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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and welcome to the Banner Corporation's Fourth Quarter 2017 Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Mark Grescovich, President and CEO. Please go ahead.
Thank you, Kate, and good morning everyone. I would also like to welcome you to the full-year and fourth quarter 2017 earnings call for Banner Corporation. As is customary, joining me on the call today is Rick Barton, our Chief Credit Officer; Lloyd Baker, our Chief Financial Officer of the Corporation; Peter Conner, our Chief Financial Officer of Banner Bank; and Albert Marshall, the Secretary of the Corporation.
Albert, would you 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. 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 a recently filed Form 10-Q for the quarter ended September 30, 2017. 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 loss to common shareholders of $13.5 million, or $0.41 per diluted share for the quarter ended December 31, 2017. This compared to a net profit to common shareholders of $0.76 per share for the third quarter of 2017 and $0.69 per share in the fourth quarter of 2016.
Results for quarter just ended were impacted by the write-down of deferred tax assets following the passage of the Tax Cuts and Jobs Act on December 22, 2017. Results were also significantly impacted by the sale of our Utah operations, and a net loss on the sale of securities in connection with our balance sheet restructuring designed to postpone the adverse impact of the Durbin amendment on debit card interchange fees.
For the full-year-ended December 31, 2017, Banner Corporation reported net income available to common shareholders of $60.8 million compared to $85.4 million for the full-year 2016. Excluding the impact of items just described in the fourth quarter, merger and acquisition expenses, gains and losses on the sale of securities and changes in fair value of financial instruments, earnings from core operations increased 5% to $98.7 million in 2017 from $94 million in 2016.
Due to the hard work of our employees throughout the company, we are successfully executing on our strategies and priorities to deliver sustainable profitability and revenue growth to Banner.
Aside from the one-time items, our core operating performance remains solid and continue to reflect the success of our proven client acquisition strategies, which are producing strong core revenue and a record pre-tax earnings for the year, and we are benefiting from the successful integration of our recent acquisitions, which have had a dramatic impact on the scale and reach of the company, and are providing a great opportunity for revenue growth.
Our core full-year 2017 performance clearly demonstrates that our strategic plan is effective and we continue building shareholder value. Our full-year 2017 core revenue reached a record $479 million and increased 4% compared to the full-year of 2016. We benefited from a larger and improved earning asset mix, a net interest margin that remained above 4% and very good deposit fee income.
Overall, this resulted in a core earnings return on average assets of 0.97% for the year. Once again, our performance this quarter and for the full-year reflects continued execution on our super community bank strategy, that is, growing new client relationships, improving our core funding position by growing core deposits, and promoting client loyalty and advocacy through our responsive service model, while augmenting our growth with opportunistic acquisitions. To that point, despite our fourth quarter balance sheet restructuring to stay below $10 billion, our core deposits increased 2% compared to December 31, 2016, and our non-interest bearing deposits increased 4% from one year ago, and now represent 40% of total deposits.
Further, we continued our strong organic generation of new client relationships. Our organic net client growth in these product categories is now 92% since December 31, 2009. Reflective of the solid performance, coupled with our strong tangible common equity ratio of 10.61%, we issued a core dividend in the quarter of $0.25 per share and repurchased 520,000 shares of common stock.
In a few moments, Lloyd Baker and 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 reflects our moderate credit risk profile.
At the end of the quarter, our ratio of allowance for loan and lease losses to total loans was 1.17%, and our total non-performing assets totalled just 0.28%. 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 seven years, we continued to invest in our franchise. We have added talented commercial and retail banking personnel to our company, and we have invested in further developing, integrating our bankers into Banner's proven credit and sales culture. We also have made and are continuing to make significant investments in our risk management and IT infrastructure, 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 have noted before, we have received marketplace recognition of our progress in our value proposition as J.D. Power and Associates ranked Banner the number one bank in the Northwest for client satisfaction. That's the third 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 second consecutive year, and Bankrate.com named Banner Bank the Best Regional Bank in America. Also, Banner ranked 35 out of 100 in the Forbes 2018's Best Banks in America.
