to deploy our excess liquidity into loan growth and funding some deposit runoff for the price-sensitive depositors rather than increasing the securities book much more beyond this point that we had in the second quarter.

27:17 Gotcha. All right, well, thank you for taking the questions. I'll step back.

27:21 Thank you, Andrew. Thank you. The next question from the phone lines comes from Jeff Rulis of DA Davidson. Please go ahead when you're ready.

27:34 Thanks. Good morning. Good morning, Jeff. I wanted to follow up on just sort of the deposit runoff. Behavior, you noted the branch sale impact and some seasonal influence, but more focusing on that rate-sensitive group and your thoughts on the ultimate amount of folks in your deposit base that would chase that rate and your reaction to obviously holding core relationships, but just getting a sense for do you think that continues and have we worked through some of maybe the fluff or the rate chasers and now you kind of hold the line with the rest of the group?

28:25 Any thoughts on deposit behavior would be great.

28:30 Yeah, Jeff, it's Peter. As we've discussed in the past, our deposit base benefits from the fact that it's granular. It's diversified geographically. It's diversified across business line segments. A large portion of our deposit base are operating accounts for businesses that have less price sensitivity. And so I guess two sentiments here. One is a lot of the price sensitive deposits left in the last rate cycle, right? Because Banner, we didn't match and didn't chase rates in the last rate cycle. And we never posted, we didn't have any deposit campaigns in the interim period.

29:17 And so we think we have a lot of resiliency built into our deposit base given their behavior in the past. That said, there will be some outflows for certain clients seeking higher rates, but we think that's a relatively small portion. And you won't see Banner leading with deposit rate specials or campaigns. We tend to price in that 40th percentile of our peer group over time in terms of posted rates. So we think we're in a pretty good position. That being said, there'll be some modest amount of deposit runoff that we're willing to let go for rate, but we don't think it's going to be a large number.

30:06 Great, thanks.

30:09 Was there a loan balance that went through on the branch sales as well?

30:16 No, it was a deposit only. We retained all of the loans with that sale.

30:23 Got it. I guess just into the loan growth expectations, Jill or Peter, I think Peter you mentioned expectations for one to four family to have some continued momentum and as these small business and resi mortgage campaigns continue on to the end of the month, balancing that with rate increases and impacted customers, just a little more thought on the loan growth outlook. I know outside of guidance, but just your thoughts on second half type growth in the loan portfolio.

31:07 So I'll start and then if Peter wants to chime in as well. I guess I'll start by saying that we would expect over the second half of the year to maintain what we've been guiding to and that's that high single digits. Utilization rates are still affected obviously by the excess liquidity in the system and we did see a little bit of a pullback right at the end of the quarter in activity with that hike in interest rates as borrowers become cautious and watch to see what happens. The positives still are there, Jeff, located in markets with strong economic engine, business model that's working, strong loan originations, and our utilization rates that have significant upside potential. Our construction and A&D portfolio is off about 10% this quarter. Those will continue to fund up through the balance of the year. Ag picked back up, as I talked about.

32:00 We have good commercial and commercial real estate pipelines. all of the things indicate that we should hit our target even with the caution in the wind with the economic environment.

32:15 That's great. Thank you. And Mark, maybe just a last one just on a lot of, you know, some pessimism out there and some price volatility, but any thoughts about M&A discussions and your appetite?

32:34 Thanks, Jeff, for the question. And it's a good question. As you're seeing, obviously, there's been a slowdown in M&A activity, certainly in the financial sector space. But that can be temporary. It's the normal course of the cycle with the pullback in valuations, some uncertainty with the economic climate, and what you're really getting in terms of potential credit exposure if you're on the acquisition side. But that's never been Banner's philosophy to be in and out of the market. Our philosophy has always been to foster relationships, enter into negotiated transactions, have that relationship with the board of directors of potential partners, the CEO of potential partners, and the executive team.

