Banner - Earnings Call - Q1 2025
April 17, 2025
Executive Summary
- Q1 2025 EPS of $1.30 and net income of $45.1M; tax-equivalent NIM expanded 10 bps sequentially to 3.92% as loan yields rose and deposit costs fell; adjusted efficiency ratio was 62.18%.
- Revenue (GAAP) was $160.191M, roughly flat vs Q4 2024 and up 10.8% YoY; management called out resilient core deposits at 89% of total and solid credit reserve coverage (ACL 1.38% of loans; 404% of NPLs).
- Against S&P Global consensus, Banner posted a significant EPS beat (Actual $1.30 vs $1.218*), while S&P’s revenue framework shows a modest miss (Actual $157.052M* vs $159.673M*), noting definitional differences vs company-reported GAAP revenue; estimates likely need upward revision given margin trajectory.
- Call catalysts: CFO guided to potential further NIM expansion in Q2 if the Fed remains on pause and deposit costs stay flat; management flagged emerging tariff and border-related macro headwinds (agriculture, retail) but reiterated fortress balance sheet and capital flexibility (pending $100M sub debt reset on July 1).
What Went Well and What Went Wrong
What Went Well
- Net interest margin expanded 10 bps to 3.92%, driven by 5 bps higher loan yields and 6 bps lower deposit costs; management expects additional NIM tailwinds in Q2 if rates remain on pause (“I would expect some NIM expansion in Q2…assuming funding costs stay flat and loan yields expand”).
- Core deposits remained strong at 89% of total, helping keep total funding cost at 1.55%; CFO noted success in pulling deposits with new lending relationships and seasonality from tax refunds.
- Credit reserves and capital robust: ACL 1.38% of loans and 404% of NPLs; CET1 12.60%, Tier 1 leverage 11.22%, total capital 15.23% (estimated); management emphasized “fortress-style” balance sheet positioning.
What Went Wrong
- Nonperforming assets increased sequentially to 0.26% of assets ($42.7M), with NPLs at $39.0M; delinquent loans rose to 0.63% of total loans; management cited rate environment and sector-wide operating cost pressures.
- Non-interest income decreased $0.9M QoQ, reflecting the absence of Q4 gains on a nonperforming loan and pooled loan sale; mortgage banking revenue softened sequentially ($3.1M vs $3.7M) amid rates >7%.
- Emerging macro headwinds: management flagged tariff impacts, Canadian border crossing declines affecting NW WA tourism, and small-business sensitivity to rising costs (“Tariffs will have a negative impact to West Coast businesses… biggest impact… small business and the consumer”).
Transcript
Operator (participant)
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 your telephone keypad. I will now hand over to your host, Mark Grescovich, President and CEO of Banner Corporation, to begin. Mark, please go ahead.
Mark Grescovich (CEO)
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?
Rich Arnold (Head of Investor Relations)
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. 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-K for the year ended December 31st, 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 (CEO)
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. 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. 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 values. Now let me turn to an overview of our performance. As announced, Banner Corporation reported a net profit available to common shareholders of $45.1 million or $1.30 per diluted share for the quarter ended March 31st, 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 pre-tax, pre-provision earnings excluding gains and losses on the sale of securities, changes in fair value of financial instruments. Our first quarter 2025 quarter 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 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. 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.
Jill Rice (Chief Credit Officer)
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 31st, 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 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 and 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 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 March 31st, 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 when the economy stabilizes. 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 pay downs 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 their seasonal decline with balances down $5 million or 2% in comparison to the linked quarter.
The 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 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.
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 follow, 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. 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.
Rob Butterfield (CFO)
Great. Thank you Jill. We reported $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 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-recurring gain on loan sale. Total loans increased $77 million during the quarter with portfolio loans increasing $84 million partially offset by held-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 largely offset by an increase in fair value. Deposits increased $79 million during the quarter due to core deposits increasing $74 million.
