Banner Corporation (BANR) Q4 2021 Earnings Report, Transcript and Summary

Hello everybody, and thank you for joining Banner Corporation's Fourth Quarter 2021 Earnings Call. My name is Bethany and I will be your operator for the call today. [Operator Instructions] I will now hand the call over to your host, Mark Grescovich, President and CEO of Banner Corporation. Mark, over to you.

Thank you, Bethany. And good morning, everyone. I would also like to welcome you to the fourth quarter and full-year 2021 earnings call for Banner Corporation. As is customary, joining me on the call today is Peter Conner, our Chief Financial Officer. Jill Rice, our Chief Credit Officer, and Rich Arnold, our Head of Investor Relations. Rich, would you please read our forward-looking Safe Harbor statement?

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, 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 in our earnings press release that was released yesterday and a recently filed Form 10-Q for the quarter ended September 30th, 2021. Certain of these risk factors may be particularly acute as a result of the rapid implementation of organizational changes and strategic projects related to Banner Forward. Forward-looking statements are effective only as of the date they're made and Banner assumes no obligation to update information concerning its expectations. Mark.

Thank you, Rich. First of all, I hope you and your families are well as we all continue to battle the COVID virus, its variants and its effects on our communities and the economy. Today, we will cover 4 primary items with you. First, I will provide you a high-level comment on Banner's fourth-quarter and full-year performance. Second, the actions Banner continues to take to support all of our stakeholders, including our Banner team, our clients, our communities, and our shareholders. Third, Jill Rice will provide comments on the current status of our loan portfolio. And finally, Peter Conner will provide more detail on our operating performance for the quarter and full year and an update on our strategic initiative we are calling Banner Forward that we outlined last quarter. The focus of Banner Forward is to accelerate growth in commercial banking, deepen relationships with retail clients, advance technology strategies, and streamline our back office. 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 during these difficult times. Banner has lived our core values summed up as doing the right thing for 131 year. It is critically important that we continue 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'm pleased to report 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 $49.9 million or a $1.44 per diluted share for the quarter ended December 31, 2021. This compared to net income to common shareholders of a $1.44 per share for the third quarter of 2021, and $1.10 per share for the fourth quarter of 2020. For the full year ended December 31, 2021, Banner Corporation reported record net income available to common shareholders of $201 million compared to a $115.9 million for the full year of 2020. The full-year performance was impacted by the allowance for credit losses recapture, a continued inflow of liquidity coupled with very low interest rates, our strategy to maintain a moderate risk profile, continued good mortgage banking revenue, and the acceleration of deferred loan fee income associated with the SBA loan forgiveness of paycheck protection loans. Peter will discuss these items in more detail shortly. Directing your attention to pre -tax -- pre -provision earnings and excluding the impact of gains and losses on the sale of securities. Changes in fair value of financial instruments, merger and acquisition expenses, COVID expenses, Banner Forward expenses, and the loss on debt extinguishment, earnings were $223.1 million for the full year 2021 compared to $215.5 million, for the full year of 2020, an increase of 3.5%. This measure I believe is helpful for illustrating the core earnings power of Banner. Banner’s full-year 2021 revenue from core operations increased 2.3% to $593.3 million compared to $579.9 million for the full-year of 2020. We benefited from a larger earning asset mix, a good net interest margin, solid mortgage banking fee, revenue, good core expense control, and the previously mentioned acceleration of deferred loan fees, associated with PPP loans. Overall, this resulted in a return on average assets of 1.24% for 2021, and a 5% increase in tangible common shareholder equity per share compared to the fourth quarter of 2020. Once again, our core performance reflects continued execution on our community banks - super community bank strategy even with the challenges of the pandemic. 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 16% compared to December 31, 2020 and represent 94% of total deposits. Further, we continued our strong organic generation of new relationships. Reflective of this solid performance coupled with our strong tangible common equity ratio, we increased our core dividend 7% in the quarter to $0.44 per share, and authorized the repurchase of approximately 5% of our common stock. Our branches continue to be fully operational. And given the recent COVID-19 cases, we have temporarily suspended our return to the workplace policies for other office personnel to ensure the safety of our employees and our clients. 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 thousand clients. Also, we made an important $1.5 million commitment to support minority owned businesses in our footprint; a $1 million equity investment in Broadway Federal Bank, which is now City First Bank, the largest Black-led depository financial institution in the United States, significant contributions to local and regional non-profits, and have provided financial support for emergency and basic needs in our footprint, including interest-free consumer loans to support our Pacific Northwest clients impacted by the significant flooding in early December. 