Banner Q1 2025 Earnings Call Transcript

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Provided by Quartr
April 17, 2025

Key Takeaways

  • Net profit of $45.1 million, or $1.30 per diluted share, rose from $1.09 in Q1 2024, reflecting core earnings of $59 million excluding securities and fair-value impacts.
  • Total loans grew 5% year-over-year and core deposits increased 3%, with core funding at 89% of total deposits and an 84% loan-to-deposit ratio.
  • Net interest margin expanded 10 basis points to 3.92%, driven by higher loan yields and lower funding costs, and management expects further margin upside in Q2.
  • Credit metrics showed delinquencies rising to 0.63% of loans and nonperforming assets at 0.26%, though the 1.38% loan-loss reserve provides ample coverage.
  • Executives flagged tariff and immigration enforcement risks that may pressure agricultural, small-business and tourism clients, with higher costs ultimately borne by consumers.
AI Generated. May Contain Errors.
Earnings Conference Call
Banner Q1 2025
00:00 / 00:00

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Operator

Hello, everyone, and welcome to the Banner Corporation's First Quarter twenty twenty five Conference Call and Webcast. My name is Nadia, and I'll be coordinating the call today. I will now hand over to your host, Mark Grzecovich, President and CEO of Banner Corporation to begin. Mark, please go ahead.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

Thank you, Nadia, and good morning, everyone. I would also like to welcome you to the first quarter earnings call for Banner Corporation. Joining me on the call today is Rob Butterfield, Banner Corporation's Chief Financial Officer Joe Rice, our Chief Credit Officer and Rich Arnold, our Head of Investor Relations. Rich, would you please read our forward looking safe harbor statement?

Rich Arnold
Rich Arnold
Head-Investor Relations at Banner

Sure, Mark. Good morning. Our presentation today discusses Banner's business outlook and will include forward looking statements. These 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.

Rich Arnold
Rich Arnold
Head-Investor Relations at Banner

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 the recently filed Form 10 ks for the year ended 12/31/2024. Forward looking statements are effective only as of the date they are made, and Banner assumes no obligation to update information concerning its expectations. Mark?

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

Thank you, Rich. As is customary, today we will cover four primary items with you. First, I will provide you high level comments on Banner's first quarter performance second, the actions Banner continues to take to support all of our stakeholders, including our Banner team, our clients, our communities and our shareholders Third, Jill Rice will provide comments on the current status of our loan portfolio and the potential impact due to the trade tariffs. 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 wanted to thank all of our 2,000 colleagues in our company who are working extremely hard to assist our clients and communities.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

Banner has lived our core values summed up as doing the right thing for the past one hundred and thirty five 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.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

As announced, Banner Corporation reported a net profit available to common shareholders of $45,100,000 or $1.3 per diluted share for the quarter ended 03/31/2025. This compares to a net profit to common shareholders of $1.09 per share for the first quarter of twenty twenty four and $1.34 per share for the fourth quarter of twenty twenty four. Our strategy to maintain a moderate risk profile and the investments we have made and continue to make in order to improve operating performance have positioned the company well for the future. The strength of our balance sheet, coupled with our strong reputation we maintain in our markets, will allow us to manage through the current market volatility. Rob will discuss these items in more detail shortly.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

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 first quarter twenty twenty five core earnings were $59,000,000 compared to $53,000,000 for the first quarter of twenty twenty four. Banner's first quarter '20 '20 '5 revenue from core operations was $160,000,000 compared to $150,000,000 for the first quarter of twenty twenty four. We continue to benefit from a strong core deposit base that has proved to be resilient and loyal to Banner, a very good net interest margin and core expense control. Overall, this resulted in a return on average assets of 1.15% for the first quarter of twenty twenty five.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

Once again, our core performance reflects continued execution on our super community bank strategy. That is growing new client relationships, maintaining our core funding position, promoting client loyalty and advocacy through our responsive service model and demonstrating our safety and soundness through all economic cycles and change events. To that point, our core deposits continue to represent 89% of total deposits. Further, we continued our solid organic growth with loans increasing 5% and core deposits increasing 3% over the same period last year. Reflective of this 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.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

Finally, I'm pleased to say that we continue to receive marketplace recognition and validation of our business model and our value proposition. Banner again was named one of America's One Hundred Best Banks and one of the Best Banks in the World by Forbes. Newsweek named Banner one of the most trustworthy companies in America and the world again this year and just recently named Banner one of the best regional banks in the country. J. D.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

Power and Associates named Banner Bank the best bank in the Northwest for retail client satisfaction, and S and P Global Market Intelligence ranked Banner's financial performance among the top 50 public banks with more than $10,000,000,000 in assets. Additionally, the Kroll Bond Rating Agency affirmed all of Banner's investment grade debt and deposit ratings. And as we've noted previously, Banner Bank received an outstanding CRA rating. Let me now turn the call over to Jill to discuss the trends in our loan portfolio and her comments on Banner's credit quality. Jill?

