Mark Grescovich - President and Chief Executive Officer Albert Marshall - Secretary Richard Barton - Executive Vice President and Chief Credit Officer Lloyd Baker - Executive Vice President and Chief Financial Officer Peter Conner - Executive Vice President and Chief Financial Officer, Banner Bank.
Jeff Rulis - D.A. Davidson & Co. Matthew Clark - Piper Jaffray Don Worthington - Raymond James Tim O’Brien - Sandler O’Neill Jackie Bohlen - Keefe, Bruyette & Woods, Inc. Tyler Stafford - Stephens Inc.
Good morning and welcome to the Banner Corporation’s Third Quarter 2017 Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to President and CEO, Mr.
Mark Grescovich. Please go ahead..
Thank you, Andrea, and good morning, everyone. I would also like to welcome you to the third quarter 2017 earnings call for Banner Corporation.
As is customary, joining me on the call today is Rick Barton, our Chief Credit Officer; Lloyd Baker, our Chief Financial Officer of the Corporation; Peter Conner, our Chief Financial Officer of Banner Bank; and Albert Marshall, the Secretary of the Corporation.
Albert, would you please read our forward-looking Safe Harbor statement?.
Certainly. 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 a recently filed Form 10-Q for the quarter ended June 30, 2017.
Forward-looking statements are effective only as of the date they are made, and Banner assumes no obligations to update information concerning its expectations. Thank you..
Thank you, Al. As announced, Banner Corporation reported a net profit available to common shareholders of $25.1 million, or $0.76 per diluted share for the quarter ended September 30, 2017. This compared to a net profit to common shareholders of $0.77 per share for the second quarter of 2017 and $0.70 per share in the third quarter of 2016.
Excluding the impact of merger and acquisition expenses, gains and losses on the sale of securities and changes in fair value of financial instruments, earnings were essentially flat at $25.2 million for the third quarter 2017, compared to $25.1 million in the third quarter of 2016.
While we experienced the decline in mortgage banking fee income in the quarter compared to the previous quarter, growth in loans and core deposits in the third quarter was strong.
Due to the hard work of our employees throughout the company, we are successfully executing on our strategies and priorities to deliver sustainable profitability and revenue growth to Banner.
Our core operating performance continue to reflect the success of our proven client acquisition strategies, which are producing strong core revenue and we are benefiting from the successful integration of our recent acquisitions, which has had a dramatic impact on the scale and reach of the company and are providing a great opportunity for revenue growth.
Our third quarter 2017 performance clearly demonstrates that our strategic plan is effective and we continue building shareholder value. Third quarter 2017 core revenue was $120.8 million, an increase of 3% compared to the third quarter of 2016.
We benefited from a larger and improved earning asset mix, the net interest margin that remained above 4% and good deposit fee revenue. Overall, this resulted in a return on average assets of 0.97% for the third quarter of 2017. Once again, our performance this quarter 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, while augmenting our growth and – with opportunistic acquisitions. To that point, our core deposits increased 6% compared to September 30, 2016.
Non-interest bearing deposits also increased 6% from one year ago, representing strong organic generation of new client relationships. Our organic net client growth in these product categories is now 95% since December 31, 2009.
Reflective of the solid performance, coupled with our strong tangible common equity ratio of 10.39%, we issued a core dividend in the quarter of $0.25 per share. In a few moments, Lloyd Baker and Peter Conner will discuss our operating performance in more detail.
While we have been effectively executing on our strategies to protect our net interest margin, grow client relationships, deliver sustainable profitability and prudently invest our capital, we have also focused on maintaining the improved risk profile of Banner. And again, this quarter, our credit quality metrics reflect a moderate risk profile.
As expected, due to the addition of new loans and the migration of acquired loans out of the discounted loan portfolio, as well as a modest amount of net charge-offs, we recorded a $2 million provision for loan losses during the third quarter.
At the end of the quarter, our ratio of allowance for loan and lease losses to total loans was 1.15% and our total non-performing assets totaled 0.30%.
In a moment, Rick Barton, our Chief Credit Officer will discuss the credit metrics of the company and provide some context around the loan portfolio and our success at maintaining a moderate credit risk profile. In the quarter and throughout the preceding seven years, we continue to invest in our franchise.
