Banner Corp
NASDAQ:BANR
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Banner Corp
Earnings Call Analysis
Q2-2024 Analysis
Banner Corp
In Q2 of 2024, Banner Corporation demonstrated solid financial results, reporting a net profit of $39.8 million, or $1.15 per diluted share. This represents an increase from $1.09 per share in the prior quarter. The increase in earnings was influenced by improved loan growth and a decreased loss from the prior quarter's securities sale. The core earnings, which exclude volatile items like security gains or losses, were pegged at $52.4 million, maintaining overall operational revenue around $150 million similar to Q1.
The banking sector faced heightened funding costs due to the rapid increase in interest rates throughout 2023. This context has been pushing Banner to adjust our strategies to mitigate risks, including a higher provision for credit losses this quarter, reflective of ongoing solid loan growth. Despite these adversities, the company aims to maintain a moderate risk profile and sustain its operations effectively.
Total loan balances increased by $279 million, reflecting a strategic focus on various sectors, such as multifamily construction and small businesses. However, total deposits decreased by $80 million due to normal seasonal outflows, primarily influenced by clients' tax payments. Nevertheless, core deposits accounted for 88% of total deposits, underscoring Banner's strong, loyal customer base.
Banner's credit metrics appear to remain robust with delinquency rates at 0.29%, reflecting an improvement from the previous quarter. However, classified loans saw a slight uptick to 1.09% of total loans. The reserve for credit losses is well-positioned, covering 1.37% of the loan portfolio, providing a security net against potential defaults.
Banner Corporation is committed to leveraging its community-focused strategy to enhance client relationships and foster organic growth. The bank is also evaluating potential M&A opportunities that align with its operational goals and geographic focus, characterized as targets within $1 billion to $3 billion in assets. Current market conditions and valuations present a viable landscape for future growth through strategic partnerships.
Management provided guidance indicating that loan growth is projected to remain in the low to mid-single digits for the year. Non-interest income is expected to show positive trends as economic activities stabilize, and the company remains optimistic about future profitability despite the potential challenges posed by the overarching economic landscape and interest rate fluctuations. Additionally, the company has announced a core dividend of $0.48 per share, highlighting its commitment to returning value to shareholders.
Total non-interest expenses increased by $487,000, influenced by inflationary pressures and legal costs normalization. The bank expects ongoing expenses to trend upward, potentially exceeding previously guided growth rates of around 3% for the year. However, investments in technology and efficiency measures are anticipated to stabilize operational costs in the longer term, supporting sustainable growth.
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Hello, and welcome to Banner Corporation's Second Quarter 2024 Conference Call and Webcast. My name is Lydia, and I will be your operator today. [Operator Instructions] I'll now hand you over to your host, Mark Grescovich, to begin. Please go ahead.
Thank you, Lydia, and good morning, everyone. I would also like to welcome you to the Second Quarter 2024 Earnings Call for Banner Corporation. Joining me on the call today is Rob Butterfield, Banner Corporation's Chief Financial Officer; Jill Rice, our Chief Credit Officer; and Rich Arnold, our Head of Investor Relations.
Rich, would you please read our forward-looking safe harbor statement?
Sure, Mark. Good morning.
Our presentation today discusses Banner's business outlook and will include forward-looking statements. Those statements include descriptions of management's plans, objectives or goals for future operations, products or services, forecast of financial or other performance measures and statements about Banner's general outlook for economic and other conditions. We also may make other forward-looking statements in the question-and-answer period following management's discussion. These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ are available in the earnings press release that was released yesterday and a recently filed Form 10-Q for the quarter ended March 31, 24. Forward-looking statements are effective only as of the date they are made and Banner assumes no obligation to update information concerning its expectations.
Mark?
Thank you, Rich.
As is customary, today, we will cover 4 primary items with you. First, I will provide you high-level comments on Banner's second quarter 2024 performance; second, the actions Banner continues to take to support all of our stakeholders, including our Banner team, our clients, our communities and our shareholders; third, Jill Rice will provide comments on the status of our loan portfolio. And finally, Rob Butterfield will provide more detail on our operating performance for the quarter as well as comments on our balance sheet.