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

Thank you, Mark, and good morning, everyone. As reflected in our earnings release, delinquent loans increased again this quarter and now represent 0.63% of total loans. This compares to 0.49% as of year end and 0.36% as of March 2024. Year over year, the increase is the result of the higher interest rate environment and the impact on all segments. Still in terms of total dollars and as a percentage of total loans, delinquencies remain manageable.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

Adversely classified loans increased a modest $5,000,000 in the quarter and represent 1.73% of total loans compared to 1.69% as of the linked quarter and 1.07% as of 03/31/2024. As with the increase in delinquencies, the increase in adversely classified assets year over year reflects the impact of the current economic cycle with higher operating costs and increased interest expense affecting borrowers. It is worth noting that by borrower, the adversely classified relationships are very granular with an average commitment of less than $1,000,000 And as I have stated in prior calls, adversely classified loans are not centered in one business line or industry. Nonperforming assets also increased in the quarter, up $3,000,000 and represent 0.26% of total assets, consisting of $39,000,000 in nonperforming loans, 3,500,000.0 in REO and $300,000 in other repossessed assets. Despite the modest deterioration, Banner's credit metrics remain manageable when considered in light of our loan loss reserve and capital positions and are indicative of Banner's culture of early and proactive portfolio management.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

Loan losses in the quarter totaled $3,700,000 and were offset in part by recoveries totaling $900,000 The net provision for credit losses for the quarter was $3,100,000 including a $4,500,000 provision for loan losses and a release of $1,400,000 related to unfunded loan commitments. The provision was driven in large part by quantitative factors including growth in the construction portfolio, risk rating migration and charge offs and to a lesser extent qualitative adjustments that were applied to address economic uncertainty. The reserve for credit losses provides coverage of 1.38 of total loans and compares to 1.37% as of the linked quarter and 1.39% as of 03/31/2024. Loan originations were down 33% when compared to the linked quarter with the largest decline seen in the commercial and commercial real estate portfolios. These declines are in large part a reflection of heightened client uncertainty slowing prospective transactions.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

It is worth noting, however, that both commercial and commercial real estate pipelines continue to grow, reflecting a desire to proceed with capital investments when the economy stabilizes. Loan outstandings grew by $84,000,000 in the quarter or 3% on an annualized basis and are up 5% year over year, in line with our first quarter expectations. The primary drivers of the growth were within the construction and development book with multifamily construction up $105,000,000 land development up $26,000,000 and commercial construction up $24,000,000 The increases quarter over quarter are largely due to draws on previously committed projects and were offset in part by expected payoffs and paydowns within the permanent commercial real estate and multifamily portfolios. On a combined basis, commercial and small business loan totals declined by $16,000,000 quarter over quarter, driven primarily by meaningful pay downs on a handful of larger commercial lines of credit. Total C and I utilization is up 1% in the quarter in spite of those pay downs.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

The residential construction portfolio at 4% of total loans is continuing to perform well. We did see a seasonal slowdown in the activity in the quarter. Still, the for sale product continues to be bolstered by a limited supply of resale inventory and our level of completed and unsold starts remains below historical norms. Looking at the entire construction portfolio, including residential, commercial and multifamily construction, along with land and land development, the total construction exposure remains acceptable at 15% of total loans. As expected, agricultural loans continue their seasonal decline with balances down $5,000,000 or 2% in comparison to the linked quarter.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

The consumer mortgage portfolio increased modestly $9,000,000 and consumer loans centered in home equity lines of credit declined $4,000,000 in the quarter. Before I wrap up, I want to touch on the current operating environment in this time of economic uncertainty. While it is too early to see the impact, recent immigration enforcement activities across our footprint have heightened both business and community concerns, especially within our agricultural and border communities. The significant reduction in Canadian border crossings is negatively impacting businesses in our Northwestern Washington markets and if continued is anticipated to have a meaningful impact to the larger summer tourism industry as well. And more broadly, while the final level and duration of the recently enacted tariffs remains uncertain and the impact is yet to be felt, tariffs will have a negative impact to West Coast businesses and the local economies.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

Given our diverse and granular loan portfolio, we expect the biggest impact to be felt by the small business community, who will be less able to absorb the increased costs, face supply chain issues, reduced demand and the overall general market disruption that is likely to evolve. And of course, the consumer who will ultimately bear the burden of increased prices. While we wait for clarity regarding the level and duration of the tariffs and begin to see the impact to the general economy from the recent policy changes, we will continue our practice of robust quarterly portfolio reviews and maintain close contact with our borrowers to better understand the longer term implication to their businesses. Our moderate risk profile with a diverse and granular loan portfolio, the majority of which is supported by strong sponsors, personal guarantees and properly margined collateral support will serve us well as we navigate these uncertain economic headwinds. I will close my prepared remarks by reiterating what you have heard from me before.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

Banner has a strong balance sheet, our reserve for loan losses remains robust and our capital base is well in excess of regulatory requirements, all of which are designed to sustain us through all business cycles. With that, I'll turn the call over to Rob for his comments. Rob?

