Banner Q2 2025 Earnings Call Transcript

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Provided by Quartr
July 17, 2025

Key Takeaways

  • Positive Sentiment: Banner reported a net profit of $45.5 million, or $1.31 per diluted share, in 2Q25, with core pretax, pre-provision earnings rising to $62 million from $52 million a year ago.
  • Positive Sentiment: Loan outstandings grew by $252 million (9% annualized, 5% YoY) across CRE, C&I and construction, while core deposits increased 4% YoY and represented 89% of total funding.
  • Positive Sentiment: Asset quality remained strong with delinquencies down to 0.41% of loans, nonperforming assets at 0.3% of assets, and a credit loss reserve covering 1.37% of loans.
  • Positive Sentiment: Net interest margin held at 3.92% as loan yields climbed, and management expects a further 4–5 bp pickup per quarter absent Fed cuts.
  • Negative Sentiment: Management noted that potential West Coast tariffs and policy changes could weigh on small businesses and consumers if implemented, posing a downside risk.
AI Generated. May Contain Errors.
Earnings Conference Call
Banner Q2 2025
00:00 / 00:00

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Operator

Hello, everyone, and welcome to the Banner Corporation Second 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 Grecovich, President and CEO, to begin. Mark, please go ahead.

Mark Grescovich
Mark Grescovich
Director, President & CEO at Banner Bank

Thank you, Nadia, and good morning, everyone. I would also like to welcome you to the second 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
SVP & Director - IR at Banner Bank

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, forecasts 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
SVP & Director - IR at Banner Bank

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 risk factors that could cause actual results to differ are available from the earnings press release that was released yesterday and the recently filed Form 10 Q for the quarter ended 03/31/2025. 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
Director, President & CEO at Banner Bank

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 second 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, Joe Rice will provide comments on the current 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 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 one hundred and thirty five years.

Mark Grescovich
Mark Grescovich
Director, President & CEO at Banner Bank

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 45,500,000 or $1.31 per diluted share for the quarter ended 06/30/2025.

Mark Grescovich
Mark Grescovich
Director, President & CEO at Banner Bank

This compares to a net profit to common shareholders of $1.15 per share for the 2024 and $1.3 per share for the first quarter of twenty twenty five. 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 the strong reputation we maintain in our markets will allow us to manage through the current market uncertainty. Rob will discuss a number of 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, building and lease exit costs and changes in fair value of financial instruments.

Mark Grescovich
Mark Grescovich
Director, President & CEO at Banner Bank

Our second quarter twenty twenty five core earnings were $62,000,000 compared to $52,000,000 for the second quarter of twenty twenty four. Banner's second quarter twenty twenty five revenue from core operations was $163,000,000 compared to $150,000,000 for the second 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 1.13% for the second quarter of twenty twenty five. Once again, our core performance reflects continued execution on our super community bank strategy.

Mark Grescovich
Mark Grescovich
Director, President & CEO at Banner Bank

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 4% 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. Finally, I'm pleased to say that we continue to receive marketplace recognition and validation of our business model and our value proposition.

Mark Grescovich
Mark Grescovich
Director, President & CEO at Banner Bank

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 and the world again this year and just recently named Banner one of the best regional banks in the country. J. D. Power and Associates named Banner Bank the best bank in the Northwest for retail client satisfaction.

Mark Grescovich
Mark Grescovich
Director, President & CEO at Banner Bank

Our company was recently certified by Great Places to Work 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 have noted previously, Banner Bank received an outstanding CRA rating. Let me now turn the call over to Jill to discuss trends in our loan portfolio and her comments on Banner's credit quality. Jill?

Jill Rice
Jill Rice
EVP & Chief Credit Officer at Banner Bank

Thank you, Mark, and good morning, everyone. As reflected in our earnings release, loan originations were strong. We reported solid loan growth across multiple product lines and Banner's credit metrics remained stable. Loan originations increased 80% when compared to the linked quarter with commercial real estate up four eighty four percent, C and I originations up 96% and construction and land development increasing 43% respectively, all while commercial and commercial real estate pipelines continue to build. This level of activity reflects a certain amount of business confidence in spite of the continuing higher rate environment and yet to be finalized trade negotiations.

