Banner Corporation (BANR) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Banner Corporation Third Quarter 2026 Conference Call and Webcast. After today's prepared remarks, we will host a question-and-answer session. [Operator Instructions] I will now hand the call over to Mark Grescovich, President and CEO of Banner. Mark? Please go ahead.

Thank you, Trevor, and good morning, everyone. I would also like to welcome you to the Third Quarter 2026 earnings call for Banner Corporation. Joining me on the call today is Rob Butterfield, Banner Corporation's Chief Financial Officer; Jill Rice, our Chief Credit Officer; and Rich Arnold, our Head of Investor Relations. Rich, would you please read our forward-looking safe harbor statement? .

Sure, Mark. Good morning. Our presentation today to us of Banner's business outlook and will include forward-looking statements. These statements include descriptions of management's plans, objectives or goals for future operations, products or services, forecasts of financial or other performance measures and statements about Banner's general outlook for economic and other conditions. We also may make other forward-looking statements in the question-and-answer period following management's discussion. These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from those discussed today. Information on the risk factors that could cause the actual results to differ are available from the earnings press release that was released yesterday and the most recently filed Form 10-Q for the quarter ended June 30, 2026. Forward-looking statements are effective only as of the date they are made, and Banner assumes no obligation to update information concerning its expectations. Mark?

Thank you, Rich. As is customary, today, we will cover four primary items with you. First, I will provide you high-level comments on Banner's third quarter 2026 performance. Second, the actions Banner continues to take to support all of our stakeholders, including our Banner team, our clients, our communities and our shareholders. Third, Jill Rice will provide comments on the current status of our loan portfolio. And finally, Rob Butterfield will provide more detail on our operating performance for the quarter as well as comments on our balance sheet. Before I get started, I want to welcome our new colleagues from the Bank of the Pacific team to Banner. And thank all of my 2,000 colleagues in our company who are working extremely hard to assist our clients and communities. Banner has lived our core values, summed up as doing the right thing for the past 135 years. Our overarching goal continues to be to do the right thing for our clients, our communities, our colleagues, our company, and our shareholders and to provide a consistent and reliable source of commerce and capital through all economic cycles and change events. I am pleased to report again to you that is exactly what we continue to do. I'm very proud of the entire Banner team that are living our core values. Now let me turn to an overview of our performance. As announced, Banner Corporation reported a net profit available to common shareholders of $47.7 million or $1.36 per diluted share for the quarter ended September 30, 2026. This compares to a net profit to common shareholders of $1.54 per share for the third quarter of 2025. The third quarter 2026 performance was impacted by the closure of the previously announced Pacific Financial acquisition. Rob will discuss this in more detail shortly. Also, our strategy to maintain a moderate risk profile and the investments we have made and continue to make in order to improve our operating performance have positioned the company well for the future. The strength of our balance sheet coupled with a strong reputation we maintain in our markets will allow us to manage through the current market uncertainty. To illustrate the core earnings power of Banner. I would direct your attention to pretax pre-provision earnings, excluding gains and losses on the sale of securities, changes in fair value of financial instruments, merger and acquisition-related expenses, and building and lease exit costs. Our third quarter 2026 core earnings were $68.6 million compared to $67.8 million for the third quarter of 2025. Banner's third quarter 2026 revenue from core operations was $179 million compared to $169 million for the third quarter of 2025, an increase of 6%. We continue to benefit from a strong core deposit base that has proved to be resilient and loyal banner, a very good net interest margin and core expense control. Overall, this resulted in a return on average assets of 1.11% for the third quarter of 2026. Once again, our core performance reflects continued execution on our super community bank strategy. That is, growing new client relationships, maintaining our core funding position promoting client loyalty and advocacy through our responsive service model and demonstrating our safety and soundness through all economic cycles and change events. To that point, our core deposits represent 90% of total deposits. Reflective of this performance, coupled with our strong regulatory capital ratios, and our strong tangible common equity per share, we announced a core dividend of $0.52 per share. In the quarter, we also released our 2025 corporate responsibility report. Banner has always been committed to doing the right thing in support of our clients, the many communities that we serve and our colleagues. The accomplishments highlighted in this report are meant to reflect the deep connection we have with all of our stakeholders and our commitment to creating positive change in the communities we serve. Finally, I'm pleased to say that we continue to receive marketplace recognition and validation of our business model and our value proposition. Banner was again named one of America's 100 Best Banks as well as one of the best banks in the world by Forbes. In Newsweek named banner, one of the most trustworthy companies both in America and the world again this year and just recently again, named Banner one of the best regional banks in the country. Additionally, our company was certified by Great Place to Work. S&P Global Market Intelligence ranked Banner's financial performance among the top 50 public banks with more than $10 billion in assets. The accrual bond rating agency affirmed all of Banner's investment-grade debt and deposit ratings. And as we have noted previously, Banner Bank again received an outstanding CRA rating. Let me now turn the call over to Jill to discuss trends in our loan portfolio and her comments on Banner's credit quality. Jill?