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. While there is no denying that loan growth continues to be hampered by the impact of COVID-19 I am pleased to report that credit quality remains strong and the level and trend of adversely classified assets continues to reflect steady improvement. Banner's delinquent loans as of December 31st, represent a nominal 0.21% of total loans up one basis point over the prior quarter and compares to 0.37% as of December 31, 2020. Non-performing assets are down $6 million when compared to the linked-quarter and now represent a nominal 0.14% of total assets. This is a 10-basis-point improvement when compared to December 31, 2020. Non-performing assets include non-performing loans of $22.8 million and REO and other assets of 869,000. As mentioned earlier, the level and trend of adversely classified assets has continued to improve. As of December 31, our adversely classified loans totaled 2.18% of total loans down from 2.45% as of the linked quarter, and compared to 3.45% of total loans as of December 31st, 2020. 75% of the reduction in classified loans, is due to the superior collection work in our special assets department, which resulted in full loan payoffs. The balance of the reduction is split evenly between risk rating upgrades that are primarily due to sustained operating performance, and normal principal reductions. Shifting to the reserve for credit losses, Banner again posted a net recovery this quarter. Gross loan losses in the quarter, were modest at $800,000 and were fully offset by recoveries of $1.1 million. For the full year, net charge-offs totaled a nominal $2.1 million or 2 basis points, excluding the fully guaranteed paycheck protection loans. Based upon muted loan growth. And in light of the continued improvement in asset quality, we again released $8.1 million from our reserve for credit losses as of December 31st. This was partially offset by an increase in our reserve for unfunded loan commitments of $2.3 million, and an additional 579,000 was provided to the reserve for credit losses securities for a net release of 5.2 million. After the release, our ACL reserve totaled 132.1 million or 1.45% of total loans as of December 31, down 7 basis points from the linked-quarter and compared to our reserve of 1.69% as of December 31, 2020. Excluding loans held for sale and the paycheck protection loans, our current ACL reserve provides coverage of 1.48% of total loans and 588% of non-performing loans. I started my comments by acknowledging that loan growth continues to be hampered by the continued impact of the COVID-19 pandemic. That said, we again reported strong loan originations, and our commercial and commercial real estate pipelines remain robust. As was reported in our release, loan originations were strong in all business channels and were up 28% year-over-year, excluding PPP loans. These new originations however, have continued to be offset by payoffs. And as we have discussed previously, Alliance excess liquidity, as well as supply chain and labor shortages have delayed both line utilization as well as new borrowings. Core portfolio loan growth, excluding PPP loans for the quarter, was $43 million or 2% on an annualized basis. And for the full-year, reflected a 1.4% increase in net of the PPP loan balances. Looking at the full-year 2021, commercial and multifamily real estate totals increased by $250 million or 6.2% and were partially offset by declines in commercial and multifamily construction of $59 and $46 million respectively. These construction declines represent both anticipated payoffs and conversion to permanent loans upon completion. The residential construction portfolio grew by $61 million, and the land and land development portfolio grew by $64 million. The growth in these portfolios is in spite of the accelerated pace of completed home sales and subsequent loan payoffs, the housing markets in which we do business continue to be strong, with inventory of completed homes at all-time lows and builders needing to restore their land and lot inventory for future construction projects. Our total residential construction exposure remains acceptable at 6.3% of the portfolio, of which approximately 40% is custom 1 to 4 family residential loans. When you include multi-family commercial construction and land, the total construction exposure is 14.6% of total loans. Offsetting the commercial real estate growth, C&I loan totals, excluding PPP, were down $94 million year-over-year or 8% and agricultural loans were down $16 million year-over-year or 5%. The year-over-year decline and C&I reflects significant pay-downs of both lines of credit and term debt resulting from excess climb liquidity, as well as from the payoff of a handful of significant relationships that went to a looser structure and or lower rates over the past 12 months. All coupled with continued lower overall utilization down 2% from December 2020. As I commented earlier this year, the primary driver of the decline in our agricultural portfolio, was due to de banking several underperforming borrowers, as well as the strategic decision to not chase looser structure and lower pricing on other large facilities. Reviewing asset quality briefly, loans rated substandard, declined to $27 million for the quarter and declined a $142 million or 42% year-over-year. This includes nearly $80 million in adversely classified loans that were paid off over the course of the year. Overall, adversely classified loans are down 53% since the pandemic induced high reported in September of 2020, and continue to be centered in the hospitality and recreation industries. We are continuing to monitor the impact that the various COVID-19 variants are having on our clients, especially with exponential spread we are now seeing from the Omicron variant across our footprint. That said, my comments from last quarter are no less true today. To date, our clients have adjusted to the ever-changing operating conditions and are continuing to perform well. With that, I will wrap up by saying we have not changed our underwriting practices since the onset of the pandemic and are not now loosening our structure to drive loan growth as we remain committed to maintaining a moderate risk profile throughout all business cycles. Our credit metrics are strong. We have a solid reserve for loan losses, especially in light of portfolio performance, and our capital levels continue to be well in excess of regulatory requirements. Banner continues to be well-positioned for the future. With that, I will turn the microphone over to Peter for his comments. Peter.