Time 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 ended the quarter at 89% of total deposits, same as the prior quarter. Total borrowings decreased $116 million during the quarter due to a decrease in FHLB advances. 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 4 basis point increase in earning asset yields was due to loan yields increasing 5 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 costs decreased 5 basis points as a result of deposit costs decreasing 6 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 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 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. 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.
Mark Grescovich (CEO)
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 (participant)
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to remove your question, please press star followed by two. When preparing to ask your question, please enter your phone as unmuted locally. Our first question goes to Jeff Rulis of D.A. Davidson. Jeff, go ahead.
Jeff Rulis (Managing Director)
Thanks. Good morning.
Mark Grescovich (CEO)
Good morning, Jeff.
Jeff Rulis (Managing Director)
Question on the margin seems like that's a little, maybe a little better than expected. I guess the components of that are you, are you more. Maybe that surprise is a strong word. I guess if you think about the earning asset yield increase versus funding costs coming down, is any component there that you think that can continue or do you feel like both are in play at least in the short run? I guess ultimately leading to kind of margin expectations?
Rob Butterfield (CFO)
Yeah. 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. The same for January, February and March. Whereas we did see on the yield side, we saw throughout the quarter that the yield did improve as we move throughout the quarter. 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 28 day count. You get 30 days on a lot of loans from an interest perspective.
If we think about going forward here, we use Moody's for interest rate forecasting, they're currently showing 325 basis point cuts in 2025, the first one starting in July. Assuming that's correct, I would expect some NIM expansion in Q2. 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 5 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. We would see some benefit on the funding cost side where we would see funding costs come down a couple basis points a quarter during the second half, assuming that scenario.
Jeff Rulis (Managing Director)
That's great, Rob, thank you. Maybe hop to the credit. I think Jill, you mentioned really no real industry specific stress, pretty granular, but just wanted to check back in. On the Ag side you mentioned some prior caution on commodity prices and there was a small increase in non-performers in a quarter. Checking back in there, do you feel like if that is just a continued area of watch or just how is the trends on the, on the Ag side going?
Jill Rice (Chief Credit Officer)
Yeah, 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, 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. The Ag industry I think will continue to show signs of strain over this next period of months too, you know, we just have to kind of wait and see how long it plays out. That is one of our primary areas of concern as it relates to tariffs.
Jeff Rulis (Managing Director)
Okay. Jill, while I have you. You mentioned line utilization on C&I was down. I guess first part would be what is that number currently? Jill, if you could kind of stabilize us 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.
Jill Rice (Chief Credit Officer)
Okay, I'm going to 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, you know, almost half of which real estate secured. Average loan size of $1.2 million. Just to put that into perspective as we continue to watch the risk in that portfolio, commercial line utilization is in the mid 30% range, I believe, and ticked up modestly. Overall we're running in that average utilization, entire book, 75% utilized. Historical averages are 70%, 76% C&I up, construction up, Ag down in the quarter.
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 as where we would get more of that growth and still consider that as a possibility. We recognize that the consumer and 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. We had a good pull through rate in the first quarter even with that high level of uncertainty.
When we, you know, hit our Q1 expectations, even with the uncertainty, we do not have enough to actually change our thoughts as to what is going to happen for the 2025 plan at this time.
Jeff Rulis (Managing Director)
That's great. Thank you for the detail. Appreciate it.
Mark Grescovich (CEO)
Thanks, Jeff.
Operator (participant)
The next question goes to David Feaster of Raymond James. David, please go ahead.
David Feaster (Director)
Hey, good morning, everybody.
Mark Grescovich (CEO)
Good morning, David.
David Feaster (Director)
I kind of want to just follow-up a little bit on that line of questioning 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 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, you know, how is client demand and the pipeline looking today? Have you started to see anything falling out of that? Just kind of the complexion of the pipeline and just where you're seeing opportunities for growth today.
