Q2 2023 Banner Corp Earnings Call
Participants
Jill M. Rice; Former Executive VP & Chief Credit Officer of Banner Bank; Banner Corporation
Mark J. Grescovich; President, CEO & Director; Banner Corporation
Peter J. Conner; Executive VP, CFO & Treasurer; Banner Corporation
Rich Arnold; Head of IR; Banner Corporation
Rob Butterfield
Andrew Brian Liesch; MD & Senior Research Analyst; Piper Sandler & Co., Research Division
David Pipkin Feaster; VP & Research Analyst; Raymond James & Associates, Inc., Research Division
Kelly Ann Motta; MD; Keefe, Bruyette, & Woods, Inc., Research Division
Robert Andrew Terrell; Analyst; Stephens Inc., Research Division
Timothy Norton Coffey; MD & Associate Director of Depository Research; Janney Montgomery Scott LLC, Research Division
Unidentified Analyst
Presentation
Operator
Hello, everyone, and welcome to Banner Corporation Second Quarter '23 Conference webcast. My name is Daisy, and I'll be coordinating your call today. (Operator Instructions)
I would now like to hand over to your host, President and Chief Executive Officer of Banner Corporation, Mark Grescovich, to begin. Mark, please go ahead.
Mark J. Grescovich
Thank you, Daisy, and good morning, everyone. I would also like to welcome you to the Second Quarter 2023 Earnings Call for Banner Corporation. Joining me on the call today is Peter Conner, Banner Corporation's Chief Financial Officer; Jill Rice, our Chief Credit Officer; Rob Butterfield, our Chief Financial Officer of Banner Bank; and Rich Arnold, our Head of Investor Relations.
Rich, would you please read our forward-looking safe harbor statement?
Rich Arnold
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 the earnings press release that was released yesterday and a recently filed Form 10-Q for the quarter ended March 31, 2023. 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?
Mark J. Grescovich
Thank you, Rich. As is customary, today, we will cover 4 primary items with you. First, I will provide you high-level comments on Banner's second quarter 2023 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 and Rob Butterfield will provide more detail on our operating performance for the quarter as well as comments on our balance sheet.
Before I get started, I want to again thank all of my 2,000 colleagues in our company, who are working extremely hard to assist our clients and communities. Banner has lived our core values, summed up as doing the right thing for the past 133 years. Our overarching goal continues to be to do the right thing for our clients, our communities, our colleagues, our company and our shareholders and to provide a consistent and reliable source of commerce and capital through all economic cycles and change events. I am pleased to report again to you that is exactly what we continue to do. I am 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 $39.6 million or $1.15 per diluted share for the quarter ended June 30, 2023. This compares to a net profit to common shareholders of $1.39 per share for the second quarter of 2022 and $1.61 per share for the first quarter of 2023. The earnings comparison is primarily impacted by the provision for credit losses and the increase in funding costs. Our strategy to maintain a moderate risk profile and the investments we have made during our Banner Forward program to improve our operating performance have positioned the company well to weather recent market headwinds. Peter and Rob will discuss these items in more detail shortly.
To illustrate the core earnings power of Banner, I would direct your attention to pretax pre-provision earnings, excluding gains and losses on the sale of securities, Banner Forward expenses, gains on the sale of branches and changes in fair value of financial instruments. Our second quarter core earnings were $63.4 million compared to $57.8 million for the second quarter of 2022.
Banner second quarter 2023 revenue from core operations increased 7% to $158.6 million compared to $148.3 million for the second quarter of 2022. We continue to benefit from a strong core deposit base that has proved to be resilient and loyal to Banner in the wake of very competitive interest rate environment, a very good net interest margin and core expense control.
Overall, this resulted in a return on average assets of 1.02% for the second quarter of 2023. Once again, our core performance reflects continued execution on our super community bank strategy, that is growing new client relationships, maintaining our core funding position, promoting client loyalty and advocacy through our responsive service model and demonstrating our safety and soundness through all economic cycles and change events. To that point, our core deposits represent 90% of total deposits. Further, we continued our strong organic generation of new relationships and our loans increased 11% over the same period last year.
Reflective of the solid performance, coupled with our strong regulatory capital ratios and the fact that we increased our tangible common equity per share by 5% from the same period last year, we announced a core dividend of $0.48 per common share. As I've mentioned on previous calls, Banner published our environmental, social and governance highlights reported last December, which I hope you have had an opportunity to review. This report reflects the many ways in which we continually strive to do the right thing in support of our clients, our communities and our colleagues and provides an outline of the level of commitment Banner has to the many communities it serves.