I'll now turn the call over to Rick Barton to discuss the trends in our loan portfolio. Rick?
Thanks, Mark. At year-end 2017, the credit landscape at Banner mirrors the steady story of the recent past, stable and well-positioned. My remarks this morning will be brief and concentrate on the stable nature of the company's credit metrics and the loan portfolio's moderate risk profile. Before commenting on some of our credit metrics, I again will make my usual statement that Banner's metrics are not likely to improve further as we move toward the next credit cycle.
Delinquent loans increased 21 basis points from the linked quarter to 0.66% of total loans. A change in the delinquent loans of this magnitude should not be unexpected when total delinquent loans are at their current low level. A year ago, delinquencies were 0.41%.
The company's level of classified assets remained low, decreasing 5% during the fourth quarter. Non-performing assets also decreased two basis points during the quarter to 0.28% of total assets. At December 31, 2016 non-performing assets were 0.35%. Non- performing assets were split between non-performing loans of $27 million and OREO of a mere $360,000. Not reflected in these totals are the remaining non-performing loans of $6 million acquired from Siuslaw and AmericanWest Banks, which are not reportable under purchase accounting rules. If we were to include the acquired non-performing loans in our non-performing asset totals, the ratio of non-performing assets to total assets would still be a modest 36 basis points.
Performing troubled debt restructures did increase by $3.4 million during the quarter as a previously restructured loan was reclassified into this category. Net charge-offs for the quarters were $2.1 million, and for all of 2017 were $5 million or 0.065% of average loans. After a fourth quarter provision of $2 million and net loan losses of $2.1 million, the allowance for loan and lease losses for the company now totals $89 million, and is 1.17% of total loans compared to 1.15% for both the linked quarter and December 31, 2016. The remaining net accounting mark against acquired loans is $21 million, which provides an additional level of production against loan losses.
Now, for a brief discussion of loan growth, discussing fourth quarter loan growth is complicated by the sale of the Utah franchise that included loans of $255 million. Without adjusting for the sale, the portfolio shrank by a $175 million. After adjusting for the sale, loan growth in the fourth quarter was $75 million or 4% on an annualized basis. After making the same adjustment for the full-year, loans grew by $395 million or 5.5%. For all of 2017, growth was spread across the portfolio with the most significant increases recorded in the C&I loan portfolio, a $167 million, the multifamily portfolio, $97 million, and the residential construction portfolio, $40 million. Modest decreases did occur in agricultural and land development portfolios.
It is also important to note that loan growth occurred throughout our remaining footprint. We continue to see excellent lease up activity on our multifamily construction loans with these loans paying off in a timely manner. It should be noted, however, that we are observing moderation in the growth of multifamily rents. The markets in which we make residential construction loans are either undersupplied, or imbalance resulting in timely absorption and managing both levels of completed inventory. As I said at offset of my remarks, it was a stable year, a stable year for credit at Banner, which further solidified the moderate risk profile of our loan portfolios and positions us well for the future.
With that, I'll turn the stage over to Lloyd for his comments.
Thank you, Rick, and good morning everyone. As outlined in our earnings release, Banner Corporation's fourth quarter results were significantly impacted by the write-down of our deferred tax assets. The sale of the seven Utah branches and the balance sheet restructuring that we engineered to position the company year-end assets below $10 billion in order to postpone the adverse effects of the Durbin Amendment for another year.
I will leave much of the detail related to those actions for Peter to discuss; however, I do want to reiterate what we have stated in the earnings release that our core operations remain solid during the quarter and for all of 2017, with strong net interest income and other revenues contributing to record pre-tax earnings for the year. Banner's fourth quarter and full-year 2017 operating results continued to reflect the increased scale of the company, and consistent revenue trends as a result of effective execution on our strategic initiatives, as well as meaningfully increased regulatory and risk management infrastructure costs as we plan for growth beyond the $10 million total asset benchmark.
