Banner Corporation (NASDAQ:BANR) Q4 2022 Earnings Conference Call January 20, 2023 11:00 AM ET Company Participants Mark Grescovich - President and Chief Executive Officer Rich Arnold - Head of Investor Relations Jill Rice - Chief Credit Officer Peter Conner - Chief Financial Officer Conference Call Participants Jeff Rulis - D.A. Davidson David Feaster - Raymond James Andrew Liesch - Piper Sandler Andrew Terrell - Stephens Kelly Motta - KBW Tim Coffey - Janney Montgomery & Scott Operator Hello, everyone, an ...

Fourth Quarter 2022 Photo by Salvador Saldana Photo by Yvonne McDonald Photo by Maria DeVecchio Photo by Siti Alimah Disclosure Statement This presentation deals with 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. Additional forw ...

Financial Data and Key Metrics Changes - Banner Corporation reported a net profit available to common shareholders of $49.1 million, or $1.43 per diluted share for Q3 2022, compared to $1.44 per share in Q3 2021 and $1.39 per share in Q2 2022 [9] - Pretax pre-provision earnings, excluding certain expenses, were $66.9 million for Q3 2022, up from $57.8 million in Q2 2022 [10] - Core revenue from operations increased by 9% to $161.5 million compared to $148.2 million in Q2 2022 [10] - Return on average assets was 1.18% for Q3 2022 [10] Business Line Data and Key Metrics Changes - Core deposits increased by 1.5% compared to September 30, 2021, representing 95% of total deposits [11] - Loans outside of PPP loans increased by 10% year-over-year [11] - Delinquent loans as of September 30 were 0.22% of total loans, up from 0.20% a year ago [13] - Core portfolio loan growth, excluding PPP loans, was $388 million or 4.1% for the quarter, with an annualized growth rate of 16.3% [14] Market Data and Key Metrics Changes - Commercial loans, excluding PPP, grew by nearly 5% or $53 million in the quarter, with an annualized rate of 18% [14] - The agricultural loans reflected an 8% year-over-year increase, excluding PPP loans [17] - The consumer mortgage portfolio saw significant growth due to holding completed construction mortgage loans on the balance sheet [17] Company Strategy and Development Direction - The company is focused on the "Banner Forward" initiative, which aims to accelerate growth in commercial banking, deepen retail client relationships, and streamline back-office operations [7] - The company continues to emphasize its core values and commitment to clients, communities, and shareholders [8] - The company is positioned to navigate economic cycles effectively, with a strong credit culture and solid reserve for loan losses [17] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism regarding loan growth, anticipating mid to upper single-digit growth in Q4 and into 2023, barring significant economic downturns [31] - The economic environment is described as uncertain, with management prepared for potential recession impacts [17] - Management noted that credit quality metrics remain strong, with a focus on maintaining a moderate risk profile [9][13] Other Important Information - The company announced a quarterly dividend of $0.44 per share [11] - Banner Corporation received recognition for client satisfaction, ranking as the number one bank in the Northwest by JD Power [12] Q&A Session Summary Question: Expense guidance and efficiency initiatives - Management does not anticipate material additional restructuring costs from the Banner Forward initiative, expecting a low 90s core run rate going into 2023 [26][27] Question: Core deposit management - Management expects modest runoff of price-sensitive deposits but continues to acquire new clients, particularly in small business and commercial sectors [29] Question: Loan growth expectations - Management anticipates maintaining mid to upper single-digit loan growth in Q4 and into 2023, despite potential economic challenges [31] Question: Margin guidance - New loans are being added in the mid to upper fives range, with expectations for deposit betas to catch up as rates rise [33][35] Question: Provision for loan losses - Provisioning was driven by loan growth and qualitative factors related to economic sentiment [36] Question: Balance sheet growth and bond portfolio - The bond portfolio is expected to gradually amortize, with cash flows around $75 million to $80 million per quarter [39] Question: Total capital ratio and share repurchases - Management is cautious about share repurchases due to economic uncertainty, with expectations for the total capital ratio to improve over time [41] Question: Fee income outlook - Management expects a rebound in fee income in Q4, following a significant mark on the multifamily loans held for sale in Q3 [43] Question: Noninterest-bearing deposits - Seasonal increases in noninterest-bearing deposits are typical in Q3, with expectations for plateauing in Q4 [48]

