Banner (BANR) Q2 2022 Earnings Call Transcript

Banner (BANR -0.09%)
Q2 2022 Earnings Call
Jul 21, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you all and welcome to Banner Corporation second quarter 2022 conference call and webcast. My name is Britta, and I'll be today's event specialist. There will be a question-and-answer session today. [Operator instructions] Your host for today's call will be Mark Grescovich, president and CEO for Banner Corporation.

So, Mark, please go ahead when you're ready.

Mark Grescovich -- President and Chief Executive Officer

Thank you, Britta, and good morning, everyone. I would also like to welcome you to the second quarter 2022 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?

Rich Arnold -- Head of Investor Relations

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 from the earnings press release that was released yesterday and the recently filed Form 10-Q for the quarter ended March 31, 2022. 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?

Mark Grescovich -- President and Chief Executive Officer

Thank you, Rich. Today we will cover four primary items with you. First, I will provide you high level comments on Banner's second quarter 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 an update on our strategic initiative called Banner Forward. As a reminder, 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.

Banner has lived our core values summed up as doing the right thing for 131 years. Our overarching goal is 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 am pleased to report 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 $48 million or $1.39 per diluted share for the quarter ended June 30th, 2022. This compared to a net profit to common shareholders of $1.56 per share for the second quarter of 2021 and $1.27 per share for the first quarter of 2022. The earnings comparison is impacted by the provision or recapture for credit losses, excess liquidity coupled with a rapid changing interest rate, our strategy to maintain and moderate risk profile continued good mortgage banking revenue, a gain on the sale of four branches, 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 merger and acquisition expenses, COVID expenses, gains and losses on the sale of securities, Banner Forward expenses, changes in fair value of financial instruments, and a gain on the sale of branches, earnings were $57.8 million for the second quarter of 2022, compared to $49.7 million for the first quarter of 2022. This measure, I believe, is helpful for illustrating the core earnings power of Banner. Banner's second quarter 2022 revenue from core operations increased 8% to $148.3 million, compared to $137.6 million for the first quarter of 2022 and down slightly compared to the second quarter a year ago.

We continue to benefit from a large earning asset mix and improving net interest margin, solid mortgage banking fee revenue, and good core expense control. Overall, this resulted in a return on average assets of 1.16% for the second quarter of 2022. Once again, our core performance reflects continued execution on our super community bank strategy that is growing new client relationships, adding to our core funding position by growing core deposits and promoting client loyalty and advocacy through our responsive service model. To that point, our core deposits increased 5% compared to June 30, 2021 and represent 95% of total deposits.

Further, we continued our strong organic generation of new client relationships, and our loans outside of PP loans increased 5% over the same period last year. Reflective of the solid performance coupled with our strong, tangible common equity ratio, we announced a core dividend in the quarter of $0.44 per share. Our branches continue to be fully operational and we have reinstated our return to the workplace policies. 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 million for approximately 13,000 clients. Also, we made an important $1.5 million commitment to support minority owned businesses in our footprint, a $1 million equity investment in City First Bank, the largest black led depository financial institution in the United States, significant contributions to local and regional nonprofits, and have provided financial support for emergency and basic needs in our footprint. Finally, we continue to receive marketplace recognition and validation of our business model and our value proposition. J.D.

Power and Associates rank Banner the number one bank in the Northwest for client satisfaction for the sixth time. Banner has been named one of America's 100 best banks by Forbes. And Banner Bank has 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?

Jill Rice -- Chief Credit Officer

Thank you, Mark, and good morning, everyone. I am pleased to be able to report solid credit metrics this morning once again. Banner's delinquent loans as of June 30th remained nominal at 0.19% of total loans, down from 0.21% when compared to the prior quarter and down from 0.24% as of June 30, 2021. Adversely, classified loans represent 1.63% of total loans, down from 1.95% as of the linked quarter and compared to 2.83% as of June 30, 2021.