Before I get started, I want to again thank all of my 2,000 colleagues in our company who are working extremely hard to assist our clients and communities. Banner has lived our core values, summed up as doing the right thing for the past 133 years. Our overarching goal continues to be to do the right thing for our clients, our communities, our colleagues, our company and our shareholders and to provide a consistent and reliable source of commerce and capital through all economic cycles and change events. I am pleased to report again to you that is exactly what we continue to do. I am very proud of the entire Banner team that are living our core values.
Now let me turn to an overview of our performance. As announced, Banner Corporation reported a net profit available to common shareholders of $39.8 million or $1.15 per diluted share for the quarter ended June 30, 2024. This compares to a net profit to common shareholders of $1.09 per share for the first quarter of 2024. Earnings continue to be impacted by the rapid increase in interest rates in 2023, resulting in increased funding costs. This quarter, the earnings comparison is primarily impacted by the prior quarter security losses and the current quarter having a higher provision for credit losses due to solid loan growth. Our strategy to maintain a moderate risk profile and the investments we have made and continue to make to improve operating performance have positioned the company well to weather recent market headwinds. Rob will discuss these items in more detail shortly.
To illustrate the core earnings power of Banner, I would direct your attention to pretax pre-provision earnings, excluding gains and losses on the sale of securities and changes in fair value of financial instruments. Our second quarter 2024 core earnings were $52.4 million. Banner's first quarter 2024 revenue from core operations was approximately $150 million, the same as the first quarter of 2024. We continue to have a strong core deposit base that has proved to be resilient and loyal to Banner in the wake of a highly competitive environment and a very good net interest margin. Overall, this resulted in a core return on average assets of 1.02% for the second quarter of 2024.
Although we are in a very difficult operating environment for commercial banks, our core performance reflects continued execution on our super community bank strategy. That is, growing new client relationships, maintaining our core funding position, promoting client loyalty and advocacy through our responsive service model and demonstrating our safety and soundness through all economic cycles and change events. To that point, our core deposits represent 88% of total deposits. Further, we continued our organic generation of new relationships and our loans increased 6% over the same period last year.
Reflective of this solid performance, coupled with our strong regulatory capital ratios and the fact that we increased our tangible common equity per share by 13% from the same period last year, we announced a core dividend of $0.48 per common share.
Earlier this month, we released our 2023 environmental, social and governance report which reflects the continued maturation of our approach to ESG. Banner has always been committed to doing the right thing in support of our clients, the many communities that we serve and our colleagues. The accomplishments highlighted in this report are meant to reflect the deep connection that we have with all of our stakeholders and our commitment to creating positive change in the communities we serve.
Finally, I'm pleased to say that we continue to receive marketplace recognition and validation of our business model and our value proposition. Banner was again named one of America's 100 best banks and one of the best banks in the world by Forbes. Newsweek named Banner one of the most trustworthy companies in America again this year and just recently named Banner one of the best regional banks in the country. S&P Global Market Intelligence ranked Banner's financial performance among the top 50 public banks with more than $10 billion in assets and the digital banking provider Q2 Holdings awarded Banner their Bank of the Year for excellence. Additionally, the Kroll Bond Rating Agency affirmed all of Banner's investment-grade debt and deposit ratings. And as we have noted previously, Banner Bank received an outstanding CRA rating in our most recent CRA examination.
Let me now turn the call over to Jill to discuss the trends in our loan portfolio and her comments on Banner's credit quality. Jill?
Thank you, Mark, and good morning, everyone.
Banner's credit metrics continue to hold up well and with negligible change in the composition and performance of the portfolio. My comments today will be relatively brief. Delinquent loans ended the quarter at 0.29%, down from 0.36% as of the linked quarter and compared to 0.28% as of June 30, 2023. Adversely classified loans increased by $6 million in the quarter and represent 1.09% of total loans, up 2 basis points when compared to March 31. Nonperforming assets increased by $3 million in the quarter representing 0.21% of total assets and consist of $30.7 million in nonperforming loans and $2.6 million in REO. The $2.1 million increase in REO is one undeveloped residential real estate parcel in the San Francisco market obtained via foreclosure.