We have added talented commercial and retail banking personnel to our company and we have invested in further developing and integrating all our bankers into Banner’s proven credit and sales culture.
We also have made and are continuing to make significant investments in our risk management and IT infrastructure, positioning the company for continued growth and scale.
While these investments have increased our core operating expenses, they have resulted in core revenue growth, strong customer acquisition, year-over-year growth in the loan portfolio and strong deposit fee income. Further, as I’ve noted before, we have received marketplace recognition of our progress and our value proposition as J.D.
Power and Associates rank Banner Bank number one bank in the Northwest for client satisfaction. The third year, we have won this award.
The Small Business Administration named Banner Bank Community Lender of the Year for the Seattle and Spokane district for two consecutive years, and this year named Banner Bank Regional Lender of the Year for the second consecutive year, and Bankrate.com named Banner Bank the Best Regional Bank in America.
Also, Banner ranked 29 out of 100 in the Forbes 2017 Best Banks in America.
The successful execution of our organic growth plan augmented with strategic acquisitions and our persistent focus on improving the risk profile of Banner has now resulted in 26 consecutive quarters of profitability, and our tangible book value increased to $31.79 per share versus $31.14 per share at September 30, 2016.
Finally, as recently announced, we made a strategic and economic decision to sell our seven branches in Utah and focus our future investments on the West Coast. That sale has been successfully closed and will be reflected in our fourth quarter financial performance.
I’d like to now turn the call over to Rick Barton to discuss the trends in our loan portfolio.
Rick?.
Thank you, Mark. Stability continued as a general theme for credit quality at Banner during the third quarter of 2017. Our portfolios moderate risk profile continues to be demonstrated by our credit metrics that will now be briefly recapped.
Before doing so, however, I want to repeat the comment we have made in our last several presentations that the company’s credit metrics are at historically favorable levels. Delinquent loans were 0.45% compared to 0.44% last quarter and 0.53% a year ago. This metric has hovered around 50 basis points since mid-2015.
The company’s level of adversely classified assets remains low and again decreased slightly during the quarter. Non-performing assets increased to 0.30% of total assets versus 0.24% in the linked-quarter and 0.33% at September 30, 2016. There was no common theme underlying this quarter’s increase in non-performing assets.
Not reflected in these totals are the remaining non-performing loans of $9 million acquired from Siuslaw and AmericanWest Banks, which are not reportable under purchase accounting rules.
If we were to include the acquired non-performing loans in our non-performing asset totals, the ratio of non-performing assets to total assets would still be a modest 36 basis points. Troubled debt restructures performing under their restructured terms declined to 15 basis points total loans, down from 18 basis points in the linked-quarter.
Gross charge-offs during the quarter were $2.3 million versus $1.6 million last quarter. After loan loss recoveries of $776,000 that cannot be considered to be recurring, the company’s recorded net charge-offs were $1.5 million for the quarter. This equates to an annual net charge-off rate of approximately 8 basis points.
The allowance for loan and lease loss provision for the third quarter was again $2 million. After this provision and the quarter’s net charge-off position just discussed, the allowance for loan and lease losses for the company now totals $89.1 million and as 1.15% of total loans, compared to 1.17% last quarter and 1.14% a year ago.
The remaining net accounting mark against acquired loans is $24 million, which provides an additional level of protection against loan losses. Loan growth in the third quarter was strong. Gross loans increased by $223 million from the linked-quarter and $375 million when compared to September 30, 2016.
The quarter-over-quarter growth rate was just under 3%, which annualizes to a 12% growth rate. This compares to a growth rate of just over 5% when comparing September 30, 2017 to September 30, 2016. Quarter-over-quarter increases were recorded in commercial business, commercial real estate, construction, one- to four-family and consumer loans.
This growth in loans reflects both marketing successes by our bankers and good economic activity in our markets. And as noted in the press release, our loan origination pipelines indicate the potential for continuing loan growth.
In summary, Banner’s loan portfolio and credit metrics were marked by stability during the just completed quarter, further seasoning the portfolios moderate risk profile. With that, I will turn the stage over to Lloyd for his comments..
Thank you, Rick, and good morning, everyone. As Mark has noted, Peter Conner, Chief Financial Officer for Banner Bank is with us here today. And after a few general remarks from me, Peter will provide more detailed insight into the third quarter results.