Non-performing assets remain low at 19.1 million and include non-performing loans of 18.7 million and REO and other assets of 357,000. This represents 0.12% of total assets and compares to 0.19% as of June 30, 2021. Due to strong loan growth in the quarter and coupled with the increasing economic uncertainty as we look to the balance of 2022 and into 2023, we've posted a $3.1 million provision for loan losses, as well as an additional $1.4 million provision for unfunded commitments. Losses in the quarter were again offset by recoveries, and after the provision, our ACL reserves totaled 128.7 million or 1.36% of total loans as of June 30th, down one basis point from the linked quarter and compares to a reserve of 1.53% as of June 30, 2021.

The reserve currently provides 688% coverage of our non-performing loans. Looking at the loan portfolio, we again reported strong loan origination with solid growth across many of the business lines this quarter. We reported core portfolio loan growth, excluding PPP loans, of 338 million or 3.7% for the quarter and 14.9% on an annualized basis. If we exclude the growth in the one to four family portfolio, the annualized growth rate remained strong at 8.3%.

And I will note that this loan growth was not the result of loosening underwriting standards. Further, our commercial and commercial real estate pipelines remain healthy. Although as would be expected, there has been a recent slowdown in activity of clients react to the increasing interest rate environment. Looking at specific product lines, C&I activity remained robust in the second quarter.

Commercial loans, excluding PPP, grew by nearly 9% or 94 million in the quarter, which is an annualized rate of 35% and balances are now 5% higher than reported as of June 2021. Additionally, there was strong growth in the small business card portfolio, up 6% or 49 million due to the successful small business campaign that rolled out in the second quarter. Balances are 16% higher than that reported a year ago. It is also worth mentioning that while overall C&I utilization inched up 1% in the quarter, it remains 6% below historical norms.

A review of the new volumes reflected that exposures continue to be modest in size and continue to be diversified by industry as well as across our footprint. As noted last quarter, commercial real estate totals continue to be hindered by payoff despite solid originations and are down 41 million in the quarter or 1%, 4% annualized. The investor CRE portfolio reduced by 43 million quarter over quarter and the owner occupied CRE portfolio declined by another 28 million in the quarter. The payoffs during the quarter totaled nearly 90 million within the investor and owner occupied CRE portfolios.

These reductions were offset in part by an increase in small balanced CRE totals of 30 million, also the result of the successful small business campaign during the quarter. The multifamily portfolio reduced by 4% quarter over quarter, but is up 23% when compared to June 30, 2021. This portfolio is split approximately 55% affordable housing and 45% market rate and remains granular in exposure and geographically diversified within our footprint. Construction and development loan balances have continued to reflect strong production even as we continue to experience rapid payoffs within the residential spec portfolio as construction has completed.

Commercial construction balances grew by 14 million or 8% in the quarter, and one to four family construction loans grew by 43 million or 7% in the quarter. This was in part offset by reductions in the multifamily construction portfolio of 17 million or 6% quarter over quarter. Slightly over half of this reduction was due to a single anticipated secondary market refinance at completion. I will reiterate what I noted last quarter.

We do expect that the increasing mortgage rates will have an impact on the velocity of home sales within our residential system portfolio, although we have not seen that materialize today. The housing markets in which we do business continue to be supply constrained with the inventory of completed and unsold homes remaining low. Consistent with prior periods, our total residential construction exposure remains acceptable at 6.6% of the portfolio, with nearly 40% of that comprised of our custom one to four family residential mortgage loan portfolio. When you include multi-family, commercial construction and land, the total construction exposure remains at 14.8% of total loans.

As anticipated, agricultural loans reflect the seasonal drag on line of credit, with balances up 38 million quarter over quarter or 16% and are up 17.5% year over year, excluding PPP loans. As I noted -- as was noted in the earnings release, there was significant growth in the consumer mortgage portfolio. This was the result of a successful jumbo mortgage campaign in the second quarter, as well as holding a portion of the completed custom construction mortgage loans in an effort to rebuild balances that ran off during 2021 and earlier this year. In total, balances grew by 150 million or 21% quarter over quarter and are now up 42% year over year.