Finally, I'm pleased to say that we continue to receive marketplace recognition and validation of our business model and our value proposition. Banner was again named one of America's 100 Best Banks and one of the Best Banks in the world by Forbes. Newsweek named Banner one of the most trustworthy companies in America. S&P Global Market Intelligence ranked Banner's financial performance among the top 50 public banks with more than $10 billion in assets. And the digital banking provider, Q2 Holdings awarded Banner, their Bank of the Year for excellence. Additionally, as we've noted previously, Banner Bank received an outstanding CRA rating in our most recent CRA Examination.
Let me now turn the call over to Jill to discuss the trends in our loan portfolio and her comments on Banner's credit quality. Jill?
Jill M. Rice
Thank you, Mark, and good morning, everyone. Banner's credit metrics continue to be strong and our super community bank model continues to serve our clients well. Delinquent loans as of June 30 were 0.28% of total loans, a reduction from 0.37% of total loans reported as of March 31 and compared to 0.19% as of June 30, 2022. Adversely classified loans represent 1.38% of total loans, down from 1.46% as of linked quarter and compared to 1.63% as of June 30, 2022. The Net loan losses continue to be negligible at $336,000 for the 3 months ending June 30, and Banner's nonperforming assets remained modest at 0.18% of the total assets.
As a result of the loan growth reported in the quarter, coupled with further deterioration in the economic forecast, we posted a provision for loan losses of $3.6 million as well as a $1.2 million reserve for unfunded loan commitments, resulting in a net provision for loan losses of $4.8 million. In addition, we recorded a $2 million provision for our securities available for sale in conjunction with ratings downgrades on financial institutions subordinated debt held within the investment portfolio. In total, the provision for credit losses for the quarter was $6.8 million. After the provision, our ACL reserve totaled $144.7 million or 1.38% of total loans as of June 30. This is a reduction of 1 basis point when compared to the linked quarter and compares to coverage of 1.36% as of June 30, 2022. The reserve currently provides 513% coverage of our nonperforming loans.
A review of the loan activity reflects increased loan origination volumes when compared to the prior quarter, with loan totals increasing $312 million or 12% on an annualized basis. Excluding the growth in one- to four-family residential loans, the annualized growth rate is 9%. C&I-line utilization increased 1% in the quarter, and we reported moderate loan growth in both commercial and small business lending, a testament to the success of our super community bank model and commitment to being open for business through all cycles.
Year-over-year, commercial business loans are up 11%. Excluding multifamily, our commercial real estate balances increased 2% in the quarter, primarily related to expanding relationships with existing clients who either acquired new properties or who moved additional loans to Banner as they refinance properties held in their portfolios. Balances are down 1% when compared to June 30, 2022, and as discussed last quarter, the current interest rate environment, coupled with the changing economic environment is expected to further mute growth in commercial real estate loans in the near term.
The portfolio continues to perform well. And similar to last quarter, less than 2% of the total CRE portfolio is adversely classified at this time. Our office portfolio remains stable in size as well as credit quality. In line with prior disclosures and as reflected in the investor presentation, the office portfolio currently represents 6.5% of total loans, remains very granular in size, geographically diversified and is split roughly 50-50 between investor CRE and owner occupied. There has been negligible change in the composition of the office portfolio since the report out last quarter. Still, I will provide a quick review related to the metropolitan area office statistics.
We have less than $60 million of office loans in the city of Seattle. And of that, less than $10 million of exposure in the central business district with an average loan size of $1.4 million. In Sacramento, we have slightly over $40 million of office secured loans, of which only 2 are located in the central business district with an aggregate exposure of less than $5 million. We have less than $15 million of exposure in the city of Bellevue, Washington, with an average loan size of less than $1.5 million. We have less than $15 million in exposure in the city of Portland, Oregon, with an average loan size of less than $1 million.
In Los Angeles, our aggregate office exposure is less than $10 million, and the average loan size is under $1 million. We currently have only one office property in San Francisco, with a balance of under $1.4 million and importantly, within these metropolitan areas, we currently have only 2 office properties adversely classified with an aggregate balance of less than $1.5 million.
Multifamily real estate loans were flat in the quarter but are up 22% year-over-year. In total, the Multifamily portfolio continues to be approximately 50% affordable housing and 50% market rate. And as I have commented before, the average loan size is less than $1.5 million with balance of spread across our footprint.
