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Good day, and welcome to the Banner Corporation's Second Quarter 2019 Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Mark Grescovich, President and CEO. Please go ahead.
Thank you, Shawn, and good morning everyone. I would also like to welcome you to the Second 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 on his final earnings call, Albert Marshall, the Secretary of the corporation, who is retiring after nearly 39 years of service. Also joining our call is our new Head of Investor Relations, Rich Arnold.
Albert, would you first please read our forward-looking safe harbor statement?
Certainly. Good morning, everyone. Our presentation today discusses Banner's business outlook and will include forward-looking statements. Both 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 announcement with AltaPacific Bancorp.
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 and merger press releases that were released yesterday and a recently filed Form 10-Q for the quarter ended March 31, 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. Thank you.
Thank you, Al. As announced, Banner Corporation reported a net profit available to common shareholders of $39.7 million or $1.14 per diluted share for the quarter ended June 30, 2019. This compared to a net profit to common shareholders of $1 per share for the second quarter of 2018 and $0.95 per share in the first quarter of 2019.
Excluding the impact of merger and acquisition expenses, gains and losses on the sale of securities, changes in fair value of financial instruments and tax adjustments, earnings were $40 million for the second quarter of 2019 compared to $32.2 million in the second quarter of 2018, an increase of 24%.
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 of 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 acquisition of Skagit Bank.
Our second quarter 2019 performance demonstrates that our strategic plan continues to be effective, and we are building shareholder value. Second quarter 2019 revenue from core operations was $139.5 million compared to $126 million in the second quarter of 2018.
We benefited from a larger and improved earning asset mix, a solid net interest margin and good deposit and mortgage fee revenue. Overall, this resulted in a return on average assets of 1.36% for the second quarter of 2019.
Once again, our performance this quarter 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 11.4% compared to June 30, 2018. Noninterest-bearing deposits increased 9.7% from 1 year ago and represent a stable 39% 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 10.05%, we issued a core dividend of $0.41 per share in the quarter and repurchased 600,000 shares of common stock. 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 1.12%, and our total nonperforming assets totaled 0.18%.
In a moment, Rick Barton, our Chief Credit Officer, will discuss the credit metrics of the company and provide some context around the loan portfolio and our success at maintaining a moderate credit risk profile.
In the quarter and throughout the preceding nine years, we continue 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 of 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 deposit fee income.
Further, as I've noted before, we have received marketplace recognition of our progress and our value proposition as J.D. Power and Associates this year again ranked Banner 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. 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 recognize our new colleagues from AltaPacific Bank, an outstanding community business bank, their clients and employees that will soon be joining Banner. We're extremely pleased with this opportunity to expand our super community bank model and enhance our density in the California market.
I'll now turn the call over to Rick Barton to discuss trends in our loan portfolio. Rick?
Thank you, Mark. Once again, Banner's credit metrics were stable during the just-completed quarter, maintaining the moderate risk profile of the company's loan portfolio. My specific remarks on our credit metrics this morning will be brief.
Delinquent loans decreased 14 basis points from the linked quarter to 0.40% of total loans. Delinquencies one year ago were 0.29%. The company's level of adversely classified assets was stable during the quarter and remained well below historical norms.
Non-performing assets decreased $1 million to $21 million during the quarter and are 0.18% of total assets. This metric at June 30, 2018, was 0.16%. Nonperforming assets were split between nonperforming loans of $18 million and REO and other assets of $3 million. Nonperforming loans are not concentrated in any single loan category.
Not reflected in these totals are the remaining nonperforming loans of $6 million acquired from Siuslaw, AmericanWest and Skagit banks, which are not reportable under purchase accounting rules.
If we were to include the acquired nonperforming loans in our nonperforming asset totals, the ratio of nonperforming assets to total assets would still be a modest 20 basis points.
For the quarter, the company recorded net loan charge-offs of $1.1 million. Gross charge-offs for the quarter were $1.9 million. While gross charge-offs were up $500,000 from the linked quarter, we still consider charge-offs at this level to be low when compared to historical norms, and they are not concentrated in any portfolio segment. Also, the quarterly increase in loan loss recoveries should not be considered recurrent.