Jill Rice
Jill Rice
EVP & Chief Credit Officer at Banner Bank

Loan outstandings grew by $252,000,000 in the quarter or 9% on an annualized basis and are up 5% year over year, in line with our year to date expectations. The primary drivers of the growth were owner occupied commercial real estate up 104,000,000 C and I loans up $65,000,000 and the construction and development book with one to four family construction up $48,000,000 land development up $21,000,000 commercial construction up 13,000,000 partially offset by expected payoffs in the multifamily construction portfolio. The growth in owner occupied commercial real estate is a mix of new middle market clients, expansion of existing relationships and continued solid performance in new small business generation. The C and I story is similar with growth coming from the expansion of existing relationships, increased line utilization and meaningful small business originations. The residential construction portfolio at 5% of total loans continues to be diversified across markets and product mix, and the level of complete and unsold inventory remains below historical norms as builders have become more cautious with replacement starts in this extended high rate environment.

Jill Rice
Jill Rice
EVP & Chief Credit Officer at Banner Bank

The increase in land and land development reflects the builders' need to replenish finished lot inventory with land development financing reserved for the strongest vertically integrated clients within the portfolio. Aggregating all business lines in the construction portfolio, the total remains balanced at 15% of total loans. Agricultural loans increased 3% in the quarter as both the size of operating lines and line utilization increased to cover higher operating costs and normal seasonal activity. And the growth in consumer one to four family secured loans reflects a strong home equity promotion that occurred in the second quarter. Circling back to Banner's credit metrics, delinquent loans declined to 0.41% of total loans as compared to 0.63% last quarter and 0.29% as of 06/30/2024.

Jill Rice
Jill Rice
EVP & Chief Credit Officer at Banner Bank

Adversely classified loans also declined in the quarter over quarter, down $8,300,000 and represent 1.62% of total loans, an 11 basis point decrease when compared to March 31. In spite of the $7,000,000 increase in the quarter, nonperforming assets remained modest at 0.3% of total assets. Non performing loans totaled $43,000,000 the majority of which are consumer related, primarily residential mortgage loans, which involve prolonged resolution timelines given consumer protection regulations. REO balances totaled $6,800,000 up $3,300,000 in the quarter as we completed the foreclosure on an industrial property and two small single family properties during the quarter. Loan losses in the quarter totaled $1,700,000 and were offset in part by recoveries totaling $600,000 The net provision for credit losses for the quarter was $4,800,000 including a $4,200,000 provision for loan losses and a $588,000 provision related to unfunded loan commitments.

Jill Rice
Jill Rice
EVP & Chief Credit Officer at Banner Bank

The provision was largely driven by the strong loan growth with the reserve for credit losses providing coverage of 1.37% of total loans, which compares to 1.38% as of the linked quarter and 1.37% as of 06/30/2024. Last quarter, I noted that the level of economic uncertainty, coupled with the myriad of policy changes that were being implemented, created a potential headwind that could negatively impact our clients and communities. To date, that has largely not materialized, evidenced by the strong loan originations and growth in the quarter as the implementation of international tariffs were paused. With those policy changes again being suggested as imminent, I am compelled to reiterate that if adopted, they will almost certainly have a negative impact on the West Coast economies with the majority of the burden borne by the small business sector and further stressing the consumer. Still in these uncertain times, Banner's super community delivery model coupled with a consistent approach to underwriting credit has enabled us to expand existing and grow new relationships while maintaining our moderate risk profile.

Jill Rice
Jill Rice
EVP & Chief Credit Officer at Banner Bank

Our strong balance sheet, robust capital base and solid reserve for loan losses continue to serve us well. With that, I will hand the microphone over to Rob for his comments. Rob?

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

Great. Thank you, Jill. We reported $1.31 per diluted share for the second quarter compared to $1.3 per diluted share for the prior quarter. The $01 increase in earnings per share was primarily due to an increase in net interest income, partially offset by the current quarter including costs associated with consolidating back office space as well as a higher provision for credit losses due to growth in the loan balances. We experienced strong positive operating leverage during the quarter compared to both the prior quarter and the quarter ended 06/30/2024, as core pretax pre provision income increased 6.6% or $3,900,000 compared to the prior quarter and increased 19% or $10,000,000 compared to the year ago quarter.

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

Total loans increased $265,000,000 during the quarter with portfolio loans increasing $252,000,000 or nearly 9% on an annualized basis. And held for sale loans increased 13,000,000 The loan to deposit ratio ended the quarter at 87%. Total securities decreased $55,000,000 primarily due to normal portfolio cash flows. Deposits decreased by $66,000,000 during the quarter due to core deposits decreasing $40,000,000 as a result of normal seasonal activity. Time deposits decreased $26,000,000 due to a 25,000,000 decrease in brokered deposits.