Lastly, home equity lines again added materially to the loan growth in the quarter, up 36 million or 8% from the linked quarter. Very briefly, touching on asset quality, adversely classified loans continue to decline, reducing 24 million in the quarter and are down 118 million or 43% year over year. Overall, adversely classified loans are down 64% since the pandemic induced high, reported in September of 2020. With that, I will wrap up my comments, noting that the uncertain economic environment has only gotten more pessimistic over the past few months.

Still, Banner's credit culture is one that is designed for success through our business cycles. Our underwriting has remained consistent even through the last extended economic expansion. Our loan portfolio continues to be diversified by both product type and geography, and is granular in nature. We continue to have a solid reserve for loan losses and robust capital.

And most importantly, our clients have continued to perform well as reflected in our credit metrics. In short, we are well-positioned to move through the next phase of this economic cycle. With that, I'll turn the microphone over to Peter for his comments. Peter?

Peter Conner -- Executive Vice President and Chief Financial Officer

Thank you, Jill, and good morning, everyone. As discussed previously and as announced in our earnings release, we reported net income of 48 million or $1.39 per diluted share for the second quarter, compared to 44 million or $1.27 per diluted share for the first quarter. The $0.12 increase in earnings per share was due to an increase in net interest income and non-interest income, partially offset by a provision expense this quarter. Core revenue, excluding gains and losses on securities, changes in fair value of financial instruments secured at fair value and gains on the sale of sold branches increased $10.7 million from the prior quarter due to an increase in net interest income.

Core non-interest expenses, which exclude Banner Forward, debt extinguishment, and M&A-related expenses increased 2.5 million due to higher compensation, fraud losses, and professional services expense. Turning to the balance sheet. Total loans increased 315 million from the prior year quarter end as a result of increases in held-for portfolio loans, partially offset by a $28 million decline in PPP loans. Excluding PPP loans and held-for-sale loans, portfolio loans increased 338 million or 14.9% on an annualized basis.

One to four family real estate loans grew 150 million on the current quarter as a result of redirecting a portion of residential custom construction loans previously earmarked for sale or completion of portfolio with an increase in jumbo mortgage production. We anticipate a similar pace of one to four mortgage loans held for investment growth in the coming quarter. Ending core deposits decreased 267 million from the prior quarter end as a result of the sale of four branches that closed in late June, accounting for 170 million of the decrease. The remaining decrease in deposits reflects a combination of seasonal outflows associated with tax payments, along with exits of rate-sensitive deposit balances seeking higher yields.

Time deposit balances declined 44 million from the prior quarter end, of which 8 million were due to the aforementioned branch sale and the remaining 36 million decline driven by higher cost CDs continuing to roll over at lower retention rates. Net interest income increased by 10.4 million from the prior quarter due to an expansion of the net interest margin, coupled with growth in average loan outstandings and lower balances of lower yielding overnight interest-bearing cash. Compared to the prior quarter, loan yields increased four basis points due to increases on floating and adjustable rate loans, partially offset by a decline in PPP loan forgiveness processing fees. Excluding the impact of PPP loan forgiveness, prepayment penalties, interest recoveries, and acquired loan accretion, the average loan coupon increased 11 basis points from the prior quarter due to increases in floating and adjustable rate loans.

Total average interest-bearing cash and investment balances declined 275 million from the prior quarter while the average yield on the combined cash and investment balances increased 46 basis points due to a lower mix of overnight funds and higher yields on both the securities portfolio and overnight funds driven by higher rates -- higher market rates. Total cost of funds declined one basis point to 11 basis points. As a result of lower borrowing costs. The total cost of deposits remained flat at six basis points in the second quarter, as the bank did not raise posted deposit rates during the quarter while borrowing costs declined due to the payoff of the higher cost FHLB Advance in the prior quarter.