Despite strong pre-tax earnings for the fourth quarter, Banner reported an after-tax net loss of $13.5 million or $0.41 per diluted share. As previously announced, this loss included $42.6 million of additional tax expense related to the write-down of our net deferred tax assets, following the recently-enacted changes to Federal tax laws. This DTA write-down was also reflected in our full-year 2017 net income, which declined a $60.8 million or $1.84 per diluted share, compared to $85.4 million or $2.52 per diluted share for 2016. However, as Mark has noted, excluding this unusual tax expenses as well as the gain on the sale of the Utah branches, securities gains and losses, changes in the value -- financial instruments carried at fair value and last year's acquisition-related costs, our 2017 earnings from core operations increased to $98.7 million or $2.99 per diluted share compared to $94 million or $2.78 per diluted share in 2016; a 7% in this core earnings per share.
A reconciliation of these earnings from core operations and non-GAAP financial information which we believe is more indicative the trends in Banner's operation is included in our press release and I strongly encourage you to review it. Our financial performance in the quarter again was driven by a strong net interest income and deposit fee generation reflecting additional client acquisition and a continued positive operating environment which supported loan growth and solid asset quality. Including the $12.2 million gain on the sale of Utah branches total revenues for the quarter were a $128 million, a 10% increase compared to the fourth quarter of 2016.
More importantly, despite the sale of the Utah branches and the related loans and deposits, our revenues from core operations for the current quarter, which excludes debt gains as well as gains in lots on the sales securities and changes in the value of financial instruments carried at fair value were a $119.3 million a 2% increase compared to the fourth quarter of 2016. And increase to $479.3 million for the year-ended December 31, 2017 a 4% increase compared to the same 12 month period a year earlier. This growth in core revenue generation continues to reflect the successful of our super community bank business model and the increasing value of the Banner franchise.
Banner's fourth quarter net interest income before provision for loan losses was again solid increasing 1% compared to a year ago despite the Utah branch sale that closed the first week of October. Similarly, our net interest income for the full-year-ended December 2017 was 5% greater than the same period a year earlier, again despite the sale of the branches that significantly reduced fourth quarter earning assets.
While our reported net interest margin decreased to 4.18% for the quarter ended December 31, 2017 compared to 4.22% for the quarter ended -- the previous preceding quarter as a result of decreased acquired loan discount accretion. Our contractual margin remained strong excluding the impact of acquisition accounting our contractual net interest margin for the fourth quarter was 4.13% compared to 4.12% the preceding quarter and 4.13% a year ago.
For all of 2017, our reported net interest margin was 4.24% compared to 4.20% for the year-ended December 31, 2016 and excluding the acquired loan discount accretion our 2017 contractual net interest margins expanded a 4.14% compared to 4.04% for the same 12 month period a year earlier.
Again, this quarter excluding the acquisition discounts, contractual loan yields and the net interest margin benefited from increased market interest rates while deposit pricing remained generally unchanged. Deposit fees and service charges were steady and in line with our seasonal expectation at $13 million in the fourth quarter of 2017, compared to a $13.3 million in the preceding quarter and increased 7% compared to $12.2 million in the fourth quarter a year ago.
For the full-year 2017, deposit fees and service charges increased by 5% to $51.8 million a direct result of growth in core deposit accounts and related transaction activity. Fourth quarter mortgage banking revenues increased modestly compared to the immediately preceding quarter and were nearly unchanged from the fourth quarter of 2016. However, for the full-year 2017 mortgage banking revenues declined by 18% as the increasing interest rates and other market conditions were clearly less favorable than in the previous year.
Total non-interest operating expenses increased to $84.7 million in the fourth quarter compared to 82.6 million in the preceding quarter and 79.8 million in the fourth quarter of '16 as we continued to invest in the necessary infrastructure to support the expanded scale of the company and incurred increased compliance and regulatory cost associated with a $10 billion total asset threshold.