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

Great. Thank you, Jill. We reported $1.3 per diluted share for the first quarter compared to $1.34 per diluted share from the prior quarter. The $04 decrease in earnings per share was primarily due to two fewer interest earning days in the current quarter and higher expenses in the first quarter. In addition, the prior quarter benefited from some non reoccurring gain on loan sale.

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

Total loans increased $77,000,000 during the quarter with portfolio loans increasing $84,000,000 partially offset by held for sale loans decreasing $7,000,000 The loan to deposit ratio ended the quarter at 84%. Total securities decreased $5,000,000 as normal portfolio cash flows were largely offset by an increase in fair value. Deposits increased $79,000,000 during the quarter due to core deposits increasing 74,000,000 Time deposits increased $4,000,000 as a $21,000,000 decline in retail time deposits was offset by a $25,000,000 increase in brokered deposits. Core deposits ended the quarter at 89% of total deposits, same as the prior quarter. Total borrowings decreased $116,000,000 during the quarter due to a decrease in FHLB advances.

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

Banner's liquidity and capital profile continue to remain strong with a robust core funding base, a low reliance on wholesale borrowing and significant off balance sheet borrowing capacity. In addition, all of our capital ratios are in excess of regulatory well capitalized levels. Net interest income increased $500,000 from the prior quarter due to tax equivalent net interest margin increasing 10 basis points to 3.92%, partially offset by a decline in average earning assets and two less interest earning days in the quarter. The 10 basis point increase in net interest margin was driven by an increase in the yield on earning assets and a decrease in funding costs. The four basis basis point increase in earning asset yields was due to loan yields increasing five basis points as adjustable rate loans continue to reprice higher and new loans are being originated at rates higher than the average yield on the loan portfolio.

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

The average rate on new production for the quarter was 8.01%. Funding costs decreased five basis points as a result of deposit costs decreasing six basis points. Non interest bearing deposits ended the quarter at 34% of total deposits. The decrease in average earning assets was due to a $90,000,000 decline in average interest bearing cash and investment balances, partially offset by average loan balances increasing 64,000,000 The earning asset yield continues to benefit from a remixing out of securities and into loans. Total non interest income decreased $900,000 from the prior quarter, primarily due to the prior quarter including a gain of $735,000 on the sale of a non performing loan and a gain of $508,000 on a pooled loan sale, partially offset by the current quarter having a $300,000 gain on a BOLI claim.

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

Total non interest expense increased $1,800,000 from the prior quarter. The increase reflected higher in salary benefit expense, primarily due to typical higher first quarter payroll taxes and higher medical insurance expense. The increase in salary and benefits was partially offset by lower marketing and professional expenses. Despite the recent market volatility, we believe our capital and liquidity levels position us well to service our clients and to take advantage of any disruptions in the markets we serve. This concludes my prepared comments. Now I will turn it back to Mark.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

Thank you, Rob and Jill for your comments. That concludes our prepared remarks. And Nadia, we will now open the call and welcome questions.

Operator

Thank Our first question goes to Geoff Rulis of D. A. Davidson. Geoff, go ahead.

Jeff Rulis
MD & Senior Research Analyst at D.A. Davidson Companies

Thanks. Good morning.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

Good morning, Jeff.

Jeff Rulis
MD & Senior Research Analyst at D.A. Davidson Companies

Just a question on the margin. It seems like that's a little maybe a little better than expected. And I guess the components of that, are you more maybe that surprise is a strong word. But I guess if you think about the earning asset yield increase versus funding costs coming down, is there any component there that you think you're that can continue? Or do you feel like both are in play at least in the short run, I guess, leading to kind of margin expectations?

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

Yeah. So what I would say there, Jeff, is that on the funding side, the funding cost for the quarter was pretty much flat for the entire quarter. So the same for January, February and March. And whereas we did see on the yield side, we saw throughout the quarter that the the yield did improve as we move throughout the quarter. And the other thing just to and I know you know this, but, you know, the day count in February always benefits the first quarter and makes the yields look a little bit better just because of the twenty eight day count, and you get thirty days on a lot of loans from an interest perspective.