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

Core deposits ended the quarter at 89% of total deposits, same as the prior quarter. Total borrowings increased $3.00 $9,000,000 during the quarter as FHLB advances were used to temporarily fund loan growth. Banner's liquidity and capital profile continue to remain strong with robust core funding base, a low reliance on wholesale borrowing and significant off balance sheet borrowing capacity. As a reflection of our robust capital and strong liquidity positions, Banner called and repaid $100,000,000 of subordinated notes at the end of the quarter. Net interest income increased $3,300,000 from the prior quarter due to average interest earning assets increasing $188,000,000 and one more interest earning day in the current quarter.

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

The increase in average earning assets was due to average loan balances increasing $223,000,000 partially offset by total average interest bearing cash and investment balances decreasing $36,000,000 The earning asset yield continues to benefit from a remixing out of securities and into loans. Tax equivalent net interest margin was 3.92%, same as the last quarter. Earning asset yields increased five basis points due to a five basis point increase in loan yields 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. The average rate on new loan production for the quarter was 7.27% compared to 8.01% for the prior quarter. The reduction was due to a higher percentage of production coming from owner occupied CRE and C and I in the current quarter.

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

Funding costs increased five basis points as a result of using FHLB advances to temporarily fund loan growth and seasonal tax deposit declines. Deposit costs were 1.47% for the current quarter, which was consistent with the prior quarter. Non interest bearing deposits ended the quarter at 33% of total deposits. Total non interest income decreased 1,400,000.0 from the prior quarter, primarily due to a loss of 919,000 on the disposal of assets related to back office space consolidation and a 227,000 net difference in the fair value adjustments on financial instruments carried at fair value. Total non interest expense was similar to the prior quarter with increases in salary and benefits, information technology, marketing, and REO expenses, which were offset by higher capitalized loan origination expense.

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

The current quarter included $834,000 of lease termination costs associated with back office space consolidation. Our strong capital and liquidity levels position us well to continue to execute on our Super Community Bank business model. This concludes my prepared comments. Now I'll turn it back to Mark.

Mark Grescovich
Mark Grescovich
Director, President & CEO at Banner Bank

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

Operator

Great. Thank Our first question goes to David Feaster of Raymond James. David, please go ahead.

David Feaster
David Feaster
Director - Banking at Raymond James Financial

Good morning, everybody.

Mark Grescovich
Mark Grescovich
Director, President & CEO at Banner Bank

Good morning, David.

David Feaster
David Feaster
Director - Banking at Raymond James Financial

I just wanted to follow-up maybe on Jill, you touched on it a bit about the improvement in originations. It's really an impressive increase. And I was just hoping you could elaborate maybe a bit more on from your standpoint, did anything change? Or do you feel like your customers are more comfortable with the broader economy? Or was there any kind of a timing issue?

David Feaster
David Feaster
Director - Banking at Raymond James Financial

Just curious whether there's anything to read into that and just kind of how the pipelines are holding up just given that increase in originations.

Jill Rice
Jill Rice
EVP & Chief Credit Officer at Banner Bank

So the increase in originations certainly pulled some of the pipeline out, and so they're rebuilding now. And if you look back historically, I think what you would see, David, is that q one is q one and q three are generally slower than q two and q four. So the tariff noise that happened at the end of q one certainly slowed things down there and the policy changes. They that opened back up a little bit, pulled some of that through. So, you know, what was muted loan growth in q one came in in q two.

Jill Rice
Jill Rice
EVP & Chief Credit Officer at Banner Bank

And I guess at the end of the day, what I would say to you is that I'm still expecting us to hit that mid single digit growth rate for the year. I expect we'll see a little bit of a pullback in q three, but, you know, we had a 5% annualized year over year in q one. We had a 5% annualized year over year in q two, and that's roughly what we're projecting for the year of 2025.

David Feaster
David Feaster
Director - Banking at Raymond James Financial

Okay. Okay. That's helpful. And and then maybe just touching on on the funding side a bit, you know, anecdotally, it's just we're hearing a lot more competition on on the deposit side as growth has increased across the industry. Could you just maybe touch on obviously, there's some seasonality too, but just kind of curious what you're seeing on the core deposit front, some initiatives that you got in place to maybe drive core deposits and and maybe, you know, just how you think about funding that additional loan growth over the back half of the year?

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

Yeah, David. So just from a this is Rob. So just from a overall pressure on deposits, we're not necessarily seeing competition heat up on deposits at this point. We're we're not seeing kind of competitive peer banks, increasing rate specials right now. Everything seems to be a a bit more static.