The ratio of core deposits to total deposits was 95% in the second quarter, the same as the previous quarter. The net interest margin increased 26 basis points to 3.44% on a tax equivalent basis. The increase was driven by higher yields on securities, overnight cash, and loans, coupled with a larger mix of loans and a lower mix of overnight cash within the earning asset base. In the third quarter, we anticipate a commensurate pace of margin expansion, followed by a slowdown in future quarters as price-sensitive deposits move off balance sheet, loan growth continues, overnight cash levels decline, and deposit rates accelerate.

Excess overnight cash is anticipated to decline at a more accelerated pace in coming quarters [Inaudible] continued loan growth and deposit outflows. Total non-interest income increased 7.7 million from the prior quarter. The current quarter benefited from a $7.8 million gain on the sale of four branches. Core non-interest income, excluding gains on sales of securities, gain on the sale of branches and changes in investments secured at fair value, increased 325,000.

Total deposit fees are flat while mortgage banking income declined 500,000 due to declining refinance activity and lower gain on sale spreads. While overall residential mortgage production increased 16% from the prior quarter, a larger share production was directed on balance sheet while production held for sale declined 43% from the prior quarter. Despite the large decline in held-for-sale production, residential mortgage gain and sale declined only modestly by 10%, thanks to pipeline hedging gains during the quarter. Within residential mortgage production, the percentage of refinance volume declined as a function of rising rates dropping to 18% of total production, down from 36% in the prior quarter.

Multifamily loan production and gain on sale premiums remain muted due to the steepening of the yield curve and decline in refinance activity. Miscellaneous fee income increased 368,000 due to increased swap fee income and a loss on the sale of former branch facilities in the previous quarter. Total non-interest expense increased 858,000 from the prior quarter, primarily due to higher compensation costs, professional fees and fraud losses. While Banner Forward implementation costs declined 900,000 to 1.6 million in the current quarter.

Excluding Banner Forward, debt extinguishment, and M&A, core non-interest expense increased 2.5 million. Compensation expense increased by 1.3 million due to increases in salaries due to annual merit increases, along with increased production-related commission and bonus expense, partially offset by decline in severance expense from the prior quarter. Check payment related fraud losses increased 1 million reflected in the payment and card processing expense line item while professional services increased due to a combination of volume-driven outside contract client servicing activity and various legal expense items from the prior quarter related to lending, governance, and settlement activities. In addition, as part of ongoing capital management, the company repurchased 200,000 shares during the quarter.

I'm pleased to report that Banner Forward remains on track. We just completed the fourth consecutive quarter of implementation and approximately 71% of the initiatives from a program value perspective have been executed and are reflected in the current quarter run rate, with the majority of the efficiency initiatives in place and revenue initiatives beginning to generate benefits in the form of accelerated loan growth and fee income generation. Due to the impact of wage inflation and sustained levels of core inflation, we are adjusting our core expense quarterly run rate guidance up modestly to run between the high 80s and low $90 million range. However, our expectations for improved operating leverage and lower core efficiency ratio remain strong as inflationary pressure on a reduced expense base is being more than offset by rate-driven expansion of the bank's net interest margin.

In closing, the company is benefiting from rising rates, as evidenced by significant margin expansion this quarter, stable, low cost deposit base, and strong diversified loan growth. This concludes my prepared remarks. Mark?

Mark Grescovich -- President and Chief Executive Officer

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

Questions & Answers:

Operator

[Operator instructions] We have the first question on the phone line from Andrew Liesch of Piper Sandler. Andrew, your line is open.

Andrew Liesch -- Piper Sandler -- Analyst

Thanks. Good morning, everyone.

Mark Grescovich -- President and Chief Executive Officer

Good morning, Andrew.

Andrew Liesch -- Piper Sandler -- Analyst

I just want to touch on the loan growth outlook here. It sounds like you had a couple of campaigns going on in the second quarter on the small business side and residential mortgage side. Have those ended? Are those continuing? Just kind of curious about the pace and the mix of the growth going forward.