After a second quarter provision of $2 million and net loan losses of $1.1 million, the allowance for loan and lease losses for the company totals $98.3 million and is 1.12% of total loans, unchanged from last quarter.
For the quarter ending June 30, 2018, this measure was 1.22%. Coverage of nonperforming loans remained very robust at 534%, up from 504% last quarter. The remaining net accounting mark against acquired loans is $23 million, which provides an additional level of protection against loan losses.
During the second quarter of 2019, total loans receivable were up $54 million when compared to the first quarter of 2019. When viewing this number, it is important to note several points.
C&I loan growth occurred across our footprint at an annualized rate of 19%. As expected, agricultural loans began their seasonal drawdown. The residential construction portfolio was down by $12 million driven by the continued rebound of home sales in our markets.
Investor of CRE construction and improvement loans both were down slightly during the quarter. The small increases in multifamily construction and permanent loans were driven by commitments to finance affordable housing.
Additionally, Banner's construction loan portfolios remain at acceptable concentration levels. Residential construction exposure, including land loans, is 7.9% of total loans. When both multifamily and commercial construction and nonresidential land loans are added into this calculation, our total construction land exposure is 12.3% of total loans.
At March 31, 2019, these ratios were 8.1% and 12.6%, respectively. The markets in which we make residential construction loans are experiencing strong sales, driven by both lower interest rates and continued robust economic activity in our markets. We feel the markets are now performing at or near historical norms.
The more affordable housing segments are still under supplied, while some inventory buildup is noted in luxury homes. The pace of lease-up activity in multifamily projects remain steady, but we are continuing to observe flattening in the growth of multifamily rents. The permanent loan market for new stabilizing multifamily projects remains robust.
As I said at the outset of my remarks, the credit story in our company remained stable during the second quarter of 2019. We continue to be well positioned to deal with the next credit cycle whatever form it might take and the portfolio impacts of macroeconomic factors such as tariffs, interest rates and the national debt.
With that said, I will pass the microphone to Peter Conner for his comments. Peter?
Thank you, Rick, and good morning, everybody. As discussed previously and as announced in our earnings release, we reported net income of $39.7 million or $1.14 per diluted share for the second quarter compared to $33.3 million or $0.95 per diluted share in the prior quarter.
The second quarter results benefited from the realization of the expense synergies from the Skagit acquisition, growth in residential and multifamily mortgage held-for-sale loan production, an increase in portfolio loan outstanding and a stable core net interest margin.
The $0.19 increase in per-share earnings from the prior quarter was due to the following items. Net interest income increased $0.04 due to an increase in average loan yields.
Noninterest income increased $0.14 due to an increase in mortgage and multifamily gain on sale income, growth and deposit-related fee income and a write-down on a former bank building in the prior quarter.
Noninterest expense declined $0.07 due primarily to lower acquisition-related expenses. Income tax expense increased $0.06 per share as a result of an increase in pretax income.
Weighted average diluted share count declined by 290,000 shares from the prior quarter as a result of repurchasing 600,000 shares during the second quarter, positively impacting earnings by $0.01 per share.
Total loans increased $179 million from the prior quarter end as a result of $125 million increase in multifamily and residential mortgage loans held-for-sale and a $54 million increase in portfolio loans.
Portfolio loan growth in the second quarter was driven by a strong C&I and HELOC loan production, partially offset by declines in residential construction loan outstandings.
Ending held-for-sale loans grew by $125 million as a result of strong multifamily loan production during the quarter and no completed bulk sales. Ending core deposits were flat to the prior quarter. While ending point-to-point core deposits were flat to the first quarter, average core deposit balances increased $75 million during the quarter or just under 4% on an annualized basis as we experienced our typical seasonal outswing in core deposits following annual tax payments in April.
Time deposits decreased by $93 million in the second quarter due to a decline in brokerage CDs. FHLB borrowings increased by $188 million in the second quarter as a result of growth in the multifamily held-for-sale portfolio and reductions in brokerage CDs as a function of ongoing wholesale funds management.
