Banner (BANR) Q2 2025 Earnings Transcript

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DATE

Thursday, July 17, 2025 at 11 a.m. ET

CALL PARTICIPANTS

- President & Chief Executive Officer — Mark J. Grescovich

- Executive Vice President & Chief Credit Officer — Jill M. Rice

- Executive Vice President, Chief Financial Officer & Treasurer — Robert G. Butterfield

Full Conference Call Transcript

Mark J. Grescovich: Thank you, Rich. As is customary, Today, we will cover 4 primary items with you. First, I will provide you high-level comments on Banner's second quarter 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 finally, Rob Butterfield will provide more detail on our operating performance for the quarter as well as comments on our balance sheet. Before I get started, I want to thank all of my 2,000 colleagues in our company who are working extremely hard to assist our clients and communities.

Banner has lived our core values, summed up as doing the right thing for the past 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 $45.5 million or $1.31 per diluted share for the quarter ended June 30, 2025. This compares to a net profit to common shareholders of $1.15 per share for the second quarter of 2024 and $1.30 per share for the first quarter of 2025. Our strategy to maintain a moderate risk profile and the investments we have made and continue to make in order to improve operating performance have positioned the company well for the future. The strength of our balance sheet, coupled with the strong reputation we maintain in our markets will allow us to manage through the current market uncertainty.

Rob will discuss number of these items in more detail shortly. To illustrate the core earnings power of Banner, I would direct your attention to pretax pre-provision earnings excluding gains and losses on the sale of securities, building and lease exit costs and changes in fair value of financial instruments. Our second quarter 2025 core earnings were $62 million compared to $52 million for the second quarter of 2024. Banner's second quarter 2025 revenue from core operations was $163 million compared to $150 million for the second 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 1.13% for the second 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 4% over the same period last year.

Reflective of this performance, coupled with our strong regulatory capital ratios and the fact that we increased our tangible common equity per share by 13% from the same period last year, we announced a core dividend of $0.48 per common share. Finally, I'm pleased to say that we continue to receive marketplace recognition and validation of our business model and our value proposition. Banner was again named one of America's 100 Best Banks and one of the best banks in the world by Forbes. Newsweek named Banner one of the most trustworthy companies in America and the world again this year and just recently named Banner one of the best regional banks in the country. J.D.

Power & Associates named Banner Bank the Best Bank in the Northwest for retail client satisfaction. Our company was recently certified by Great Places to Work (sic) [ Great Place To Work ] 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 have noted previously, Banner Bank received an outstanding CRA rating. Let me now turn the call over to Jill to discuss trends in our loan portfolio and her comments on Banner's credit quality. Jill?

Jill M. Rice: Thank you, Mark, and good morning, everyone. As reflected in our earnings release, loan originations were strong. We reported solid loan growth across multiple product lines and Banner's credit metrics remained stable. Loan originations increased 80% when compared to the linked quarter, with commercial real estate up 484%, C&I originations up 96% and construction and land development increasing 43%, respectively, all while commercial and commercial real estate pipelines continue to build. This level of activity reflects a certain amount of business confidence in spite of the continuing higher rate environment and yet to be finalized trade negotiations.

Loan outstandings grew by $252 million in the quarter or 9% on an annualized basis and are up 5% year-over-year, in line with our year-to-date expectations. The primary drivers of the growth were owner-occupied commercial real estate up $104 million, C&I loans up $65 million and the construction and development book with one-to-four-family construction up $48 million, land development up $21 million, commercial construction up $13 million, partially offset by expected payoffs in the multifamily construction portfolio. The growth in owner-occupied commercial real estate is a mix of new middle market clients, expansion of existing relationships and continued solid performance in new small business generation.

The C&I story is similar with growth coming from the expansion of existing relationship, increased land utilization and meaningful small business origination. The residential construction portfolio at 5% of total loan continue to be diversified across market and product mix and the level of complete and unsold inventory remains below historical norms as builders have become more cautious with replacement starts in this extended high rate environment. The increase in land and land development reflects the builders need to replenish finished lot inventory with land development financing reserves for the strongest vertically integrated clients within the portfolio, aggregating all business lines in the construction portfolio, the total remains balanced at 15% of total loans.

Agricultural loans increased 3% in the quarter as both the size of operating lines and line utilization increased to cover higher operating costs and normal seasonal activity and the growth in consumer one-to- four-family secured loans reflects the strong home equity promotion that occurred in the second quarter. Circling back to Banner's credit metrics, delinquent loans declined to 0.41% of total loans as compared to 0.63% last quarter and 0.29% as of June 30, 2024. Adversely classified loans also declined in quarter-over-quarter, down $8.3 million and represent 1.62% of total loans, an 11 basis point decrease when compared to March 31. In spite of the $7 million increase in the quarter, nonperforming assets remained modest at 0.30% of total assets.

Nonperforming loans totaled $43 million, the majority of which are consumer related primarily residential mortgage loans, which involve prolonged resolution time lines given consumer protection regulations. REO balances totaled $6.8 million, up $3.3 million in the quarter as we completed the foreclosure on an industrial property and 2 small single-family properties during the quarter. Loan losses in the quarter totaled $1.7 million and were offset in part by recoveries totaling $600,000. The net provision for credit losses for the quarter was $4.8 million, including a $4.2 million provision for loan losses and a $588,000 provision related to unfunded loan commitments.