Jill Rice -- Chief Credit Officer

They are continuing, anticipated to end this month. So a little bit pulling into this quarter.

Andrew Liesch -- Piper Sandler -- Analyst

Gotcha. I guess what was the impetus to start to start these? It seems like they've been a pretty decent driver of growth.

Jill Rice -- Chief Credit Officer

Part of the Banner Forward initiative is to just expand the growth in all of the business lines, whether it's business banking or moving upstream. And so this was just one of the Banner Forward initiatives.

Andrew Liesch -- Piper Sandler -- Analyst

Got it. All right. that's helpful. And then on the -- just on the provisioning, that came a little bit higher than I was expecting.

So just looking at the 3.1 billion for loan losses, I mean, it was -- how are you guys viewing the reserve ratio going forward? You think that's going to continue to build? You think you're going to continue to add to the provision around this level, just given the macroeconomic concerns?

Jill Rice -- Chief Credit Officer

So you hit on the things that are going to drive it there, Andrew. So provisioning is really it's a function of the loan growth, it's a function of the economic conditions and our asset quality. And that's been our message all along that we would return to provisioning with loan growth, which we had. And then, my standard line, we don't give guidance as to where we're actually going to have our reserve at.

But given the increasing economic uncertainty as we look into 2023, you can expect that we'll continue to be on the conservative side with regards to our level of reserves.

Andrew Liesch -- Piper Sandler -- Analyst

Got it. And then one just one last question. On the size of the securities portfolio, what's the plan there? Is there any plans to grow it or use cash flows from that to also fund loan growth and deposit outflows?

Peter Conner -- Executive Vice President and Chief Financial Officer

Yeah, hi. Andrew, it's Peter. We're basically at a point -- an inflection point with respect to the securities portfolio where we would anticipate going forward, we're going to deploy our excess liquidity into loan growth and funding some deposit runoff or the price sensitive deposits -- depositors rather than increase in the securities. But much more beyond this point that we had in the second quarter.

Andrew Liesch -- Piper Sandler -- Analyst

Gotcha. All right. Well, thank you for taking the questions. I'll step back.

Mark Grescovich -- President and Chief Executive Officer

Thank you, Andrew.

Operator

Thank you. The next question from the phone lines comes from Jeff Rulis of D.A. Davidson. Please go ahead when you're ready.

Jeff Rulis -- D.A. Davidson -- Analyst

Thanks. Good morning.

Mark Grescovich -- President and Chief Executive Officer

Morning, Jeff. Wanted to follow up want to follow up on just sort of the deposit runoff behavior. You noted the branch sale impact and some seasonal influence, but more focusing on that rate sensitive group and the -- your thoughts on the ultimate amount of folks in your deposit base that would chase that rate and your reaction to, obviously, holding core relationships but just getting a sense for you think that continues? And have we worked through some of maybe the flop or the rate chasers and now you kind of hold the line with the rest of the group? Any thoughts on deposit behavior would be great.

Peter Conner -- Executive Vice President and Chief Financial Officer

Yeah, Jeff. It's Peter. We, as we've discussed in the past, our deposit base is -- benefits from the fact that it's granular. It's diversified geographically.

It's diversified across business lines, segments. A large portion of our deposit base are operating accounts for businesses that have less price sensitivity. And so I guess two sentiments here. One is a lot of the price-sensitive deposits left in the last rate cycle, right.

Because Banner, we didn't match and didn't chase rates last -- in the last rate cycle and we never posted -- we didn't have any deposit campaigns in the interim period. And so we think we have a lot of resiliency built into our deposit base, given their behavior in the past. That said, there will be some outflows for certain clients seeking higher rates but we think that's a relatively small portion. And you want to see Banner leading with deposit rate specials or campaigns.