This investment is even more visible looking at 2017 full-year operating expenses which increased 5% to $227 million compared to 2016's adjusted expenses of $311 million, excluding the acquisition related cost. Looking forward, curtailing this operating expense growth to a level better aligned with revenue growth is an important priority for Banner entering 2018. Finally, I believe it's worth noting that our capital remains very strong although our tangible equity was reduced during the quarter by the impact of the DTA write down and by the repurchase of $30 million of common stock.
This concludes my prepared remarks. In summary, despite a number of unusual items during the fourth quarter, Banner Corporation had very solid performance in the quarter and for all of 2017 that continues to reflect the hard work of our many dedicated and skilled associates. As always, I will look forward to your questions. But, first Peter will add some more color on the quarter. Peter?
Good morning. Thank you, Lloyd. As Mark and Lloyd noted, there were a number of events that made for unusually noisy quarter. In order to fully understand our core operating results, a careful explanation of the impact of the sale of the Utah operation, de-leveraging of the balance sheet, and impact of tax legislation is necessary. As discussed previously, we announced in our earnings release -- as we announced in our early release, we reported a loss of $0.41 per share for the fourth quarter.
The $1.17 per share decrease from the prior quarter was due to the following items. Net interest income decreased $0.03 due to an increase in average loan outstandings as a result of the sale of the Utah operations and a decline in the loan discount accretion on acquired loans. Non-interest income increased $0.30 due to the gain on the sale of Utah operations, partially offset by the loss of security sold as part of the balance sheet de-leveraging strategy to remain below 10 billion at year-end.
Non-interest expense increased $0.09, as a result of increased professional services and marketing expense. Partially offset by an increase in gains on sales of OREO. They are accounted for as a credit to expense. Income tax expense increased $1.35 in the current quarter due to the write down of company's deferred tax assets as a result of the passage of the tax legislation. I will now turn to the balance sheet.
Ending assets declined 670 million from the end of the third to 9.8 billion at the end of the fourth quarter as a result of the sale of Utah operation and the sale of investment securities undertaken to remain below 10 billion at year-end. Investment portfolio including interest bearing deposits declined to 1.3 billion at quarter end, reflecting the sale of 470 million in securities.
Total loans decreased 207 million from the prior quarter end as a result of the sale of Utah operations along with a decline in held for sale multi-family loans as a result of a bulk sale completed at the end of December. Excluding the impact of the sale of the Utah loan portfolio, loans held for portfolio increased by 75 million or 4% in the link quarter and 395 million or 5.5% year-over-year.
Core deposits declined 222 million or 3% compared to the prior quarter as a result of the sale of Utah operations and transfer of certain client deposits to off balance sheet alternatives as part of our de-leveraging strategy. Excluding the impact of the sale of Utah operation, core deposits declined 80 million or 1%, principally due to transfer of client deposits to off balance sheet alternatives.
On an annual basis, core deposits grew 140 million or 2% from the prior year quarter end. Excluding the sale of Utah operations, core deposits grew 274 million of 4% from the prior year quarter-end. Time deposits declined $134 million in the fourth quarter due to continue runoff of the retail time deposit portfolio, maturity of brokered CDs, and the sale of the Utah operation. Total cost of deposits was 15 basis points flat to the prior quarter.
Net interest income declined by $1.9 million from the prior quarter due to the sale of the Utah operation and de-leveraging of the balance sheet at year-end. The actions taken to de-leverage the balance sheet, principally the sale of investment securities and pay down of wholesales borrowing accounted for approximately $400,000 of the net interest income decline in the fourth quarter. Loan yields declined six basis points to 4.82% in the fourth quarter due to lower discount accretion on acquired loans in the current quarter. Accretion accounted for six basis points of the loan yield in the fourth quarter compared to 12 basis points in the previous quarter. The contractual loan yield excluding accretion increased one basis point in the fourth quarter, to 4.76%. The net interest margin decreased four basis points to 4.18%.