Thank you, Mark, and good morning, everyone. As noted, we completed the acquisition of Pacific Financial this month, adding to our portfolio growth while maintaining strong credit metrics, a testament to the credit culture at both organizations. Loan originations exceeded expectations, increasing 2% from the linked quarter in contrast to the typical seasonal slowdown and increasing 61% when compared to the third quarter of 2025. Importantly, Banner's credit metrics remain stable. Loan outstandings grew by $1 billion in the quarter or 8% from the linked quarter. Of that amount, $766 million was attributable to the acquisition, while the additional $235 million resulted from organic loan growth. On a stand-alone basis, $235 million equates to an annualized growth rate of approximately 8% for the legacy Banner portfolio. Commercial real estate was the primary driver of loan growth during the quarter. owner-occupied real estate grew by $100 million, including $74 million of acquisition-related growth and $26 million of organic growth. Investor CRE grew by $61 million, reflecting acquired balances of $77 million that were partially offset by payoffs within the legacy portfolio. Growth within the small balance real estate portfolio was entirely acquisition related. Multifamily real estate grew by $57 million, including $37 million of acquisition-related growth with the remainder driven by transfers from construction and new originations partially offset by continued refinancing activity into the secondary markets. The construction portfolio increased $108 million, including $29 million of acquisition-related growth and $79 million of organic growth. The majority of this increase occurred within the land and land development and commercial construction segment. The construction portfolio remains well balanced with 1:4 family construction continuing to represent 5% of total loans and the overall construction portfolio representing 14% of total loans. As discussed in prior calls, we continue to closely monitor the completed and unsold inventory levels within the 1:4 family for-sale construction portfolio. Current levels remain well within historical norms and builders remain cautious regarding Neustar. C&I loan balances increased by $72 million, approximately 45% of which was acquisition-related while the small business portfolio grew by $79 million entirely through organic growth. Looking at the ag portfolio, the $52 million increase primarily reflects acquired balances. The 1-4 family portfolio increased by $64 million, including $46 million of acquisition-related growth with the balance reflecting custom construction conversions upon completion net of payoffs. Finally, consumer balances increased by $103 million, including $63 million of acquisition-related growth and $40 million in new originations, primarily via home equity lines of credit. Turning to our credit metrics. Delinquent loans at 0.56% of total loans increased 5 basis points from the linked quarter and compared to 0.39% as of September 30, 2025. Adversely classified assets declined by $9 million in the quarter and now represent 1.61% of total loans. Nonperforming assets increased by $2.4 million in the quarter and are comprised of nonperforming loans of $59 million and REO balances of $4 million. Net charge-offs were modest during the quarter. Loan losses totaled $1.2 million and were partially offset by recovery totaling $528,000. The provision for credit losses in the quarter was $2.8 million, consisting of a $1.8 million provision for loan losses and a $1 million provision for unfunded loan commitments. Additionally, the allowance for credit losses increased by $8.6 million to establish the initial reserve associated with the acquired loan portfolio. At 1.32% of total loans, the reserve remained strong and compares to 1.35% as of the linked quarter and 1.36% as of September 30, 2020. I will close by noting that our credit metrics remain strong and reflective of our moderate risk profile. The addition of the Pacific Financial portfolio aligns well with Banner's underwriting standards and the credit culture is highly consistent with our own, further reinforcing our risk profile. We remain well positioned to navigate this economic cycle with a granular and diversified loan portfolio that is supported by a strong balance sheet. A robust reserve for credit losses and capital levels well in excess of regulatory requirements. With that, I will hand the mic over to Rob for his comments. Rob?