Thank you, Jill, as discussed previously and as in our earnings release, we reported net income of $49.9 million or $1.44 per diluted share for the fourth quarter equal to the results we posted last quarter of $49.9 and $1.44 million per diluted share. While there was no change in total per-share earnings, the composition of the results were affected by the offsetting effects of lower net interest income and lower non-interest expense. Core revenue excluding gains and losses on securities and changes in fair value of financial instruments carried at fair value decreased $10.2 million from the prior quarter. Primarily as a result of a decline in PPP loans has given us income and lower mortgage revenue. Core expenses which exclude Banner Forward debt extinguishment M&A and COVID-related expenses declined 6 million due primarily to lower compensation and legal costs. Turning to the balance sheet, total loans decreased a $101 million from the prior quarter end as a result of a $176 million decline in SBA PPP loans, partially offset by an increase in core loans held for investment in loans held for sale. Excluding PPP loans and held for sale loans, portfolio loans increased $43 million. Ending core deposits increased $175 million from the prior quarter end due to continued, albeit slower growth, in the level of client deposit liquidity. Time deposit balances declined by $12 million from the prior quarter end, ending at $839 million as higher-cost CDs continue to rollover at lower [indiscernible] Net interest income declined by $8.6 million due to a decline in SBA PPP loan forgiveness, prepayment, and interest recovery related interest income, partially offset by higher securities income and lower funding costs. Compared to the prior quarter, loan yields decreased 31 basis points on a tax adjusted basis due to a decline in PPP loan forgiveness processing fees, along with lower prepayment and recovery interest income. Excluding the impact of PPP loan forgiveness, prepayment penalties, interest recoveries, and acquired loan accretion, the average loan coupon increased 10 basis points from the prior quarter, primarily due to a smaller balance of low yielding 1% coupon SBA PPP loans. Total average interest bearing cash and investment balances increased by $750 million over the prior quarter, funded by PPP loan payoffs, and deposit growth. While the average yield on the combined cash and investment balances declined three basis points due to a larger mix invested in overnight funds at low rates, partially offset by an increase in average portfolio security yields. Total cost of funds declined 3 basis points to 13 basis points. As a result of lower deposit and borrowing costs. Total cost of deposits declined from eight to seven basis points in the fourth quarter due to declines in interest bearing retail deposit rates, an ongoing re-pricing of the cd book. While borrowing costs declined due to the maturity of an FHLB sixth-grade advance. The ratio of quarter deposits to total deposits was 94% in the fourth quarter, the same as the previous quarter. The net interest margin declined 30 basis points to 3.17% on a tax equivalent basis. The decline was driven by a decline in the pace of SBA PPP loan forgiveness activity, along with continued albeit slower growth in excess deposit liquidity invested in overnight interest bearing cash. Partially offsetting the decline, were lower funding costs and an increase in average security yields. In the coming quarters, we anticipate the pace of margin compression to slow and then begin to expand as a function of excess deposit liquidity, core loan growth, and increasing market rates. As we have guided in previous quarters, we anticipate laddering excess deposit liquidity into the securities portfolio at a measured pace, while remaining flexible to shifts in loan demand and the yield curve. Total non-interest income decreased $860,000 in the prior quarter. The current quarter benefited from a $2.6 million fair