Construction and development loan balances declined by 3% in the quarter, reflecting a continued decline in residential construction projects as sales of completed residential starts continue to outpace replacements within this product line. When compared to June of 2022, construction and land development loans reflect an increase of 8% driven primarily by the growth in the multifamily construction portfolio, and to a much lesser extent, to growth in the land development book. Multifamily construction loans have increased nearly 70% year-over-year with over 2/3 of the dollars related to affordable housing projects. While the volume of residential construction starts have slowed, home sales did pick up this quarter across our footprint, a function of limited housing inventory that is compounded by the lack of resale housing supply, which is working in a builder's favor.
The portfolio remains diversified, both in product mix and price points start to spread across our geography, and I continue to be pleased with the portfolio's performance. And it bears repeating that we have remained consistent in our underwriting and our land exposure continues to be limited to our strongest sponsors. As noted last quarter, builders have been proactive in marketing the product to keep completed homes moving. They are being selective in adding new starts, and they remain well capitalized and able to absorb a longer sales cycle and reduce profit margins.
In total, residential construction exposure remains acceptable at 5% of the portfolio, down 1%. And of that, 45% is comprised of our custom one- to four-family residential mortgage product. When you include multifamily, commercial construction and land, the total construction exposure remained at 14% of total loans. As expected, agricultural loan balances increased in the quarter due to operating line usage, up 14% when compared to the linked quarter. Balances are up 9% year-over-year. And lastly, as noted in the earnings release, we again reported growth in the consumer mortgage portfolio, up 7% in the quarter, continuing the trend of retaining completed all on custom construction loans on balance sheet.
I will close on the same way I started, noting that Banner's credit metrics continue to be strong and our Super community Bank model continues to serve our clients well. As I said last quarter, our credit culture is designed for success through all business cycles and our moderate risk profile with consistent underwriting and robust review processes is a source of strength, as is our solid reserve for loan losses and capital base. Certainly, the economic environment continues to be uncertain. And when the effects of a recession begin to emerge, we will not be immune. That said, we remain well positioned to navigate whatever this economic cycle brings.
With that, I'll turn the microphone over to Peter for his comments. Peter?
Peter J. Conner
Thank you, Jill, and good morning, everyone. This will be my last earnings call after nearly 8 years as CFO since the company's acquisition of AmericanWest Bank. Having served the company through a unique period of economic volatility, I am proud to leave the company better than I found it. The strength of our balance sheet, the level of our operating performance, the depth of our executive management team and the client-centric culture our colleagues deliver every day are among the very best advanced peer group. I want to thank Mark and the Board for the opportunity that they allowed me to play in the company's success in building long-term franchise value.
With that, I hand the job of discussing our financial results over to Rob.
Rob Butterfield
Thank you, Peter. We reported $1.15 per diluted share for the second quarter compared to $1.61 per diluted share for the prior quarter. The $0.46 decrease in earnings per share was primarily due to lower net interest income and a higher provision for credit losses. Core revenue, excluding losses on the sale of securities and changes in investments carried at fair value, decreased $11.8 million from the prior quarter, primarily due to a decrease in net interest income.
Total loans increased $324 million during the quarter, with a $312 million increase in held-for-portfolio loans and a $12 million increase in held-for-sale loans. One- to four-family real estate loans increased $88 million. Commercial business loans increased $69 million and commercial real estate loans increased $60 million.
Total security balances declined $202 million. The decline was primarily due to the sale of $127 million of available for sale securities, with changes in fair value and normal portfolio cash flows also contributing to the decline. We will consider a similar level of security sales during the third quarter. Further sales could be contemplated depending on market conditions.
Ending core deposits decreased $462 million from the prior quarter due to seasonal tax payments and outflows of rate-sensitive nonoperating balances. The decrease in core deposits was primarily isolated to the month of April, as we experienced an increase in core deposits during the second half of the quarter. The decline in core deposits was mostly offset by a $407 million increase in CDs, including $204 million of brokered CDs, resulting in a total deposit decline of $55 million or 0.4% from the prior quarter. The bank continues to use exception pricing and selective deposit rate specials on CDs and relationship savings accounts to offer clients fair but not top of market rates.