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

I mean, deposits are always highly competitive, so let's just keep that in mind. But the ultra competitive department or environment that we experienced, you know, really, you know, a year ago is not quite what we're seeing right now. I mean, really, I mean, our our whole philosophy all along has been relationship banking. And so our expectation is is that as we are bringing in new clients, we expect it to come with the total relationship, not only the loans, but also the deposits. And we've also talked about that, we're heavily focused on on small business, and small business tend to be deposit rich in their relationships, so that tends to help as well.

David Feaster
David Feaster
Director - Banking at Raymond James Financial

Okay. And then to the extent that that loan growth continues to to outpace deposits, I mean, would you expect to kind of bridge that gap? I guess, first, could you remind us the cash flows from the securities book? And then would you expect to kind of bridge the gap with or, you know, plug it with, you know, FHLB advances? Or is there any shift in appetite to maybe, you know, look at repositioning securities or selling anything to free up some liquidity to to fund the growth that you guys are seeing?

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

Yes. So so, David, on the security portfolio, first of all, it's about 60,000,000 a quarter of the the cash flows that are coming off right now. We we're not currently planning any kind of repositioning, but we would you know, we're remain some flexibility there just depending on if market conditions change. And what was the first part of the question? I'm sorry. I'm trying to

David Feaster
David Feaster
Director - Banking at Raymond James Financial

And just kind of to the extent that, again, growth exceeds core deposit growth. Is the FHLB advances kind of a plug or just, you know, kind of curious how you think about funding your growth going forward?

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

Yeah. It was a plug for this quarter certainly, and I think that's why we saw that increase in funding costs during the quarter was deposit costs were flat, but funding cost was up because of the combination of two, both the really strong loan growth that we had for the quarter, but then also just normal seasonal deposit outflows that we experienced during the first two months of the quarter. And so that's why you saw FHLB advances increase. If normal seasonality returns, we would expect that we would see deposit growth happen in the third quarter, and deposit growth could very well outpace loan growth in the third quarter if historical, kind of trends come in line. And so, I mean, usually, during the third quarter, that's when we see our ag clients, their crops come in, cash comes in from that.

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

So historically, we've always seen increases in deposits during the third quarter.

David Feaster
David Feaster
Director - Banking at Raymond James Financial

Okay. That's helpful. Thanks everybody.

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

Thanks David.

Operator

The next question goes to Andrew Carroll of Stephens. Andrew please go ahead.

Andrew Terrell
Managing Director at Stephens Inc

Hey, good morning. Good morning. If I could just finish up kind of on the margin of funding there, the sub debt that was redeemed or paid off this quarter, do you have the rate on that or the cost of it? Just trying to get a sense for, you know, the rate of what's remaining.

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

Yeah. It the the cost on that at the time, so it was 5%, but then there was also amortization of some of the, you know, original debt issuance cost there. So it was it was about $5.50 was the all in cost on that sub debt. And so we would expect some some pickup, reduction in in funding cost because now, you know, effectively, if you move that from the $5.50 to FHLB advances, at least temporarily, I mean, they're in the $4.50 range. So maybe we pick up a 100 basis points on that.

Andrew Terrell
Managing Director at Stephens Inc

Yep. Got it. Okay. I appreciate it. And then maybe sticking with you, Rob, on just the expense base.

Andrew Terrell
Managing Director at Stephens Inc

You definitely had maybe a little bit of a benefit this quarter from the deferred origination costs. It sounds like maybe loan growth is a little bit slower in the 3Q. Just hoping to get a sense of kind of the puts and takes of the expense base into the back half of the year and if you have kind of an expected quarterly run rate?

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

Yeah. So, Andrew, on on the expense side of the equation, you know, we continue to go live with some of the different modules on the new deposit and loan origination system. So in the second half of the year, we would expect IT expenses to to increase. And what we're looking at is we're we're looking at kind of over the longer term offsetting a portion of that with, consolidation of some additional back office space. I think you saw some of those nonrecurring expenses come through during the current quarter, but we would probably expect that we continue to see some nonrecurring expenses come through probably over the next three or four quarters related to that specific initiative.

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

And if you think about our run rate, you know, what we talked about is the first quarter was probably a decent run rate that we would expect, and then if you kinda layer in just normal inflationary changes as you go forward from there. As you mentioned, the second quarter was was down, and that was partially driven really by the higher capitalized loan cost, higher origination, you know, just due to the higher originations. But if you think about q one was really low originations historically as well. So we would expect capitalized loan cost probably to be somewhere in between those two.