value gain on our Fintech investment, partially offset by a decline on the gain on trust preferred securities investments. Core non-interest income, excluding gains on the sales of securities and changes in investments carried at fair value decreased 1.6 million. Deposit fees were down modestly by 100,000 while mortgage banking income declined 4 million due to 0 sales and multifamily loans in the current quarter and a decline in average gain on sales spreads in residential mortgage. While residential mortgage loan spreads compressed modestly in the current quarter, loan production remained robust in the fourth quarter, declining only 5% from the third quarter. Within residential mortgage production, the age of refinance volume increased to 36% of total production, up from 32% in the prior quarter. While demand for our multifamily loan product remains high, no sales were consummated this quarter as the held-for-sale loan inventory was in process of being replenished after a large bulk sale at the end of last quarter. Miscellaneous fee income increased $2.5 million primarily due to gains on the sale -- the sale of closed branch locations and an accounting adjustment related to increase in the value of the company's SBA servicing assets. Turning to non-interest expense. Total non-interest expense decreased $10.3 million from the prior quarter, principally due to declines in Banner Forward related implementation costs and legal expenses from the prior quarter. This quarter's non-interest expense included a $2.3 million loss on the redemption of certain junior subordinated debt liabilities carried at fair value. Banner Forward implementation costs declined to $1.2 million from $7.6 million in the prior quarter. Excluding Banner Forward debt extinguishment. M&A and pandemic specific operating costs, core non-interest expense declined $6 million. Salary and benefit expense declined by $2 million primarily due to staff reductions and lower severance expense. Payment and card processing expense declined $1.1 million primarily due to a single fraud loss in the third quarter. Professional and legal expenses declined in $10.1 million due to Banner forward related consulting fees, and a $4 million accrual for pending litigation in the prior quarter. And this link expense declined $1.4 million primarily due to lower credit card losses, and lower loan production-related costs. In addition, as part of ongoing capital management, the Company began redeeming a portion of its outstanding, TruPS junior subordinated debentures, increasing volley holdings, and increasing its core shareholder dividend by 7% to $0.44 per share. We anticipate redeeming a total of $57 million in floating rate TruPS debt by the end of the first quarter. Honestly, we posted a DTA adjustment which reduced reported tax expense in the current quarter. Based on our current mix of tax-exempt revenues and state tax and excess weightings, our effective tax rate guidance going forward, is 19.5%. And finally, Banner Forward is on track and completed its second full quarter of implementation. Approximately 25% of the initiatives from a program value perspective have been executed and are reflected in the current quarter core run rate, with the majority of those now in place driving expense efficiency. As we discussed previously, the remaining efficiency-related initiatives are anticipated to be an implemented sequentially over the next three quarters, with implementation of the revenue initiatives ramping up in the second half of the year and into 2023. We continue to guide towards a core expense quarterly run rate in the mid-to-high 80 million range before the effects of wage or vendor costs inflation above our recent experience, that could affect anticipated results. In closing, the company remains well positioned for rising rates with a low cost, granular core deposit base, annual ample on balance sheet liquidity to support renewed loan demand. This concludes my prepared remarks. Mark.