The effects of purchase accounting, including both loan accretion and time deposit premium amortization accounted for five basis points of the net interest margin in the fourth quarter, compared to 10 basis points in the previous quarter. The contractual margin excluding the effects of purchase accounting increased one basis point in the fourth quarter. Core non-interest income excluding gains and losses on security sales, fair value adjustments on securities and debt instruments carried at fair value increased $450,000 from the prior quarter primarily as the result of a modest increase in multifamily gain on sale income. Excluding the impact of deposit fees generated by the Utah operation, core non-interest income increased $700,000 over the prior quarter. Other fee income categories were generally in line with the prior quarter.
Non-interest expenses increased by $2.1 million in the fourth quarter from the previous quarter. Professional services expense increased $2 million due to a combination of outside consulting engagements focused on completing the build out of the bank's risk management-related infrastructure, as well as normal seasonal increases in outside audit expense associated with year-end. Advertising and marketing expense increased $1.3 million as a result of media promotion campaigns and increases in direct mail marketing that normally increase this time of year. Real estate operations expense decreased $1.2 million due to gains on sale of OREO completed in the fourth quarter.
This concludes my prepared remarks. Mark?
Thank you Rick, Lloyd, and Peter for your comments. That concludes our prepared remarks. And Kate, we will now open the call and welcome your questions.
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jeff Rulis of D.A. Davidson. Please go ahead.
Maybe a question for Lloyd, following up on the expense line, I guess given the branch sale and the expense run rate, is there anything, I guess if we roll forward into Q1 kind of that run rate that's delayed or that we should see a reduction at all in some of the costs that -- on that front?
Well, we should see a reduction, yes. There obviously will be a little better impact from the branch sale. But perhaps more importantly, Jeff, is, as Peter pointed out, we did have very high professional service fees in the quarter. And we would expect some diminishment there, although the larger impact there will be probably in the second, third, and fourth quarter next of year. The one cautionary note of course is that, as Peter noted, we did have a significant gain on OREO sales in the quarter, which flows through as a credit to the expense line. And then finally, marketing was probably higher than our normal run rate during the quarter.
So on balance, we should see a little reduction, probably a more significant impact in subsequent quarters. However, as the infrastructure build is still going to impact the first quarter somewhat.
Okay. And on a related front, I guess, how do you guys -- how would you approach sort of DFAST costs or compliance costs, given I think you were kind of to the end of that and then depending on whatever regulatory world shapes up, is there -- at this point, it's kind of just a core expense rate and anything additional, how should we look at maybe additional or lower compliance costs, if you think about it that way.
This is Peter. So in regards to your question on DFAST, so I think it’s important in that so well we stayed under 10 billion in total assets at year end. It didn't change our timing on becoming a DFAST filer. In 2019, since that is triggered on a different basis of four quarter moving average, asset over 10 billion. So we don't expect that meaningful increase in DFAST related costs. We've already built in much of that infrastructure in 2017.
I think as Lloyd pointed out, where we'll see some reductions is in the professional services lines related to the risk management related work around compliance BSA and related activities in terms of the build out of the infrastructure there that will decline meaningfully in the second half of 2018. And we're not changing our guidance relative to the run rate cost of the infrastructure build out being approximately $5 million a year. That will be there going forward. That number has not changed. It’s really the temporary nature of some of the work an outside consultant expense that generated some of the increases that we saw this year that will begin to reduce in the first half, actually in the first quarter and the second quarter of 2018.
So Peter, if I get you right then, the 5 million should be in the run rate and I guess, again, if you trigger the 10 billion mark of a different definition I guess, but there's no revamp in expenses as you approach kind of -- as we go forward, I suppose in that number?
That's right, Jeff. Yeah. Exactly.
And then one last one on just the margin, maybe for Lloyd, just any margin -- delayed margin benefit from the balance sheet restructuring that's anticipated?
