BANR - NASDAQ

Hello, everyone, and welcome to the Banner Corporation's First Quarter 2025 Conference Call and Webcast. My name is Nadia, and I'll be coordinating the call today. If you would like to ask a question, please press star, followed by one on the telephone keypad. I will now hand over to your host, Mark Grescovich, President and CEO of Banner Corporation to begin. Mark, please go ahead.

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, 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. 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. 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 December 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?

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 twenty 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 135 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 value. Now let me turn to an overview of our performance. As announced, Banner Corporation reported a net profit available to common shareholders of $45.1 million or $1.30 per diluted share for the quarter ended March 31, 2025. This compares to a net profit to common shareholders of $1.09 per share for the first quarter of 2024 and $1.34 per share for the fourth quarter of 2024. 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. 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 2025 core earnings were $59 million compared to $53 million for the first quarter of 2024. Banner's first quarter 2025 revenue from core operations was $160 million compared to $150 million for the first quarter of 2024. 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 2025. 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, 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 and our value proposition. Banner, again, was 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 and S&P Global Market Intelligence ranked Banner's financial performance among the top 50 public banks with more than $10 billion 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?

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. Adversely classified loans increased a modest $5 million in the quarter and represent 1.73% of total loans. Compared to 1.69% as of the linked quarter and 1.07% as of March 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 relation are very granular with an average commitment of less than $1 million. And as I have stated in prior calls, adversely classified loans are not centered in one business line or industry. Non-performing assets also increased in the quarter, up $3 million and represent 0.26% of total assets consisting of $39 million in non-performing loans, $3.5 million 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 proactive portfolio management. Loan losses in the quarter totaled $3.7 million and were offset in part by recoveries totaling $900,000. The net provision for credit losses for the quarter was $3.1 million including a $4.5 million provision for loan losses and a release of $1.4 million related to unfunded loan commitment. The provision was driven in large part by quantitative factors, including growth in the construction portfolio, risk grading 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 March 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. It is worth noting, however, that both commercial and commercial real estate pipelines continue to grow, reflecting a desire to proceed with capital investments. Loan outstandings grew by $84 million 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 million, land development up $26 million, and commercial construction up $24 million. 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 million quarter over quarter. Driven primarily by meaningful paydowns on a handful of larger commercial lines of credit. Total C&I utilization is up 1% in the quarter in spite of those paydowns. 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 to dollars or 2% in comparison to the linked quarter consumer mortgage portfolio increased modestly $9 million and consumer loans, centered in home equity lines of credit, declined $4 million 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 has negatively impacted 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. Given our diverse and granular loan portfolio, we expect the biggest impact be felt by the small business community who will be less able to absorb the increased cost face supply chain issues, reduced demand, and the overall general market disruption that is likely to fall. 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 a diverse and granular loan portfolio majority of which is supported by strong sponsors, personal guarantees, and properly margins collateral support will serve us well as we navigate these uncertain economic headwinds. I will follow my prepared remarks by reiterating what you have heard from me before. 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?

Great. Thank you, Jill. We report $1.30 per diluted share for the first quarter, compared to $1.34 per diluted share for the prior quarter. The $0.04 decrease in earnings per share was primarily due to fewer interest earning days in the current quarter and higher expenses in the first quarter. In addition, the prior quarter benefited from some nonrecurring gain on loan sale. Total loans increased $77 million during the quarter, with portfolio loans increasing $84 million. Dollars partially offset by health for sale loans decreasing $7 million. The loan to deposit ratio ended the quarter at 84%. Total securities decreased $5 million as normal portfolio cash flows were are largely offset by increase in fair value. Deposits increased $79 million during the quarter due to core deposits increasing $74 million. Client deposits increased $4 million as a $21 million decline in retail time deposits was offset by a $25 million increase in broker deposits. Core deposits into the quarter at 89% of total deposits. Same as the prior quarter. Total borrowings decreased to $116 million during the quarter, due to a decrease in FHLB advances. 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. 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 ten basis points to 3.92%. Partially offset by a decline in average earning assets and two less interest earning days in the quarter. The ten 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 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. The average rate on new production for the quarter was 8.01%. Funding cost decreased five basis points as a result of deposit cost decreasing six basis points. Non-interest bearing deposits ended the quarter at 34% of total deposits. Decrease in average earning assets was due to a $90 million decline in average interest bearing cash and investment balances. Partially offset by average loan balances increasing $64 million. The earning asset yield continues to benefit from 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 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 fully claim. Total non-interest expense increased $1.8 million 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.