Jill Rice (Chief Credit Officer)
I'll start at the end there and the opportunities for growth. You know, my answer to that is no different than it's been historically. They range up and down our footprint and in this, you know, across the industries, pipelines have continued to grow, closings have continued. We're pulling them through and rebuilding. I think the slow part of Q1, you know, the trade wars had not started, but there was a level of just uncertainty that had everybody taking a step back to see what was coming and then as it hit, even more uncertainty as opposed to clarity. We still have people who want to, you know, move forward once they can understand where we are going to land.
I, you know, I still feel so decent about where we're going to end this year, David, because of that, you know, they want to do business. They just need some of this noise to settle down.
David Feaster (Director)
Okay, okay, that's helpful.
You know, maybe following up, you know, on just the potential impacts from the tariffs and trade wars. I mean, where do you see, like, as you look at the book, where do you see the most risk and where are you prepared, like, watching more closely if this does become more protracted? I mean, we've already touched on Ag, which is obviously a small portion of the book, but just, you know, you thinking about construction, right, and multi, you know, you've had a lot of success especially within multifamily. You know, how do you think about managing, you know, just 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 and your approach to managing it in just in this kind of uncertain market.
Jill Rice (Chief Credit Officer)
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 you step back into the heart of your question, say what am I looking at and thinking about outside of Ag? The tariffs are going to impact a bunch of things across the West Coast. Our trade partners, technology sector, we're not heavy into it, but it's going to affect our economy. Agricultural, we've talked about 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.
I step back and I look at the portfolio and then I size it. What do we have in manufacturing? Manufacturing would represent approximately 3% of our loan book. Average loan size within all of those manufacturing sector NAICS codes would be under $1 million. In terms of individual risk, limited in terms of aggregate risk in the portfolio, again pretty small for the manufacturing sector. We do not have a lot of exposure to auto dealers. Largest loan size to auto dealers in our book is $5 million. I look at the transportation industry, 1% of our loan book. Look at the retail exposure, it is bigger, it is 12% of the loan book. It is diversified geography. It is diversified by service and product and you know, industry. 93% of the retail exposure is real estate secured. That, you know, 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 million or less. I am looking, we are watching, we are talking to our clients and then we are just scoping the overall exposure. We will continue to do that as we see where these tariffs land and who they are hitting the hardest. I will come back to what I said in my prepared remarks. I think the biggest impact is going to be the small business sector and the consumer who is going to bear the brunt of it.
David Feaster (Director)
Okay, that's great color. I appreciate that.
Just last one for me, maybe touching on the funding cost side. You've done a great job. Continue to drive core deposit growth, reducing deposit costs even in a seasonally weaker quarter. I was hoping you could maybe touch on the competitive landscape for deposits, your strategy to continue to drive core deposit growth and how you think about opportunities to further optimize funding costs and fund loan growth going forward.
Rob Butterfield (CFO)
Yeah, so. Thanks, David. It's Rob.
Yeah, I guess a couple 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. What we've been successful at is as we're adding new clients from the lending side, we've been successful at also bringing across the deposits. 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 refunds start to come in as well. You know, I mean, I think if we're 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 in that three- to seven-month tenor right now.
Although we do still see some rate specials out there in that 12 or 13 month range and see, and even some of the 4%. But you know, I mean we 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, you know, in that $29,000 range. So I think all that just helps us from being able to kind of control our deposit cost and our funding costs over time.
David Feaster (Director)
Okay, that's helpful. 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?
Rob Butterfield (CFO)
Yeah, I think on the. If we think about the security side, we're seeing around $60 million of cash flows off that a quarter right now. We're not redeploying that back into the security portfolio. The only thing we're purchasing from security portfolios is for CRA purposes. The expectation is that we would see kind of a continued rotation out of the security portfolio and use those funds to help drive the loan growth and fund the loan growth. I will say, David, 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'll be flexible if market conditions change or if we think there's an opportunity there. That's not a strategy we're looking at currently.
David Feaster (Director)
Got it. Thanks everybody.
Mark Grescovich (CEO)
Thank you, David.
Operator (participant)
Thank you. The next question goes to Andrew Liesch of Piper Sandler. Andrew, please go ahead.