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

Thank you. [Operator Instructions] The first question comes from Jeff Rulis at D.A. Davidson. Jeff, your line is open.

Thank you. This is Andrew [Gorska] (ph) speaking on behalf of Jeff Rulis at D.A. Davidson. Mark, maybe one for you. There are lot of large mergers occurring in your footprint. Are you seeing any changes in your customer base or hiring as a result of those pending mergers?

Yes. Good morning, Andrew. And thank you for joining. And thank you for the question. If you look at the history of Banner over the course of the last 12 years, we have been incredibly successful with taking market share and growing our client base. And as we've seen organically, we have grown our client base without acquisitions more than a 120% over that period of time. A lot of that has to do with our delivery channel and our business model and our product suite, but it also a lot of it had to do with market disruption that was occurring through M&A of other financial institution or business models that we're shifting from the banks. And that is exactly what's going on right now. So we are excited to be in a position, especially with the implementation of Banner Forward, that we're going to be in a position to take advantage of the market disruption from every angle: client perspective, community involvement perspective, as well as adding talent to our organization and filling out some of the density of our footprint. So this is a great time for our organization and we're going to be in a position to take advantage of the market disruption that's occurring. It hasn't occurred yet. It tends to mirror the consolidation phase of those institutions. But we are seeing opportunities start to present themselves in anticipation of what some of the fallout will be for those organizations. Hopefully that helps Andrew.

Absolutely. Thank you very much. One other question. I was looking to get a little more color on the SBA valuation and the gains on branch locations within miscellaneous income and thoughts on that recurring in the future.

Sure. Andrew, it’s Peter, the -- just to give you some numbers around those two items. The SBA asset accounting adjustment was $1.1 million and that related to capturing the value of our SBA loans and service for the SBA administration and it’s grown gradually over the years and become a more significant item and so we decided to account for that servicing asset this quarter. It's not an item that will go forward. However, we will continue to record our regular SBA loan sales. so many loan sales program continues to be very active and that will continue to generate fee income. And the branch sales this quarter were generated at $800,000 gain. That's part of that miscellaneous fee income total.

Perfect. Thank you. I'll step away. Thank you.

Thank you, Andrew.

The next question comes from David Feaster at Raymond James. David, your line is open.

All right. Good morning everybody.

Good morning David.

I just wanted to start on maybe the growth front. I mean, origination have remained very strong. I mean payoffs and pay downs are offsetting some of that improvement. But just curious how you think about net growth as we look into next year, I guess, just with the shift towards middle market, potential deceleration in payoffs as rates rise, less distraction from PPP. What do you think is a good loan growth run rate looking forward.

Good morning, David. This is Jill. So I’ll just say that we still feel really good about the loan growth going into 2022 and for all the reasons that we've discussed over the last few quarters for located in markets with really strong economic engines. And as you noted, we've had very strong loan origination over the course of the year. Our utilization rates are slowly improving. And while we have lower than normal utilization in the commercial construction portfolio, that's a function of that new residential [A&D] (ph) and home starts. So those would be expected to drop over the course of the year. And furthermore, with the strong pipelines, we just really believe that with the excess liquidity as that gets absorbed, and commercial utilizations continues and ramps back to normal, coupled with the Banner Forward initiatives, we think we'll get to that single -- upper single-digit growth rate by the end of the year and it's going to be a ramp throughout 2022.

Okay. That's helpful. And I guess maybe we've talked about that shift towards middle market as part of the Banner Forward. Could you just talk about where we are in that evolution and whether you think you have the capabilities internally or you’re going to potentially bring in some new talent from some of the disruption that we just talked about. Just curious where we are on that front.

Yes. So I think we touched on it a little bit last quarter. We do have the talent internally, and we would look to expand that by talent acquisition from this disruption, if the right team or person was available. But certainly, we've got the talent and in the -- in our organization right now, and we expect it to go forward. It's just a shift in focus.

And then maybe just touching on the asset sensitivity, it looks like you declined a bit quarter-over-quarter. Just curious how you're thinking about managing the sensitivity and what drove the decline, and what kind of beta assumptions you have in there? And then just maybe initial expectations for how the margin might benefit from the first rate hike [Indiscernible]?