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

But if if we think about going forward here, so we use Moody's for interest rate forecasting. They're currently showing three twenty five basis point cuts in '25, the first one starting in July. And assuming that's correct, I would expect some NIM expansion in Q2. And that really is assuming that funding costs essentially stay flat and we see some additional expansion in our loan yields as adjustable rate loans continue to reprice up and new loans continue to come on at higher yields. The model is currently showing that we would see about a five basis point increase in loan yields while the Fed is on pause.

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

If I think about the second half of the year, under that Moody's forecast where there would be those rate cuts in the second half of the year, I would essentially expect that earning asset yields to be flat during that period of time while the Fed's decreasing rates. But we would see some benefit on the funding cost side where we would see funding costs come down a couple of basis points a quarter during the second half assuming that scenario.

Jeff Rulis
MD & Senior Research Analyst at D.A. Davidson Companies

That's great, Rob. Maybe hop to the credit. I think, Joe, you mentioned really no real industry specific stress, pretty granular. But just wanted to check back in on the ag side. You had mentioned some prior caution on commodity prices, and there was a small increase in non performers in the quarter.

Jeff Rulis
MD & Senior Research Analyst at D.A. Davidson Companies

Checking back in there, do you feel like you've that is just a continued area of watch? Or just how is the trends on the ag side going?

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

Yes. Well, the ag side definitely is a continued area of watch, especially as we think about the tariff implications to that segment, Jeff. You know, most of the crops are sold domestically. However, you know, with the increased tariffs, would expect an increase in domestic supply, which will impact the pricing on that end as well, while the input costs continue to rise. So the ag industry, I think, will continue to show signs of strain over this next period of month to you know, we we just have to kind of wait and see how long it plays out.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

But that is one of our primary areas of concern as it relates to tariffs.

Jeff Rulis
MD & Senior Research Analyst at D.A. Davidson Companies

Okay. Just, Joe, I'll add it. You mentioned line utilization on C and I was down. I guess first part would be what is that number currently? And then, Jill, if you could kind of stabilize us on growth for the full year.

Jeff Rulis
MD & Senior Research Analyst at D.A. Davidson Companies

Do you feel like some of this uncertainty versus where we were entering the year? Any thoughts on the full year expectations would be helpful.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

Okay. So I'm going go back and I'm going to close out my ag comment with a reiteration as to the size of the portfolio. Before we go on to your current questions there, Jeff, just for everyone's benefit, the ag represents 3% of the loan book and it is almost half of which real estate secured average loan size of $1,200,000 So just to put that into perspective as we continue to watch the risk in that portfolio. Line u commercial line utilization is in the mid 30% range, I believe, and, you know, ticked up modestly. So, overall, you know, we're running in that average utilization.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

You know, entire book, 75% utilized. Historical averages are 70 per 76%. C and I up. Construction up. Ag down, in the quarter.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

So, you know, they kind of crossed each other out, I guess, if you would if you look at it that way. To loan growth expectations, we're still targeting mid single digit for 2025. When we went into the year, we were, you know, looking at a back half where we would get more of that growth and still consider that as a possibility. And we recognize that the consumer business confidence has been negatively impacted by these policy changes, and we can't tell exactly what's going to happen with that level of uncertainty. We offset that, however, with the commercial pipelines that have been continuing to rebuild nicely.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

We had a good pull through rate in the first quarter even with that high level of uncertainty. And when we hit our Q1 expectations, even with the uncertainty, we don't have enough to actually change our thoughts as to what's going to happen for the 2025 plan at this time.

Jeff Rulis
MD & Senior Research Analyst at D.A. Davidson Companies

That's great. Thank you for the detail. Appreciate it.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

Thanks, Jeff.

Operator

The next question goes to David Feaster of Raymond James. David, please go ahead.

David Feaster
David Feaster
Director - Banking at Raymond James Financial

Hey, good morning, everybody.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

Good morning, David.

David Feaster
David Feaster
Director - Banking at Raymond James Financial

I kind of want to just follow-up a little bit on that line of questioning a bit. I mean, obviously, you talked about the pipelines and originations did decline quarter over quarter. And it sounds like it's primarily a function of weaker demand even ahead of trade wars. I was hoping you could touch on maybe any other competitive dynamics that you're seeing and just how is client demand and the pipeline looking today? Have you started to see anything falling out of that?

David Feaster
David Feaster
Director - Banking at Raymond James Financial

Just kind of the complexion of pipeline and just where you're seeing opportunities for growth today.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

So I'll start at the end there and the opportunities for growth that, you know, my answer to that is no different than it's been historically. They range up and down our footprint and in in this you know, across the industries. Pipelines have continued to grow. Closings have continued, so we're pulling them through and rebuilding. I I think the slow part of q one, you know yeah.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

The trade wars had not started, but there was a level of just uncertainty that had everybody's taking a step back to see what was coming. And then as it hit, even more uncertainty as opposed to clarity. But we still have people who want to, you know, move forward once they can understand where we are going to land. So I, you know, I I still feel decent about where we're gonna end this year, David, because of that. You know, they want to do business.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

They just need some of this noise to settle down.