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

Thank you. If you would like to ask a question, please press star, followed by one on the telephone keypad. If you would like to remove your question, please press star, followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question goes to Jeff Rulis of DA Davidson. Jeff, go ahead.

Thanks. Good morning. Morning, Jeff. Question on the 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 it any component there that you think you're that that can continue, or do you feel like both are in play at least in the short run and I guess ultimately leading to kind of margin. Expectations Yeah. So what I would say there, Jeff, is that on the on the funding side, the funding cost for the quarter was pretty much flat for the entire quarter. So the same for 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 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 get thirty days on a lot of loans from an interest perspective. But if if we think about going forward here so we use Moody's for interest rate four They're currently showing three twenty five basis point cuts in twenty five, the first one starting in July. And assuming that's correct, I would expect some NIM expansion in q two. 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 good 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. 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 cost come down a couple of basis points a quarter during the second half assuming that scenario. That that's great, Rob. Thank you. Maybe, hop to the credit. I think, Joe, you mentioned really no real industry specific stress, pretty granular, but just wanted to check if back in on the on the ag side. You you had mentioned some some prior caution on commodity prices, and and there was a small increase in in nonperformers in the quarter. Checking back in there, do you feel like you've that is just a continued area of watch or just how is the the trends on the on the ag side going?

Yeah. 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, with the increased tariffs, I 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 the this next period of months. To you know we we just have to kinda wait and see how long it plays out, but that is one of our primary areas of concern as it relates to tariff.

Okay. And just Joe, I'll have it. The mentioned line utilization on on c and I was down. I guess first part would be what what what is that number? Currently? And then Jill, if you could kinda kinda stabilize us on on growth for the full year, 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.

Okay. So I'm gonna go back and I'm gonna close out my egg 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 three percent of the loan book and it is, you know, almost half of which the real estate secured average loan size of one point two million. So just to put that into perspective as we continue to watch the risk in that portfolio. Line you commercial line utilization is in the mid thirty percent range, I believe, and you know, ticked up modestly. So overall, you know, we're running in that average utilization know, entire book, seventy five percent utilized, Historical averages are seventy percent. Seventy six percent. So C and I up construction up egg down in the quarter. So, you know, they kind of cross 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 twenty twenty five. When we went into the year, we were looking at a back half as 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, you know, tell exactly what's gonna happen with that level of uncertainty. We offset that, however, with the commercial pipelines that have been continuing to rebuild nicely. We had a good pull through rate first quarter even with that high level of uncertainty. And when we, you know, hit our q one expectations, even with the uncertainty, we don't have enough to actually change our thoughts as to what's gonna happen for the twenty twenty five plan at this time.

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

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

Hey. Good morning, everybody. Good morning, David. I kinda wanna just follow-up a little bit on that line of question. A bit. You know, I mean, obviously, you talked about you know, the pipelines and and but, you know, originations did decline quarter over quarter. And and it sounds like it's primarily a function of weaker demand. Even ahead of trade wars. I was hoping you could could touch on maybe any other competitive dynamics that you're seeing and and just you know, how is client demand and and the pipeline looking today? Have you started to see any anything falling out? Of that and just kind of the complexion of the pipeline and just where you're seeing opportunities for growth today?

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 but footprint and in in this 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, 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. They just need some of this noise to settle down.

Okay. That's helpful. And then, you know, maybe following up, you know, on on just the potential impacts on 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? I mean, we've already touched on Ag, which 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 especially within multifamily. You know, how do you think about managing know, just with potential rising construction costs and some of those kinds of things? Curious how your approach to this where you're, you know, where you're watching more closely in your approach to managing it in just in this kind of uncertain market?

