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Banner Corp (NASDAQ:BANR)
Q4 2019 Earnings Call
Jan 24, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone, and welcome to the Banner Corporation's Fourth Quarter and Full-Year Conference Call and Webcast. [Operator Instructions]

At this time, I'd like to turn the conference call over to Mark Grescovich, President and CEO. Sir, please go ahead.

Mark J. Grescovich -- President & Chief Executive Officer

Thank you, Jamie, and good morning everyone. I would also like to welcome you to the full year and fourth quarter 2019 earnings call for Banner Corporation. As is customary, joining me on the call today is Rick Barton, our Chief Credit Officer; Peter Conner, our Chief Financial Officer; and Rich Arnold, our Head of Investor Relations.

Rich, would you please read our forward-looking safe harbor statement?

Rich Arnold -- Head of Investor Relations

Good morning. Our presentation today discusses Banner's business outlook and will include forward-looking statements. Those statements include descriptions of management's plans, objectives or goals for future operations, products or services, forecasts of financial or other performance measures and statements about Banner's general outlook for economic and other conditions as well as statements concerning the merger with AltaPacific Bancorp.

We also may make other forward-looking statements in the question and answer period following the 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 September 30, 2019. 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 J. Grescovich -- President & Chief Executive Officer

Thank you, Rich. As announced Banner Corporation reported net income to common shareholders of $33.7 million or $0.95 per diluted share for the quarter ended December 31, 2019. This compares to a net income to common shareholders of $1.15 per share for the third quarter of 2019 and a net income of $1.09 per share in the fourth quarter of 2018.

Results for the fourth quarter of 2019 were impacted by $7.5 million of acquisition-related expenses. For the full year ended December 31, 2019 Banner Corporation reported net income available to common shareholders of $146.3 million, compared to $136.5 million for the full year 2018, an increase of 7%. Excluding the impact of merger and acquisition expenses, gains and losses on the sale of securities, prepayment penalties on federal home loan bank borrowings and changes in fair value of financial instruments, earnings from core operations increased 14% to $153 million in 2019 from $135 million in 2018, despite the headwinds of a declining rate environment in the impact of the Durbin Amendment. 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 continued 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.

Our full year 2019 core revenue reached a record $551 million and increased 7% compared to the full year 2018, demonstrating that our strategic plan is effective and continuing to build shareholder value. We benefited from a larger and improved earning asset mix, a strong net interest margin and good fee income. Overall, this resulted in a return on average assets of 1.22% for the year. Once again, our performance this quarter and for the full year reflects continued execution on our super community bank strategy that is growing new client relationships, improving our core funding position by growing core deposits and promoting client loyalty and advocacy through our responsive service model, while augmenting our growth with opportunistic acquisitions. To that point, our core deposits increased 10% compared to December 31, 2018 and represent 89% of total deposits. Further, we continued our strong organic generation of new client relationships.

Reflective of this solid performance, coupled with our strong tangible common equity ratio of 9.77%, we issued a core dividend of $0.41 per share and a special dividend of $1 per share in the quarter and repurchased 1 million shares of common stock in 2019. In a few moments, 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. Again this quarter, our credit quality metrics reflect our moderate risk profile. At the end of the quarter, our ratio of allowance for loan and lease losses to total loans was 1.08%. In a moment, Rick Barton, our Chief Credit Officer, will discuss the credit metrics of the company, the increase in non-performing loans associated with a single credit and provide some context around the loan portfolio and our continued success at maintaining a moderate credit risk profile.

In the quarter and throughout the preceding nine years, we continued 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 enhancing our digital and physical delivery platforms, 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 fee income.

Further, as I've noted before, we have received marketplace recognition of our progress in our value proposition as J.D. Power and Associates this year again ranked Banner Bank the number one Bank in the Northwest for client satisfaction. The fifth 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 fifth consecutive year, and Money Magazine named Banner Bank the Best Bank in the Pacific Region again this year. Also Banner was ranked in the Forbes 2019 Best Banks in America for the third consecutive year.