Andrew Terrell
Managing Director at Stephens Inc

Got it. Okay. Thank you. And I just wanted to ask, for you, maybe for Mark. The M and A environment seems like it's maybe a little more amicable today, and we've seen quite a few deals announced.

Andrew Terrell
Managing Director at Stephens Inc

Just curious if anything has changed in terms of your view on M and A, how palatable you see it being today? And then just any update on kind of status of discussions or how M and A kind of fits into the banner strategy over the kind of near to medium term?

Mark Grescovich
Mark Grescovich
Director, President & CEO at Banner Bank

Yes. Thank you, Andrew, the question. Clearly, there's been a number of transactions that have been announced. Think certainly, the m and a environment has picked up and conversations have have picked up. But what I would remind you is that our organization is totally focused on our organic business operation.

Mark Grescovich
Mark Grescovich
Director, President & CEO at Banner Bank

And as you can see by the numbers that we put up quarter over quarter and year over year, the organic business model and our execution, we're very focused on it and it's very successful. So opportunistic M and A is something we will continue to look at, but I don't feel compelled that we have to do anything. It is simply something that I think the entire industry is going to continue to look to some consolidation to get additional efficiencies, but we remain very focused on our organic business model.

Andrew Terrell
Managing Director at Stephens Inc

Great. Thank you for taking the questions.

Mark Grescovich
Mark Grescovich
Director, President & CEO at Banner Bank

Thank you, Andrew.

Operator

The next question goes to Jeff Rulis of D. A. Davidson. Jeff, please go ahead.

Jeffrey Rulis
MD & Senior Research Analyst at D.A. Davidson

Thanks. Good morning. Jill, I had a question about that. Good morning, Mark. The loan growth comment you made about a pullback in the third quarter, was that a pullback from the 9% pace from 2Q or a net run up? I guess, is it still positive, correct?

Jill Rice
Jill Rice
EVP & Chief Credit Officer at Banner Bank

Yeah. It's a pullback from the 9% growth rate. And if you look in our disclosures, right, if you just quarter over quarter, third quarter is generally a little slower than second quarter.

Jeffrey Rulis
MD & Senior Research Analyst at D.A. Davidson

Got it. Thanks for clarifying. And Rob, on the back to the margin, you you got that the pickup or the reduction from from the sub debt move as well as, okay, I guess if loan growth levels off or slows down a little bit and FHLB needs are somewhat reduced and you get that maybe the seasonal pickup in deposits frames up a pretty good margin outlook. I guess if you think about the second half absent any Fed moves expectations there that sounds like that's more, I guess tailwinds than headwinds on the margin.

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

Yes. I think that's right, Joe. The as long as the Fed is on pause, which you know, we use Moody's. I think last forecast I saw from them, were gonna assuming with no rate cut until September, that's a long time from now. So we'll see what really happens and and then an additional one in December.

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

And under that scenario, we would expect loan yields to continue to increase four to five basis points a quarter. So the third quarter, we'd see that, you know, kind of the same clip that we experienced during the the second quarter as far as loan yield expansion. And the funding side's where, you know, there's probably a little less predictability. But if we do assume that, deposit cost would remain flat, but where we could see the improvement in funding costs would be that normal seasonal activity. If that third quarter seasonal increase comes in deposits, then we'd have a lower reliance on FHLB advances, which would reduce the funding cost.

Jeffrey Rulis
MD & Senior Research Analyst at D.A. Davidson

Got it. Thank you. Last one for me was maybe on the credit side, where the risk rating downgrade for additions did not include, we assume, Jill, you're cautious on the small business and consumers. Are those the areas that added to those balances this quarter?

Jill Rice
Jill Rice
EVP & Chief Credit Officer at Banner Bank

So you kind of faded out on me, Jeff, but the the decrease in substandard this quarter was really a mix. We had several upgrades, a couple of payoffs, and then a handful of downgrades into substandard for that net change of 8,300,000.0. The agricultural sector has experienced more downgrades due to the pressure on commodities prices and input costs. So we are seeing some continued pain in the ag sector. So I'll remind you it's 3% of the loan portfolio, 50% operating lines, 50% real estate secured.