Net interest income increased $600,000 from the prior quarter due to an increase in average loan yields. Loan yields increased 2 basis points principally due to an increase in prepayment-related interest income.
Loan interest accretion from the acquired loan portfolios was flat to the prior quarter, contributing 9 basis points to loan yield in both quarters.
The weighted average loan coupon excluding the effects of prepayments, interest recoveries and deferred loan fee income declined 1 basis point from the first quarter due to declines in term LIBOR and treasury rates.
Total cost of funds of 56 basis points was flat to the prior quarter as a modest increase in deposit costs was offset with lower rates on wholesale funding. The total cost to deposits in the second quarter was 39 basis points, up 2 basis points from the prior quarter as a result of lagged increases in retail deposit rates partially offset by a reduction in higher cost brokerage CD balances. Brokerage CDs accounted for 4 basis points of total deposit costs, down from 7 basis points in the prior quarter.
The composition of noninterest-bearing deposits to total deposits remained steady at 39%, and the ratio of core deposits to total deposits also remained steady at 88% in the second quarter.
The net interest margin increased 1 basis point to 4.38%. The effects of purchase accounting-related loan accretion were 7 basis points in the current quarter, the same as the preceding quarter.
The increase in net interest margin was driven by an increase in the yield on earning assets, largely as a result of a return to a more typical pace of prepayment and interest penalty-related interest income after coming off of lower level of this activity in the first quarter that we typically see.
Overall, the foundational elements of the company's net interest margin have not changed and remain the same, and the company's balance sheet remains modestly asset-sensitive.
Total noninterest income increased $4.6 million from the prior quarter. Core noninterest income, excluding losses on the sale of and changes in securities carried at fair value, increased $4.7 million.
Total mortgage banking income increased $2.5 million due to substantial increases in residential mortgage and multifamily loan production relative to the prior quarter.
Residential mortgage production was up in both purchase and refinance-related originations across all product types. Multifamily held-for-sale loan production increased meaningfully from the first quarter, driven in part by a borrower refinance demand as a result of lower 5- and 10-year treasury rates, along with the typical seasonal increase in production we normally experience in the second quarter.
Total income was down modestly in the second quarter as a result of the debt benefit gain in the first quarter. Miscellaneous fee income increased $900,000 primarily as a result of a branch building write-down in the first quarter.
Noninterest expense declined by $3.3 million due to a $1.8 million decline in acquisition expenses; a $1.5 million decrease in core noninterest expense, driven largely from an increase in capitalized loan origination costs from increases in loan production, along with an increase in standard loan originations unit cost rates implemented in the second quarter.
Run rate core expenses now reflect the synergies of the Skagit acquisition, with the $1 million increase in second quarter personnel expense, a result of increased commission incentives and annual merit increases being partially offset by a decline in headcount.
Finally, we are excited about the AltaPacific acquisition and the positive impact it will have to our California presence. We anticipate closing the transaction in the fourth quarter and look forward to opening the AltaPacific team to the Banner family. Information about the transaction and AltaPacific Bank can be found on Banner's Investor Relations website.
This concludes my prepared remarks. Mark?
Thank you, Rick. Thank you, Peter. That concludes our prepared remarks this morning. And Shawn will now open the call and welcome your questions.
[Operator Instructions] Our first question comes from Jeff Rulis with D. A. Davidson. Please go ahead.
Thanks. Good morning guys.
Good morning, Jeff.
Mark, I was hoping to maybe just get some color on how the AltaPacific deal came about. I mean had you been actively seeking a deal in California/were they approaching you? And just kind of a little background, if you could?
Sure. As I've stated many times, the way we approach M&A activity is through negotiated transactions, and those take quite a bit of time to come to fruition. So conversations with banks such as AltaPacific have been occurring for several quarters, in some cases, several years, like with the case of Skagit.
So this has been over a period of time where we've had conversations with their executive management team and board about the potential for a combination. And it just so happened that the timing was right and it's a good opportunity for us to get additional density in a market we're already in.