David Feaster
David Feaster
Director - Banking at Raymond James Financial

Okay. Okay. That's helpful. And then, you know, maybe following up, you know, on on just the potential impacts from the tariffs and trade wars. I mean, where where do you see like, as you as you look at the book, where do you see the most risk and and where are you prepare like, watching more closely if this does become more protracted?

David Feaster
David Feaster
Director - Banking at Raymond James Financial

I mean, we've already touched on that, which is obviously a small portion of the book. But just, you know, you thinking about construction. Right? And and multi you know, you've had a lot of success, within multifamily. You know, how do you think about managing, you know, just with potential rising construction costs and some of those kinds of things?

David Feaster
David Feaster
Director - Banking at Raymond James Financial

Curious how your approach to this, where you're, you know, where you're watching more closely and your approach to managing it in just in this kind of uncertain, market.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

So the approach to managing it is, you know, kind of what we do on a day to day always in terms of staying close to our clients and asking them what they're seeing, what they're feeling, and what the impact is to their bottom line. If if you step back into the heart of your questions, like, am I looking at and thinking about outside of ag? It it the tariffs are going to impact, you know, a bunch of things across the West Coast and our trade partners. You know, technology sector, we're not heavy into it, but it's it's going to affect our economy. Agriculture, we've talked about.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

West Coast ports, that's going to affect our economy. Auto dealers, retailers, Boeing and other manufacturers, we don't lend to Boeing, but certainly we have some manufacturing in our portfolio. And those costs will run the gamut there as well. So I step back and I look at the portfolio and then I size it. What do we have in manufacturing?

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

Manufacturing would represent approximately 3% of our loan book. Average loan size within all of those manufacturing, NAICS codes would be under $1,000,000 So in terms of individual risk, limited. In terms of aggregate risk in the portfolio, again, small for the manufacturing sector. We don't have a lot of exposure to auto dealers. Largest loan size to auto dealers in our book is $5,000,000 I look at the transportation industry, 1% of our loan book. Look at the retail exposure, it's bigger, it's 12% of the loan book, but it's diversified geography. It's diversified by service and product and industry. 93% of the retail exposure is real estate secured. So that reduces some risk there as well. When you look at those last three segments I named, each one of them would have less than 1% or have an average loan size of $1,000,000 or less.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

So I'm looking, we're watching, we're talking to our clients, and then we're just scoping the overall exposure. And and we'll continue to do that as we see where do these tariffs land and who are they hitting the hardest. And I'll come back to what I said in my prepared remarks. I think the biggest impact is gonna be the small business sector and the consumer who's going to bear the brunt of it.

David Feaster
David Feaster
Director - Banking at Raymond James Financial

Okay. That's great color. I appreciate that. And then just last one for me, maybe touching on the funding cost side. You've done a great job continuing to drive core deposit growth, reducing deposit costs even in a seasonally weaker quarter.

David Feaster
David Feaster
Director - Banking at Raymond James Financial

I was hoping you could maybe touch on the competitive landscape for deposits, your strategy continue to drive core deposit growth, And how you think about opportunities to further optimize funding costs and fund loan growth going forward?

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

Yes. So thanks, David. It's Rob. So yes, I guess a couple of things there. I mean, I think there's limited opportunities as long as the Fed is on pause to see additional reductions in funding cost.

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

And but what we've been successful as we're adding new clients from the lending side, we've been successful at also bringing across the deposits. So I think we're seeing the benefit of that. Q1 also did have some seasonality into it. We usually see some increase in our deposits as tax free funds start to come in as well. And I mean I think from if we're looking about competitors right now in the marketplace, from the CD side is where you're seeing we're still seeing rate specials out there.

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

I would say most of the rate specials are in that three to seven month tenure right now, Although we do see you'll see some rate specials out there in that twelve or thirteen month range and see it and even some in the 4%. But, you know, I mean, just have a very granular deposit base. It's diversified from both metro versus rural, and it's also diversified geography wise. And it's a very granular deposit base. Average deposit size is in that 29,000 range.

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

So I think all that just helps us from being able to kind of control our deposit cost and our funding cost over time.

David Feaster
David Feaster
Director - Banking at Raymond James Financial

Okay. That's helpful. So would you kind of expect maybe some continued optimization and loan growth be funded with some securities cash flows? Or do you see the balance sheet continuing to grow?

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

Yeah. I think on the so if we think about the security side, we're seeing around $60,000,000 of cash flows off that a quarter right now, and we're not redeploying that back into the security portfolio. The only thing we're purchasing from security portfolios for CRA purposes. And so the expectation is is that we would see kind of a continued rotation out of the security portfolio and use those funds to help help drive the loan growth and and fund the loan growth. But but I I will say we're we're also David, we're also we're not currently planning on any larger security sale or any kind of loss sale at this point in time.