33:27 And then when the timing's right, should there be an opportunity, we would do a combination. So the dialogue continues, the relationships continue to progress and it's a matter of market timing before certain companies believe that it's time to enter into a combination with Banner. Thanks Mark. Thank you Jeff. Thank you. We now have a question from Tim Coffey of JANNE. Please go ahead when you're ready. I'll wait in your line.

34:06 Great. Thank you. Morning, everybody. Thanks for the questions. I had a question about Banner Forward. Orrin, I had a question about Banner Forward. And as you're kind of starting to get to the tail end of this project, I'm wondering how should we start thinking about the revenue opportunities from this project? I mean, clearly, you're doing a couple of loan programs already. But as we get forward on this, you know, how should we think about that?

34:37 Our guidance on the trajectory and sequencing of Banner Forward hasn't changed. We anticipate the revenue initiatives within Banner Forward are beginning to generate value in the second quarter and will continue as we go out into Q3, Q4 and beyond in the form of sustained loan growth. So the whole notion is around the loan growth initiatives is to develop a sustained level of loan growth through the business lines that generate loan production over time. So it's not a big bang where we have one campaign and we're done. The real focus is a permanent and long lasting improvement in loan production and productivity across those functions.

35:27 that will benefit over time the pace of loan outstanding growth. And then with respect to fee income, we began implementing some of the fee income programs late in the second quarter, and we'll begin to see those bear more fruit in the coming quarters as we get a full quarter benefit of those fee increased, those fee programs, and there's some additional fee income initiatives will be coming online late this year and into the first half of 23 that'll improve the core fee income line as well. So we haven't changed our guidance and there's still upside on the pace of revenue growth in those areas that has yet to be recognized in our performance.

36:17 Okay, and if I could just follow up there, if we just talk about the loan growth, the same loan growth over time, would a way to think about that be, it would take, you know, the, say the target from the high single digits to maybe the low double digits for the total?

36:33 Yeah, I think that the thing to keep in mind is to adjust for the, you know, we, as Jill mentioned in her remarks, the wonderful mortgage growth this quarter and what we I think we would expect the next quarter is not something that we would expect to continue over the long run. However, that upper single digit pace of loan growth is something that we would continue to perpetuate going forward X the mortgage growth we saw this quarter. So that's really the focus is to sustain that upper single digit loan growth over time in a diversified and a conservative credit risk meaner that BANADL always operated.

37:22 Okay, so perhaps a good way to think about it is that you can sustain growth through individual vertical volatility then?

37:31 Yeah, that's fair. Okay, okay.

37:34 And then, Jill, just a question about the current state of just underwriting and portfolio maintenance. Has anything changed there? Not to suggest that credit quality is not improving because it is, but given the heightened economic uncertainty, have you started to adjust or are you underwriting our more frequent analysis of the portfolio?

37:58 We really haven't because we've maintained a very conservative portfolio management since the last great recession. We are looking at our watch and worse credits on an ongoing basis. We stress our portfolio on multiple fronts from origination throughout the cycle. And so the bank looks at underwriting rates and changes those as rates rise so that we're looking forward into an increasing rate environment as well. And that's always been our practice. The idea of underwriting here is that were consistent through all cycles so people know that they can count on us through all cycles. And so you don't want to change the way you're looking at any one business line very materially at any given time.

38:49 Okay. All right, great. Those are my questions. Thank you very much. Thanks, Tim. Thank you, Tim. As a reminder, if you would like to ask any more questions, please press star 1 on your telephone keypad. We now have another question on the line from Kelly Motta of KDW. Please go ahead when you're ready.

39:12 Hi, good morning. Thanks for the question. I apologize if this is repetitive. I got disconnected during the prepared remarks. But you mentioned your willingness to let some higher rate deposits go in the prepared remarks. and at Banner, you guys have really good core deposits. I wouldn't imagine there's quite a bit of that, but I was hoping you could maybe ring sense the amount of deposits you consider more transactional and would be willing to let go.