Great. And maybe, Rick, just a follow-on on -- do you have updated like sort of pro forma CRE and construction concentration levels relative to capital, given the DOI -- not sizable, but maybe even predeal? Could you just remind us what those levels were?
Okay. Jeff, good morning. Our real estate concentration levels are just slightly below the regulatory guidelines that are set out, the 100% for AD&C and 300% for total CRE exposure. The bulk of the AltaPacific portfolio is real estate-centric, so it will add marginally to those concentration levels.
Okay. So, for both, just below that -- those guidelines on both metrics?
Yes.
Okay. Got you. And then, maybe just the last one on the mortgage banking outlook; last year, you actually had a stronger third quarter than the second quarter. I don't know if there was some pent-up demand for this year, rate timing. Any thoughts on the back half of the year in the mortgage book in the fee income side?
Yes. Jeff, it's Peter. Yes, we -- to your point, there was a bit of pent-up demand coming out of the first quarter. But as you recall, we had some unusually negative impact from weather in the first quarter in the residential mortgage space. And so there was some pent-up demand that flowed into the second quarter of this year.
I'd also characterized; our refinance volumes had increased in the second quarter. We were -- 23% of our volume was refinanced in the second quarter compared to 20% in the first quarter. So we got a bit of a tailwind as well from the lower 10-year treasury that helped with the overall production in the second quarter.
So I'd characterize, I wouldn't assume that we'd see a commensurate increase like we saw last year in the third quarter, but characterize our second quarter as robust. And as you recall, our best two quarters of the year are always the second and third quarter. But I wouldn't carry the increase in the second quarter as another indication of a further increase in the third quarter.
Okay, great. Thank you.
Thank you, Jeff.
Our next question comes from Gordon McGuire with Stephens. Please go ahead.
Good morning. Nice for taking the question.
Good morning, Gordon.
Maybe just moving over to the NIM with the market pricing and rate cut, I was wondering if you could update us or give some guidance on how we should think that trend over the next couple quarters if we get a few cuts.
Hi, Gordon, it's Peter. Yes. So we -- as we've discussed previously, our balance sheet is modestly asset-sensitive. And we -- if you think about a 25 basis point rate cut, our margin would decline in the mid-single digits, and that's a function of our loan portfolio. 30% of our loans are what we consider floating, and within that 30%, 20% of them are tied to prime and 10% to LIBOR.
So we've already seen some of the decline as LIBOR leads the expectations and Fed funds cuts. That's some of that is already reflected in our second quarter results. And then the 10-year is down substantially from where it was last year. So we've seen quite a bit of the impact of the decline in the long end of the curve already. So our expectation is a mid-single-digit type impact to margin in the following quarter, over 25-basis point cut.
Of course, given the benefit of time, we have the opportunity to help manage the impact to some of the downside on margin through levers we have on how we fund the company, both from a wholesale perspective as well as from the mix in the retail deposit base.
Got it. And then just in the service charges. I think in the release, you mentioned they were up due to interchange. Any updated guidance for Durbin?
Our guidance is -- has not changed with Durbin. So we anticipate a $7.5 million impact interchange income in the second half of this year. And then next year, including growth for additional accounts and transactions, we'd assume a $15.5 million impact for full year 2020.
Got it. And then, congratulations on the deal, but maybe any thoughts on additional M&A just given the relative size of AltaPacific; whether you'd be interested in adding another one in the near term?
Yes, Gordon. This is Mark. Look, I think we're always looking at ways in which we can increase our density in the current footprint. We're in some very attractive markets, and we want to continue to expand in those markets. We're going to stay focused on our organic growth strategy, but if we can augment the franchise, we'll certainly will ake advantage of that.
Okay. So this deal wouldn't prevent you from another one if you had the opportunity?
Not necessarily a very large transaction for the bank.
Yes. And then as far as preference between California, you're going to increase size there. Any thoughts on whether you're looking Northwest area or California? Any preference there?