Before I turn the call over to Rick Barton to discuss trends in our loan portfolio, I want to again recognize our new colleagues and clients from AltaPacific Bank that joined Banner in November. We're extremely pleased with this opportunity to expand our super community bank model and enhance our density in California.

I'll now turn the call over to Rick Barton to discuss trends in our loan portfolio. Rick?

Richard B. Barton -- Executive Vice President & Chief Credit Officer of Banner Bank

Thanks, Mark. At year-end 2019, the credit landscape at Banner includes the AltaPacific Bank loan portfolio. As you have read in our press release and heard this morning, our credit metrics remained stable in the fourth quarter, except for an increase in non-performing loans. This change was centered in a single commercial business credit relationship that is encountering headwinds driven by marketplace changes beyond their control. The challenges faced in this relationship are not present elsewhere in the Banner portfolio. The broader risk profile of the company's loan portfolio is attributed to the continuing hard work of Banner's bankers, the compatible credit culture at AltaPacific and the effort and spirit of cooperation by all involved in planning the integration of Alta's loan portfolio and loan operations into Banner's.

My remaining remarks this morning will be brief and concentrate on the company's credit metrics and our loan portfolios moderate risk profile. Delinquent loans increased 11 basis points from the linked-quarter to 0.41% of total loans. This change in delinquent loans fits within the pattern of recent quarters and should not be unexpected when total delinquent loans are at the current low level. A year ago, delinquencies were 0.45%. The company's level of adversely classified assets remains well below historic norms.

Non-performing assets as noted increased in the fourth quarter of 2019 to 0.32% of total assets, up from 0.15% in the linked-quarter. At December 31, 2018, non-performing assets were 0.16%. Non-performing assets were split between non-performing loans of $40 million and REO and other foreclosed assets of $1 million. The increase in REO came from the AltaPacific portfolio. Not reflected in these totals are non-performing loans of $7 million from acquired portfolios which are not reportable under purchase accounting rules. If we were to include the acquired non-performing loans and our non-performing asset totals, the ratio of non-performing assets to total assets would still be a modest 38 basis points.

Performing troubled debt restructures of $6.5 million were level with linked-quarter. For the quarter, the company recorded net loan charge-offs of $1.2 million. Gross charge-offs for the quarter were $1.9 million, down from $3.2 million in the third quarter of the year. For all of 2019, net charge-offs were $5.9 million or a nominal 7 basis points, while gross and net charge-offs were up from 2018, we still consider charge-offs at this level to be low when compared to historic norms and note that charge-off recoveries were abnormally high in 2018.

Further, we have not observed any meaningful pattern of correlation in charge-offs taken during the past two years. After a fourth quarter provision of $4 million and net charge-offs of $1.2 million, the allowance for loan and lease losses for the company totals $101 million and is 1.08% of total loans, compared to 1.11% for both the linked-quarter and December 31, 2018. The fourth quarter decrease in this metric reflects the AltaPacific acquisition and good organic loan growth. If the AltaPacific loans are excluded from the ALLL calculation, the ALLL to legacy Banner loans is 1.10%. Coverage of non-performing assets is 254% lower than in past quarters, because of the addition to non-performing loans. The $2 million increase in our fourth quarter provision is tied both to the change in non-performing loans and loan growth. The net accounting mark against acquired loans is $25 million, which provides an additional level of protection against loan losses.

It's worth noting that the company's preparation and modeling for the transition to CECL are complete. As noted in our press release, based on our portfolio as December 31, the combined allowance for credit losses on loans and unfunded commitments under CECL would increase between 10% and 20% over our existing combined reserves for loans and unfunded commitments.

Fourth quarter held for investment loan growth includes AltaPacific loans of $332 million. Without adjusting for the acquisition, Banner's portfolio grew by $470 million. After adjusting for the purchase, organic growth in the fourth quarter was $138 million or 6% on an annualized basis. After making the same adjustment for the full year, loans grew by $288 million or 3.3%. For all of 2019 growth in the historic Banner portfolio was most concentrate -- concentrated in the C&I portfolio that increased by 13% spread across our footprint.