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

We continue to look at that. We'll be flexible if market conditions change or if we think there's an opportunity there, but that's not a strategy we're looking at currently.

David Feaster
David Feaster
Director - Banking at Raymond James Financial

Got it. Thanks, everybody.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

Thank you, David.

Operator

Thank you. The next question goes to Andrew Liesch of Piper Sandler. Andrew, please go ahead.

Andrew Liesch
Andrew Liesch
MD & Senior Research Analyst at Piper Sandler Companies

Thanks. Good morning. Really helpful information here on the tariffs. Really appreciate it. Capital continues to be a strength for Banner.

Andrew Liesch
Andrew Liesch
MD & Senior Research Analyst at Piper Sandler Companies

I guess how should we look at capital going forward? Is there an appetite to buy back stock with the stock down here? Do you want to retain it for uncertainty? Mark, can you just update your thoughts on your capital plans?

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

Thanks, Andrew. It's Rob. So yes, I mean, our we always talk about our number one priority is the core dividend and maintaining that core dividend, which continues to be at a conservative payout ratio. And over time, as as EPS continues to to increase, we would we would look at, you know, kind of increasing the core dividend at some point in time as well. We do have that share authorization, which you which you just mentioned there in place right now.

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

We haven't executed on that. It is something that we continue to to consider. And and certainly with the stock price being down just due to, you know, overall market volatility, it makes it more attractive, certainly. I would say the other thing that's out there right now that's probably one of the top things on our radar right now is we do have that hundred million dollars of sub debt out there right now, and it moves from a fixed rate to a variable rate on July 1. And so we're currently considering whether we, repay that or whether we look at replacing that.

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

So that's probably one of our top capital priorities right now.

Andrew Liesch
Andrew Liesch
MD & Senior Research Analyst at Piper Sandler Companies

Got it. And then any sort of change in M and A conversations over the last couple of months?

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

I would say thank you, Andrew. It's Mark. Let me just follow-up on Rob's comment. Our philosophy has always been to try and have this fortress type of balance sheet, and I feel like we're there. And there'll be an opportunity to deploy excess capital as we see more clarity in market conditions.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

I think the conversations as they exist with M and A, continue to occur. But obviously, the current volatility has caused everybody to take a step back and decide how do we proceed going forward. What does the credit metrics look like? What do the capital positions look like? There is favorability on the regulatory side, which I'm encouraged by.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

But I think just given the pullback in valuations in the current market, I think we're going to have to ride that out and see where it lands.

Andrew Liesch
Andrew Liesch
MD & Senior Research Analyst at Piper Sandler Companies

Got it. Very helpful. Always appreciate your insights. I will step back. Thanks.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

Thank you, Andrew.

Operator

Thank you. The next question goes to Andrew Terrell of Stephens. Andrew, please go ahead.

Andrew Terrell
Managing Director at Stephens Inc.

Hey, good morning.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

Good morning, Andrew.

Andrew Terrell
Managing Director at Stephens Inc.

Morning. If I could just circle back to the margin, Rob, just to maybe summarize some of the discussion around the margin. I mean, it sounds like in an environment where the Fed is not cutting rates, you've got pretty decent loan repricing opportunity. And then maybe that if we do get rate cuts that stalls out, but then you've obviously got room to further cut deposit costs. It sounds like no matter either of those outcomes, the progression throughout the year on the margin should be higher from here, correct?

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

Yes. I think as long as it's either Fed on pause or Fed gradually decreasing rates, that would be correct. I think the one scenario where we would see some margin compression is if the Fed got very aggressive on reducing rates.

Andrew Terrell
Managing Director at Stephens Inc.

Yeah. Okay. Got it. So only negative, just a more material rate cut. Okay.

Andrew Terrell
Managing Director at Stephens Inc.

Yeah. And then I'll I'll just ask you. We we we talked about this a while back, but just line of sight to 4% margin. When I asked you that question previously, I think we were 30 basis points or so away, but you've closed that gap pretty quickly. I guess, thinking of those kind of ranges of outcomes on the margin, does it feel feasible you can kind of pass 4% on the NIM in 2025?

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

Yes. I don't I guess I'm not prepared to give a timeline on when we're going to cross the 4% level. But, I mean, clearly, if you look at historically, we have been above 4%. And I think in under the right market conditions, can get back there again. And, you know, if we continue to see, you know, the the favorable market conditions that would allow that and we see that, you know, expansion each quarter, then eventually, think we would get there. Yeah.

Andrew Terrell
Managing Director at Stephens Inc.