Banner Corporation’s third quarter and year-to-date 2017 operating results continue to reflect generally consistent growth and revenue trends as a result of effective execution on our strategic initiatives, including significant benefits as a result of the acquisition of AmericanWest Bank, as well as meaningfully increased regulatory costs as a result of our approach to and subsequent breach of the $10 billion total asset threshold.
Our financial performance in the quarter, again, was driven by strong net interest income and deposit fee generation, reflecting the increased scale of the company, additional client acquisition and continued – and a continued positive operating environment, which supported significant loan growth and solid asset quality.
However, as Mark has noted, we did experience a decrease in mortgage banking revenues compared to particularly strong levels in the preceding quarter and in the third quarter a year ago.
Peter will provide more detail on the decline in mortgage banking revenues, which in part reflects accounting and operational changes, and in part, market pricing dynamics.
However, it is important to note that for both our one to four-family and multifamily production unit, loan origination sales were – origination and sales volumes for the quarter were good and their pipelines remained solid.
Further, despite the weakness in mortgage banking revenues, total revenues from core operations for the current quarter increased 3% compared to the third quarter of 2016 and increased 5% for the nine months year-to-date 2017 compared to the same nine-month period a year earlier.
This solid core revenue generation continues to reflect the successful execution of our super community bank business model and the increasing value of the Banner franchise.
While not particularly important – impactful in the current quarter, fully appreciating Banner’s core operating results for each of the periods presented requires a clear understanding of the effects of merger and acquisition-related expenses on last year’s performance, as well as the valuation adjustments for certain financial instruments that we carry at fair value and win material gains and losses on the sale of securities.
For the third quarter of 2017, Banner reported net income of $25.1 million, or $0.76 per diluted share.
This amount included $493,000 of net charges for valuation adjustments, for financial instruments and $270,000 net gains on the sale of securities, which together related – which together net of the related tax effects had an insignificant impact on earnings.
Fair value adjustments and securities transactions had a similarly small $0.01 per diluted share negative effect on the immediately preceding quarter and reduced the margin by – reduced earnings by just $0.03 per diluted share for the first nine months of 2017.
By contrast, acquisition-related expenses were $1.7 million in the third quarter of 2016, which along with nearly offsetting fair value charges in securities gains reduced earnings net of taxes by $0.04 per diluted share for that quarter.
More importantly, for the first nine months a year ago, acquisition-related expenses were much larger, $10.9 million, while fair value charges net of securities gains were $941,000. All of which together, net of tax effects reduced earnings by $0.23 per diluted share for that period.
Excluding the acquisition-related expenses, fair value adjustments and securities gains, our earning from core operations were $25.2 million, or $0.76 per diluted share for the current quarter, compared to $25.5 million, or $0.78 per diluted share in the immediately preceding quarter and $23.9 million, or $0.74 per diluted share in the third quarter a year ago.
Earnings in the current quarter benefited from $1.3 million of net tax adjustments related to filing our annual state and federal tax returns. For the first nine months of 2017, our earnings from core operations increased 7% to $75.3 million, or $2.28 per diluted share, compared to $70.2 million, or $2.06 per diluted share in 2016.
As a result of the increase in total earnings from core operations, as well as a reduction in the average shares outstanding as a result of stock repurchases, principally executed in the second-half of last year. Our 2017 year-to-date earnings per share from core operations increased by a 11% compared to the same nine-month period a year earlier.
Again, this quarter, we have included a reconciliation of earnings from core operations and other non-GAAP financial information in the press release, which I encourage you to review.
As I noted, Banner’s third quarter net interest income before provision for loan losses was again strong cresting $100 million, actually totaling $100.2 million and increasing 7% compared to $93.7 million for the third quarter a year ago, reflecting increased earning asset balances and a stronger net interest margin.
Similarly, our net interest income for the first nine months of 2017 was 6% greater than the same period a year earlier.
While our reported net interest margin decreased to 4.2% for that quarter ended September 30, 2017, compared to 4.33% in the preceding quarter, largely as a result of decreased acquired loan discount accretion, our contractual margin remained strong and well above year ago levels.