We're hopeful there are some there Jeff. I'm always pretty cautious about the margin. I’m pretty proud of how well our margin is held up over an extended period of time, but as you know, the interest rate increase in the fourth quarter was mid December. So that will have a positive impact on the margin going forward and while we didn't do this intentionally with respect to the margin, the sale of the securities occurred in first half of December and interest rates have continued to trend up a little bit there. And so as we re-leverage the balance sheet, we’ll benefit from some higher rates on the securities portfolio. Now, that will change the mix back to have a little bit more security. So there's some offset there, but we're optimistic that the margin will hold in there and probably be just a little bit stronger going forward.
It seems like that redeployment in the securities happened last year as well in early ’17?
It did. I'd like to tell you we’re that smart, but we were really just lucky in terms of how interest rates moved each time we decided to do the restructuring transaction in standard 10 billion. I think the other aspect though it's important to note on that we benefited from as well was the change in the tax law. So the $2.3 million loss that we incurred in ’17 was subject to the 35% marginal tax rate. Going forward, the improved interest income will be subject to the 21% marginal tax rate. So again, we didn't know obviously like everything, but yes, we didn't know for sure that tax legislation would be signed when we made the decision to move back under 10 billion. But timing sometimes, it’s better to be lucky than good.
You guys are being modest. All in the master plan.
Thank you. The next question is from Jackie Bohlen of KBW.
Just looking at the balance sheet from a strategic perspective, if you could just provide an update on how you're thinking of growth for the entire year, inclusive of the re-leveraging and then growth that you might see in the latter half? And how much, if you were to find yourself in a similar position in November, December of 2018, how much wiggle room you might have to be able to do what was done in the past two years again? And if that's something you would look to pursue at that time.
This is Peter. I'll address the balance sheet look. As you might expect in the first quarter, we’re in the process of re-levering the balance sheet through the purchase of securities and it will take through the end of March to complete that re-leveraging activity, so the net effect of that will be a lower average investment portfolio balance in the first quarter, relative to the fourth quarter. That will have the effect of having, as Lloyd pointed out, some improvement on the reported net interest margin.
However, the aggregate amount of net interest income generated for the first quarter is going to be very similar to the fourth quarter, because even though the rate is high, we’re going to have a somewhat lower earning asset balance in the first quarter. Outside of the investment portfolio, we continue to look for mid to high single digit loan growth throughout 2018 and commensurate growth in our core deposit base.
And so when you take that into account, we do not anticipate being in another position at the end of ’18 to deliver once again below $10 billion. That was really a function of the sale of the Utah operation that gave us the opportunity to do it this year, but we don't foresee that type of event occurring again in 2018.
And with regards to the advertising expenses, there is some seasonality over the last couple of fourth quarters, the trend in expenses is not the exact amount in 2017, is that a good way to look at modeling that expense going forward?
Yeah. As we saw, we incurred $8.7 million in marketing expense for the full year of ’17 and that's a reasonably good number to look at as far as expectations go in 2018. With the seasonality that you pointed out, reflect the quarter to quarter.
The next question is from Matthew Clark of Piper Jaffray.
On share repurchase, can we assume that that activity will continue, depending upon where your stock trades obviously, but should we start to maybe build in some repurchase activity each and every quarter.
It’s Lloyd. As part of our capital management that does come into play, the timing this past quarter was somewhat linked with the de-leveraging as well, but we do have authorization and we look at that on a continual basis as one of the tools that we might use to manage capital. So I can’t promise you that it's going to continue, but the auction is always on the table.
This is Mark. We still have a remaining roughly 1 million shares that we can repurchase under the current authorization.
And then just on the expense run rate discussion with all the puts and takes, it seems like a little bit of relief in the first quarter and then maybe the run rate moves down a little more in the second, third and fourth. Is that the right way of thinking about it or did I misinterpret that discussion?
Matthew, this is Peter. That's the fair characterization. The offsetting effects are – we’ll see some reductions in professional services going into the first and more meaningfully in the second quarter, obviously offset with just normal costs of growing the business in terms of personnel expense. And other just ongoing support costs for the company. But I think you’ve characterized it correctly.