Financial Data and Key Metrics Changes - Banner Corporation reported a net profit available to common shareholders of $48 million or $1.39 per diluted share for Q2 2022, compared to $1.56 per share in Q2 2021 and $1.27 per share in Q1 2022 [8][22] - Pre-tax pre-provision earnings were $57.8 million for Q2 2022, up from $49.7 million in Q1 2022 [9] - Core revenue from operations increased 8% to $148.3 million compared to $137.6 million in Q1 2022 [10] - Return on average assets was 1.16% for Q2 2022 [10] Business Line Data and Key Metrics Changes - Core deposits increased by 5% compared to June 30, 2021, representing 95% of total deposits [11] - Core portfolio loan growth, excluding PPP loans, was $338 million or 3.7% for the quarter, with an annualized growth rate of 14.9% [15] - Commercial loans, excluding PPP, grew by nearly 9% or $94 million in Q2 2022, with balances now 5% higher than reported as of June 2021 [16] - The consumer mortgage portfolio grew by $150 million or 21% quarter-over-quarter, and home equity lines increased by $36 million or 8% [20] Market Data and Key Metrics Changes - Delinquent loans as of June 30 remained low at 0.19% of total loans, down from 0.21% in the prior quarter [14] - Adversely classified loans decreased to 1.63% of total loans, down from 1.95% in the linked quarter [14] - Nonperforming assets were low at $19.1 million, representing 0.12% of total assets [14] Company Strategy and Development Direction - The company is focused on the "Banner Forward" initiative, which aims to accelerate growth in commercial banking, deepen retail client relationships, and streamline back office operations [7][8] - The strategy includes expanding loan production and enhancing fee income through various initiatives [56] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism regarding loan growth despite economic uncertainties, expecting to maintain high single-digit growth rates [48] - The company is prepared for potential economic challenges, emphasizing a conservative approach to underwriting and asset quality management [61][21] Other Important Information - Banner has made significant commitments to support minority-owned businesses and local nonprofits, totaling over $1.5 million [12] - The company received recognition for client satisfaction, being ranked 1 bank in the Northwest by J.D. Power [12] Q&A Session Summary Question: Loan growth outlook and campaigns - Management confirmed that small business and residential mortgage campaigns are ongoing and expected to continue until the end of the month [34][36] Question: Provisioning and reserve ratio - Management indicated that provisioning is influenced by loan growth and economic conditions, with a conservative approach expected moving forward [38][39] Question: Deposit runoff behavior - Management noted that while some deposit outflows are anticipated due to rate sensitivity, the core deposit base remains resilient [42][45] Question: Loan growth expectations for the second half of the year - Management expects to maintain high single-digit loan growth, supported by strong pipelines in commercial and agricultural sectors [49][48] Question: M&A discussions and appetite - Management stated that while M&A activity has slowed, discussions continue, and they remain open to opportunities when market conditions are favorable [51][52] Question: Revenue opportunities from Banner Forward - Management anticipates sustained loan growth and fee income improvements as a result of the Banner Forward initiative [54][56] Question: Underwriting and portfolio maintenance - Management confirmed that underwriting practices remain conservative, with ongoing monitoring of credit quality [60][61] Question: Expense guidance and inflation pressures - Management acknowledged wage inflation pressures and adjusted core expense guidance to the high 80s to low 90 million range [68][70]

Financial Data and Key Metrics Changes - Banner Corporation reported a net profit available to common shareholders of $44 million or $1.27 per diluted share for Q1 2022, compared to $1.33 per share in Q1 2021 and $1.44 per share in Q4 2021, reflecting a decline due to credit loss allowances and low interest rates [9][25] - Pre-tax pre-provision earnings were $49.7 million for Q1 2022, consistent with $49.5 million in Q1 2021, indicating stable core earnings power [10] - Core revenue from operations decreased by 3% to $137.6 million compared to $141.4 million in Q1 2021, primarily due to a decline in mortgage banking revenues [10][11] Business Line Data and Key Metrics Changes - Core deposits increased by 9% compared to March 31, 2021, representing 94% of total deposits, indicating strong client loyalty and funding position [11] - Loans outside of PPP increased by 5% year-over-year, with commercial and commercial real estate pipelines remaining solid [12][17] - Agricultural loans declined by $35 million quarter-over-quarter, reflecting seasonal trends, but were up 11.5% year-over-year [21] Market Data and Key Metrics Changes - Delinquent loans remained low at 0.21% of total loans, down from 0.43% a year ago, indicating strong credit quality [15] - Adversely classified loans decreased to 1.96% of total loans, down from 3.13% a year ago, reflecting improved asset quality [15][22] - Non-performing assets were low at $19.1 million, representing 0.11% of total assets, down from previous periods [15] Company Strategy and Development Direction - The "Banner Forward" initiative aims to accelerate growth in commercial banking, deepen retail client relationships, advance technology strategies, and streamline operations [7][8] - The company is focused on maintaining a moderate risk profile while enhancing client service and operational efficiency [23][34] - Future initiatives will focus on revenue growth, particularly in commercial and small business banking, with expectations for improved loan and deposit growth [56][78] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the loan growth outlook, anticipating upper single-digit growth rates by year-end, despite some seasonal headwinds [42] - Concerns were raised about macroeconomic factors such as inflation, commodity price increases, and supply chain disruptions, but the company maintains a strong credit profile [23][60] - The company expects to benefit from rising interest rates, with net interest margin anticipated to expand as the rate cycle progresses [28][34] Other Important Information - Banner Corporation has been recognized for client satisfaction and performance, being ranked the number one bank in the Northwest by JD Power for the sixth time [13][14] - The company has made significant commitments to support minority-owned businesses and local communities, reflecting its corporate social responsibility initiatives [12][13] Q&A Session Summary Question: Remaining costs for Banner Forward initiative - Management anticipates $1 million to $2 million in remaining implementation costs over the next two quarters [37] Question: Core expense levels - Core expenses for Q1 were reported at approximately $85.4 million, with expectations for mid-to-high $80 million range in future quarters [40] Question: Loan growth outlook - Management expects strong loan growth, with pipelines remaining solid and utilization rates anticipated to improve [42] Question: Competition and loan yields - Competition remains intense, with pricing pressures noted, but new loan yields are showing modest improvements [75][76] Question: Impact of M&A on customer attraction - Management is monitoring the effects of M&A activity in the region, but specific impacts on customer acquisition were not detailed [81]