Well, obviously, we just added in California. So, we now have $2 billion of our franchise is in California. What I would suggest is we actually like all of our markets and can use additional density in all of our footprint. I wouldn't look for us to expand outside of our footprint, though.
Got it. Thank you. That's all I had.
Thank you, Gordon.
Our next question comes from Matthew Clark with Piper Jaffray. Please go ahead.
Good morning.
Good morning, Matthew.
Peter, just wanted to hone in on deposit cost a little bit more with the Fed potentially cutting next week by 25 basis points. Just want to get your sense for the beta on deposit costs going lower.
Yes, Matthew. So, in terms of our expectation for deposit costs, so we were at 39 basis points in the second quarter. There's still a little bit of inertia left in terms of repricing our deposit book simply through the passage of time and the maturity of our CD book rolling over at somewhat higher rates as it matures at 6, 12 and 24-month tenors coming on at slightly higher rates. There's a bit of just carry inertia. We had some modest pricing adjustments on our interest-bearing book in the middle of the second quarter that I'll carry over in the full quarter of impact in the third quarter.
But all that being said, if we did see a decline of 25 basis points, I'd anticipate our deposit costs to be flat to potentially up a basis point just due to the fact that we have that carry impact of the inertia going into the third quarter, beyond the third quarter then, we begin to look at reductions and opportunities we have to calibrate our pricing relative to market conditions in the fourth quarter with some potential reductions at that point. But I would not characterize any meaningful decline in deposit costs going into the third quarter, even with the 25 basis point cut at the end of this month.
Okay, great. And then just on the multifamily gain-on-sale activity, can you just isolate the -- not much of it is in the release, but can you just isolate the multifamily loans sold and the related gain on sale? Just want to get a sense of that margin going forward and what you think as sort of sustainable?
Yes. We -- and as we've discussed in prior calls, we have adopted a fair value accounting methodology, the multifamily production. So we actually account for the revenue when the loans are produced, not when they're sold. And so we mark the loans based on where market conditions are in terms of where we can sell those loans typically in the following quarter. And on a net basis, after broker fees, regeneration expenses, hedging costs, we're marking those loans in the 90 basis point net gain on sale level, and that's where we anticipate selling within our books right now.
So the cash event of the sale really will have no impact on income a little bit up and down, but what we've recognized in terms of revenue in the second quarter was based on what they have produced. They did, as I mentioned earlier, had a very strong quarter of loan production. We reproduced $100 million in multifamily held-for-sale loan production in the second quarter, and that was up from about $25 million in the first quarter. So they've had a very strong quarter of production, and we have good receptivity to our products in the secondary market. So we expect to sell that production in an orderly fashion over the next quarter.
Okay, great. Thank you.
Thank you, Matthew.
Our next question will come from Tim O'Brien with Sandler O'Neill & Partners. Please go ahead.
Thanks. A question for Peter. The accretable yield or the fair value discount on acquired loans was $22.6 million at quarter end?
Yes.
How much of that could be affected by CECL?
It's a good question, Tim. So as -- I think as lots of us know, we've been -- we're working on our CECL model. But one of the implications of CECL from a purchase accounting perspective is that we will have to double count the non-impaired credit mark that we currently have on our books into the reserve beginning the first quarter of 2020. And so that's part of our overall CECL impact. And so there will be a double counting of the portion of that loan discount and the reserve related to the non-impaired acquired loans. We're not prepared to give guidance on what our CECL impact is at this juncture as we're working through the models. And the bigger impact is going to be the overall CECL model, not the impact of the purchased loans.
But the upside is that once we're under CECL, we'll accrete 100% of that non-impaired credit mark back into income. No longer will it be used for charge-offs. And so there'll be a little bit of a benefit in the form of a higher run rate of accretable yield post-CECL because all of the charge-offs on that non-impaired acquired portfolio will run against the reserve, not against the discount in the future. So we can return 100% of that discount into interest income in the future.