It is also important to note that Banner's construction loan portfolios remain in acceptable concentration levels, including the AltaPacific loans in these segments. Residential construction exposure including land loans is 7.5% of total loans, with both multifamily and commercial construction loans and commercial land exposure added into this calculation. Our total AD&C exposure is 12.6% of total loans. These concentrations were 7.4% and 12.3% respectively in the linked-quarter. Total multifamily loans construction plus permanent at year-end were 7.6% of total loans compared to 7% at September 30, 2019. The markets in which we make residential construction loans, including the new AltaPacific markets are experiencing continued robust sales, driven by both lower interest rates and strong economic activity. Market dynamics are consistent with more affordable housing segments undersupplied and some inventory buildup noted in luxury homes. The pace of lease-up activity in multifamily projects remain steady with a continuing moderation of growth in the rate of -- the growth rate of rents. The permanent loan market for new stabilizing multifamily projects is still strong. As I said at the outset of my remarks, after considering the fourth quarter increase in non-performing loans, the overall risk profile of Banner's credit portfolio remain moderate, positioning us well for the future.

With that said, I will pass the microphone to Peter Conner for his comments. Peter?

Peter J. Conner -- Executive Vice President, Chief Financial Officer

Thank you, Rick and good morning everybody. As discussed previously, and as announced in our earnings release, we reported net income of $33.7 million or $0.95 per diluted share for the fourth quarter, compared to $39.6 million or $1.15 per diluted share in the prior quarter. Despite the headwinds affecting the net interest margin, the fourth quarter results benefited from organic growth, both in core deposits and portfolio loans, strong mortgage loan production as well as revenue lift from the AltaPacific acquisition closed on November 1.

The $0.20 decline in per share earnings from the prior quarter was primarily the result of increased non-interest expenses related to acquisition costs associated with AltaPacific, increased provision for loan losses and to a lesser extent the decline in net interest margin. Total loans increased $270 [Phonetic] million from the prior quarter end as a result of the acquisition of AltaPacific and solid organic portfolio loan growth. Organic portfolio loan growth excluding held-for- sale loans contributed $138 million to year end loan outstandings. Held-for-sale loans declined by $34 million as bulk sales out of the multifamily portfolio exceeded production during the quarter. Ending core deposits increased $418 million from prior quarter-end, due to both the AltaPacific acquisition and strong organic growth during the quarter.

Organic core deposit growth during the fourth quarter, excluding AltaPacific contributed $113 million to year end total -- to the year end total and on a linked-quarter annualized basis through 5.2%. Time deposits declined $98 million due to a decline in brokered CDs and modest run-off of the retail CD portfolio, offset by $8 million acquired with the AltaPacific acquisition. FHLB borrowings increased $68 million due to remixing away from brokered CDs during the quarter.

Net interest income increased $2.9 million from the prior quarter as earning assets increased as a result of the AltaPacific acquisition and organic growth in loans and core deposits. Compared to the prior quarter, loan yields decreased 7 basis points, principally due to declines in prime and LIBOR index loan yields, partially offset by higher levels of loan accretion and prepayment related interest income. The average loan coupon rate declined 13 basis points, which was partially offset by an increase in accretion related interest income of 4 basis points, and an increase in deferred loan origination prepayment and interest penalty related fees totaling 2 basis points.

Total cost of funds declined 5 basis points to 52 basis points as a result of lower deposit costs and wholesale funding costs. The total cost of deposits declined from 42 basis points to 40 basis points in the fourth quarter due to declines in retail deposit costs. Brokered CDs accounted for 5 basis points of total deposit costs, the same level as in the prior quarter.