Sure, David, it's peter. We'll just give you a little bit of overview of the balance sheet and the earning asset sensitivity. So 2/3 of our loan book are either just floating-rate loans and about 60% of that portion, have floors on them, with some of those floors, pretty good portion of those floors being at their floor. And then the rest of the book, about 1/3 fixed rate. And so as the short end moves up, as we anticipate the short end and the Fed beginning to tighten, we'll see a lift in the average loan yield on the floating and adjust rate, but somewhat muted with some of the loans floor re-pricing and recapturing those loan floors. And then on the funding side, where - as we just discussed, we're paying down $57 million of floating rate TruPS, which will help with asset sensitivity, as that source of debt won't reprice up, won't be in our balance sheet. And then our deposit base is 45 in non-interest bearing. And we did -- we've looked at the beta experience from the last tightening cycle in 2017 and ‘18. And what happened last cycle was it took a full-year for Banner and most of our peer banks actually raised rates after the Fed started lifting up. We think there will probably a similar effect this time and maybe even more prolonged given the fact there is more liquidity in the system than there was 3 years ago. And so it's very likely that the betas we have, which were based on the last cycle's experience, will be even lower. The lag especially will be even longer. And so we think there's probably some conservatism in our disclosed asset sensitivity because it's reflecting the last tightening cycle, as opposed to what's likely to be a more prolonged deposit rate cycle -- rate increase cycle this time. So that's -- and then the rest I think, is this month quarter-to-quarter changes in asset sensitivity really a function of putting a little more of the cash to work and the securities book at longer duration. But overall, we're still -- I would call us substantially asset sensitive and probably more so than what we're disclosing given the lags we’re expecting deposit rates this time.

That makes sense. Thank you.

Thank you, David.

The next question comes from Andrew Terrell at Stephens. Andrew, your line is open.

Hey, good morning.

Morning.

Peter it looks like there were some securities purchases this quarter, still a lot of cash on the balance sheet because of the deposit growth and, I hear your comments on getting some of the liquidity deployed measured over time is what it sounds like. I guess, are you inclined to ramp up the securities build here in the first quarter, given some of the improvement we've seen in yields, or should we still expect it to be measured over time?

Yeah, it'd be the latter. We continued to be somewhat measured, again, we don't want to, as we've said in the past, where we think the cost of going a bit more slowly on deploying that cash in the near-term, as whereas -- or the optionality of taking advantage of the steeper yield curve and higher rates in the future along with what we anticipate renewed hence the stronger loan demand going into 2022. And so, we want to retain some dry powder for loan demand. Also, the potential first in deposit liquidity runoff. Right as yield curve steepens, we think that's one of the catalysts that will begin to move the systemic deposit liquidity out of the banking system. So we want to continue to be pragmatic and moderate about the pace of investing that cash. We'll continue to invest cash and the securities book, but you're not going to see us invest all of it in one quarter. It's going to continue to be at this measured pace.

Okay. I appreciate it. And then I think I heard you that there is no kind of multifamily loans sold this quarter. Are you planning to retain more moving forward or was it just more nuance this quarter? And just overall outlook on mortgage banking operations heading into 2022?

Yes. Sure. We don't have any plans to pivot and move that multifamily production on the portfolio. The lack of loan sales is really just the success we've had in that business unit in the third quarter, and actually all through 2021 and selling and cleaning out the inventory very quickly because of the high demand for our product. So the fourth-quarter was spent replenishing the inventory in the hope for sale back end multifamily during the fourth quarter and we anticipate resuming quarterly sales going into the first quarter. But it's always a little bit lumpy as we've described in the past, that business does ebb and flow based on the timing and production and consummation of the bulk sales. But we don't anticipate any change in the overall trajectory that business and we still see very strong demand in our product given the underwriting and the reputation our came has in the marketplace. On the residential side, we had another very strong quarter of residential mortgage loan production, fourth-quarter. And as we've said in the past, typically we see it as a slowdown seasonally in the winter months. And our markets where folks don't tend to move or buy homes, but we didn't see much of a slowdown. Our production is only down 5% in Q4 compared to Q3. We did see a bit more, a bit of margin compression on gain on sale spreads. And we exercise pick up a bit in refinance mix in the fourth quarter. We really continue to see very robust demand for mortgages and homes across our markets where we have a broad geography that's benefiting from a lot of this relocation, this big ex-urban migration into more suburban and rural markets where we have a lot of presence. So we're benefiting from that align with our test and construction business, which is showing a need for the demand to the lack of housing inventory by building anything, the construction of a single-family home. So we're very happy with our business and the diversity and resilience with our business model and mortgage. So we really don't see a lot of change other than the potential for some refinance volume declines as a function of the steepening of the yield curve.