This is Lloyd. I was just going to say, we're trying to figure out how Rick's going to get another $2 million worth of again on REO sales with $360,000 balance in REO. That’s challenging.
Impressive. And then on the discount accretion, it came down quite a bit. I think it’s about $1 million. I mean, should we be kind of forecasting that to come down off 1 million or was that – there was something unusual there that depressed it this quarter.
This is Peter, Matt. First of all, it's always going to be lumpy and challenging to predict in a quarter to quarter. On balance, for the year, the fourth quarter was lower due to the fact that we had very low free payment activity in the acquired loan portfolios in the fourth quarter. So I won't characterize -- guarantee that it's going to go up, but I would say that the fourth quarter was unusually low, but over time, that rate of discount accretion continues to decline as we run through our acquired loans and the acquired loan discount. So again, I’d characterize it as lumpy and continuing to decline on an annualized basis from what we saw in 2017 going into 2018.
And then just last one for me, on the adjusted reserve ratio, it was unchanged I think this quarter at 1.45% with the $21 million credit mark. And I think you guys have talked about that feeling comfortable with that ratio, getting down to maybe 1.40%. I guess, what are your updated thoughts on that coverage ratio and where they kind of settle out in this environment?
Matthew, this is Rick. I think you summarized our position very well. We're still comfortable with what we've said in the past. And unless there are some follow-on questions, I think that you stated it very well.
[Operator Instructions] The next question comes from Tim O’Brien of Sandler O’Neill.
So just another way to approach that professional services expense line, ’16 costs were a little over 8 million, ’17 costs were 17.5 million, how much of the 5 million that you referred to from the compliance side is reflected in that number and what is the -- the 17 million, how much comes out of that approximately do you budget for the full year ’18?
Tim, this is Peter. So, a large percentage of the 17 million was related to the development of the risk management infrastructure in 2017. So as we wind down that investment in bringing up our risk infrastructure to what’s appropriate for a $10 billion plus bank, you'll see that number come down. In terms of a percentage, I don't have a specific percentage to give you, but you can think of 30% to 40% of that number in 2017 was related to those projects and a good portion of that will begin to go away in 2018 once we reach the second and third quarters of 2018.
So maybe a different tact, so was -- can you identify or distinguish a percentage of that 17.5 million that was non-recurring. Maybe that’s a different way you can -- we can get at this. Is there a chunk of that that just flat out comes out that's not going to recur that’s identifiable?
Yes. There is, Tim. But we're not in a position to give you specific numbers or guidance about exactly what that is, but there is a significant amount of that 17 million in 2017 that will come out in 2018. Again, as I said earlier, 30 plus percent of it in 2017 was related to the build out of the infrastructure, so you can think about that number as a potential opportunity for reduction.
Okay. And then one thing that I want to make sure I got was the foregone service charges from the Utah operation, was that fully baked in to the fourth quarter dip in that number, in that revenue number, in that fee income number, the 13 million.
The Utah generated about 250,000 in fee income per quarter. Nearly all of that was out of the fourth quarter, we closed on October 6. So we did have a few days of Utah in the fourth quarter, but by and large, that $250,000 contribution from Utah was absent in the fourth quarter.
So barring seasonality and normal growth you'd expect in target the strategic growth, that's a good baseline number to work, that’s a good core number to work off of. Is that fair?
Yes.
All right. And then -- I guess that's it for me. Thanks for answering my questions.
That's a good core run rate now that we’re below 10 billion again.
There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mark Grescovich for closing remarks.
Thank you, Kate. As I stated, we’re pleased with our solid 2017 core performance and see it as evidence that we are making substantial and sustainable progress on our disciplined strategic plan to build shareholder value by executing on our super community bank model, by growing market share, strengthening our deposit franchise, improving our core operating performance, maintaining a moderate risk profile and prudently deploying excess capital. I would like to thank all my colleagues who are driving the solid performance for our company. Thank you for your interest in Banner and for joining our call today. We look forward to reporting our results to you again in the future. Have a good day, everyone.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.