The composition of non-interest bearing deposits to total deposits held steady at 40% of total deposits and the ratio of core deposits to total deposits increased to 89% in the fourth quarter, in part due to the acquisition of AltaPacific. The net interest margin declined 5 basis points to 4.20% as a result of lower market rates, principally due to the decline of Fed funds and LIBOR rates coupled with the lag in deposit repricing. Partially offsetting margin compression in the fourth quarter was a higher impact of acquired loan accretion as a result of the AltaPacific acquisition.

Loan accretion contributed 8 basis points to the margin in the fourth quarter, up 2 basis points from the 6 basis points of loan accretion contributed to the margin in the third quarter. The Bank continued to adjust deposit rates down during the quarter and into January, and we anticipate seeing a continued decline in average deposit cost carry through into the first quarter. It's also worth noting that during the fourth quarter, the Bank prepaid a portion of its higher cost FHLB longer term borrowings and replaced them with lower cost and shorter duration FHLB borrowings to reduce the company's asset sensitivity.

Total non-interest income declined modestly by $584,000 from the prior quarter. Adjusted non-interest income, excluding losses on the sales of and changes in securities carried a fair value declined by $684,000. Deposit fees declined $694,000 due to lower interchange fees. Total mortgage banking income declined modestly by $366,000 as a robust refinance volume that continued into the fourth quarter was offset by a decline in average gain on sale premiums. Miscellaneous fee income increased $288,000 due to increased swap and SBA fee income.

Adjusted non-interest expense increased by $2.6 million from the prior quarter excluding acquisition costs. A significant portion of the increase was a result of higher operating costs associated with AltaPacific. $700,000 of the increase was due to FHLB prepayment fees on term advances and the remainder was due to normal seasonal increases in charitable contributions and employee conference expense. By way of comparison, during the third quarter, the small bank FDIC insurance fund expense rebate largely offset the SERP expense true-up associated with the reduction in the discount rate applied to the bank's SERP liability.

Finally, with the closing of AltaPacific on November 1, we look forward to a smooth conversion and branch consolidation in the first quarter and recognizing the remaining expense synergies in the second quarter. This concludes my prepared remarks. Mark?

Mark J. Grescovich -- President & Chief Executive Officer

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

Questions and Answers:

Operator

Ladies and gentlemen we'll now begin the question-and-answer session. [Operator Instructions] And our first question today comes from Jeff Rulis from D.A. Davidson. Please go ahead with your question.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Good morning.

Mark J. Grescovich -- President & Chief Executive Officer

Good morning, Jeff.

Jeffrey Rulis -- D.A. Davidson -- Analyst

On the margin side of things, did -- the loans brought on non-accrual, did that impact margin in the quarter?

Peter J. Conner -- Executive Vice President, Chief Financial Officer

Yes. Hi, Jeff, it's Peter. Now the non-accrual increase did not have a material effect on the margins in the fourth quarter.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Okay. Is that -- was that a timing thing. Or it's just, it was not in sum, but like late in the quarter? Or it just had an immaterial effect?

Richard B. Barton -- Executive Vice President & Chief Credit Officer of Banner Bank

Yes. It occurred very late in the quarter Jeff, this is Rick.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Okay. So to that end, I guess, Peter and/or Rick, just the outlook on the margin given, I think Peter you outlined the prepayment on FHLB and continued expectation for deposit costs. I guess, how does that net out on margin going forward?

Peter J. Conner -- Executive Vice President, Chief Financial Officer

Yes. We -- and as I mentioned in my prepared comments Jeff, we had some benefit from loan accretion from AltaPacific and a bit of an increase in interest prepayment related fees that go into the loan yield in the fourth quarter. If we take -- kind of adjust for those things, moving on to a normalized basis and a bit of a decrease in loan accretion that we normally expect as we get further into the acquired portfolios, along with the inertia we now have on reducing deposit cost is we know there is a lag in repricing deposits when market rates decline. We are guiding to a mid single-digit decline in margin in the first quarter given those moving parts. We'd expect a similar mid single-digit decline in cost of funds as well for the company in part due to ongoing declines and repricing of our retail deposit products, but also some benefit from prepaying some of the term advance FHLB borrowings that we did.