39:53 Hi Kelly, it's Peter.

39:55 As we mentioned earlier, we feel really good about our and our core deposit base and our clients and the sticky nature of our core deposit base as benefited and as evidenced by the last tightening cycle in 17 and 18. So a lot of the price and sort of clients that would have left in the last cycle because Banner didn't chase rates for deposit growth last time. There's a small amount of balance that is rate sensitive that we expect to move off balance sheet as rates go higher. But for the most part, we think that's a fairly small and limited number.

40:40 And we're not going to chase rates this time either. And we anticipate the bulk of our deposit base is relatively granular. A lot of it's operating accounts for businesses that really aren't. They're here for rates. They're here for service and product. and not there to seek higher yields. So while we will see deposit betas grow and increase at Banner, we're not gonna be top of the market in any of our products in terms of rate, but nor do we expect a large outflow of deposit balances, but we will see some modest outflow. But I can't give you a precise number, but I would anticipate some continuing reductions in our deposit balances due to rate as we go through the next several quarters.

41:34 Got it. Thank you for all the color. And then on expenses, they came in a little higher than what you had guided for the past quarter of like the mid to high 80s. I was wondering if that was a function of the – Branch closures being end of the quarter weighted or if there's greater pressure being seen, inflationary pressures and how to think about that as we look forward and balance out with the savings from Banner forward.

42:08 Yeah, we didn't get the benefit of the branch consolidations this quarter because they were all or the branch sales, they were all sold at the end of June. So we expect the benefit of that sale to manifest itself on a full quarter basis in Q3. And there's some other initiatives related to occupancy that'll take effect in Q3 as well. That being said, we are seeing wage inflation pressures. And when we announced Banner Forward, wages were going up in the mid 2% range annually. Today, in the market, they're going up in the 5% range. And so we are seeing some wage inflation pressures that are offsetting some of the original guidance around that mid to high $80 million number that are offsetting some of the saves we've got in the pipeline. So our guidance is more of a neutral high 80s to low 90s core expense run rate.

43:11 We do have some other, we expect as we go into 23 and beyond, as we've said, a portion of our expenses are being reinvested in technology and workflow automation across our support and loan origination areas that will generate scalability benefits as Banner continues to grow both organically and through M&A over the long run. So we're not trying to create a temporary skinning of expense at the cost of not having scale. So we are intentionally harvesting some of those expense gains into investments in technology and workflow process automation that will benefit the company over the long run. But we calibrated very modestly up our guidance given the wage inflation and core inflation pressures from our vendors as well that are beginning to show up in certain areas.

44:09 Understood. Thanks. Maybe one last one for me is just wondering about your repurchase appetite. I saw you had a bit of repurchases during the quarter.

44:21 Yeah, our guidance hasn't changed there. We remain opportunistic in terms of capital deployments. And so, again, it's an opportunistic decision quarter to quarter. We are are seeing expanded loan growth now, so we need to continue to retain capital to support loan growth. TCE is not a measure that we manage to explicitly, but we do pay attention to it, albeit our regulatory capital ratios remain very strong. And so it'll be a quarter-to-quarter decision, and our appetite hasn't changed over the long run that Sherry Purchase will remain Thank you so much for the time.

45:07 I really appreciate it. Thank you, Kelly. Thank you, Kelly. As a reminder, if you would like to ask any more questions, please press star followed by one on your telephone keypads now. We have had no further questions registered, so I'd like to hand it back to Mark for some closing.

45:51 Thank you, Briga. As I've stated, we're very proud of the Banner team and our second quarter performance. Thank you all for your interest in Banner and joining us on our call today. We look forward to reporting our results to you again in the future. Have a wonderful day, everyone. Bye now. Thank you all. That does conclude today's call. Thank you again for joining. You may now disconnect your line.