Excluding the impact of acquisition accounting, our contractual net interest margin for the third quarter was 4.12%, compared to 4.18% in the preceding quarter and 4.01% in the third quarter a year ago. For the first nine months of 2017, our reported net interest margin was 4.27% compared to 4.16% for the nine months ended September 30, 2016.
And excluding the acquired loan discount accretion, our 2017 year-to-date contractual net interest margin expanded to 4.15%, compared to 4.01% for the same nine-month period a year earlier. Again, this quarter, loan yields and the net interest margin benefited from increased market interest rates, while deposit pricing remained generally unchanged.
Deposit fees and service charges were steady and in line with our seasonal expectations at $13.3 million in the third quarter, compared to $13.2 million in the preceding quarter and increased 3% compared to $12.9 million in the third quarter a year ago.
For the first nine months of 2017, deposit fees and service charges increased 5% compared to the same period a year earlier, a direct result of growth in core deposit accounts and related transaction activity.
Total non-interest expenses were $82.6 million in the third quarter, a modest increase compared to $81.9 million in the preceding quarter and $79.1 million in the third quarter of 2016.
However, excluding last year’s acquisition-related expenses, core operating expenses increased more significantly, as we continue to invest in the necessary infrastructure to support the expanded scale of the company and incur increased compliance and regulatory costs associated with crossing the $10 billion in total asset threshold.
Finally, I believe it’s worth noting that our capital remain strong and our tangible book value per share increased to $31.79 at September 30, 2017, compared to $31.06 at December 31, 2016.
Despite the payment of $1 per share of special dividend earlier this year and $0.0325 [ph] per share regular quarterly dividends declared during the nine-month period. This concludes my prepared remarks.
In summary, Banner had another good quarter, continuing the solid year-to-date, performance that reflects the hard work of our many dedicated and skilled associates. As it – as always, I would look forward to your questions, but first, Peter will add some more color on the quarter..
Thank you, Lloyd, and good morning, everyone. I will provide some additional commentary on the third quarter financial results. As Mark and Lloyd noted, and as we announced in our earnings release, we reported net income of $0.76 per share for the third quarter. The $0.01 per share decrease from the prior quarter was due to the following items.
Net interest income increased $0.01 due to an increase in average loan outstandings, offset by a decline in GAAP loan yields. Non-interest income declined $0.06 due principally to declines in multifamily and mortgage loan fees.
Non-interest expense increased $0.02, as a result of gains on OREO sales and B&O tax recoveries recognized in the prior quarter with modest changes in other expense categories generally are starting each other.
Income tax expense decreased $0.06 in the current quarter, due primarily to a one-time tax refunds related to write-downs on assets acquired from AmericanWest. Lending assets grew $243 million in the second quarter to $10.4 billion. The investment portfolio, including interest-bearing deposits remained flat at $1.7 billion at quarter-end.
However, the average investment portfolio balance grew modestly by $53 million, or 4% over the prior quarter. Total loans increased $228 million from the prior quarter-end, with growth well distributed across nearly every category.
Core deposits were up $161 million compared to the prior quarter, reflecting normal seasonal growth for this time of year, coupled with continued client acquisition. Time deposits declined $106 million, due to the maturity of brokerage CDs and run-off of the retail CD portfolio. Total cost of deposits was 15 basis points flat to the prior quarter.
Net interest income increased modestly by 504,000 from the prior quarter, as the decline in loan yields partially offset a robust $119 million growth in average loan outstandings.
Loan yields declined 10 basis points to 4.88% in the third quarter, due to a combination of lower discount accretion on acquired loans in the current quarter, interest reversals on loans put on non-accrual in the current quarter, and a decline in prepayment penalty income compared to the elevated levels in the previous quarter.
Accretion accounted for 12 basis points of the loan yield in the third quarter, compared to 18 basis points in the previous quarter. The contractual loan yield, excluding accretion declined 4 basis points.
Excluding the impact of prepayments and delinquent interest write-offs in both quarters, the contractual loan yield actually increased by 2 basis points. The net interest margin decreased 11 basis points to 4.22%.
The effects of purchase accounting, including both loan accretion and time deposit premium amortization accounted for 10 basis points of the net interest margin in the third quarter, compared to 15 basis points in the previous quarter. The contractual margin, excluding the effects of purchase accounting declined 6 basis points in the third quarter.