The net provision for credit losses for the quarter was $2.4 million and includes a $2 million provision for loan losses and a $430,000 provision for unfunded loan commitments. Loan losses in the quarter were a modest $991,000 and were partially offset by recoveries totaling $746,000. After the provision, the reserve for credit losses loans totaled $152.8 million and provides 1.37% coverage of the portfolio and 498% coverage of our nonperforming loans. By way of comparison, the reserve for loan losses provided 1.39% coverage of the loan portfolio as of the linked quarter and 1.38% coverage as of June 2023.
Both loan originations and outstandings rebounded in the second quarter, with portfolio loan balances up $275 million, or 3% year-to-date, and a healthy 6% when annualized. As we have seen in prior quarters, construction advances on previously committed multifamily projects continue to fuel growth. This quarter, we also benefited from solid commercial, small business and owner-occupied real estate loan growth which was in part due to clients deciding to move forward on previously delayed capital investment projects.
Additionally, we ran a very successful small business campaign in the quarter, adding both new clients and loan totals. In aggregate, C&I utilization increased 1% quarter-over-quarter. Residential construction exposure remains moderate at 4% of the portfolio, down 1% from the linked quarter and is split approximately 65% for sale housing and 35% 1-4 family custom construction residential mortgage loans. The residential markets in which we are providing speculative for-sale housing, like most of the nation, remain undersupplied in terms of available inventory. This has enabled timely absorption of the spec inventories despite the higher interest rate environment.
When we include multifamily commercial construction and land, the total construction exposure is 15%, up 1% from the prior quarter, the result of the continued funding of affordable and to a lesser extent, middle-income multifamily projects. The 5% increase in agricultural loans reflects an increase in the size of operating lines necessary to cover the growing season with utilization rates in line with that reported as of March 31 and as of June 30, 2023. And the 11% decline reflected in the multifamily real estate portfolio is almost entirely a segmentation shift related to the small balance affordable loans, loans with balances under $2 million, being reassigned to the small balance CRE segment.
As noted earlier, our overall credit metrics remain solid. That remains true when isolated to both the office and multifamily segments of the commercial real estate book, areas that continue to be watched closely for adverse trends. As reflected on Pages 21 and 22 of our investor presentation, there has been no material change in any of the highlighted segment. Adverse classifications within each of the segments are modest, delinquencies negligible and the portfolios are diversified both in size and by geographic locations. Additionally, the real estate secured loans are generally lowly leveraged.
The repricing risk within the office and multifamily book continues to be closely monitored, less than 15% of each or set to reprice within the next 2 years and current revenue streams appear adequate to sustain the effects of an increase in their interest rate in almost all cases.
Lastly, I will note that our credit underwriting criteria has not changed materially over the course of the last decade, which is to say that the vast majority of our loan book has solid sponsorships, personal guarantees and properly margined collateral support.
With that, I will wrap as I have the last several quarters, reiterating that Banner's credit metrics continue to be strong, our reserve for loan losses remained solid, and our capital base continues to be robust. We will not be immune to isolated credit issues. However, we remain well positioned for the future.
With that, I'll turn the microphone over to Rob for his comments. Rob?
Great. Thank you, Jill.
We reported $1.15 per diluted share for the second quarter compared to $1.09 per diluted share for the prior quarter. The $0.06 increase in earnings per share was primarily due to the prior quarter including a $4.9 million loss on the sale of securities, partially offset by a higher provision for credit losses in the current quarter due to higher growth in loan balance.
Total loans increased $279 million during the quarter with growth in several categories, multifamily construction, primarily due to affordable housing projects, owner-occupied CRE, C&I and small business score. Total securities decreased $63 million, primarily due to normal portfolio cash flows. Deposits decreased by $80 million during the quarter as the $119 million decrease in core deposits was partially offset by a $39 million increase in time deposits. The decrease in core deposits during the quarter was primarily due to normal seasonal outflows related to client tax payments.
