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Banner Corp (BANR) Q2 2019 Earnings Call Transcript

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Banner Corp (NASDAQ: BANR)
Q2 2019 Earnings Call
Jul. 25, 2019 , 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Banner Corporation's Second Quarter 2019 Conference Call and Webcast. [Operator Instructions]

I would now like to turn the conference over to Mr. Mark Grescovich, President and CEO. Please go ahead.

Mark J. Grescovich -- Chief Executive Officer, President

Thank you, Sean. 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 please read our forward-looking safe harbor statement?

Albert H. Marshall -- Senior Vice President and Secretary

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, 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.

Mark J. Grescovich -- Chief Executive Officer, President

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 to Banner. Our core operating performance continued to reflect the success of our proven client acquisition strategies, which are producing strong core revenue, and we are benefiting from the successful integration of our recent 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. Non-interest bearing deposits increased 9.7% from one year ago and represent a stable 39% of total deposits. Further, we continue to -- 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 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 non-performing 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 Banners' 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 1 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 are 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?

Richard B. Barton -- Executive Vice President and Chief Credit Officer

Thanks , 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% [Phonetic] of total loans. Delinquencies one year ago were 0.29%. The Company's level of adversely classified assets was stable during the quarter and remains well below historical norms.

Non-performing assets decreased $1 million to $21 million during the quarter and were 0.18% at total assets. This metric at 2/30/2018 was 0.16% . Non-performing assets were split between non-performing loans of $18 million and REO and other assets of $3 million. Non-performing loans are not concentrated in any single loan category, not reflected in these totals are the remaining non-performing loans of $6 million acquired from Siuslaw, American West and Skagit 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 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 link 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 1.22%, coverage of non-performing loans remain 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 new home sales in our markets. Investor, 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 that markets are now performing at or near historical norms. The more affordable housing segments are still undersupplied, 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?

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

Thank you, Rick and good morning, everybody. As discussed previously and as announced in our earnings release, we reported net income of $39.7 million or $1.14 per diluted share for the second quarter, compared to $33.3 million for $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 multi-family mortgage held for sale, loan production and increase in portfolio loan outstandings 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. Non-interest income increased $0.14 due to an increase in mortgage and multi-family gain on sale income, growth in deposit related fee income and a write down on a former bank building in the prior quarter. Non-interest 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 pre-tax 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 a $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 brokered CDs. FHLB borrowings increased by $188 million in the second quarter as a result of growth in the multi-family held for sale portfolio and reductions in brokered 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 two 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 long fee income, declined 1 basis points from the first quarter, due to declines in term labor 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 of 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 brokered CD balances.

Brokered CDs accounted for 4 basis points of total deposit costs, down from 7 basis points in the prior quarters. The composition of non-issue bearing deposits to total deposits remains steady at 39% percent 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 a lower level of this activity in the first quarter than 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 five year and 10 year treasury rates. Along with the typical seasonal increase in production, we normally experienced in the second quarter. Total income was down modestly in the second quarter, as a result of a debt benefit gain in the first quarter.

Miscellaneous fee income increased $900,000, primarily as a result of a branch building writedown in the first quarter. Non-interest expense declined by $3.3 million due to a $1.8 million decline in acquisition expenses. A $1.5 million decrease in core non-interest expense, driven largely from an increase in capitalized loan origination costs from increases in loan production, along with an increase in standard loan origination 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 welcoming 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?

Mark J. Grescovich -- Chief Executive Officer, President

Thank you, Rick. Thank you, Peter. That concludes our prepared remarks this morning. And Sean, we will now open the call and welcome your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Jeff Rulis with D. A. Davidson.

Jeffrey Rulis -- Managing Director, Senior Research Analyst

Thanks. Good morning, guys.

Mark J. Grescovich -- Chief Executive Officer, President

Morning, Jeff.

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

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?

Mark J. Grescovich -- Chief Executive Officer, President

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 same 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.

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

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 [Indecipherable] not sizable but maybe even predeal? Could you just remind us what those levels were?

Richard B. Barton -- Executive Vice President and Chief Credit Officer

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.

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

Okay. So for both. Just below that -- those guidelines on both metric.

Richard B. Barton -- Executive Vice President and Chief Credit Officer

Yes.

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

Okay, got you. And then maybe just the last one on -- 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 -- in the mortgage book, in the fee income side?

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

Yeah, hi, Jeff, it's Peter. Yeah we -- to your point, there was a bit of pent-up demand coming out of the first quarter. 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 this year. I'd also characterize, our refinance volume did increase 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 into 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.

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

Okay, great. Thank you.

Mark J. Grescovich -- Chief Executive Officer, President

Thank you, Jeff.

Operator

Our next question comes from Gordon McGuire with Stephens. Please go ahead.