Great. Thank you, Jill. We reported $1.36 per diluted share for the third quarter compared to $1.43 per diluted share in the prior quarter. The decrease in earnings per share compared to the prior quarter was primarily due to merger and acquisition expenses and a loss on the sale of securities acquired in the Pacific Financial merger, partially offset by stronger net interest income and a lower provision for credit losses. Core pretax pre-provision income increased $4.2 million or 7% compared to the prior quarter. As Jill previously mentioned, total loans increased $1 billion during the quarter, which included $766 million of loans acquired from Pacific Financial Corporation and $235 million of organic loan growth. The loan-to-deposit ratio ended the quarter at 84%. Total security balances increased $158 million during the quarter, primarily reflecting securities acquired in the Pacific Financial transaction after repositioning the acquired portfolio, partially offset by an increase in unrealized loss in the security portfolio due to an increase in interest rates. Deposits increased $1.6 billion during the quarter as part of the Pacific Financial acquisition. We acquired $1 billion in deposits, excluding acquisition-related organic deposit growth. Organic deposit growth was $463 million during the quarter or 13% on an annualized basis, demonstrating the strength of our balance sheet and our deposit franchise and our client relationships. Core deposits increased $1.46 billion and represent 90% of total deposits at the end of the quarter. Certificates of deposits increased $142 million during the quarter due to the CDs acquired from Pacific Financial. Total borrowings declined during the quarter as we repaid all outstanding FHLB advances, reflecting the strength of our deposit funding base. Tangible equity to asset ratio was 9.48%, and total shareholder equity increased to $135 million during the quarter to $2.13 billion. Net interest income increased $8.2 million from the prior quarter due to a combination of net interest margin expansion and growth in average earning assets, including the impact of the Pacific Financial acquisition and organic loan growth. The tax equivalent net interest margin was 4.14% compared to 4.13% in the prior quarter. The increase in net interest margin was driven by higher yields on earning assets as average loan yields increased 3 basis points and the yield on investment securities increased by 7 basis points. The average rate on new loan production for the current quarter was 6.55% compared to 6.53% from the prior quarter. The increase in asset yields was partially offset by higher funding costs, primarily reflecting an increase in the cost of deposits due to a combination of an increase in market interest rates, and the majority of the growth in deposits being in interest-bearing accounts. Total deposit cost increased 5 basis points to 1.38%. Noninterest-bearing deposits ended the quarter at 32% of total deposits. Total noninterest income decreased $2.8 million from the prior quarter. The decrease was primarily driven by a $2.1 million loss on the sale of securities acquired from Pacific Financial as market interest rates increased during September prior to the sale being completed. Higher debit card transaction expenses, lower gains on the sale of mortgage and SBA loans and lower income from swap related activities also contributed to the decrease. These decreases were partially offset by favorable changes in the valuation of financial instruments carried at fair value. Total noninterest expense increased $7.7 million from the prior quarter. The primary driver was a $4.9 million increase in merger and acquisition expenses associated with the closing of the Pacific Financial transaction and a $1.1 million increase in write-downs of foreclosed real estate holdings. The current quarter also included one month of expense associated with the operations acquired from Pacific Financial. Our capital liquidity and credit quality metrics continue to position us well to support our clients, communities and future growth opportunities while maintaining a disciplined risk profile. This concludes my prepared comments. Now I'll turn it back to Mark.

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

[Operator Instructions] Our first question comes from the line of Jeff Rulis with D.A. Davidson.

This is Ryan Pan on for Jeff Rulis. Bigger picture on the margin, some moving pieces with the FHLB advances runoff, I mean, security sale. So where do you see the NIM trajectory from here?

Sure, Ryan. This is Rob. So if we think about the fourth quarter and the asset side of it, I would expect some expansion in loan yields has about 25% of our loan portfolio would have repriced up with the increase in Fed funds rate in September. And then in addition, the closing of the Pacific Financial deal would also add a couple of basis points to the loan yield as well. And then I would expect the portfolio also to see an increase in yield in that 6 to 7 basis point range. On the funding side, I would expect some increase in the cost of deposits as we have seen competitors increase deposit pricing after the Fed increased the Fed funds rate. So on a net basis, I would expect some expansion in NIM in the fourth quarter. If we're looking out further, 2027 would really be dependent on Fed actions. I've seen the market pricing in anywhere from 1 to 2 increases in '27 in addition to the increase that they're pricing in December. I will say Moody's forecast is showing something different, and we usually follow Moody's they're actually showing two rate decreases in 2027. So I would say there's a bit of lack of clarity out there around the interest rate trajectory right now. the market is right, and we see some increase in the fourth quarter and then also a few increases in 2027, then I would expect some expansion of our net interest margin as we are slightly asset sensitive. If the Fed were on pause for some reason, I think we'd also see some moderate expansion during 2027, really just dependent on the level of deposit rate competition. And a gradual decline or if the Fed decides to decrease some interest rates in 2027, then I think it's either flat to a moderate compression.