The provision was largely driven by the strong loan growth with the reserve for credit losses providing coverage of 1.37% of total loans, which compares to 1.38% as of the linked quarter and 1.37% as of June 30, 2024. Last quarter, I noted that the level of economic uncertainty, coupled with the myriad of policy changes that were being implemented created a potential headwind that could negatively impact our clients and communities. To date, that has largely not materialized, evidenced by the strong loan originations and growth in the quarter as the implementation of international tariffs were paused.

With those policy changes again being suggested as imminent, I am compelled to reiterate that if adopted, they will almost certainly have a negative impact on the West Coast economies with the majority of the burden borne by the small business sector and further stressing the consumer. Still, in these uncertain times, Banner's super community delivery model, coupled with a consistent approach to underwriting credit has enabled us to expand existing and grow new relationships while maintaining our moderate risk profile. Our strong balance sheet, robust capital base and solid reserve for loan losses continue to serve us well. With that, I will hand the microphone over to Rob for his comments. Rob?

Robert G. Butterfield: Great. Thank you, Jill. We reported $1.31 per diluted share for the second quarter compared to $1.30 per diluted share for the prior quarter. The $0.01 increase in earnings per share was primarily due to an increase in net interest income partially offset by the current quarter, including costs associated with consolidating back office space as well as a higher provision for credit losses due to growth in the loan balances. We experienced strong positive operating leverage during the quarter compared to both the prior quarter and the quarter ended June 30, 2024, as core tax pre-provision income increased 6.6% or $3.9 million compared to the prior quarter and increased 19% or $10 million compared to the year ago quarter.

Total loans increased $265 million during the quarter with portfolio loans increasing $252 million or nearly 9% on an annualized basis, and held for sale loans increased $13 million. The loan-to-deposit ratio ended the quarter at 87%. Total securities decreased $55 million, primarily due to normal portfolio cash flows. Deposits decreased by $66 million during the quarter due to core deposits decreasing $40 million as a result of normal seasonal activity. Time deposits decreased $26 million due to a $25 million decrease in broker deposits. Core deposits ended the quarter at 89% of total deposits, same as the prior quarter. Total borrowings increased $309 million during the quarter as FHLB advances were used to temporarily fund loan growth.

Banner's liquidity and capital profile continue to remain strong with robust core funding base a low reliance on wholesale borrowing and significant off-balance sheet borrowing capacity. As a reflection of our robust capital and strong liquidity positions, Banner called and repaid $100 million of subordinated notes at the end of the quarter. Net interest income increased $3.3 million from the prior quarter due to average interest-earning assets increasing $188 million and 1 more interest earning day in the current quarter. The increase in average earning assets was due to average loan balances increasing $223 million, partially offset by total average interest-bearing cash and investment balances decreasing $36 million.

The earning asset yield continues to benefit from a remixing out of securities and into loans. Tax equivalent net interest margin was 3.92%, same as the last quarter. Earning asset yields increased 5 basis points due to a 5 basis point increase in loan yields as adjustable rate loans continue to reprice higher and new loans are being originated at rates higher than the average yield on the loan portfolio. The average rate on new loan production for the quarter was 7.27% compared to 8.01% for the prior quarter. The reduction was due to a higher percentage of production coming from owner-occupied CRE and C&I in the current quarter.

Funding costs increased 5 basis points as a result of using FHLB advances to temporarily fund loan growth and seasonal tax deposit declines. Deposit costs were 1.47% for the current quarter, which was consistent with the prior quarter. Noninterest-bearing deposits ended the quarter at 33% of total deposits. Total noninterest income decreased $1.4 million from the prior quarter, primarily due to a loss of $919,000 on the disposal of assets related to back office space consolidation and a $227,000 net difference in the fair value adjustments on financial instruments carried at fair value.

Total noninterest expense was similar to the prior quarter with increases in salary and benefits, information technology, marketing and REO expenses, which were offset by higher capitalized loan origination expense. The current quarter included $834,000 of lease termination and costs associated with back office space consolidation. Our strong capital and liquidity levels position us well to continue to execute on our super community bank business model. This concludes my prepared comments, and now I'll turn it back to Mark.

Mark J. Grescovich: Thank you, Jill, and Rob, for your comments. That concludes our prepared remarks. And Nadia, we'll now open the call, and we welcome your questions.

Operator: [Operator Instructions] Our first question go to David Feaster of Raymond James.

David Pipkin Feaster: I just wanted to follow up maybe on -- Jill, you touched on it a bit about the improvement in origination is really an impressive increase. And I was just hoping you could elaborate maybe a bit more on -- from your standpoint, did anything change? Or do you feel like your customers are more comfortable with the broader economy or was there any kind of a timing issue? Just curious whether there's anything to read into that? And just kind of how the pipelines are holding up just given that increase in originations.

Jill M. Rice: So the increase in origination certainly pulled some of the pipeline out until they're rebuilding now. And if you look back historically, I think what you would see, David, is that Q1 and Q3 are gene