Great. That was really helpful. I appreciate all the color Peter. Maybe if I can speak one last one in for Jill. And I think you mentioned some of the prepared remarks, just the commercial pay-down, some of it was due to looser structure or better pricing. I guess I was curious as it is it more related to pricing or more related to structure? And then just on the structure plain. Are banks in your market stretching on credit structure for growth or is it other k non-bank lenders? And then can you just overall expand on what exactly you're seeing other companies doing from just a structure standpoint, that Banner's not willing to do?

Sure. It primarily is more non-banks in our markets than banks. But it's a function of rate. There's -- and rates are really low, and so we're not chasing them to the bottom. And then in terms of whether it's insurance companies or other, longer terms, longer interest only terms, lack of guarantees on credits that we may -- we would say we need personal guarantees on, and so I guess those are the real big issues there in terms of what we're not willing to do. When you think about the agricultural portfolio, it's the farm credit and things like that that we just can't compete with. Then on the small business side especially we’re competing with credit unions that give extremely much longer terms as well as longer fixed rate in terms.

Okay.

Large banks, small banks, and the non-bank lenders that we're competing with.

Got it. Okay. Thank you all for taking my questions.

Thank you, Andrew.

The next question comes from Tim Coffey of Janney. Tim, your line is open

Great. Thanks. Good morning, everybody. Peter, if you could --

Hi Tim.

--follow-up on the mortgage questions. What kind of impact do you think your footprint is going to see from the FHFA increasing the conforming loan limits for 2022?

Yeah. We do business in California and Oregon and Seattle metro markets along with the Eastern Washington, Columbia basin, and some of them are rural Idaho markets. So all of those some lift from those -- those limit -- those increased -- increased loan limits. We do -- we voiced sense jumbo loans as well. So I think our expectation is we just see some shifts from the jumbo production we did that was above those old conforming limits into the [indiscernible]. We think there will be a modest lift, but we're not going to -- there's not a huge [indiscernible] because it's really just crossing the line from where jumbos began and where the conforming on incented in the past, but there's probably a modest benefit for us because we're in all that. We are in the high-cost markets and in the low cost markets, we're in all of them, so it's a good thing for us, I think our lenders welcomed it. Conventional loans are just more liquid and salable and easier to underwrite. So it's a good thing for us, but I don't want to characterize it as a huge pivot in terms of increased loan production.

Sure, sure. I know there's a handful of markets in the country that are benefiting from this higher rate or higher cap and you're in a lot of them. Jill, when you look at construction concentration within a loan portfolio, what's the current cap? I think you said it was 14%. I'll end but I'm wondering what the highest level you'd be comfortable with?

So we're pretty much [indiscernible] in terms of the overall construction. And what we really want to focus on in that bucket is the spec construction and land and that's where we really try to keep it in the 6% to 8% maximum in terms of the loan book. And then the rest of it, it ebbs and flows, but we're really -- we're pretty close to where we want to be.

Okay. And then Peter, if I can go back to you. How should we be thinking about the costs associated with Banner Forward because if look at the slide deck, it looks like via this potential, they could start ramping up the next couple of quarters.

We as we've guided Banner Forward is an expense efficiency, but also revenue generation focused initiatives, as well as investments in systems and tools and additional revenue-producing positions in then the company. So we're taking some of the savings, that we're harvesting on the expense side and reinvest in the company, right In terms of additional positions that are generating revenue, in commercial and other areas in investment and systems and tools that will help improve automation efficiency. And some of the additional account acquisition, across our digital channels. And so as we've guided, we expect to see our core expenses running that mid-to-high $80 million range, over the next four quarters. Well, we’d begin to see the lift in revenue towards the second half of 2022. The question comes up around inflation, and we have put through some market equity increases in our salary-base already. And we did contemplate, increasing wages in our guidance. However, there's always some risks that inflation really moves up more quickly than we anticipate and causes us to increase some of those costs to keep pace with market. But overall, we're on track with Banner Forward and any real inflation increase, it should be offset by increased margin rate. So we think, from a P&L perspective and the pre -tax income perspective, any inflation increase that we're not anticipating, we're going to get back on the revenue side, in any case. But we're right on track. We're happy with the progress so far. And we have a very tight governance and oversight management infrastructure on the entire project that is working very well.