Andrew Liesch (Senior Equity Research Analyst)
Thanks. Good morning. Really helpful information here on the tariffs. Really appreciated. You know, capital continues to be a strength for Banner, 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?
Rob Butterfield (CFO)
Thanks, Andrew. It's Rob.
Yeah, I mean, 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. Over time, as EPS continues to increase, we would look at kind of increasing the core dividend at some point in time as well. We do have that share authorization which you just mentioned there in place right now. We have not executed on that. It is something that we continue to consider 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 $100 million of sub debt out there right now and it moves from a fixed rate to a variable rate on July 1st. We are currently considering whether we repay that or whether we look at replacing that. That's probably one of our top capital priorities right now.
Andrew Liesch (Senior Equity Research Analyst)
Got it. There been any sort of change in M&A conversations over the last couple months?
Mark Grescovich (CEO)
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, you know, as we see more clarity in market conditions. I think the conversations as they exist with M&A, they continue to occur. Obviously the current volatility has caused everybody to take a step back and decide, you know, how do we proceed going forward? What do the credit metrics look like? What do the 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 going to have to ride that out, see where it lands.
Andrew Liesch (Senior Equity Research Analyst)
Got it. Very helpful. Always appreciate your insights. I will step back, thanks.
Mark Grescovich (CEO)
Thank you, Andrew.
Operator (participant)
Thank you. The next question goes to Andrew Terrell of Stephens. Andrew, please go ahead.
Andrew Terrell (Managing Director)
Hey, good morning.
Mark Grescovich (CEO)
Good morning, Andrew.
Andrew Terrell (Managing Director)
Good morning.
If I could just circle back to the margin just to maybe, you know, summarize some of the discussion around the margin. I mean, it sounds like, you know, in a, in an environment where the Fed is not cutting rates, you've got, you know, 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 costs. It sounds like, you know, no matter either of those outcomes, the progression throughout the year on the margin should be higher from here, correct?
Rob Butterfield (CFO)
Yeah, 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)
Yeah, okay, got it. Only negative, just a more material rate cut. Okay. Yeah. I'll just ask you, we talked about this a while back, but just, you know, 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. You know, thinking of those kind of ranges of outcomes on the margin, does it feel feasible you can, you can kind of pass 4% on the NIM in 2025?
Rob Butterfield (CFO)
Yeah, I don't, I guess I'm not prepared to give a timeline on when we're going across the 4% level. I mean, clearly if you look at historically we have been above 4% and I think under the right market conditions, we can get back there again. You know, if we continue to see, you know, 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.
Andrew Terrell (Managing Director)
Okay. If I could just lastly check in on expenses, I think last quarter we talked about $100 million 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?
Rob Butterfield (CFO)
Yeah, 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. 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)
Perfect. Thank you for taking the questions and nice quarter.
Mark Grescovich (CEO)
Thank you, Andrew.
Operator (participant)
Thank you. The next question goes to Kelly Motta of KBW. Kelly, please go ahead.
Kelly Motta (Director of Equity Research)
Hey, good morning.
Thanks for the question. Most of mine have been asked and answered at this point. Just wondering, is this last quarter a good indication of the tax rate for the year and are there any upcoming tax credit investments or anything of that nature that we should factor into the model?
Rob Butterfield (CFO)
Yeah, Kelly, it's Rob. Yeah, I think the current quarter tax rate is probably a pretty good judge on what we would see for the year at this point.
Kelly Motta (Director of Equity Research)
Got it. That's helpful.
Last one for me. I know part of Banner Forward initiative, we're developing some source of fee 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 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.
Rob Butterfield (CFO)
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. You know, if you think about mortgage rates, you know they, when mortgage rates, the 30 year, dip down to 6.5%, we saw some pickup in activity there. Now that it's back over 7%, we see some slowdown there. Mortgage banking is really going to be driven by the rates ultimately there. 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.