Okay. And if I could just lastly check-in on expenses. I think last quarter we talked about $100,000,000 or so run rate being a good base to build off of in 2025 with kind of normal inflationary growth. Just wanted to check-in, any thoughts changed on expenses? How should we think about kind of quarterly progression as we move throughout the year on the expense base?

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

Yes. I mean, expenses always move around a bit quarter to quarter, so it's not unusual to see a swing of a couple million dollars up or down. But if I just think about the run rate we saw in the first quarter, I think that's probably a decent run rate that we would expect if you annualize that for 2025.

Andrew Terrell
Managing Director at Stephens Inc.

Perfect. Thank you for taking the questions and nice quarter.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

Thank you, Andrew.

Operator

Thank you. The next question goes to Kelly Mota of KBW. Kelly, please go ahead.

Kelly Motta
Managing Director at Keefe, Bruyette & Woods (KBW)

Hey, good morning. Thanks for the question. Most of mine have been asked and answered at this point. Just wondering, this last quarter a good indication of the tax rate for the year? And are there any upcoming tax cut in investments or anything of that nature that we should factor into the model?

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

Kelly, it's Rob. So, yeah,

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

I think I think the current quarter tax rate is is probably a pretty good judge on what we would what we would see for the year at this point.

Kelly Motta
Managing Director at Keefe, Bruyette & Woods (KBW)

Got it. That's helpful. Last one for me. I know part of Banner Forward initiative, were developing some source of fee revenue. Just wondering, if you could provide now an update on your outlook for fees.

Kelly Motta
Managing Director at Keefe, Bruyette & Woods (KBW)

It looks like maybe the deposit fees and service charge line was down a bit. I'm assuming that was activity based. But, if you could provide some color around that, that would also be helpful. Thank you.

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

Sure. Yeah. I think if you look at Q1 and you just back out the BOLI claim that we have there, that's probably a decent run rate for 2025. And if you think about mortgage rates, when mortgage rates for the third year dipped down to 6.5%, we saw some pickup in activity there. But then now that it's back over 7%, we've seen some slowdown there.

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

So mortgage banking is really going be driven by the rates ultimately there. And so it will be at the headwinds of whatever the rate environment is. The one item that we have been building out over time has been that SBA gain on loan sale business line that we have, and we have seen some pickup there. So in Q1, the gain on loan sale from SBA was around 800,000 and the run rate for last year was around $400,000 So we would expect that if we can continue to see that business line grow that we would continue to get some benefit from building that out.

Kelly Motta
Managing Director at Keefe, Bruyette & Woods (KBW)

Got it. That's helpful. Thanks again for the questions. Really nice quarter. I'll step back.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

Thank you, Kelly.

Operator

Thank you. The next question goes to Tim Coffey of Janney. Tim, please go ahead.

Timothy Coffey
MD & Associate Director of Depository Research at Janney Montgomery Scott

Great. Thank you. Good morning, everybody, and thank you for the opportunity to ask a question or two. Mark, if I can start with you, what is your outlook for the economy right now? Is just anything more severe than just a potential growth slowdown?

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

I do think that if we continue on the progress that we're making right now on the you know, the self inflicted wound on tariffs, I think there's quite a bit of uncertainty in the economy right now. And I'm a little bit more pessimistic than most that I think we're going to continue to see a slowdown, which is why over 2024, we build our balance sheet into a fortress style balance sheet. The positive for us is there's a lot of market disruption that occurs in our footprint with some of the banks that have combined are still struggling or are over lent, and it's providing us good opportunity to take market share. So I do anticipate that the economy is going to slow here, but I feel very positive that we're in a great position to take market share.

Timothy Coffey
MD & Associate Director of Depository Research at Janney Montgomery Scott

Okay. And just a question about the defense spending in your footprint, right? I mean, there's a lot It's it's hard to make those cuts to support facilities for nuclear submarines and aircraft carriers, and that's big in the Puget Sound area and San Diego. Do you think that embedded level of spending will help those economies and the markets that you're in there more than others?

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

I think that's an excellent question, Tim. So do you wanna talk about some of the investment that's being made in the sub base?

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

Yeah. No. I think sub base Bangor, Puget Sound, Maple Shipyard, the San Diego Shipyard, I I I think, Tim, you hit it. Those are going to be areas that are continuing to support and and bolster those communities. We also have Hanford and Eastern Washington that could have some, you know, negative implications in terms of those cuts.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

So, you know, it really is gonna be, community by community specific as to the lift to the economy supported by the federal government is the way I would respond to that. I don't know, Mark, if you would add anything else to that.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

No. I think you hit it right on the head, right? But it's right now, they are going to have to continue to support the fleet. And as there's more geopolitical issues that occur throughout the world, they're going to have to continue to support the fleet. So I think there'll be some additional investment into a lot of these areas that support it, right?

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

So that's a positive. I think it's more insulated than we think.