Core deposits ended the quarter at 88% of total deposits. Total borrowings increased $329 million during the quarter as FHLB advances were partially used to fund loan growth and the seasonal decline in deposit balances. Banner's liquidity and capital profile continued to remain strong with a robust core funding base, a low reliance on wholesale borrowings and significant off-balance sheet borrowing capacity. In addition, all of our capital ratios are in excess of the regulatory well-capitalized levels.
Net interest margin decreased $413,000 from the prior quarter as the reduction in net interest margin was mostly offset by growth in earning assets. Compared to the prior quarter, average loan balances increased $159 million and loan yields increased 9 basis points due to adjustable rate loans repricing higher as well as new production coming on at higher interest rates. The average rate on new production for the quarter was 8.47%, identical to the prior quarter. Total average interest-bearing cash and investment balances declined by $68 million from the prior quarter, while the average yield on the combined cash and investment balances increased 3 basis points.
Total funding cost increased by 13 basis points to 1.66, 166 basis points rather, due to an increase in the cost of deposits and higher average borrowing balances. The cost of deposits increased 13 basis points to 150 basis points primarily due to an increase in rates on interest-bearing deposits and also due to a shift in deposits with a portion of noninterest-bearing deposits moving into interest-bearing deposits. The cost of deposits for the month of June were 154 basis points. Noninterest-bearing deposits ended the quarter at 35% of total deposits.
On a tax equivalent basis, net interest margin decreased 4 basis points to 3.70% as the pace and decline in net interest margin slowed compared to the prior quarter. The decrease was driven by the increase in funding cost and interest-bearing liabilities, outpacing the increase in yields on earning assets by a few basis points. Based on the current trends, it appears net interest margin is nearing the trough. Ultimately, this will be dependent on the deposit flows in the third quarter.
Total noninterest income increased $5.6 million from the prior quarter, primarily due to the prior quarter including a $4.9 million loss on the sale of securities. The current quarter also benefited from having lower fair value write-downs on financial instruments carried at fair value. The $671,000 increase in income from mortgage banking operations also contributed to the increase in noninterest income. During the quarter, we sold $20 million of 1-4 family portfolio loans at a gain of $284,000.
Total non-interest expense increased $487,000 from the prior quarter. The increase reflected higher compensation expense due to normal annual salary increases completed at the end of the first quarter. Higher REO expense also contributed an increase as the prior quarter included a gain on the sale of an REO property. These increases were partially offset by higher capitalized loan origination cost, lower occupancy and equipment expense and lower professional expense. Legal expense for the quarter benefited from an $874,000 reversal of expense related to finalizing 2 legal matters. We would expect noninterest expense to gradually trend up through the remainder of the year.
In closing, despite the market headwinds, our strong balance sheet continues to provide us with the capacity to further support our current clients, as well as to continue to add new clients in the many markets we serve.
This concludes my prepared comments. Now I will turn it back to Mark.
Thank you, Jill and Rob, for your comments. That concludes our prepared remarks. And Lydia, we will open -- now open the call and welcome questions.
[Operator Instructions]
Our first question today comes from David Feaster with Raymond James.
Maybe just starting on the deposit side. I'm sure some of the trends you saw in the quarter, I know there is seasonality from tax payments and we've got some C&I borrowers deleveraging that we're hearing about. You actually saw utilization increase in C&I. But I'm curious, especially on the NIB side, how have trends been throughout the quarter especially in June and into early July. And just kind of how you think about the NIB -- growing NIB and what you're seeing on that front?
Yes, David, it's Rob. Thanks for the question. So yes, if you think about the quarter, the way I would describe it early in the quarter, we actually saw balances increasing. I think that was partially client bringing some balances that were off balance sheet on balance sheet to make client tax payments. But then we saw that normal seasonal outflow that we would expect the second half of April and even going into May. I would say there was a stabilization in May and a little bit of decline in June.
And if we look forward, I mean this is -- the third quarter is typically a good deposit quarter for us. What we see there is we see our ag clients primarily as crops come in and cash flows come in from those crops, that's when we see our balances build. So I think that's really going to be the telling story as whether we see that normal seasonal increase in deposits from our ag clients in the third quarter, and I think that will tell us a lot going forward.