We tend to price in that 40th percentile of our peer group over time in terms of posted rates. So we think we're in a pretty good position. That being said, there'll be some modest amount of deposit runoff that we're willing to let go for rate, but we don't think it's going to be a large number.

Jeff Rulis -- D.A. Davidson -- Analyst

OK. Great. Thanks. Was there a loan balance that went through on the on the branch sales as well?

Peter Conner -- Executive Vice President and Chief Financial Officer

No, it was a deposit only. We retained all of the loans with that sale.

Jeff Rulis -- D.A. Davidson -- Analyst

Got it. OK. And I guess just ended the loan growth expectations, Jill or Peter. I think, Peter, you mentioned, expectations for one to four family to have some continued momentum.

And as these small business and resi mortgage campaigns continue on to the end of the month, balancing that with rate increases that impacted customers. Just a little more thought on the on the loan growth outlook, I know outside of guidance, but just your thoughts on second half type growth in the loan portfolio.

Jill Rice -- Chief Credit Officer

So I'll start and then if Peter wants to chime in as well. I guess I'll start by saying that we would expect over the second half of the year to maintain what we've been guiding to in that high single digit utilization rates are still affected, obviously, by the excess liquidity in the system. And we did see a little bit of a pullback right at the end of the quarter in activity with that hike in interest rates as borrowers become cautious and watch to see what happens. But the positives still are.

They're located in markets with strong economic engine, business model that's working strong loan originations and our utilization rates that have significant upside potential are construction and A&D portfolio is off about 10% this quarter. And those will continue to fund that for the balance of the year. Ag pick back up, as I talked about. We have good commercial and commercial real estate pipeline.

So, all of the things indicate that we should hit our target, even with the caution in the wind with the economic environment.

Jeff Rulis -- D.A. Davidson -- Analyst

That's great. Thank you. And, Mark, maybe this last one just on a lot of -- some pessimism out there and some price volatility but any thoughts about M&A discussions and your appetite?

Mark Grescovich -- President and Chief Executive Officer

Thanks. Thanks, Jeff, for the question. And it's a good question. As you're seeing, obviously, there's been a a slowdown in M&A activity, certainly in the financial sector space, but that can be temporary.

It's the normal course of the cycle with a pullback in valuations, some uncertainty with the economic climate and what you're really getting in terms of credit -- potential credit exposure if you're on the acquisition side. But those -- that's never been Banner's philosophy to be in and out of the market. Our philosophy has always been to foster relationships, enter into negotiated transactions, have that relationship with the board of directors of the central partners, the CEO of potential partners and the executive team. And then when the timing is right, should there be an opportunity, we would do a combination.

So the dialog continues, the relationships continue to progress and it's a matter of market timing before certain companies believe that it's time to enter into a combination with Banner.

Jeff Rulis -- D.A. Davidson -- Analyst

Thanks, Mark.

Mark Grescovich -- President and Chief Executive Officer

Thank you, Jeff.

Operator

Thank you. We now have a question from Tim Coffey of Janney. Please go ahead when you're ready. [Inaudible] your line.

Tim Coffey -- Janney Montgomery Scott -- Analyst

Great. Thank you. Morning, everybody. Thanks for the questions.

Mark Grescovich -- President and Chief Executive Officer

Good morning.

Tim Coffey -- Janney Montgomery Scott -- Analyst

I had a question about Banner Forward. And as you can kind of start to get to the tail end of this project, I'm wondering how should we start thinking about kind of the revenue opportunities from this project? I mean, clearly, you're doing a couple of loan programs already. But as we get forward on this, if I had intended well -- how should we think about that?

Peter Conner -- Executive Vice President and Chief Financial Officer

Yeah, Tim. It's Peter. Yeah, the -- our guidance on kind of the trajectory and sequencing of Banner Forward hasn't changed. We anticipate the revenue initiatives within Banner Forward and are beginning to generate value in the second quarter and continue as we go out into Q3, Q4 and beyond in the form of sustained loan growth.