Understood. Very helpful. On the loan side of things, strong organic loan growth this quarter. If you could talk to what you're hearing from customers midst of a rising rate environment. I know, Jill, you mentioned that builders might be cautious. But if that could impact demand? And any expectations as we head into 2027 on loan growth side?

Sure, Ryan. It's a bit early to really peg what's going to happen in terms of loan demand with the rate environment. We have had a I'll call it a handful of clients who have hit the pause button and are stepping back and looking at some of their expansion plans. But again, it's too soon to really know, the strong loan growth was fantastic this quarter. I do think the increasing rate environment that we're moving into is going to be an initial headwind. But that said, we have meaningful unfunded construction projects in process outside of the residential portfolio that -- yes, they are being cautious with new starts. Commercial and commercial real estate pipelines remain healthy. We're still anticipating a mid-single-digit loan growth as we close out 2026, and I would position that to be the same loan growth rate we will expect into 2027.

Okay. And just last for me, trying to gauge a run rate on fee income. And stripping out that loss on securities, is that kind of where we can think of where we should think the run rate is? Or where would you set expectations on fees? .

Sure, Ryan. It's Rob. So noninterest income in the third quarter, I think, was lower than our typical run rate. We have seen lower mortgage banking activity and also SBA gain on loan sale as higher interest rates have slowed activity in these areas. If I think about the fourth quarter, and you wanted to get to a run rate, you would need to add a full quarter of Bank Pacific activity. We saw one month of that in the third quarter. So you need to add to more months in there. They're running about $400,000 a month. So that would be an additional $800,000 on top of what we saw in the third quarter. And I think there's just a number of areas where we just -- you always see fees move up and down quarter-over-quarter. So I think there's probably some normalization above that after you added Bank of Pacific maybe $0.5 million or something in that range. And I think that gets you probably close to a run rate as long as we see that slowdown in mortgage banking and SBA.

Our next question comes from the line of Matthew Clark with Piper Sandler.

Just a couple more on the margin. if you had the spot rate on deposits at the end of September and then your expectations around the interest-bearing deposit beta, I think it was 28% on the way down. Just curious what you think you might achieve on the way up.

Sure, Matthew. So spot cost of deposits for the month of September was $140 million compared to $138 million for the quarter. So we were seeing some additional pressure in the month of September there. And then as far as the deposit beta on the interest-bearing deposits, as you said, 28 basis points is what we're seeing on the upside. Modeling-wise, we're modeling something higher. We're modeling $40 million. So I would say it would end up somewhere between 28% and 40%. But that tends to be very lagged as what we've experienced in the past. Oftentimes, I think we've seen some front-running of that. If you think about that deposit cost increased 5 basis points during the third quarter. And typically, we would expect that to be relatively flat without the kind of pressure on market index rates that we saw during the third quarter. So we're hoping some of that it was front-end loaded, but I would expect some carryover from the Fed actions in the fourth quarter.

Got it. And then just on deposits on the organic side, really strong. I think some of that was seasonal, but maybe speak to the portion that you wouldn't attribute to being seasonality and where it's coming from and whether or not there's anything -- whether or not those balances are sustainable.

Yes. So we -- I mean the third quarter is always the best quarter for a deposit growth standpoint. There is some seasonality to that, but the majority have been sticking around typically what we see, and it's mostly on the ag side as we see cash coming in from crop harvest and other things, and it builds as you get into the -- go through the third quarter and typically what happens at the beginning of the fourth quarter, we would normally expect that those clients would use that cash flow to pay down operating lines of credit and do other things with that cash. So if you think about $463 million, there could be $100 million of that, that would come back out in early fourth quarter. But then typically, what happens as you move into the end of the year, we see other clients that start to position their balance sheet for the end of the year. And oftentimes, they will put additional cash on their balance sheet as we fourth quarter. So that usually ends up balancing out. And typically, we would see some increase in deposits in the fourth quarter when you balance those two out.

Got it. And then last one for me for Mark, on M&A, I know you were in the midst of integrating this latest deal, but any comments around whether or not conversations have picked up at all in your appetite to consider another deal.

Yes. Thank you, Matthew, for the question. Our philosophy hasn't changed. We continue to have dialogue with folks that we think would be great partners with Banner and we're very excited about the Bank of the Pacific combination, Pacific financial closure, and we do have an integration that's going to occur mid-month. So we're focused on that. But to the extent that opportunities arise, we are prepared to move forward. But like I said, we're focused on the current disruption, our organic growth and making sure that the Pacific Financial integration goes extremely well.

Our next question comes from the line of Kelly Motta with KBW.