Excluding the impact of loan prepayments and interest write-offs in both quarters, the contractual margin declined by 1 basis point mirroring the change in funding costs.
Core non-interest income, excluding gains and losses on security sales and fair value adjustments on securities and debt instruments carried at fair value declined $2.6 million from the prior quarter. The decline was primarily due to lower gains on sale from multifamily and mortgage loan sales.
Gain on the sale of multifamily loans declined by $1.5 million from the prior quarter, due to a combination of a 25% reduction in the amount of loan sold, the initiation of a hedging program in the second quarter and a decline in market spread in the secondary market for multifamily loans.
The initiation of the hedging program in the second quarter had the effect of accelerating recognition of income on hedge loans originated, but not sold in the second quarter adding to the cash gain on unhedged loans originated in the first quarter and sold in the second quarter.
Compounded decline in multifamily income in the third quarter, the fair values established on hedge funds originated in the second and third quarter were in excess of the realizable market value. Currently, the expected net gain on sale for this product after deducting hedging and origination costs ranges between 75 and 85 basis points.
While residential mortgage production and sales increased in the third quarter compared to the second quarter, fee income declined by 700,000 due to lower market spreads on loan sold in the current quarter, in part, due to an increase in the percentage of originated CRE qualified loans, which carry lower secondary market premiums.
Finally, total income declined 400,000 in the current quarter due to a debt benefit related gains recognized in the second quarter. Non-interest expenses increased modestly by 700,000 in the third quarter from the previous quarter.
The core operating expense categories, including personnel expense, occupancy and third-party expenses were generally flat to the previous quarter. Real estate operations expense increased due to a decline in net gains on OREO sales recorded as a credit to expenses in the second quarter.
State and municipal taxes increased 500,000 due to a more normal amount of – due to a more normal amount – due to a non-recurring B&O tax refund in the second quarter as a result of a multi-year product. This concludes my prepared remarks..
Thank you, Rick. Lloyd, and Peter for your comments. That concludes our prepared remarks. And Andrea, we’ll now open the call and we welcome questions..
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jeff Rulis of D.A. Davidson. Please go ahead..
Thanks. Good morning..
Good morning, Jeff..
Maybe a question for Mark on the – it’s a nice influx of non-interest bearing deposits. I think, you touched on a little bit some seasonality in there.
But could you just maybe expand on or some context on competition that you’re having in the deposit side and maybe thoughts on sort of future success on the non-interest bearing front?.
Yes. Thanks, Jeff. This is Mark. I’ll comment briefly and I’ll turn it over to Peter to comment on our pricing discipline. We’ve had a very successful strategy of client acquisition and a very good strategy of reducing client attrition. So you’re seeing a nice inflection in our client base.
We’ve actually been able to grow our net client growth by about 4.5% annualized, which again, that that has been a very strong number for us year-over-year, given the fact that we had a major conversion last year.
So the fact we’ve been able to exercise what amounts to two conversions and continue to grow our client base that I think is a testament to the product and the sales staff we have in acquiring deposits. In terms of pricing discipline on the deposit front, I’ll turn it over to Peter..
Yes. Good morning, Jeff. This is Peter. As we’ve said in previous calls, we monitor our competition across all of our regional markets, and they all had a slightly different composition of competition. But we typically price in the 58% to 68% out of each of those markets across our products.
However, we do see one-off specials from certain credit unions and other regional banks. What really is going to drive our deposit pricing going forward is what the Money Center Banks do in our markets that typically own a majority the share. So far that we’ve had a very benign deposit beta over the last several increases.
And so, again the real key driver here is going to be what the large banks in our market do with respect to their interest-bearing deposits going forward, But again, as Mark alluded to the fact that we have a very large component of non-interest bearing deposits in our mix really create some benefits for us in terms of the net beta overall in our core deposit base..
Great, thanks. And maybe, Peter, a follow-up on the expense side just on the kind of the DFAST cost ramp preparation. I think, we, for the first-half of the year, or leaving the second-half of 2017, you mentioned, I think there was another $1 million to $1.5 million to go in the way up towards what you’ve estimated about $5 million in total.
Could you give us some update of where we sit on what’s incurred through Q3, and kind of where you expect to be for the all in by the year-end?.