Okay. Do you expect we'll see any kind of chunky non-recurring expenses next couple of quarters?

We're past all the big costs, the only remaining restructuring costs are branch consolidation related. A couple of -- and some minor asset write-downs, but we -- I expect somewhere between $1 million and $2 million of remaining Banner Forward restructuring costs in the next two quarters. So it'll be fairly small. It's not going to -- all of the major restructuring costs are behind us at this point except for maybe $1 million to $2 million.

Okay. Okay. Thanks. That's very helpful. And then, I think that those are my questions. I appreciate your time. Thank you.

Thanks, Tim.

The next question comes from Q - Andrew Liesch at Piper Sandler. Andrew, your line is open.

Thank you. Good morning everyone. Just a follow-up question on the asset sensitivity and I know you got the Banner Forward initiative here and some of the spending that's going along with that and the cost saves that are going to result. But are there any other investments longer-term that you're contemplating? So basically my question is, with these rate hikes, how much of that is going to fall to the bottom line versus reinvestment back into the company?

Yeah. Andrew, its Peter. Yes. Our guidance on Banner Forward contemplates a fairly substantial investment and a number of systems and tools to accelerate the acquisition of new business through our digital channels and the middle market and in commercial banking and staffing up in some of the commercial banking metro markets. So we've recognized some of those investments already in our guidance. I think the real -- I think the expense question is really one of wage and inflation, right? How much of that increased interest income will be necessary to go back into market-related increases in wages that are over and above what we're contemplating. But I would characterize there is no other significant infrastructure investment in the company or new product line that we haven't already disclosed in the outlook that we provided.

Got it. Okay. That's really helpful. And then Jill, just on the reserve ratio, still fairly but pretty high above the day one CSL level. Where -- do you think it won't get back down to that level at some point after you’ve just seen like several quarters with negative provisions, I'm just curious where you think that will eventually settle in.

You are all probably going to be tired of hearing me start this with we don't give specific guidance on reserving. But to that end, how I would characterize going forward is that you could expect that there would be a decline in the coverage percentage in the current economic environment. And that we'll begin provisioning again as we return to more normalized growth. But we're operating within the bounds of CECL and we're going to continue to be conservative and maintain an upper core to our reserve.

Understood. Thank you very much for taking my questions.

Thanks, Andrew.

The next question comes from Q - Kelly Motta at KBW. Kelly, your line is open.

Hi, good morning. Thanks for the question --

Morning, Kelly.

[indiscernible] finance has been asked and answered already. But I did want to ask about capital. You raised the dividend and you also ups the buyback. Have a new program as of late December, just wondering how you're approaching the buyback and capital return?

Yeah. Kelly, it's Peter. Yeah. We continue to guide as we have in the past and our perspective on capital deployment. We remain agnostic and opportunistic about which form of deployment makes the most sense each quarter. Whether that'll be share repurchases, special dividends, or their forms of the high debt retirement like we're doing now. It's always a function of where our share price is and what -- where we feel the best return for the shareholders are across those tools. But we have -- we've remained agnostic. Last year we were focused on share repurchases as we felt that was the better form of return to the shareholders given our price and our prospects for future growth. Currently, we're focused on redeeming the $57 million of legacy TruPS debt, that's all floating on Libor, which will reprice up as a short end of the rate curve moves up. And we also increased the core dividends we disclosed earlier. We also anticipate asset growth due to being our forward with an increase in loan demand going into 2022. So we haven't changed our perspective and share repurchases are certainly going to be part of that toolkit. We anticipate in 2022 and it'll just be a question of pace and amount depending on the circumstances each quarter.

Got it. Thank you.

Thank you. Kelly.

We have no further questions in the queue, so I'll hand the call back to Mark for any closing remarks.

Thank you again, Bethany, as I've stated, we're very proud of the Banner team as we continue to do the right thing, as we battle this COVID virus and its variants, and transition our economy to normalization. Thank you all for your questions today, and your engagement, and interest in Banner, and joining us for the call. Hope everyone has a great day and we look forward to reporting our results to you again next quarter. Have a good day.

This concludes today's conference call. Thank you for joining. You may now disconnect your lines.