Jill Rice
Jill Rice
EVP & Chief Credit Officer at Banner Bank

I continue to watch the small business sector. Looking forward, we haven't seen, you know, real pain in it yet. The delinquencies are pretty static in that as well. So it's just where I think the pain of the tariffs will ultimately land before they get pushed to the final consumer. Hopefully, that answered your question as you were fading out on me, Jeff. If I didn't hit it all Sorry.

Jeffrey Rulis
MD & Senior Research Analyst at D.A. Davidson

Yeah. Okay. So the sorry. I think it was a headset thing. The the little bump in nonperforming was was mostly ag.

Jill Rice
Jill Rice
EVP & Chief Credit Officer at Banner Bank

Actually, no. That was substandard. Sorry, Jeff. The bump in nonperforming is almost exclusively one to four family residential properties due to that extended time period and what you know, the way we have to work with them with consumer protection laws, it's they take a long time to work their way through.

Jeffrey Rulis
MD & Senior Research Analyst at D.A. Davidson

Sure. Okay. That's good detail. Thank you.

Mark Grescovich
Mark Grescovich
Director, President & CEO at Banner Bank

Thanks, Jeff.

Operator

Thank you. And the next question goes to Kelly Motta of KBW. Kelly, please go ahead.

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

Hey, good morning. Thanks for the question. Maybe I would start off by circling back on the margin. There's been a lot of moving parts and I appreciate all the color thus far. But wondering, particularly in light of the really strong loan growth, I know one of the drivers of margin ahead has been just the back book repricing of the loan book. So wondering how spreads are holding up, new where new pricing is coming in, and if there's, there's a lot of color on the deposit competition, but wondering, how how things are holding up on the loan side in terms of pricing and spreads. Thank you.

Jill Rice
Jill Rice
EVP & Chief Credit Officer at Banner Bank

So, Kelly, on the loan side, pricing on the term pieces are, you know, they're pretty they are holding up. They're you know, there's hasn't been a lot of change in that. You know, where we're gonna see the change will be in the variable rate portfolio when the rates reset. If you look at the originations and see, you know, the dip in the yield quarter over quarter, it was really the different mix between the product type, you know, less construction and more c and I and owner occupied CRE. But in general, they, the yields are holding up.

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

Got it. And I I think, Rob, in the commentary on on prior calls have been, like, roughly a five basis point increase in loan yields absent, Fed cuts, which would cut into that. I'm wondering if that kind of rough rule of thumb still holds in terms of modeling from the NIM perspective.

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

Yeah. I think I think that's right. I'd say four to five basis points, what is what I would expect. And I think the modeling showing that that would continue as long as the fed is on pause for the for the next, you know, handful of quarters. But over time, that backlog of adjustable rate loans that haven't repriced through the cycle, kind of continues to dwindle.

Robert Butterfield
Robert Butterfield
EVP & CFO at Banner Bank

So over time, we'd expect that to, you know, trend down over time. But in the near term, we would expect it in that four to five basis point range.

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

Got it. That's that's helpful. Maybe last question for me on on loan growth. Obviously, was a really good quarter. Wondering, Jill, are you seeing any particular markets where there's been better opportunities or the activity is holding up a bit better?

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

Just wondering if there's any sort of regional differences that, or color on that front that you could provide.

Jill Rice
Jill Rice
EVP & Chief Credit Officer at Banner Bank

Yes, Kelly. I would say this past quarter largely when you think of the more middle market space, it was more Pacific Northwest generated than California. I think when you look at the small business origination, both C and I and the owner occupied CRE, that's broad based across the footprint. And then I guess I would add that I would expect to see some solid growth out of coming out of California as we've added several seasoned relationship managers recently to that market. So I expect more growth coming in the California market in the near term.

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

Got it. That's helpful. I'll step back. Thank you so much.

Mark Grescovich
Mark Grescovich
Director, President & CEO at Banner Bank

Thank you, Kelly.

Operator

It appears we have no further questions. I'll hand back to Mark for any closing comments.

Mark Grescovich
Mark Grescovich
Director, President & CEO at Banner Bank

Thank you, Nadia. As I stated, we're very proud of the Banner team and our second quarter twenty twenty five performance. Thank you for your interest in Banner and joining our call today. We look forward to reporting our results again to you in the future. Have a great day, everyone.

Operator

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

Executives
    • Mark Grescovich
      Mark Grescovich
      Director, President & CEO
    • Rich Arnold
      Rich Arnold
      SVP & Director - IR
    • Jill Rice
      Jill Rice
      EVP & Chief Credit Officer
    • Robert Butterfield
      Robert Butterfield
      EVP & CFO
Analysts
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