Do you have a sense, Peter, at this point, of when you guys might be able to share a little bit more quantitative detail on CECL impact here before year-end? Is that a possibility maybe when you report third quarter, something like that, results or something like that? Are you guys anticipating trying to do something like that? Or what are your thoughts? Are you going to wait till next year?
Well, we're not giving guidance on the quarter. We're going to disclose a range just yet. We'll certainly be -- by the end of the fourth quarter, we are working through the models, and we're running models in parallel with our FAS 5. And we're well down the road in terms of our CECL number, but we'll give guidance when we're ready to give guidance.
And then, shifting gears, I didn't capture necessarily color you gave about the uptick, the seasonal uptick in service charges this quarter that netted you guys with like $1.4 million additional relative to last quarter. Can you run that through that color? I haven't seen that before with you guys, that kind of a seasonal uptick in that line item before. And it was -- so it was -- it stood out. Could you talk a little bit more about that?
Sure. Yes, sure. It's -- and it's a good question. So we did see a meaningful increase in debit card interchange-related income from the first quarter to second quarter, and that was caused for three reasons. One, as you point out, we have a seasonal increase in transaction volume that we normally see, coupled with normal account growth and account acquisition that caused the increase. Two, we saw some revenue synergy benefit coming off of the Skagit conversion, where that -- where Skagit hadn't recognized the opportunity to collect all of the interchange income on its debit card portfolio that we're now recognizing post conversion under Banner.
And then three, we did have a nonrecurring income item in the second quarter, interchange income of about $400,000 related to the recapture of a contract negotiation with our debit card processor that we pull up into income in the second quarter. So I would characterize $400,000 of that second quarter result is nonrecurring, but the rest of it is recurring.
And I think you gave some indication in the press release about Skagit synergies and also what the impact of Durbin is going to be on that. Did you do that as well? Did you account for that Durbin on the Skagit piece?
Yes. Yes, we did. The $7.5 million I mentioned earlier does contemplate the inclusion of the Skagit portfolio and the growth that we see there. So we've gone through a completed audit of our impact recently with all the current debit card accounts and transactions. So that $7.5 million is a current update to the impact that we just made including the Skagit portfolio.
How much of the -- so was $1.6 million higher sequentially take out $400,000 for the one-time, so $1.2 million. How much of the increase in the quarter was tied to Skagit? Can you share that?
I don't have a precise number for you, Tim, but it's something less than $500,000. But it's -- it did have a meaningful impact.
Okay. All right. And then one last question. Your capital ratios were hardly dented from the share repurchase this quarter. Can you guys -- can you remind us, do you have authorization remaining under the previous program? What are your thoughts on additional -- I know that the stock is up nicely and -- but just curious what your prospect of potential additional repurchases might be.
So, we have a 5% authorization to repurchase shares. We -- and that translates into roughly 1.7 million shares. We've used $600,000 of that authorization, so we have plenty of additional ammunition to do further repurchases this year. But as we've said all along, we've been agnostic with the form of our capital deployments between M&A, share repurchases and special dividends. So far this year, we've done two out of three. So -- and last year, we did all three. So we're not guiding to the form of capital deployment, but we are going to continue to deploy the excess capital. And we continue to guide to a mid-9 TCE level over time.
And I'm going to throw one more question yet. Capitalized loan origination costs were obviously up quite a bit, and that benefited -- that helped you manage non-interest expense. Any color on that in terms of go-forward look? Was there any anomaly in that number, that $7.399 million?
Well, we -- if you look at our loan production numbers from Q1 to Q2, they were up 49%. And our capitalized loan origination expense was up 52%. So the vast majority of the increase in that line item was due to this large production quarter we had. A smaller amount of it was due to some rate adjustments we put through in the second quarter. So we increased, for certain loan products, the standard loan origination cost that goes against the capitalized loan origination calculation in the quarter. But the vast majority of the change was simply due to the loan production in the quarter.
Thanks Peter. Thank guys.
Thank you, Tim.
[Operator Instructions] Our next question comes from Luke Wooten with KBW. Please go ahead.
Hi, Good morning guys. Thank you for taking my questions.
Good morning Luke.