Banner's liquidity and capital profile continues to remain strong with all capital ratios in excess of the well-capitalized levels and a significant off-balance sheet borrowing capacity as reflected in the low level of wholesale borrowings at the end of the quarter. Net interest income decreased by $10.8 million from the prior quarter due to the increase in funding costs. Compared to the prior quarter, average loan balances increased $210 million, while yield on loans increased 13 basis points due to increases on floating and adjustable rate loans as well as new production coming on at higher interest rates.
Total average interest-bearing cash and investment balances declined $352 million from the prior quarter, while the average yield on the combined cash and investment balances decreased 5 basis points due to mortgage-backed securities representing a higher mix of the overall security portfolio. Total cost of funds increased 46 basis points to 86 basis points due to increases in deposit rates and borrowing costs. The total cost of deposits increased 36 basis points to 64 basis points, reflecting increases in the rates on interest-bearing deposits as well as a shift in the mix of deposits with some noninterest-bearing deposits moving into CDs and other interest-bearing deposits.
The brokered CDs issued during the quarter added 3 basis points to the cost of deposits for the quarter. Net interest margin decreased 30 basis points to 4.0% on a tax equivalent basis. The decrease was driven by higher funding costs on interest-bearing deposits, partially offset by higher yields on earning assets. During the second half of the quarter, the pace of net interest margin compression slowed as core deposits levels stabilized and earning asset yields continue to increase. Going forward, we expect net interest margin will experience some additional compression, but at a slower pace than we experienced in the second quarter, contingent on the pace of further Fed fund rate hikes.
Total noninterest income declined $855,000 from the prior quarter. The current quarter included a $4.5 million loss on the sale of securities, the payback on these trades averaged 2 years. In addition, we recorded a $3.2 million negative fair value adjustment on investments held for trading as spreads widened and market rates increased.
Core noninterest income, excluding the loss on the sale of securities and changes in investments carried at fair value, decreased $981,000, primarily due to a $1 million decline in mortgage banking income due to a negative fair value adjustment on multifamily loans held for sale. Total residential mortgage production, including both loans held for investment and held-for-sale increased 52% from the prior quarter. Despite the large percentage increase from the prior quarter, volumes remain well below the prior quarter due to lower revamped activity with purchases accounting for 93% of the mortgage loan production for the current year quarter.
During the month of June, Banner modified its NSF and overdraft fee program by no longer charging fees on returned items. We anticipate this change will result in a quarterly reduction in our deposit fees of approximately $750,000. Lastly, miscellaneous income decreased $212,000 due to a decrease in the fair value of SBA servicing rights, partially offset by higher swap fee income.
Total noninterest expense increased $784,000 from the prior quarter, primarily due to increased deposit insurance expense and higher salary and benefit expense, partially offset by a higher deduction for capitalized loan origination costs. Deposit insurance expense increased $949,000 due to an increase in the assessment rate. Compensation expense increased $583,000 due to the first full quarter of normal annual salary and wage adjustments made towards the end of the first quarter as well as higher commission expense, partially offset by lower payroll taxes and lower incentive accruals. Capitalized loan origination costs increased $1 million due to higher loan production compared to the prior quarter.
Despite the headwinds of the competitive rate environment, the pace of core deposit outflows continued to moderate this quarter as we benefited from net deposit account growth in our consumer and small business clients due to the success of our targeted deposit sales and marketing campaigns. The company continues to invest in technology to further streamline its deposits at opening and loan origination processes while enhancing the digital client experience and continues to take advantage of the ongoing market disruption with selective additions to the commercial and small business teams.
This concludes my prepared comments. I will turn it back to Mark.
Mark J. Grescovich
Thank you, Rob, Peter and Jill, for your prepared comments. I would also like to remind everybody on the call that while this is Peter Conner's last earnings call for Banner Corporation, he is committed to be the CFO through the third quarter of this year 2023, and he will remain (inaudible) for our company until -- through the first quarter of 2024. So Peter, thank you for your many years of service and dedication to Banner. We appreciate that very much.
With that, that concludes our prepared remarks. And Daisy, we will now open the call and welcome your questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question today comes from Jeff Rulis from D.A. Davidson.
Unidentified Analyst
This is Andrew on for Jeff today. Just to start out on the deposit cost side. Just wondering if there's any update on how we should be thinking about deposit betas through the cycle with the accelerating deposit costs this quarter?
Mark J. Grescovich
Andrew, this is Mark, and welcome, very good question, and I'll turn it over to Rob.