In the fourth quarter, we prepaid approximately $100 million of longer term durated FHLB advances and move those into overnight or very short FHLB borrowings by the end of the year.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Okay. And Rick, just hoping for some color on the large commercial relationship. Is that one single loan, a bucket of loans, if you could talk about kind of any type and color and then potentially kind of the expected workout timeline?

Richard B. Barton -- Executive Vice President & Chief Credit Officer of Banner Bank

Okay. Jeff, I'll be happy to address that. It is a single loan and it's not uncommon for things to be very lumpy in the commercial world when credit events happen. It's agribusiness credit that we have been monitoring for quite some time. They've had it in our classified loan totals. We have scoured the portfolio and have come to the conclusion that this issue with this particular relationship is isolated to that relationship, but not found in other credits individually or portfolio segments collectively. This is going to be a more extended work out period, but we have -- are very capable special assets department managing the credit and we'll be driving to a conclusion as soon as we can.

Jeffrey Rulis -- D.A. Davidson -- Analyst

Okay. Thanks. I'll step back.

Peter J. Conner -- Executive Vice President, Chief Financial Officer

Thank you, Jeff.

Operator

Our next question comes from Andrew Liesch from Piper Sandler. Please go ahead with your question.

Aaron Deer -- Piper Sandler -- Analyst

Hi. Good morning guys. It's actually Aaron Deer on for Andrew this morning.

Mark J. Grescovich -- President & Chief Executive Officer

Good morning, Aaron.

Aaron Deer -- Piper Sandler -- Analyst

I'm just curious, going back to the credit that that you're working out, just it sounds like a unique situation. I'm curious what's the nature of it that gives you confidence that it didn't look like you took any sort of provision against the credit in the quarter. So presumably the loss content is pretty small. Just wondering what -- what's behind that?

Richard B. Barton -- Executive Vice President & Chief Credit Officer of Banner Bank

Well, in fact, we did increase our provision for the quarter from third quarter from $2 million to $4 million and the increase in the provision was principally linked to the increase in non-performing loans, and to a lesser extent to the organic loan growth in the portfolio.

Aaron Deer -- Piper Sandler -- Analyst

And I'm sorry, I misspoke, I meant to say that it didn't look like you take any charge-off against the credit.

Richard B. Barton -- Executive Vice President & Chief Credit Officer of Banner Bank

That is correct. We're still going through the work out period and, if and when we identify the necessity to take a loss on the loan we will do so.

Aaron Deer -- Piper Sandler -- Analyst

Okay. And then I just wondered if you can give us a sense of where the -- how the pipeline stands today and any sort of guidance you can give in terms of your outlook for growth in 2020?

Richard B. Barton -- Executive Vice President & Chief Credit Officer of Banner Bank

The pipelines are still in decent condition. There are a lot of opportunities that our bankers are looking at. And I think all differ to Peter to just to comment on what we project loan growth collectively to be for 2020.

Peter J. Conner -- Executive Vice President, Chief Financial Officer

Yes. Aaron this is Peter. We haven't changed our guidance on loan growth. We were guiding to mid-single digit continuation and growth of our portfolio loans. And a well diversified mix across our portfolio. If you note -- in Rick's comments, you'll note that we continue to have stronger growth in the C&I portfolio in the CRE categories and we expect that pattern of more emphasis on growing the C&I book to continue into 2020.

Aaron Deer -- Piper Sandler -- Analyst

And is that because of finding just a better pricing in that category or there is just more opportunities?

Mark J. Grescovich -- President & Chief Executive Officer

Aaron, this is Mark. I think what you're seeing is this. Confidence in the economy starts to improve, whether that be with some of the trade packs that that are getting passed. You're finding the businesses are looking to increase productivity because of the low unemployment rate, they're having to invest in capital investment or at least considering it. So we feel more confident that there is some growth in the C&I portfolio that has been muted for a period of time because of lack of capital investments. Also we're seeing opportunities. It's a focus of our organization to focus on C&I growth as opposed to just following the commercial real estate market.