So the whole notion is around the loan growth initiatives is to develop a sustained level of loan growth through the business lines to generate loan production over time. So it's not a big bang where we have one campaign and we're done. The real focus is a permanent and long lasting improvement in loan production and productivity across those functions that will benefit over time the pace of loan outstandings growth. And then with respect to fee income, we began implementing some of the fee income programs in the late -- late in the second quarter.

And we'll begin to see those bear more fruit in the coming quarters as we get a full quarter benefit of those fee increase -- those fee programs and then some initial additional fee income initiatives that'll be coming online late this year and into the first half of '23 that will improve the core and core fee income line as well. So we haven't changed our guidance and there's still upside on the revenue -- pace of revenue growth in those areas that has yet to be recognized in our performance.

Tim Coffey -- Janney Montgomery Scott -- Analyst

OK. And if I just follow up there, if we just talk about the loan growth, the sustained loan growth over time, will the way to think about that be it would take the -- to the target from the high single digits to maybe the low double digits for [Inaudible]

Peter Conner -- Executive Vice President and Chief Financial Officer

Yeah, I think the thing to keep in mind is to adjust for the -- as Jill mentioned in her remarks, the one to four mortgage growth this quarter. And what we expect next quarter is not something that we would expect to continue over the long run. However, that upper single digit pace of loan growth is something that we would continue to perpetuate going forward ex the mortgage growth we saw this quarter. So that's, that's really the focus is to sustain that upper single digit loan growth over time in a diversified conservative credit risk manner that Banner has always operated in.

Tim Coffey -- Janney Montgomery Scott -- Analyst

OK. So perhaps the good thing about it is that you can sustain growth through individual vertical vault volatility then?

Peter Conner -- Executive Vice President and Chief Financial Officer

Yeah, that's fair.

Tim Coffey -- Janney Montgomery Scott -- Analyst

OK. OK. And then, Jill, just a question about the current state of just underwriting and portfolio maintenance. Has anything changed there not to suggest that, credit quality is not improving, because it is.

But given the heightened economic uncertainty, have you started to kind of adjust or the underwriting are more frequent analysis of the portfolio?

Jill Rice -- Chief Credit Officer

We really have that because we've maintained a very conservative portfolio management through -- since the last Great Recession. We are looking at our watch and worse credits on an ongoing basis. We stress our portfolio on multiple fronts from origination throughout the cycle. And so, the bank looks at underwriting rates and changes those as rates rise so that we're looking forward into an increasing rate environment as well, and that's always been our practice.

The idea of underwriting here is that we're consistent through all cycles, so people know that they can count on us through our cycles. And so you don't want to change the way you're looking at any one business line very materially at any given time.

Tim Coffey -- Janney Montgomery Scott -- Analyst

OK. All right. Great. Those are my questions.

Thank you very much.

Mark Grescovich -- President and Chief Executive Officer

Thanks, Tim.

Operator

Thank you, Tim. [Operator instructions] We now have a new question on the line from Kelly Motta of KBW. Please go ahead when you're ready.

Kelly Motta -- Keefe, Bruyette and Woods -- Analyst

Hi, good morning. Thanks for the question. I apologize if this is repetitive. I got disconnected during the prepared remarks, but you mentioned your willingness to let some higher rate deposits go in the prepared remarks and at Banner, you guys have really good core deposits.

I wouldn't imagine there's quite a bit of that, but I was hoping you could maybe ringfence the amount of deposits you would be -- you consider more transaction would be willing to let go.

Peter Conner -- Executive Vice President and Chief Financial Officer

Yeah. Hi, Kelly, it's Peter. Yeah, we, as we mentioned earlier, we feel really good about our core deposit base and our clients and their and the sticky nature of our core deposit base has benefited and as evidenced by the last tightening cycle in '17 and '18. So a lot of that pricing for the clients that would have left in the last cycle because Banner entered in chase rates for deposit growth last time.