Rob Butterfield
All right. Thanks, Mark. Andrew, yes. So to this point, we have been modeling our deposit betas similar to the last rate cycle, which was 25%, excluding brokered deposits. And at this point, we think it could creep on that, but we expect to continue to perform well on a relative basis compared to the industry average. And the other thing I'll note on that is, as far as our deposit specials that we've been running, the last increase in our deposit special we experienced was the beginning of May. So there hasn't been any really change in our deposit specials. I think ultimately, it's going to be based more on the shift that we see between deposits.
Unidentified Analyst
Got it. And then just one more question on deposits. It looks like noninterest-bearing has fallen to about 39% of total deposits and -- just wondering how much of that runoff stems from seasonal outflows this quarter?
Rob Butterfield
Yes. So I guess my numbers might be a bit different than yours, but I'm showing 41%. Last cycle, we were at 39% or pre-COVID, we were at 39% as far as our noninterest-bearing, and we're expecting that they'll kind of slow down to that. From a seasonality standpoint, we do experience seasonal tax outflows in April, which is why we had the decline in April there. Also, we do see some ag borrowers that earlier in the quarter, fund their operations with cash before they start drawing down their lines.
Operator
Our next question is from Kelly Motta from KBW.
Kelly Ann Motta
I think maybe starting on the loan growth. I know it's your intention to be open through cycles to support your borrowers. But I was surprised to see how strong the growth was at -- just given how much rates have risen. Have you seen a pullback in demand at all? And what should we be thinking about ahead as you look to the pipeline? Any color about that would be helpful.
Jill M. Rice
Kelly, yes, certainly, we've seen a slowdown in -- I don't want to use the word demand, but in the pipelines refilling. Our pipeline are filling back up, but you will find them running 15% to 20% lower than they were at this time last year. The loan growth, we think back to last quarter with the construction draws as the residential construction builds out, the affordable housing builds out, the ag draws, all of that impacted the loan growth of this quarter. And so the continued economic pessimism increased rate environment, overall uncertainty is going to -- we believe, continue to mute loan growth going forward. And I would still suggest that we'll target a low single-digit growth rate going forward.
Kelly Ann Motta
Understood. I appreciate that. Also wondering, Jill, if you could -- obviously, the markets in the West have received a lot of attention. I was hoping you could provide kind of an overview by market of where you're still seeing the most opportunities versus which markets might be lagging more within your footprint?
Jill M. Rice
I don't really see a difference, Kelly, across our footprint. I mean, the West Coast is pretty much operating in the same vein up and down. The coast activity is flowing across the area.
Mark J. Grescovich
Let me just add, Kelly, that we've had some excellent experience in our small business banking group in Northern California and all the way up and down the coast. So actually, the business activity from a small business standpoint has been pretty good for us.
Kelly Ann Motta
Understood. Appreciate that. Maybe circling to the margin. Obviously, deposit costs have heated up at this stage and caused some compression ahead. Just hoping to get some color on where new loan production is coming on? As well -- is this 30 basis point of margin compression is -- do you expect a similar level this quarter as we look ahead? Any kind of guidance around that would be helpful.
Rob Butterfield
Sure, Kelly. It's Rob. So yes, the new loan production came on at 7.69% for the quarter. As far as an overall compression standpoint, I mean, we did experience that compression, but we expect that to moderate going forward. And we even saw that in the second quarter. So the second half of the quarter, we actually saw a slower compression. The NIM for the month of June and May were within 1 basis point or 2 of each other. So our expectation is that we could see some additional compression here, but it will moderate quite a bit from what we saw in the second quarter.
Peter J. Conner
And Kelly, this is Peter. I'll add a little more color to Rob's commentary around deposits. And again, we -- the last time we increased our posted rates on deposits was the very beginning of May. So it's been 2 months since we've actually posted an increase in our offer rates outside of some tenor adjustments on the CDs. And really, the interest rate beta going forward are going to be a function of remixing the deposit base a bit more into CDs away from core deposits, but not a function of increasing our offer rates going forward and that coupled with additional deleveraging on our wholesale funding costs, including FHLB will really keep the margin compression limited going forward, as Rob indicated.
So as well, we're seeing our CD specials generating net new growth, about 50% of the growth in the CD specials is coming from new money to the bank with the rest of it coming from existing accounts. So we're seeing success with the rates we've got. And as Rob indicated earlier, we're not top of the market, we're about 100 basis points below and seeing good success with those rates.
Kelly Ann Motta
Got it. I'll step back. And again, Peter, congrats on your retirement and Rob, looking forward to continuing to work with you.