Okay. That's helpful. And then switching to the loan growth side. Loan growth was trending better than expected, one of the strongest quarters of originations in the past 2 years. I'm curious some of the commentary on what do you think drove that. Is it primarily the small business campaign that you mentioned? Are you seeing any changes in demand or market share gains? And just how you think about the loan growth outlook as you look forward?
Thanks, David. So I'll start with the last part of that first and say that loan growth outlook, as I look forward, hasn't really changed. That if you -- for the year, I think we're going to be low to mid-single digits. This quarter certainly was strong. It is a function, yes, of the small business campaign, but it's also a function of the muted demand and growth we had in the first quarter and some of that pulling into Q2. It was an expansion of our existing relationships more so than market share gain, but we've had that as well. So it is a mix. And that's why I looked at it as year-to-date growth as opposed to the quarter, 10% growth isn't sustainable. And again, I think we'll be at the low to mid-single-digit growth rate for the year.
Okay. Terrific. And then I just wanted to dig into maybe a little bit on the margin side. I was hoping you could give a little color on the repricing dynamics in the loan and the securities portfolio just to help think about the margin trajectory. I know you talked about that we're nearing the trough and the deposit flows in the third quarter are going to be key to that. And just kind of commentary on helping us think through the margin trajectory and some of the key drivers in that?
Sure. So David, it's Rob. So the margin compression, as I noted, was limited at the 4 basis points, which was expected on our -- we expected that just due to that normal seasonal outflow in deposits we experienced. But if you think about going forward, our loans have been repricing, I think, 10 basis points for the prior 2 quarters ago and then 9 basis points this quarter. So we would expect that as long as the Fed is on pause, we would expect that we'd continue to see kind of that 8 to 10 basis points of loan yield increase quarter-over-quarter.
Of course, as the Fed starts to cut, everybody's crystal ball is their own on that one, but assuming 1 rate cut a quarter or something like that, then we would expect that our floating rate loans, variable rate loans that those -- which is 26% to 27% of our portfolio, that those would reprice down. But then we think for a while, we would continue to see that offset of adjustable rate loans that still haven't repriced through the cycle reprice up. So I think once the Fed starts to cut, if it's kind of a gradual cut, I think we'll see loan yields flatten out at that time.
On the deposit side, the retail CD book, it's really nearing its peak average rate on that book because the CDs that are rolling off in the third quarter and in the fourth quarter, the average rate on those CDs rolling off is essentially equivalent to what we're seeing average CD rates come on. So I think we've neared the peak on the repricing of the CD book at this point. So beyond that, it would just be exception repricing request, which I would say are tapering off, which suggests that most of our rate-sensitive clients have been repriced at the standpoint. And then any other changes in deposit costs would be tied to the movement between deposit products. Of course, we think once the Fed starts to cut, I think we'll see that stabilization in our deposit rates at that point in time. But there's going to be some lag, I think, before deposit costs begin to come down after that.
Our next question comes from Andrew Liesch with Piper Sandler.
Good morning, everyone. Mark, it's been a while since you guys have completed an acquisition, but -- and certainly with bank stock valuations where they are over the last couple of weeks makes deals -- how is your -- how are your conversations with prospective targets been over the last few months? And is M&A something that you might be pursuing in the near term?
Well, thank you for the question, Andrew. Clearly, that is -- we are embarking on 2 core strategies. The first is our organic growth strategy, right, taking advantage of the market disruption, taking advantage of the footprint in which we operate and our strong commercial banking and consumer banking teams. And we've rolled out our small business initiative, which is really helping to drive some organic growth.
On the M&A front, that's the second piece, which would be inorganic growth for the company. And we've had a number of folks that we think would be great partners with Banner, and we continue to have that dialogue. Clearly, as valuations begin to move up, it becomes economically more feasible to do something and put something together. And I would characterize the conversations as being much more realistic in terms of having an opportunity to do something that's additive.