In Q1, the gain on loan sale from SBA was around $800,000 and the run rate for last year was around $400,000. We would expect that, you know, if we can continue to see that business line grow, that we would continue to get some benefit from building that out.
Kelly Motta (Director of Equity Research)
Got it. That's helpful. Thanks again for the questions. Really nice quarter. I'll step back.
Mark Grescovich (CEO)
Thank you, Kelly.
Operator (participant)
Thank you. As a reminder, if you would like to ask a question, please press star followed by one on a telephone keypad. The next question goes to Tim Coffey of Janney. Tim, please go ahead.
Tim Coffey (Managing Director)
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 just anything more severe than just a potential growth slowdown?
Mark Grescovich (CEO)
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 going to continue to see a slowdown, which is why over 2024 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 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. 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.
Tim Coffey (Managing Director)
Okay. Just a question about the defense spending in your footprint. Right. I mean there's a lot. 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 (CEO)
I think that's an excellent question, Tim. Jill, do you want to talk about some of the investment that's being made in the Sub Base?
Jill Rice (Chief Credit Officer)
Yeah, you know, I think Sub Base Bangor, 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 bolster those communities. We also have Hanford and Eastern Washington that could have some, you know, negative implications in terms of budget cuts. You know, it really is going to 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 (CEO)
I think you hit it right on the head, right. That, you know, 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. I think there'd be some additional investment into a lot of these areas that support it. Right. That's a positive. I think it's more insulated than we think.
Tim Coffey (Managing Director)
Yep. Okay, I appreciate that. This kind of marks about your thoughts on a special dividend and just what you think about it, you know, just holistically, just totally unrelated to the previous two questions. Just how you think about a special year in cash dividend?
Rob Butterfield (CFO)
Hey, Jim, it's Rob. Yeah, 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 a special dividend. I think there's probably some other opportunities we have that would be a better way to deploy capital currently, but it's not something we're ruling out either.
Tim Coffey (Managing Director)
Okay, I appreciate that, Rob. Thank you.
Jill, I know you've been asked and answered a couple questions on tariffs, but I've got two more for you. The first one is, as you're collecting financials from C&I borrowers, are you seeing anything in those financials that give you pause?
Jill Rice (Chief Credit Officer)
That's a pretty broad question when you think about C&I 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 the top line revenue in some cases, especially in that not-for-profit health care side of the equation. It's really kind of hard to answer there, Tim, on a specific case. You know, it's case by case. Yeah, there are things that make us step back and go, okay, how are they going to counter that? What's the solution to that? Whether it's expense control or demand and revenue slipping.
Tim Coffey (Managing Director)
Right. My apologies, I should have made it a little bit more general.
Are you seeing anything, any changes year-over-year that indicate a slowdown in your footprint?
Jill Rice (Chief Credit Officer)
No.
Tim Coffey (Managing Director)
Okay. All right.
Mark Grescovich (CEO)
It's still early. It's still early.
Tim Coffey (Managing Director)
Yeah, of course it is. All right. Given kind of the overall outlook right now, Jill, have you increased any kind of oversight on the retail CRE book?
Jill Rice (Chief Credit Officer)
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 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 happening across the general footprint.
Tim Coffey (Managing Director)
All right, those are my questions. Thank you very much.
Mark Grescovich (CEO)
Thanks, Tim.
Operator (participant)
Thank you. We have a follow-up from David Feaster of Raymond James. David, please go ahead.
David Feaster (Director)
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 in your thoughts on California and what's driving that growth.
Jill Rice (Chief Credit Officer)
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 loans and deposits. 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. The short answer is good talent added to the team.
David Feaster (Director)
Okay, thank you.
Rob Butterfield (CFO)
Thank you, David.
Operator (participant)
Thank you. We have no further questions. I'll hand the call back over to Mark for any closing comments.
Mark Grescovich (CEO)
Thank you. As I've stated, we're very proud of the Banner team in the first quarter 2025 performance, 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 in 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 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.
Operator (participant)
Thank you. This now concludes today's call. Thank you for joining. You may now disconnect your lines.