Operator
Our next question is from David Feaster from Raymond James.
David Pipkin Feaster
Just kind of -- staying on deposits, and I don't want to kill this, but kind of reading between the lines, it sounds like deposit pressures have abated a bit that most of the remix was really weighted towards the front end of the quarter. I'm just curious what gives you confidence that deposit trends are stabilizing? Could you maybe talk about some of the competitive dynamics? And then where you're seeing the most competition? Is it the larger banks, smaller banks, nonbanks? And then just any thoughts on your strategy to drive core deposit growth? Where are you seeing the most opportunity to gain relationships, the deposit pipeline? And any -- just any thoughts on that front as well.
Peter J. Conner
David, this is Peter. I'll answer the question and ask Rob to add some additional color. So in terms of the competition, what -- what we see -- what we saw at the beginning of the first quarter was really the outflow is going not to other banks or credit unions, but to off-balance sheet opportunities in treasuries or money market (inaudible) with brokerages where our business clients, we're harvesting some of their nonoperating balances and generating higher yields. That really slowed down dramatically at the end of the second quarter. We're not seeing that pace of movement so far in the third quarter.
Our competition is effectively our other community banks in the market, to a lesser extent, some of the credit unions. And in terms of the specials, it's interesting that most of the banks that we compete with (inaudible) around the same tenors of CDs, and we're all within 25 basis points of each other in terms of the offer rate. So we've really stabilized kind of the center point of where pricing and tenor is at this point.
In terms of generating new business, as you heard from Mark and Jill and Rob, we've seen really good success in the small business space. As part of being (inaudible), we invested heavily in building out the teams, the sales efforts there, the product set and some of the infrastructure to accelerate small business banking. And as you know, small business banking clients tend to come with a very rich deposit relationship as well. So we're seeing good success there.
And if you look at our earnings release, you can see the number of accounts, deposit accounts actually grew in the second quarter or first quarter, part of that is due to the success of small business campaign, along with the success of some of our core deposit product specials that have been out there that require opening new accounts to bring your money in. So we're feeling pretty good about where we are at the end of the second quarter. And the outlook going forward really seeing stabilization of deposits and now are seeing some of that account or on top of that, albeit at higher rates. And as we said earlier, really the interesting deposit beta for us is really a remixing function, not one of increasing rates on existing accounts.
Rob Butterfield
Yes. And David, the only thing I'll add to Peter is -- just to give a little more color maybe on the deposit flows we saw for the quarter. So as I mentioned in my comments, April, the deposit outflows were really confined to April. May, we saw a stabilization where our retail deposits, and I'm excluding brokered from that. So just our retail deposits, we saw an increase during the month of May. And then we saw a further increase during the month of June. In June, we saw an increase in core deposits as well as an increase in noninterest-bearing deposits. And then as we've moved into July, we've seen that stabilization continue. So it's not -- I mean, our confidence level might not be through the roof right now necessarily, but I think we're seeing some positive signs there.
David Pipkin Feaster
Okay. That's helpful. And then maybe just jumping over to the loan growth side and following up there. Again, nice to the increase in originations and especially at the rates you were able to get. Originations were primarily driven by construction. I'm just curious what you're seeing on the construction side at that point? Is it more on the multifamily side? And then just, again, what are you seeing on the C&I front as well? And what are you hearing from those clients and what's driving the increase in utilization there?
Jill M. Rice
Yes, David. So in a construction and land book, nearly 40% of the originations in the quarter were affordable housing construction starts, very little of that would be drawn, but those are -- so you'll see that fund up over the next 18 to 24 months, but we had significant growth as we near quarter end and the tax credit funding time lines and things like that pushed a bunch of affordable housings to close in the quarter.
As to commercial, we saw increased loan utilization. We are seeing equipment acquisitions, business -- a little bit of everything, C&I-line utilization, it's term debt and it's mostly to our existing customers who they need to keep their businesses going, and they're recognizing that rates are where they're at, and they've just got to move and keep the doors going the way we're keeping our doors open.
David Pipkin Feaster
Okay. That makes sense. And then obviously, there's been a lot of disruption around you over the past few months. You got the failures, you've got some M&A. There's a lot of opportunity. It seems like we're still in the early innings of capitalizing on this. But I'm just curious, maybe as you step back, Mark, where are you seeing the most opportunity? Is it the client acquisition side? Is it new hires? Where are you seeing the most expansion opportunity? Or are you more focused on in market? Or is there anything that you're interested in expanding into? I'm just curious maybe what are you most excited about?