Yes, sure, and I’ll add some additional color around what we expect going forward in terms of aggregate expense. So through the third quarter, we’ve recognized 80%, approximately 80% of our DFAST run rate expense still that’s above the $5 million. We’ve recognized $4 million of that annualized run rate through the third quarter.
So we have $1 million left to go on an annualized basis to complete the build-out of the permanent DFAST and risk management-related infrastructure.
That being said, looking forward into the fourth quarter, our professional expenses will largely stay relatively consistent with what we saw in the second and third quarters principally, because we typically have a seasonality pattern to our outside audit expense, as they get ready for year-end.
And then going forward into 2018, so we’ll begin ramping down some of the risk management infrastructure-related engagements that we are working on now. But going into 2018, that professional services component will be a bit lumpy, as we invest in several delivery platform.
Infrastructure projects are going to begin to get underway in the first quarter of 2018..
Okay, great.
And maybe one last one, if we’re just on the fringes of expenses and fee income, the branch sale of the Utah piece that, how does that, if at all impact fee income and expenses sequentially?.
So as we announced in the press release, we saw $255 million in loans and $160 million in deposits associated with Utah divestiture.
The easiest way to think about Utah is on a net basis after the lost revenues and expenses, it was generating between $1 million and $2 million a year in net income after tax, it was dilutive to the overall company’s efficiency ratio.
In terms of the elements of the revenue and expense, you can think of approximately $9 million a year and revenue contribution of about $7 million a year and expense contribution from that divestiture. So again, the $1 million to $2 million is guidance.
Now that, that’s the near-term impact as we continue to scale that, that drag obviously will go away as we’re able to deploy some of the existing overheads more efficiently across the rest of the franchise as we continue to grow..
Great. Thanks for the color..
Thank you, Jeff..
Our next question comes from Matthew Clark of Piper Jaffray. Please go ahead..
Hi, good Morning..
Good morning, Matthew..
I think, Peter, you mentioned the contractual loan yields were down, or actually, excuse me, up or actually up 2 basis points, excluding a lot of the noise around prepays and interest reversals.
I guess, can you talk to what that adjusted yield was and what the new money rate was in the quarter? Just trying to get a better hand on the new production and the fact that we had a June rate hike what I thought you would have gotten a little more lift in loan yields?.
Yes. So, yes, this is Peter. So we – so the contractual loan yields in the third quarter excluding accretion was 475. And so as we discussed, we had a bit of noise due to some interest reversals and some fairly large prepayments in the second quarter.
Going forward, we don’t expect a whole lot of additional contractual loan yield improvements outside of another Fed hike. Going forward, it’s going to be influenced more around the change in the mix of our loan portfolio.
But by and large the effect of the interest reversals that I talked about earlier, our contractual loan yields are closer to the 480 level, high 470s, 480 level right now on a normalized basis. But we wouldn’t guide to any meaningful increase over that level going into the fourth quarter pending another tightening by the Fed..
So your sense is that that the core margin the 412 remain fairly steady from here without a December hike?.
Yes, I think that’s fair..
Matthew, this is Mark, let me just add a little color, because I wonder, it’s very similar to Jeff Rulis’s question regarding the deposit front. That’s why we’ve invested so much of our franchise and growing out our core deposits and recognize the deposit base is really the franchise value of our organization.
So having a core deposit mix, where we added 87% of total deposits in a non-interest bearing concentration that close to 40%, 39% is really important to us maintaining the earnings power..
Yes, okay. And then on gain on sale in the single family resi and multifamily arena, how should we think about kind of production from here? Obviously, there’s some seasonality with single family. But you talked to, I think a 75 to 85 basis point normalized gain on sale margin for multifamily, which I think is a lot lower than we previously expected.
But how much of that’s net of hedging or what? But just a little more clarity around what a normalized run rate might be going forward for that business?.
Yes, Mathew, this is Peter. So the – that business unit is currently generating $70 million to $90 million a quarter in loan production and sales. The 75 to 85 – and they are currently realizing 75 to 85 basis points on a net-net basis after deferred origination costs, some broker fees and the hedging cost that go with the program.
So you can obviously do the math on that kind of expectation going forward in terms of what the normalized run rate in terms of gain on sale on that business.