Gordon McGuire -- Stephens -- Analyst

Good morning. Thanks for taking the question.

Mark J. Grescovich -- Chief Executive Officer, President

Good morning, Gordon.

Gordon McGuire -- Stephens -- Analyst

Maybe just moving over to the NIM with the market pricing and a rate cut. I was wondering, if you could update us or give us some guidance on how we should think that trends over the next couple of quarters if we get a few cuts.

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

Yeah, hi Gordon. It's Peter. Yeah, so we -- as we -- as we've discussed previously, our balance sheet is modestly asset sensitive. And, you know, 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 expectation and Fed funds cuts that some of that's already reflected in our second quarter results.

And then the tenure is down substantially from where it was last year. So we've seen quite a bit of the impact of the decline in the longer 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 of 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.

Gordon McGuire -- Stephens -- Analyst

Got it. And then just on the service charges, I think your release mentioned, they were up due to interchange. Any -- any updated guidance for Durbin?

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

Our guidances 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.

Gordon McGuire -- Stephens -- Analyst

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?

Mark J. Grescovich -- Chief Executive Officer, President

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 or 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're certainly would take advantage of that.

Gordon McGuire -- Stephens -- Analyst

Okay so this deal wouldn't prevent you from another one if you had the opportunity.

Mark J. Grescovich -- Chief Executive Officer, President

Not necessarily a very large transaction for the bank.

Gordon McGuire -- Stephens -- Analyst

Yeah. And then as far as preference between California, you've got an increased size there. Any thoughts on whether you're looking Northwest area or California? Any preference there?

Mark J. Grescovich -- Chief Executive Officer, President

Well, obviously, we just added in California, so we now have $2 billion -- 2 billion of our franchises 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

Gordon McGuire -- Stephens -- Analyst

Thank you. That's all I Hand.

Mark J. Grescovich -- Chief Executive Officer, President

Thank you, Gordon.

Operator

Our next question comes from Matthew Clark with Piper Jaffray. Please go ahead.

Matthew Clark -- Piper Jaffray -- Analyst

Hi good morning.

Mark J. Grescovich -- Chief Executive Officer, President

Good morning, Matthew.

Matthew Clark -- Piper Jaffray -- Analyst

Peter, I 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

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

Yeah. Matthew, so I -- in terms of our -- our expectation for deposit costs, so we -- 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 they mature either Six months, 12 months and 24 months tenors coming on at slightly higher rates.

There's a bit of just carry inertia. We did some modest pricing adjustments on our interest bearing book in the middle of the second quarter that will carry over in a 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 cost to be flat to potentially up 1 basis points just due to the fact that we'd have that carry impact of the inertia going into the -- 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 a 25 basis point cut at the end of this month.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, great. And then just on the multi-family gain on sale activity, can you just isolate the -- I am not sure if it's in the release but can you just isolate the -- the multifamily loan sold and the related gain on sale? Just want to get a sense for that margin going forward and what you think as sort of sustainable.

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

Yeah. We -- as we've discussed in prior calls, we've adopted a fair value accounting methodology to the multi-family 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, origination 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 what's on 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 produced. They did as I mentioned earlier, had a very strong quarter of loan production. We produced $100 million in multi-family 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 -- our product in the secondary market. So we expect to -- to sell that production in an orderly fashion over the next -- over the next quarter.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, great. Thank you.

Mark J. Grescovich -- Chief Executive Officer, President

Thank you, Matthew.

Operator

Our next question will come from Tim O'Brien with Sandler O'Neill & Partners. Please go ahead.

Tim O'Brien -- Sandler O'Neill & Partners -- Analyst

Thanks, A question for Peter. The accretable yield or the fair value discount on acquired loans was $22.6 million at quarter end?

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

Yes.

Tim O'Brien -- Sandler O'Neill & Partners -- Analyst

How much of that could be affected by CECL?

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

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 --of a portion of that loan discount in the reserve related to the nonimpaired required 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 a 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 nonimpaired acquired portfolio will run against the reserve, not against the discount in the future. So we can return a 100% of that discount into interest income in the future.

Tim O'Brien -- Sandler O'Neill & Partners -- Analyst

Do you have a sense, Peter, at this point or 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?

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

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 Fed's- 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.

Tim O'Brien -- Sandler O'Neill & Partners -- Analyst

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, what, like $1.4 million additional relative to last quarter. Could you run me 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?

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

Sure. Yeah, sure. And it a good question. So we did see a meaningful increase in debit card interchange related income from the first quarter to the second quarter. And that, there was cause 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 to 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 -- a non-recurring 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 booked into income in the second quarter. So I would characterize 400,000 of that second quarter result is non-recurring, but the rest of it is recurring.