Just kind of housekeeping question related to the closing of the AltaPacific. Is that supposed to be mid-quarter? Or do you have a specific time on that, just for modeling purposes?
We haven't guided to anything more specific, Luke, in the fourth quarter. For modeling purposes, I would assume a mid-fourth quarter closing. It's also important -- the following question is when are we going to convert. We anticipate converting in the mid-first quarter of 2020. And so this looks very much like the time line from Skagit acquisition and conversion in terms of synergy we're closing and then synergy recognition.
Okay.
In terms of synergy timing, my expectation is we've recognized 25% of the guided synergies in the fourth quarter run rate and then achieve the rest of the synergies by the end of the first quarter. So we'd see the majority and almost entirely the synergies by the second quarter of 2020.
Okay. That's very helpful. And then just -- I know you mentioned earlier, on the Durbin impact. That $50 million should be increased only -- not in only by the ABNK, but I think it was $50,000 in the presentation. Is that correct on an annual basis?
Yes. That's correct. And the reason is they are a business-focused community bank, and so their level of debit card transaction activity is substantially lower on a proportionate basis than Banner's.
Okay. Thanks. And then just switching to the deposits, the roll-off in brokerage CDs is -- it was definitely welcome this quarter. Do you kind of see that maintaining at that level going forward and then kind of back filling it with core deposits? Or how do you see deposit growth kind of coming through the back half of this year, excluding the acquisition?
Well, we normally see a seasonal increase in our retail core deposits in the third quarter, and we anticipate that to come through this year as well, like it has in past years. That being said, we'll see a modest increase in brokerage CD balances in the third quarter. We did run them off in the second quarter as we managed our -- also our funding between FHLB borrowings and brokerage CDs. And we attempt to take advantage of the best tenor versus price trade-off that we can achieve between those two sources of wholesale funding.
And going into the third quarter, we'll see a bit of a shift back into brokerage CDs, although not large. It will be at a higher average balance than we had in the second quarter. But more importantly, we anticipate funding our loan growth with retail core deposits more than brokerage CDs or FHLB increases in the third quarter.
Okay. That's helpful. And then kind of just continuing on that, just a little bit more color, just in terms of what the rates on brokerage CDs versus FHLB borrowings, do you guys disclose that or would you be willing to disclose that, just kind of seeing how those impact the cost...?
And they're public out there. And the brokerage CDs for the tenors that we look at, which are typically in the six to 12-month range, are running right around 2%, 2.05%, in that range. And that is down actually substantially from about 2.50% from six to nine months ago. And FHLB borrowings around fairly close to that brokerage CD level, albeit, we get some activity, stock dividend that shows up in non-interest income over these FHLBs. We've got to take that into account. But the all-in cost between those two sources are within 5 to 10 basis points of each other, around that 200-basis point level.
Okay. That's helpful. And then lastly, just Mark, maybe a question for you, just kind of on -- so you guys are definitely building out the California presence and didn't know if there was other markets. I know it was brushed on briefly earlier. But looking at may be like the Idaho or the other markets that you're not -- you don't have a huge presence in, like the California, Oregon, Washington, would there be any kind of de novos in those markets or would -- maybe you look to do kind of more acquisition?
Well, Luke, it really depends on the pace of M&A. As you know, de novo operations have a longer-term payback than M&A acquisitions. So we'll evaluate both of those concepts. We may end up doing a little bit of both, quite frankly. But it will be all the markets, all the markets that we're currently in.
Okay. That's helpful. Thank you, guys for taking my questions.
Thank you, Luke.
This concludes our question-and-answer session. I would like to turn the conference back over to Mark Grescovich for any closing remarks.
Thank you, Shawn. As I stated, we're pleased with our solid second quarter 2019 performance and the challenging interest rate environment and see it as evidence they we're 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'd like to thank all my colleagues who are driving this solid performance for our company, and we look forward to reporting our results to you in the future. Thank you for your interest in Banner and joining us on the call today. Have a good day, everyone.
The conference has now concluded. Thank you for attending today's presentation. And you may now disconnect.