I think it's more important to talk about things we're not interested in doing, which is there's nothing outside. We don't want to go outside of our current wheelhouse. -- right? We know we have a good value proposition, a strong franchise. There's no reason for us to reach into geographies we don't understand. There's no reason for us to reach in the monoline businesses that have a nationwide footprint. So we have a number of institutions on the West Coast that we continue to have dialogue. And as you know, M&A comes down to timing. All of the transactions that we've accomplished have been opportunistic and have been a very good fit. So I just would view M&A as being the same as it's been in the past, which is when things begin to loosen up, valuations return to normalization, the credit marks and the interest rate marks become much more palatable to take, I think you'll see some combinations occur.
Got it. That's very helpful. Rob, just your commentary on expenses kind of gradually trend upward from here. I guess how much is inflation still driving that? Or is it investments in the franchise or maybe normalization of the legal fees? Just curious what might be driving some of this gradual increase?
Yes. I think it's -- Andrew, I think it's all 3 of those. Yes, normalization of legal expense, I mentioned on the comments that we had the legal recovery related to 2 matters. And that was expense that we previously had over the last probably 3 or 4 quarters, and we were able to recapture it, but we're not going to recapture legal expenses every quarter. So that's certainly part of it. Normal inflationary stuff as well. I mean we did have our normal wage increase that we had at the end of the first quarter. So that's built into the second quarter already. So that run rate is probably there.
But we are seeing that just vendors that we have as contracts come up, we are seeing pressure on those contracts because if it was a 4-year contract that we locked in 4 years ago and is coming up for renewal, those vendors are wanting to price in the inflation that they've seen over the last 3 or 4 years. So I think we're seeing pressure on that.
And quite frankly, I mean, fraud losses are never ending battle right now. Fraud losses have been higher than our credit losses probably for the last 3 or 4 years, maybe longer now. And you got to stay ahead of -- you got to stay ahead of the fraudsters on that stuff. So we're continuing to invest in different fraud technology in order to combat that. And then we've also -- are making investments of -- other investments in technology to really make the company more efficient. So as we grow into the future, we don't have to add as many expenses into the future. So it's really a combination of things.
Our next question comes from Andrew Core with Stephen.
Just maybe if I could follow back up on expenses. Rob, I appreciate all your commentary there. I think last quarter, the quarter before, we were talking about kind of a 3% year-on-year expense growth rate in 2024 and apologies if I missed this, but any changes kind of with some of the commentary there about the percentage rate of expense growth you'd expect this year?
Yes, I think it will probably be a bit higher than that. I don't have the exact percentage here, but it could be in that 3.5% range or maybe even a little bit higher. I think the run rate at this point is probably in that 99 range per quarter right now for expenses. So whatever that is from a percentage standpoint.
Okay. Understood. And then I had a question around some of the loan repricing dynamics. I appreciate that some of the kind of adjustable rate repricing tailwinds or fixed rate kind of repricing tailwinds or what's contributing to that kind of 8 to 10 basis points a quarter at now barring any Fed moves, but it feels like with floating rate loans at just call it, 27%, 28% of total, if you put a 25 basis point cut against that, you still should see kind of positive progression from a loan yield standpoint, even including maybe a couple of moves lower with the Fed. I wanted to see if you agreed with that. And then curious to get thoughts on just how long that kind of repricing dynamic from the adjustable or fixed rate book can play out?
Yes. So a couple of things, right. I mean, it's pretty easy to do the math on the variable rate stuff. I mean, I think that will impact us at about 7 basis points. So let's pretend there was a rate cut of 25 basis points in September, then that would mean that those -- we would see 7 basis points of a decline in loan yield related to that decrease in the fourth quarter. And if we get an 8 to 10 basis point increase and then maybe you're up a basis point or 2 in the fourth quarter under that scenario. And keep in mind, I'm not suggesting that's what's going to happen from the Fed, but just trying to give you an example.