Timothy Coffey
MD & Associate Director of Depository Research at Janney Montgomery Scott

Yes. Okay. I appreciate that. And then just kind of marks about kind of your thoughts on a special dividend and just kind of what you think about it just holistically, just totally unrelated to the previous two questions, but just how you think about a special year in cash dividend?

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

Tim, it's Rob. So yes, I mean, as you know, we have done special dividends in the past. And so it's certainly a tool in the toolkit that we might use to manage capital levels. I would say it's probably lower on our priority right now as far as using the special dividend. I think there's probably some other opportunities we have that would be a better better, way to deploy capital currently, but I it's not something we're ruling out either.

Timothy Coffey
MD & Associate Director of Depository Research at Janney Montgomery Scott

Okay. Alright. I appreciate that, Rob. Thank you. And then, Jill, I know you've asked asked and answered a couple of questions on, tariffs, but I've got, I've got two more for you.

Timothy Coffey
MD & Associate Director of Depository Research at Janney Montgomery Scott

The first one is, as you're collecting financials from C and I borrowers, are you seeing anything in those financials that give you pause?

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

That's a pretty broad question when you think about PNI borrowers. I mean so hit and miss, certainly, there are things that give us pause. You know, you're seeing take health care, I guess, as one example where you're seeing increased costs that are not being offset by, you know, the top line revenue in some cases, especially in that not for profit health care side of the equation. So so kinda hard to answer there, Tim, on a specific case. You know, it's case by case.

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

But, yeah, there are things that make us step back and go, okay. How are they going to counter that? You know, what's the solution to that? Whether it's expense control or, you know, demand and revenue slipping.

Timothy Coffey
MD & Associate Director of Depository Research at Janney Montgomery Scott

Right. My apologies. I should have made it a little more general. Are you seeing anything any changes year over year that indicate a slowdown in your footprint?

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

No. Okay.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

Alright. It's it's still early. Still early.

Timothy Coffey
MD & Associate Director of Depository Research at Janney Montgomery Scott

Yeah. I I of course, it is. Alright. And just given kind of the overall outlook right now, Jill, have you increased any kind of oversight on the retail CRE book?

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

No. We haven't changed the way we manage the portfolio, but I would suggest that we have been pretty hands on from the get go through all business cycles. You know, we have this process that is a, you know, pretty deep and thorough portfolio review on a quarterly basis to, just make sure we're all on the same page as to what's, you know, happening across the general footprint.

Timothy Coffey
MD & Associate Director of Depository Research at Janney Montgomery Scott

Okay. Alright. Well, those are my questions. Thank you very much.

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

Thanks, Tim.

Operator

Thank you. We have a follow-up from David Feaster of Raymond James. David, please go ahead.

David Feaster
David Feaster
Director - Banking at Raymond James Financial

Hi. Thanks, everybody. Just one quick follow-up on California. When I look at you've had a lot of success there over the past several quarters on both loans and deposits. I'm just kind of curious what you're seeing in that market. I think it's somewhat underappreciated. But curious where you're having success and your thoughts on California and what's driving that growth?

Jill Rice
Jill Rice
Executive VP & Chief Credit Officer at Banner

I would say what's driving that growth is the additional talent that we have brought into the market both in Northern And Southern California and the success they are having in moving over clients and, bringing on new, you know, loans and deposits. So we we feel really good about that market and what they have been doing and would continue you know, expect that to continue to grow. Certainly, you're seeing some growth in the affordable housing construction that's been booked previously and funding up as well. But, the short answer is good talent added to the team.

David Feaster
David Feaster
Director - Banking at Raymond James Financial

Okay. Great. Thank you.

Robert Butterfield
Robert Butterfield
Executive VP & CFO at Banner

Thank you, David.

Operator

Thank you. We have no further questions. I'll hand the call back over to Mark for any closing comments.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

Thank you. As I've stated, we are very proud of the Banner team and the first quarter twenty twenty five performance that we had. It's a great way to kick off the year. Even though there's quite a bit of uncertainty out there, we feel very confident in our position to continue to grow the bank and the strength of our balance sheet and our core earnings power. So thank you for your interest and for joining the call today.

Mark Grescovich
Mark Grescovich
President & Chief Executive Officer at Banner

We look forward to reporting our results to you in the future. Thank you everyone and have a wonderful day.

Operator

Thank you. This now concludes today's call. Thank you for joining. You may now disconnect your lines.

Executives
    • Mark Grescovich
      Mark Grescovich
      President & Chief Executive Officer
    • Rich Arnold
      Rich Arnold
      Head-Investor Relations
    • Jill Rice
      Jill Rice
      Executive VP & Chief Credit Officer
    • Robert Butterfield
      Robert Butterfield
      Executive VP & CFO
Analysts
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