Aaron Deer -- Piper Sandler -- Analyst

That's encouraging and good color. And then just one question. Going back to the guidance given earlier on the margin, it sounds as if I heard you correctly, looking for maybe a mid single-digit drop -- sequential drop into the first quarter. Is that looking at the core margin ex any accretion or what would be the reported margin or on the basis of both?

Peter J. Conner -- Executive Vice President, Chief Financial Officer

That would be the GAAP margin, Aaron. So that's the reported margin.

Aaron Deer -- Piper Sandler -- Analyst

Okay, very good.

Peter J. Conner -- Executive Vice President, Chief Financial Officer

Yes. And so by the way, we think that margin compression will taper off after the first quarter, we are still a bit of inertia running through in terms of loan pricing but absent another Fed cut we think that margin -- that landing level will stabilize in part because deposit repricing will continue to benefit the margin even after the first quarter, right. So we'll continue to see deposit prices catch up to some extent into the second, even in third quarter.

Aaron Deer -- Piper Sandler -- Analyst

Got it. Okay, great. Thank you. I'll step back.

Mark J. Grescovich -- President & Chief Executive Officer

Thanks Aaron.

Operator

Our next question comes from Jackie Bohlen from KBW. Please go ahead with your question.

Jackie Bohlen -- Keefe, Bruyette, & Woods -- Analyst

Excuse me, hi, good morning everyone.

Peter J. Conner -- Executive Vice President, Chief Financial Officer

Good morning Jackie.

Jackie Bohlen -- Keefe, Bruyette, & Woods -- Analyst

Just a quick question again. Rick, sorry to hop back into this non-accrual, its just so unusual for you guys to have an uptick in that. I was just curious, given that the factors are outside of the borrowers control so that strikes me as more of a macro event. How is it isolated to the specific borrower and not others. Does it have to deal with the type of agribusiness that the borrowers involved in?

Richard B. Barton -- Executive Vice President & Chief Credit Officer of Banner Bank

That's exactly right, Jackie.

Jackie Bohlen -- Keefe, Bruyette, & Woods -- Analyst

Okay. Well, that was easy. And then in terms of cost savings and the conversion, understanding that you're looking to 1Q conversion and there could be some cost saves trickling into 2Q. Do you expect the majority of cost saves to come out in 2Q or will you have a lot of those realized by the end of the first quarter with some trickle into 2Q?

Peter J. Conner -- Executive Vice President, Chief Financial Officer

Yes. Jackie, it's Peter here. We -- the conversion is actually mid-quarter in terms of all the systems and branch consolidation and remaining FTE displace to go with that. So we anticipate recognizing just about all of the synergies for the full second quarter. And we're still tracking to what we had guided to when we announced the transaction back in the end of July of 45% expense synergy.

Jackie Bohlen -- Keefe, Bruyette, & Woods -- Analyst

Okay. It sounds like 2Q is pretty clean and 3Q should be a very clean run rate?

Peter J. Conner -- Executive Vice President, Chief Financial Officer

Yes. Yes. And there may be a little bit of M&A expense pumping through Q2, but it will be fairly small, but we expect to see the majority of the synergies reflected in the second quarter.

Jackie Bohlen -- Keefe, Bruyette, & Woods -- Analyst

Okay. Great. Thank you.

Peter J. Conner -- Executive Vice President, Chief Financial Officer

Thank you, Jackie.

Operator

[Operator Instructions] Our next question comes from Tim Coffey from Janney. Please go ahead with your question.

Timothy Coffey -- Janney Montgomery -- Analyst

Thank you. Good morning, gentlemen.

Peter J. Conner -- Executive Vice President, Chief Financial Officer

Good morning, Tim.

Timothy Coffey -- Janney Montgomery -- Analyst

Given that the increased non-accrual loan was a commercial loan, was there any corresponding deposit relationship with it?