Last time, there are there are small there is a small amount of balance that is rate sensitive that we expect to move our balance sheet as rates go higher. But for the most part, we think that's a fairly small and limited number. And we're not we're not going to chase rates this time either. And we anticipate -- the bulk of our deposit base is relatively granular.

A lot of it's operating accounts for businesses that really aren't there here for rates. They're here for service and product and not there to seek higher yield. So while we will see deposit betas grow and increase at Banner, we're not going to be top of the market in any of our products in terms of rate, nor -- but nor do we expect a large outflow of deposit balances. But we will see some modest outflow.

But I'm not going to -- I can't give you a precise number, but I would anticipate some continuing reductions in our deposit balances due to rate as we go through the next several quarters.

Kelly Motta -- Keefe, Bruyette and Woods -- Analyst

Got it. Thank you for all the color. And then on expenses, they came in a little higher than what you had guided for the past quarter of like the mid to high 80s. I was wondering if that was a function of the branch closures being end of the quarter weighted or if there was greater pressure being seen, inflationary pressures, and how to think about that as we look forward and balance out with the savings from Banner Forward.

Peter Conner -- Executive Vice President and Chief Financial Officer

Yeah. We didn't get the benefit of the branch consolidations this quarter because they were all -- or the branch sales are all sold at the end of June. So we expect the benefit of that sale to manifest itself on a full quarter basis in Q3. And there's some other initiatives related to occupancy that'll take effect in Q3 as well.

That being said, we are seeing wage inflation pressures. And when we announced Banner Forward, wages were going up in the mid 2% range annually. Today, in the market they're going up in the 5% range. And so we are seeing some wage inflation pressures that are offsetting some of the original guidance around that mid to high $80 million number that are that are that are offsetting some of the saves we've got in the pipeline.

So our guidance is more of a neutral, high 80s, a little 90s core expense run rate. We do have some other -- we expect as we go into '23 and beyond, as we've said, a portion of our expenses are being reinvested in technology and workflow automation across our support and loan origination areas that will generate scalability benefits as Banner continues to grow both organically and through M&A over the long run. So we're not trying to create a temporary skinning of expense and at the cost of not having scale. So we are intentionally harvesting some of those expense gains into investments in technology and workflow process automation that'll benefit the company over the long run.

But we are -- we calibrated very modestly up our guidance given the wage inflation and core inflation pressures from our vendors as well that are beginning to show up in certain areas.

Kelly Motta -- Keefe, Bruyette and Woods -- Analyst

Understood. Thanks. Maybe one last one for me is just wondering about your repurchase appetite. I saw you had a bit of repurchases during the quarter.

Peter Conner -- Executive Vice President and Chief Financial Officer

Yeah, we -- our guidance hasn't changed there. We remain opportunistic in terms of capital deployment. And so, again, it's an opportunistic decision quarter to quarter. We are seeing, expanded loan growth now.

So we need to continue to retain capital to support loan growth. We are -- it's not a measure that we manage to explicitly, but we are -- we do pay attention to it, albeit our very capital ratios remain very strong.And so it'll be a quarter-to-quarter decision and our appetite hasn't changed over the long run that share repurchases remain an important and useful tool for capital plan. But we don't have any strong expectations or guidance in terms of the pace of share repurchases other than it would be an opportunistic decision quarter to quarter going forward.

Kelly Motta -- Keefe, Bruyette and Woods -- Analyst

Got it. Thank you so much.

Duration: 0 minutes

Call participants:

Mark Grescovich -- President and Chief Executive Officer

Rich Arnold -- Head of Investor Relations

Jill Rice -- Chief Credit Officer

Peter Conner -- Executive Vice President and Chief Financial Officer

Andrew Liesch -- Piper Sandler -- Analyst

Jeff Rulis -- D.A. Davidson -- Analyst

Tim Coffey -- Janney Montgomery Scott -- Analyst

Kelly Motta -- Keefe, Bruyette and Woods -- Analyst

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