So it'll be a 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 you step back and the heart of your question, say, what am I looking at and thinking about outside of egg? It it the tariffs are gonna 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 gonna affect our economy. Agriculture, we've talked about. West Coast ports, that's gonna affect our economy. Auto dealers, retailers, Boeing and other manufacturers, we 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? Manufacturing would represent approximately three percent of our loan book. Average loan size within all of those manufacturing NAICS codes would be under a million dollars. So in terms of individual risk, limited. In terms of aggregate risk in the portfolio, again, pretty small from the manufacturing sector. We don't have a lot of exposure to auto dealers. Largest loan size to auto dealers in our book is five million. I look at the transportation industry, one percent of our loan book. Look at the retail exposure, it's bigger. It's twelve percent of the loan book, but it's diversified geography. It's diversified by service and product and you know, industry. Ninety three percent of the retail exposure is real estate secured. So that, you know, reduces some risk there as well. And when you look at those last three segments, I named, each one of them would have less than one percent or or have an average loan size of one million or less. 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. I'll come back to what I said in my prepared remarks. Think the biggest impact is gonna be the small business sector and the consumer who's gonna bear the brunt of

Okay. That's great color. I appreciate that. And then just just last one for me, maybe touching on funding cost side. You you've you've done a great job, continue to drive core deposit growth reducing deposit costs even in an seasonally weaker quarter, I was hoping you could maybe touch on the competitive landscape for for deposits, your your strategy continue to drive core deposit growth, and and how you think about opportunities to further optimize funding costs and and, you know, you know, fund fund loan growth going forward.

Yeah. So so thanks, David. It's Rob. So so yeah. I guess a couple a couple things there. I mean, I I think there's limited opportunities as long as the Fed is on pause to see additional reductions in funding cost. And but but what we've been successful as is as as we're adding new clients from the lending side, we've been successful at also bringing across deposits. So I think I think we're 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 refunds start to come in as well. And and, you know, I mean, I think from we're, like, thinking about competitors right now in the marketplace, from the CD side is where you're seeing we're still seeing rate specials out there. I would say most of the rate specials are are in that three to seven month tenure right now. Although, we we do still see some rate specials out there in that twelve or thirteen month range and see it and and even some in the four percent. You know, I mean, we just have a very granular deposit base It's it's diversified from both metro versus rural, and it's also diversified geography wise. And and it's very granular deposit base. Average deposit size, you know, in that twenty nine thousand dollar range. So I think all that just helps helps us from a being able to kinda control our deposit cost and our funding costs over time.

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

Yeah. I I think on the so if we think about the security side, we're seeing around sixty million dollars 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. We continue to look at that. We've 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. Got it.

Thanks, everybody.

Thank you, David.

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

Thanks. Good morning. Really helpful information here. Tariffs. Really appreciate it. You know, capital continues to be a strength for Banner. I guess, how should we look at at at capital going forward? Is there an appetite to buy back stock with the stock down here? You wanna retain it for uncertainty? Mark, you just update your thoughts on on your capital plans.

Thanks, Andrew. It's Rob. So, yeah, I mean, our we we always talk about our number one priority is the core dividend and 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. We have an

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 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

first.

And so we're currently considering whether we repay that or whether we look at replacing that. So that's probably one of our top capital priorities right now. Got it. And then

any sort of change in m and a conversations over the last couple couple months

I would say thank you. Andrew. It's Mark. Let me just follow-up on Rob's comment. You know, 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. I think the conversations as they exist with m and a they continue to occur, but obviously, the current volatility is caused everybody to take a step back and and decide you know, how how do we proceed going forward? What is what is the credit metrics look like? What are the connect capital positions look like? There is favorability on the regulatory side. Which I'm encouraged by. But I think just given the pullback in valuations in the current market, I think we're gonna have to ride that out and see where it lands. Got it.

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

Thank you, Andrew.

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

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

Yeah. I I think as long as it's either set 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.

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

Yes. And then I'll I'll just ask you. We we talked about this a while back, but just, you know, line of sight to a four percent margin. When when I when I asked you that question previously, I think we were thirty basis points or so away, but you've closed that gap pretty quickly. I guess, you know, thinking of those kinda ranges of outcomes on the margin, does it feel feasible you can you can kinda pass four percent on the NIM in twenty twenty five?

Yeah. I don't I guess I'm not I'm not prepared to give a timeline on when we're gonna cross the four percent level, but I mean clearly if you look at historically we have been above four percent and I think under the right market conditions, we can get back there again. And 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, I think we would get there. Yeah.

Okay. And if I could just lastly check-in on expenses. I think, like, last quarter, we talked about one hundred million dollars or so run rate being a good base to build off of in twenty twenty five with kind of normal inflationary growth. Just wanted to check-in, you know, any any thoughts changed on expenses You know, how how should we think about kinda quarterly progression as we move throughout the year on the expense base?