Richard B. Barton -- Executive Vice President & Chief Credit Officer of Banner Bank

We always have corresponding deposit relationships with our major commercial exposures and off the top of my head, I don't know exactly what the size of the deposit relationship is, but it's a fraction of the credit exposure.

Timothy Coffey -- Janney Montgomery -- Analyst

Okay. Is it your estimation that that deposit relationship could be at risk as well?

Richard B. Barton -- Executive Vice President & Chief Credit Officer of Banner Bank

Independently, no, I don't think so.

Timothy Coffey -- Janney Montgomery -- Analyst

Okay. And then Peter looking at the level of borrowings that you have on the balance sheet as a percentage of your total funding it's a bit higher than it has been historically. Is that a function of kind of a limited organic -- sorry organic deposit growth this quarter? Or is that something that you see increasing the absolute balances of borrowings increasing as a funding base increases?

Peter J. Conner -- Executive Vice President, Chief Financial Officer

Yes. So we actually have -- one of the reasons we had a higher level of borrowings at year end -- while there are a couple of reasons why we had higher levels of borrowings in the year end, one, we carried over the multifamily held-for-sale portfolio and some of the borrowings are always used to fund that held-for-sale portfolio until it sells. And so that's one reason for the elevation. Two, we actually, we're a bit cautious giving some of the disruption in the repo markets and the treasury side that we saw in the third quarter, esentially repeat at year-end. So we were -- as an abundance of caution, we put some short duration term FHLB borrowings over year-end to prevent any risk of disruption in the overnight market. And so that was a just a tactical decision to increase the FHLB borrowings over year-end. And then third, we did roll down brokered CDs and put the difference back in FHLB borrowings. And again as I mentioned in my prepared comments, the core -- organic core deposit growth excluding AltaPacific was very good in the fourth quarter. It grew by $113 million or 5.2%. So we had one of the best quarters actually in terms of core deposit we've seen all year. So our core deposit growth and account generation didn't diminish in the fourth quarter, but I'd summarize the comment. So it was really just a tactic to manage our wholesale funding base between brokered CDs and FHLB borrowings, but it's not -- we actually expect the borrowing levels to drop in the first quarter.

Timothy Coffey -- Janney Montgomery -- Analyst

Okay. And then looking at the AltaPacific deposit portfolio, do you expect to move some of those deposits out? Or do you anticipate it will be kind of the status quo going forward?

Peter J. Conner -- Executive Vice President, Chief Financial Officer

No. They actually -- the AltaPacific deposits were actually a couple of basis points lower than Banner's at acquisition point. So we actually and we reprice them to Banner's rates as we've gone through our mapping, and so we actually don't expect to see any outflow in the Alta deposit base. And we think there is some benefit in bringing Banner's products and service capability to the AltaPacific client base that will actually potentially create some upside on fee income.

Timothy Coffey -- Janney Montgomery -- Analyst

Okay, great. Those are my questions. Thank you.

Mark J. Grescovich -- President & Chief Executive Officer

Thanks, Tim.

Operator

[Operator Instructions] And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for closing remarks.

Mark J. Grescovich -- President & Chief Executive Officer

Thanks, Jamie. As I stated, we are pleased with our solid 2019 performance in a challenging interest rate environment 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 reporting our results to you again in the future. And hope everyone has a great day.

Operator

[Operator Closing Remarks]

Duration: 39 minutes

Call participants:

Mark J. Grescovich -- President & Chief Executive Officer

Rich Arnold -- Head of Investor Relations

Richard B. Barton -- Executive Vice President & Chief Credit Officer of Banner Bank

Peter J. Conner -- Executive Vice President, Chief Financial Officer

Jeffrey Rulis -- D.A. Davidson -- Analyst

Aaron Deer -- Piper Sandler -- Analyst

Jackie Bohlen -- Keefe, Bruyette, & Woods -- Analyst

Timothy Coffey -- Janney Montgomery -- Analyst

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