Tim O'Brien -- Sandler O'Neill & Partners -- Analyst

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 sitting [Phonetic] on the Skagit piece?

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

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 complete 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 we anticipate including the Skagit portfolio.

Tim O'Brien -- Sandler O'Neill & Partners -- Analyst

How much of the -- so was $1.6 million higher sequentially take out $400,000 for that one-time, so $1.2 million. How much of the increase in the quarter was tied to Skagit? Can you share that?

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

I don't -- I don't have a precise number for you, Tim but it's -- it's -- something less than 500,000. But it's -- you know, it did have a meaningful impact.

Tim O'Brien -- Sandler O'Neill & Partners -- Analyst

Okay. All right. And then one last question. Your capital ratios were hardly dented from the share repurchases this quarter. Do you guys. Can you remind us -- do you have authorization remaining under the previous program? What are your thoughts on addition? I know that the stock is up nicely and. But just curious what your -- the prospect of potential additional repurchases might be.

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

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.

Tim O'Brien -- Sandler O'Neill & Partners -- Analyst

I am going to throw one more question at it. Capitalized loan origination costs were obviously up quite a bit and that benefited. That helped you manage no initiative expense. Any color on that in terms of go forward, look. Was there any anomaly in that number, the $7.399 million?

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

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 the 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 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.

Tim O'Brien -- Sandler O'Neill & Partners -- Analyst

Thanks, Peter. Thanks, guys.

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

Thank you, Tim.

Operator

[Operator Instruction] Our next question comes from Luke Wooten with KBW

Luke Wooten -- KBW -- Analyst

Hi. Good morning, guys. Thank you for taking my questions.

Mark J. Grescovich -- Chief Executive Officer, President

Good morning, Luke.

Luke Wooten -- KBW -- Analyst

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?

Mark J. Grescovich -- Chief Executive Officer, President

We haven't guided to anything more specific, Luke, in the fourth quarter. For modeling purposes, I would assume a mid-fourth quarter closing.

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

But it's also important to -- 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 the Skagit acquisition and conversion in terms of synergy WEP [Phonetic] closing and then synergy recognition. 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 the entirely the synergies by the second quarter of 2020.

Luke Wooten -- KBW -- Analyst

Okay. That's that's very helpful. Thanks. And then just I know you mentioned earlier on the Durbin impact that $50 million should be increased only nominally by the ABNK [Phonetic]. I think, it was 50,000 in the presentation. Is that correct? On an annual basis?

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

Yeah, that's correct. And the reason is they are a business focused community bank. And so their -- their level of debit card transaction activity is substantially lower on a proportionate basis than Banner's.

Luke Wooten -- KBW -- Analyst

Okay. Thanks. And then just switching to the deposits. The roll-off in brokered CD 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?

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

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 brokered CD balances in the third quarter. We did run them off in the second quarter as we manage our wholesale funding between FHLB borrowings and brokered 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 brokered 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 brokered CDs or FHLB increases in the third quarter

Luke Wooten -- KBW -- Analyst

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 brokered 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...

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

And they're public out there. And the brokered CDs for the tenors that we look at, which are typically in the six months to 12-month range, are running right around 2%, 2.05%, in that range. And that is down actually substantially, it's down from about 2.50% from six months to nine months ago. And FHLB borrowings around fairly close to that brokered CD level, albeit we get some activity, stock dividend that shows up in noninterest income over these FHLBs. You got to take that into account. But the all-in cost between those two sources are within five basis points to 10 basis points of each other, around that 200-basis point level.

Luke Wooten -- KBW -- Analyst

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?

Mark J. Grescovich -- Chief Executive Officer, President

Well, Luke, it really depends on the pace of M&A. As you know, de novo operations have a longer-term payback than an M&A acquisition. 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.

Luke Wooten -- KBW -- Analyst

Okay, that's -- that's helpful. Thank you guys for taking my questions.

Mark J. Grescovich -- Chief Executive Officer, President

Thank you, Luke.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mark Grescovich for any closing remarks.

Mark J. Grescovich -- Chief Executive Officer, President

Thank you, Sean.

As I stated, we're pleased with our solid second quarter 2019 performance in a challenging interest rate environment and see it as evidence they were 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.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Mark J. Grescovich -- Chief Executive Officer, President

Albert H. Marshall -- Senior Vice President and Secretary

Richard B. Barton -- Executive Vice President and Chief Credit Officer

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

Jeffrey Rulis -- Managing Director, Senior Research Analyst

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

Gordon McGuire -- Stephens -- Analyst

Matthew Clark -- Piper Jaffray -- Analyst

Tim O'Brien -- Sandler O'Neill & Partners -- Analyst

Luke Wooten -- KBW -- Analyst

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