Mark J. Grescovich
Yes, David, thank you for the question. I think, look, as I've said before, Banner has been really successful when there's been quite a bit of market disruption, and that's exactly what we have. We're -- we are actually capitalizing on every front you mentioned. We're bringing new talent into the organization at all levels of the company, including loan originators and as well as credit folks. At the same time, we're being able to fill our pipelines up with opportunities as well from the disruption that's occurring in a lot of the -- with a lot of the banks. That disruption is going to accelerate at a higher pace.
Right now, it's been, as you mentioned, a little bit benign, although the discussions with all of our bankers has occurred and there will be a catalyst event that most businesses will utilize to change financial institutions. Whether it be a credit request or an expansion request or some form of disruption or change of the environment. And we're just now starting to see that come about. And that's why Jill was optimistic about our pipeline is actually starting to grow. And a lot of it is coming not from just business activity, but also us capitalizing on market disruption.
And then if you think about the final piece of all that disruption, as you mentioned, we have some specialty lines of business in our own shop, which include some form of agricultural verticals such as the wine industry, where we're experiencing some great opportunities that had wine verticals with some of the other institutions that failed, right? So we're having -- being able to capitalize on our own core competency in certain lines of business that are going to be very effective for us going forward in terms of taking market share. So thank you for the question.
David Pipkin Feaster
No, that's extremely, extremely helpful. And maybe just one quick modeling one, if I can. Do you have an estimate for the FDIC loss share or just that catch-up?
Rob Butterfield
Yes. Yes. So David, on that one, the assessment rate change that we affected in earlier in the year, we were fully capturing that. And so we've built it into our run rate for the remainder of the year. So the number you saw there, that's a good number for Q3 and Q4.
Operator
Our next question is from Andrew Terrell from Stephens.
Robert Andrew Terrell
Peter, real quick, I just want to say congratulations. It's been a pleasure working with you, and Rob look forward to continuing working with you as well. Maybe if I could start on -- just one quick one on the margin. On the special rates you guys discussed a couple of times in the call, what special rates are you offering in the market right now? Is it just CD special rates? Or have you raised posted rates across the Board and how it compares to your competitors?
Rob Butterfield
Yes, Andrew, it's Rob. Yes, the current deposit rate specials are running. We do have a CD special out there a 7-month one which has a standard rate of 4% on it. And then we also have a high relationship savings account that we're currently offering. So on that one to get that rate, you have to also have a checking account that requires a relationship. And the rates on that range from 2% to 4% depending on the tier. And I would say the average cost on that product right now is probably in the low 3s right now.
Mark J. Grescovich
Andrew, this is Mark. So Andrew, if you take into account Rob's commentary on the rates, you can see that we're certainly not top of market.
Robert Andrew Terrell
Yes, for sure, for sure. So I guess it seems like incremental funding, putting those two together would be around 4% or sub-4%. So yes, it definitely seems better than maybe market right now. On the securities portfolio, I know there were some sales this quarter, but I guess I'm looking at your capital position, it's really strong. Any interest in maybe getting a little more aggressive on the securities repositioning front? And if not, what do we need to see in order for that trade to become more attractive?
Rob Butterfield
Yes. So Andrew, Rob, again here. So yes, I mean we tend -- not want to bet on any particular rate cycle. So I would expect Q3 to look very similar to what we saw in Q1 and Q2 as (inaudible) -- I mean, we certainly have the capital to do it. But we're looking at kind of just averaging out. If you think about as we came into those securities, we averaged into them. We didn't make a big bet at any particular time. and that will be our approach here, too. I think to see a larger sale activity, I think we would need to see rates come down.
Robert Andrew Terrell
Okay. Understood. And then -- last question, just updated thoughts on buyback appetite, I guess, with a slower level of balance sheet growth. I mean capital really should go quite nicely, and you're already in a solid position. Any interest in a buyback at this point?
Rob Butterfield
Yes. So as you say, I mean, capital position, we certainly have the capital capacity to do it. And we are contemplating that for the second half of the year. And just as a reminder, too, our most recent repurchase authorization expired in December. And so I think before we started repurchasing, you'd likely see an announcement that we approved a new authorization.
Operator
Our next question is from Tim Coffey from Janney Montgomery Scott.
Timothy Norton Coffey
Rob, I apologize if I missed this, but did you provide any kind of thoughts on how we should think about noninterest expenses going forward?