So I think that -- I think we'll -- right now, I think in our modeling, if the Fed was on pause, we continue to see that 8 to 10 basis points. And I think it starts to go down. It's not 10, maybe it's over the next 4 quarters, we were 10 for 2 quarters in a row, we were 9 last quarter, which suggest it's just kind of coming down a little bit. So -- but I don't -- it doesn't go to 0 necessarily. But I think over time, what happens is maybe it moves from 9 to 8 and then to 7 and so forth, assuming the Fed is on pause.
Okay. That's very helpful. I appreciate it. And then last one, I think we talked about last quarter, maybe the option for some further security sales in 2Q similar in size to 1Q and obviously, rates are what they are. It didn't seem like you guys did too much of the securities book this quarter just with rates backing off a little bit so far to start the third quarter. Any increased appetite or interest in further bond book repositioning in the third quarter?
Yes. I mean really, if you -- the second quarter, we didn't -- we were considering something there. Ultimately, we didn't do anything. We've always used kind of a 3-year payback as our benchmark on whether we were willing to do something or not. And there is becoming less and less in the portfolio that, that would qualify for. And we really didn't do any security sales during the quarter. We had that $600,000 loss, but that was really related to the bond that was called early. So there were really no security sales during the quarter.
And I would say, at this point, I mean, we're not currently considering any further security sales, but I'm going to preference that by saying that we remain flexible. So we continue to monitor the market conditions. And if the market conditions are right, we might do another security sale, but it's currently not something we're planning on, but we'll continue to monitor it.
[Operator Instructions] Our next question is from Kelly Motta with KBW.
Maybe I was hoping to close the loop on the M&A discussion. I appreciate your comments, Mark, about wanting to stay with businesses that you know in your footprint and whatnot. I'm just wondering if you could refresh us on the size of potential targets you're interested in and if potentially they could go up to stay an MOE for instance?
Yes. I think, Kelly, thank you for the question, and good morning. The -- I would view it this way. We do not believe at this point, given our operational trajectory and the -- some of the market conditions, which allow us to continue to take market share that we don't need to do anything transformational. So I would characterize any kind of M&A philosophy as being something that would be a decent size, additive to density in our current footprint, that would be the goal. I don't tend to quantify that based on asset size. But you can probably detect that it's somewhere between $1 billion and $3 billion. For us to do anything that would be considered close to an MOE, it would have to be incredibly strategic and would really have to be an additive not only in the short term but the long term. And -- but I don't know that we need to reach for anything transformational given our current operating model.
Got it. That's super helpful. And I apologize if you covered this, I was having some technical difficulties earlier in the call, but I think you mentioned that most of your rate sensitive customers have -- you get the sense that they've already moved, which is an encouraging sign for stabilization. Did you cover the noninterest-bearing outflows this quarter? Was that partly seasonal? And would you expect a moderation or stabilization in that provided we don't get any movement in rates here?
Yes, Kelly. So just briefly on that. So yes, the decrease in Q2 was primarily due to normal seasonal tax payments that we see every year. So that was expected. As we look at Q3, Q3 is a good quarter for us typically for deposits really as our ag clients as crops come in and cash comes in on that. So I think that will be the test on whether we're nearing a bottom in our noninterest-bearing what it looks like in Q3.
Got it. Last question for me, it's for Jill. If you could just sort of refresh us what average LTVs are on various loan portfolios and how those -- that and debt service coverage is holding up at this stage?
So it varies based on portfolio, certainly, but our average -- our weighted average loan-to-value in the CRE book at this stage, and keep in mind that we're using at origination appraisals 99% of the time, but the weighted average loan-to-value would be less than 65%, and depending on the type of product would go lower than that. And then the weighted average debt service coverage north of 125% in almost -- well, in all books and again, gets stronger depending on the "riskier" type of property.
Thank you. We have no further questions in the queue. So I'll turn the call back over to Mark for any closing comments.
Thank you, Lydia, and thank you for your questions.
As I stated, we're very proud of the Banner team and our second quarter 2024 performance given the current difficult operating environment that we're facing. Thank you again for your interest in Banner and joining our call today. We look forward to reporting our results to you again in the future. Have a wonderful day, everybody. Thank you for participating.
This concludes today's call. Thank you for joining. You may now disconnect your lines.