Part of the compression in spreads is due to the fact that there is more competition on the rate side in originating those loans in the marketplace so that generates somewhat lower gain on sale fees and that was part of it as well as some compression in the secondary market for that product as well, so there is two parts to the compression we’ve seen in the gain on sales in the last six months..
And you are speaking to just multifamily; I assume there is single family on top of that?.
Yes, and mortgage is – the residential mortgage business, this quarter we generated higher levels of production in the third quarter and actually slightly higher levels of loans sold into the secondary market.
We do portfolio portion of that production for various reasons that we don’t sell, but the gain on sale on the loans that we did sell was affected.
It had some compression due to the fact that we increased the proportion of CRA qualified loans that were originated and then sold, there is a limit on the gain on sale for CRA loans sold into the secondary market. And so that had the majority of the effect on compressing some of the mortgage gains on sales we saw this quarter..
Okay and then just on the expense outlook, I mean you are running at 3.15 to 3.25 kind of expense to asset ratio, operating efficiency ratio over 68%, I know the improvement you expect to partly come from revenue growth, but are there any opportunities or initiatives that you could consider to right size the expense base outside of revenue?.
Matt, I think what we are considering is we like to taking actions. You’ve seen that we announced obviously the sale of Utah and were also consolidated as part of AmericanWest 11 branches.
We also have some consolidation of existing branches by branches, so we continue to look at ways across the footprint to consolidate and reduce the expense overhead. So the initiatives going forward are going to be primarily focused on revenue generation and as opposed to pairing back the franchise.
Now there is some technology investments we could get in the back office that will help the efficiency ratio and at the same time provide us some additional scalability..
Okay, thanks a lot..
Thank you..
Our next question comes from Don Worthington of Raymond James. Please go ahead..
Good morning everyone.
Just looking at the uptick in NPAs and whether there was any color on that you can provide, was it kind of a couple of small credits or one credit, anything like that that they can provide?.
Don this is Rick Barton. It’s the latter scenario that was spread through a number of credits, there was no commonality in terms of geography industry or any other factor you might look at, so it was a very granular increase..
Okay and then what about the gross charge-offs in the quarter? What were those related to?.
Well, the increase was really driven by an agricultural credit that suffered from a combination of market forces and bad management by the company..
Okay, so it was largely one credit there. Okay, thank you..
Our next question comes from Tim O’Brien of Sandler O’Neill. Please go ahead..
You guys alluded to the premium, deposit premium on the branch, can you give us a ballpark of what the net benefit will be, will it be the full amount or is it going to be somewhat less than that for some other fees and costs associated with the sale of the Utah part of the business?.
Yes, sure Tim, this is Peter.
We receive an 8.5% deposit premium on the total deposit sold, however that gets reduced by some write downs of core deposit and tangible on goodwill associated with that franchise, so on a net basis pre-tax we are anticipating between $11 million and $12 million in pre-tax gain on sale to be booked in the fourth quarter..
Okay great thanks, and then getting back one more time on the efficiency initiatives that you guys have kind of qualified for next year and a lumpy cost accruals around that, do you have a – can you share a little bit of info about budgeted total cost that you expect to resolve from these initiatives that you execute for the year?.
Yes, Tim we have an ongoing process of evaluating our branch footprint and branches for optimal performance, so it’s an ongoing process of reviewing locations in our market and our ability to continue to generate growth in those areas that’s appropriate for our strategic goals.
In terms of just aggregate expense, we have some offsetting factors, so while we continue to optimize the branch network, we have some ramp carry on the build out of our risk management infrastructure that will carry into 2018.
So, again as I said earlier, we’ve gone through an S curve in operating efficiency in 2017 as we’ve built out that risk infrastructure, so as we land towards the end of the fourth quarter, we’ll see obviously much more measured phase of expense growth going into 2018, but I wouldn’t guide to any material reductions in expense in 2018 outside the effects of Utah..
And then with regard to your California business or you know perhaps in the pack Northwest as well, are you feeling looking out into 2018 relative to where we just came through, while we came through in 2017, are you feeling pressure on – with regard to salary and comp cost and also in filling vacancies, staff vacancies at the Bank.
Is it a tight labor market and you guys are affected by it?.