Rob Butterfield
Yes. We haven't covered that yet, Tim. So yes, I expect it to be very similar to what we've experienced in the first 2 quarters of the year within that range.
Timothy Norton Coffey
Okay. So are we looking kind of more to mid-$90 million right now?
Rob Butterfield
Yes, I think that's accurate.
Timothy Norton Coffey
Okay. Make sure I note that down. And Jill, is there something that you're paying attention to in the credit portfolio? Because clearly, I mean, we're not -- you're not seeing many problems, but from other banks in the West, they've expressed not concerned, but to keep an eye on debt coverage ratios in the current rate environment and subjecting those loans to higher scrutiny. Is there something that you're keeping an eye on?
Jill M. Rice
Yes, Tim. I mean certainly, we're monitoring debt service coverage ratios, and that's not because of the cycle we're in. That's basically one of the standard covenants that we would put on all of our loans to monitor performance on a going forward basis. As I step back and watch what's happening, certainly, we're watching office like everyone else, and it's the repricing opportunities or I guess that's not really the right word, but the repricing events that are going to happen to all of the borrowers as we move forward. So continuing to stay on top of that with a forward look towards debt service coverage.
Mark J. Grescovich
As you know, we continue to stress the portfolio at various levels, just to see exactly what's going to happen if rates go up a little bit further. And right now, we're not seeing any kind of stress level.
Timothy Norton Coffey
Okay. Speaking of stress, though, are you seeing a different level of stress between your -- to your commercial real estate in the central business district versus your commercial real estate in the suburban markets?
Jill M. Rice
At this point, we really aren't. And I think if you think back to the prepared comments and the loan sizes that we have in these areas. I mean, they're small enough that even if they were having trouble at the property level, the global debt service coverage available to our borrowers really would backfill it. But we're not. And that -- it's reflected in the negligible as adverse the classified loans in the office book in those markets.
Timothy Norton Coffey
Okay. And then just on deposit pricing. I understand what you're saying about where you want to keep your deposit pricing at. But if the market that you raised deposits in continues to increase their cost of what they're willing to pay for deposits. Are you concerned that, that could lead to a higher deposit rates for Banner?
Rob Butterfield
Yes. Tim, it's Rob. So I mean we are certainly subject to the competitive rate environment and what happens there. And so if the deposit rates within our market shifted dramatically, then we might have to respond to that. But I think we'll continue to kind of try to balance the deposit outflows with the cost of the deposits and decide where it's advantageous to defend those deposits or let those deposits go off balance sheet.
Mark J. Grescovich
This is Mark again. As you know, we have an in-house exception system that allows us to protect our very best clients so that we can provide some exception pricing if needed.
Timothy Norton Coffey
Right. Yes. I remember we talked about loan deposit ratio kind of comfort levels last quarter. So...
Operator
(Operator Instructions) Our next question is from Andrew Liesch from Piper Sandler.
Andrew Brian Liesch
Just one follow-up question here on credit quality. Just with the provisioning, you mentioned a couple of times or a few times now, deterioration in the forecast model. I guess what deterioration are you seeing? Or is it just when you look out at, see what the leading economic indicators are saying?
Jill M. Rice
Yes, Andrew. So the economic indicators and the forecast model that are driving the deterioration of our commercial real estate price index almost exclusively, and that comes back and affects the model. Offset, of course, by the asset quality in the portfolio to some extent, keeping it moderate.
Rob Butterfield
Just one thing I'll add is we use the Moody's forecast in the model. So it's not our internal forecast. We use Moody's forecast for that.
Andrew Brian Liesch
Got it. Got it. So I guess if you look at the provision in the quarter, would the vast majority of it tied to the loan growth?
Jill M. Rice
It was. Loan growth was the driver.
Andrew Brian Liesch
Got you. Thank you. You've covered everything else. Have a great rest of your day.
Operator
(Operator Instructions) We have no further questions. So I'd like to hand back to Mark for any closing remarks.
Mark J. Grescovich
Thank you, Daisy. As I stated, we're very proud of the Banner team and our second quarter 2023 performance even in light of the competitive deposit environment we're facing, we certainly appreciate the loyalty of our deposit customers and the resiliency of our franchise. Thank you, again, for your interest in Banner and for joining our call today. We look forward to reporting our results to you again in the future. Have a great day, everyone.
Operator
Thank you, everyone, for joining today's call. You may now disconnect your lines, and have a lovely day.