Yeah. I mean, expenses always move around a bit quarter to quarter, so it's not in usual to see us swing up 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 for twenty twenty five.

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

Thank you, Andrew.

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

Hey. Good morning. Thanks for the question. Most of mine have been asked and answered at this point. I just just wondering is is this last quarter a good indication of the tax rate for the year, and are there any you know, upcoming tax credit investments or anything of that nature that we should factor into the model.

Kelly, it's Rob. So, yeah, 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.

Got it. That's helpful. Last one for me, I know part of Banner Forward initiative were developing some sources of p p revenue. Just wondering if you could provide now an update on your outlook for fees. It looks like maybe the deposit fees and service charge line was 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.

Sure. Yeah. I think if you look at q one, and and you just back out the the bully claim that we have there, that's probably a decent decent run rate for for twenty twenty five. And you know, if you think about mortgage rates you know, they when mortgage rates for thirty year dip down to and a half percent, we saw some pickup in activity there. But then now that it's back over seven percent, we see some slowdown there. So mortgage banking is is really gonna 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 sell business line that we have. And we have seen some pickup there. So in q one, the gain on loan sale from SBA was was around eight hundred thousand, and the run rate for last year was around four hundred thousand. So we would expect that, you know, if we can kind continue to see that business line grow that we would continue to get some benefit from building that out.

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

Thank you, Kelly.

Thank you. And as a reminder, if you would like to ask a question, please press The next question goes to Tim Coffey of Janney. Tim, please go ahead.

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 it is it just anything more severe than just a potential growth slowdown?

I I do think that if we continue on the progress that we're making right now on the as 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 gonna continue to see a slowdown which is why over two thousand twenty four, we you know, 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, you know, some of the banks that have combined or are still struggling. Or over lent, and it's providing us good opportunity to take market share. So I do anticipate that the economy is gonna gonna slow here. But I feel very positive that we're in a great position to take market share.

Okay. And just a question about the defense spending and your footprint. Right? I mean, there's a lot It 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 the markets that you're in there more than others?

I think that's an excellent question, Tim. Shelby, you wanna talk about some of the investment that's being made? In the sub base Yeah. No. I think

subbase Banger, Puget Sound Naval Shipyard, the San Diego Shipyard, I think Tim you hit it. Those are going to be areas that are continued to support and and bolster those communities. We also have Hanford and Eastern Washington that could have some negative implications in terms of those cuts. 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'm would respond to that. I don't know, Mark, if you would add anything else to that. No. I think I think you're

think you hit it right on the head. Right? But, you know, it's right now, they are gonna have to continue to support the fleet. And as there's more geopolitical issue that occur throughout the world, they're gonna have to continue to support the fleet. So I think there'd be some additional investment in into a lot of these areas that that support it. Right? So that's a positive I think it's more insulated than we than we think. Yep. Okay. I appreciate that. And then this kind of marks about can you have thoughts on a special dividend and just kind of what you think about it you know, just holistically? Just, you know, totally unrelated to the previous two questions. But just how you think about a a special year in cash dividend?

Hey, Tim. It's Rob. So yeah. I mean, as you know, we have done special dividends in the past. And so it's certainly a 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 It's you know, I 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 rolling out either.

Okay. Alright. I appreciate that, Rob. Thank you. And then, Jill, I know you've had and asked and answered a couple of questions on tariffs, but I've got I've got two more for you. The first one is, as you're collecting financial from C and I borrowers, are you seeing anything in those financials that give you pause?

Well, 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, is one example where you're seeing increased costs that are not being offset by the top line revenue in some cases, especially in that not for profit health care side of the equation. So it's kinda hard to answer that, Tim, on a specific case. You know, it's case by case. 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.

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

No.

Okay.

Alright. It's still early. It's still early.

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

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. Okay.

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

Thanks, Tim.

You. We have a follow-up from David Feaster of Roman James. David, please go ahead.

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

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 mark. Market and what they have been doing and within 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.

Okay. Great. Thank you.

Thank you, David.

Thank you. We have no further questions. So Hannah call back over to Mark for any closing comments.

Thank you. As I've stated, we're 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 very confident and our position to continue to grow the bank and the strength of our balance sheet and our core earnings power. Thank you for your interest and and for joining the call today. We look forward to reporting our results to you in the future. Thank you everyone and have a wonderful day.