Well, I think, Tim this Mark. I think it’s safe to assume that talent acquisition in the banking industry across the footprints is a difficult proposition. We have to really have a value propositions in organization to attract and retain talent in your organization. We’ve been very successful at building out our staff.
We’ve been very successful at attracting and retaining really quality colleagues that are driving the performance here.
So, while there is pressure on the compensation front, I think the value proposition that they provide along with through our super community bank business model along with our product set and size and capacity to help clients is really good for the revenue generators and we’ve been successful at attracting and retaining them.
On the – when we looked at the support staff and the infrastructure, we also have a very good value proposition to provide them and we’ve done an excellent job of building staff out. I would not expect that our staff levels would increase precipitously from where they are at today. I think we have the scale to continue to grow into the organization..
All right, thanks for answering my questions guys..
Thanks Tim..
[Operator Instructions] Our last question comes from Jackie Bohlen of KBW. Please go ahead..
Mark, when you had spoken about the net client growth that you’ve had, how much of an overlay is there between the opportunities between deposit generation and loan generation, meaning that as some of these customers coming, as you got the loan relationships, they are bringing over deposits or it’s missed at that growth purely from a depositor?.
Excellent question Jackie and thank you for that, it’s really a wholesome relationship, what we see in our – in what we would characterize as a services for household on new clients into our organization are approaching five products or five services, so there truly is a wholesome relationship.
Also you can see by us touting the Small Business Administration awards that we’ve gotten that our small business generation is really taking root and has value proposition and with that comes obviously the deposits. So in the small business front, it’s not necessarily the loans.
You may have small loans, but you have equal sized deposit basis that come with it. So they truly are wholesome relationships as they enter into our organization. The other piece, I would say is on the mortgage front, we’re running about a 35% cross-sell ratio with our mortgage business.
So new mortgages that come into the company, about 35% of them are wholesome relationships that have additional products and services..
Thank you. That’s very helpful..
You’re welcome.
Our next question comes from Tyler Stafford of Stephens Inc. Please go ahead..
Hey, good morning, guys. I just hopped on very late, so I apologize if I miss you – this discussion already. But you haven’t talked about M&A, I’d just be curious about your thoughts or feelings around Banner being able to participate in M&A right now and offset some of the expense and scale as you’ve got? Thanks..
Yes. Thanks, Tyler, this is Mark. We have no additional guidance from what we’ve provided in the past on the M&A front. We’ve been very disciplined in our approach in M&A. We want to be certain that the infrastructure we have in place is scalable.
And I think we’ve outlined for folks in the past what our roadmap is in terms of crossing $10 billion the cost impact and what we need to do as an organization. I think, the organic growth is what we’re focused on now. And should there be opportunities still in our footprint on the West Coast, we will certainly take advantage of those.
But I don’t have any additional guidance..
No, that’s fine. Thanks, Mark..
Thank you..
And we have a follow-up question from Matthew Clark of Piper Jaffray. Please go ahead..
Yes, that was my M&A question. Just wanted to get a better sense for maybe why we haven’t seen an announcement.
Is it just that activity is – has slowed, or is it just on price you guys just can’t make it work, or just trying to get a better sense of what might be going on the same as well?.
Yes, Matthew, this is Mark. Like I said, I don’t have any additional guidance. Our first filter is to make sure, it’s very strategic for us with a strong deposit franchise and it’s going to have to have a nice brilliant [ph] position and then the economics become the next issue.
So we want to make sure that as we proceed forward, recall that, we have just digested what amounts to four acquisitions. So we want to make sure that whatever we do going forward is the best strategic fit for the organization..
Understood. Thanks..
Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Mark Grescovich for any closing remarks..
Thank you, Andrea.
As I stated, we are very pleased with our solid third quarter 2017 performance, and see it as evidence that we are making substantial and sustainable progress on our disciplined strategic plan to build shareholder value by executing on our super community bank model by growing market share, strengthening our deposit franchise, improving our core operating performance, maintaining a moderate risk profile and prudently deploying excess capital.
I would like to thank all my colleagues who are driving the solid performance for our company. Thank you for your interest in Banner and for joining our call today. We look forward to talking to you next quarter. Thank you, everyone. Have a good day..
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines..