Banner Corporation Aktie

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Banner Corporation First Quarter 2026 Conference Call and Webcast. [Operator Instructions]

I would now like to turn the call over to Mark Grescovich, President and Chief Executive Officer of Banner Corporation. Mark, please go ahead.

Thank you, Tiffany, and good morning, everyone. I would also like to welcome you to the First Quarter 2026 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 and 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 our recently filed Form 10-K for the year ended December 31, 2025. Forward-looking statements are effective only as of the date they are made, and Banner assumes no obligation to update information concerning its expectations. Mark?

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 2026 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 wanted to thank all of my 2,000 colleagues in our company who are working extremely hard to assist our clients and our 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 $54.7 million or $1.60 per diluted share for the quarter ended March 31, 2026. This compares to a net profit to common shareholders of $1.30 per share for the first quarter of 2025 and $1.49 per share for the fourth 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.

Rob will discuss these items in more detail shortly. 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. 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, changes in fair value of financial instruments and building and lease exit costs.

Our first quarter 2026 core earnings were $66.3 million compared to $58.6 million for the first quarter of 2025. Banner's first quarter 2026 revenue from core operations was $169 million compared to $160 million for the first quarter of 2025, an increase of nearly 6%. 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 1.37% for the first quarter of 2026. 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. Reflective of this performance, coupled with our strong regulatory capital ratios, and the fact that we increased our tangible common equity per share by 11% from the same period last year, we announced a core dividend increase of 4% to $0.52 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 as well as one of the best banks in the world by Forbes. And Newsweek named Banner Bank, one of the most trustworthy companies both in America and the world again this year. And just recently again, named Banner one of the best regional banks in the country.

Additionally, J.D. Powered Associates named Banner Bank the Best Bank in the Northwest for retail client satisfaction for 2025. Our company was certified by Great Place to Work, S&P Global Market Intelligence ranked Banner's financial performance among the top 50 public banks with more than $10 billion in assets. And as we've noted previously, Banner Bank again received an outstanding CRA rate.

Let me now turn the call over to Jill to discuss trends in our loan portfolio and for comments on Banner's credit quality. Jill?

Thank you, Mark, and good morning, everyone. As detailed in our press release, we again had a strong quarter of loan originations, in line with that reported in the fourth quarter and 61% higher than that reported in the first quarter of 2025. Still, significant commercial real estate payoffs coupled with expected paydowns within the ag portfolio, offset production such that portfolio loans decreased $14 million when compared to December 31, 2025. Year-over-year loan growth was modest at 2.4%.

Production within the commercial real estate portfolio continued to be meaningful with owner-occupied CRE up 3% in the quarter and 15% year-over-year and investor real estate up 1% in the quarter and nearly 8% year-over-year. Those increases, however, were almost entirely offset by the significant commercial real estate paydowns within the multifamily portfolio, down 6% in the quarter and 9% year-over-year as stabilized properties moved into the secondary market.

Within the construction portfolios, the 12% increase quarter-over-quarter in commercial construction reflects the continued funding of previously approved projects. In addition to the multifamily payoffs noted previously, we had two large land development projects payoff, which resulted in a 7.5% decrease in balances this quarter. We are continuing to see an elongation of the days on market within the for-sale 1-4 Family construction portfolio, given the elevated interest rate environment and general economic uncertainty.

Still, the level of completed and unsold inventory remains within historical norms and the builders continue to have strong balance sheet and profit margins to work with. In total, the 1-4 Family construction portfolio continues to represent a modest 5% of the loan portfolio, and the total construction portfolio, including land and land development continues to be acceptable at 14% of the loan book. After declining 3% last quarter, C&I line utilization moved closer to normal, increasing 2% this quarter.

In total, commercial loans were up a modest 1%, both in the quarter and year-over-year. Agricultural balances as expected, were down 6% in the quarter as crop proceeds reduced line balances and the decline reported year-over-year reflects the collection and payoff of multiple classified ag balances.

Shifting to credit quality. Our credit metrics remained strong. Delinquent loans increased 2 basis points and now represents 0.56% of total loans which compares to 0.63% reported as of March 31, 2025. Adversely classified loans increased by $42 million in the quarter, representing 2% of total loans and total nonperforming assets at $51.7 million represent a modest 0.32% of total assets. The increase in adversely classified assets is centered in three relationships, operating and manufacturing, residential construction and wholesale agricultural deposits.

As of March 31, the allowance for credit losses totaled $160.4 million, providing 1.37% coverage of total loans, consistent with prior quarters. Loan losses in the quarter totaled $1.5 million and were offset part by recoveries totaling $253,000. The risk rating migration discussed previously coupled with the net charge-offs resulted in a provision of $1.3 million to the reserve for credit losses loans. This was offset by a release from the reserve for unfunded commitments of $2.1 million for a net provision recapture of $796,000.

The first quarter of 2026 continued to be impacted by economic uncertainty given persistent inflation, the higher for longer interest rate environment and increasing geopolitical issues. Through this, we have maintained consistent underwriting standards, which include a focus on strong sponsors, properly margin collateral, seasoned repayment sources, and in the vast majority of cases, personal guarantees, and we continue our practice of robust quarterly portfolio reviews in order to identify any emerging issues early. We remain well positioned to weather the uncertain economic environment ahead.

With that, I will hand the microphone over to Rob for his comments. Rob?

Thank you, Jill. We reported $1.60 per diluted share for the fourth quarter compared to $1.49 per diluted share for the prior quarter. The increase in earnings per share compared to the prior quarter was primarily due to the current quarter having lower expenses, a recapture of provision for credit losses.

In addition, the prior quarter included a decrease in the valuation of financial instruments carried at fair value and a loss on the disposal of assets. Core pretax pre-provision income for the current quarter increased 13% or $7.7 million compared to the quarter ending March 31, 2025. Our performance metrics remain solid as we reported a return on tangible common equity for the current quarter of 14% and return on average assets of 1.37%.

As Jill previously mentioned, loan balances were essentially flat during the quarter as the good loan production was offset by an increase in payoffs. The loan-to-deposit ratio ended the quarter at 85%, giving us ample capacity to continue to support existing clients and to add new clients. Total security balances were relatively flat as normal portfolio cash flows were mostly offset by security purchases. Deposits increased by $97 million during the quarter due to core deposits increasing $165 million or 5.5% on an annualized basis. The increase in core deposits was partially offset by time deposits decreasing $67 million, mostly due to $50 million of brokered CDs maturing during the quarter, ending the quarter with no brokered deposits.

Core deposits ended the quarter at 89% of total deposits. Total borrowings decreased $142 million during the quarter, ending the quarter with no outstanding FHLB advances. The tangible common equity ratio increased from 9.84% to 9.97%. As a reflection of our robust capital and strong liquidity positions, Banner repurchased 250,000 shares during the quarter and declared an increase in the quarterly dividend of $0.52 per share. Net interest income decreased $2.3 million from the prior quarter due to a combination of lower earning assets and 2 fewer interest earning days in the current quarter. Partially offset by an 8 basis point increase in net interest margin.

The decrease in average earning assets was primarily due to average interest-bearing cash and security balances decreased to $953 million. Tax equivalent net interest margin was 4.11% for the current quarter compared to 4.03% for the prior quarter. Funding cost decreased 9 basis points due to deposit costs decreasing 8 basis points. Deposit costs benefited from a full quarter of the deposit pricing reductions implemented in the fourth quarter of last year. We also benefited from an improved earning asset mix as lower-yielding cash and security balances or a smaller percentage of earning assets.

The improved earning asset mix offset the 3 basis point decline in loan yields. The average rate on new loan production for the current quarter was 6.69% compared to 6.88% for the prior quarter. Noninterest-bearing deposits ended the quarter at 33% of total deposits. Total noninterest income increased $3.9 million from the prior quarter, primarily due to the prior quarter, including a loss of $1.4 million on the disposal of assets and a fair value decrease of $2 million on financial instruments carried at fair value.

While the current quarter had a $1.7 million fair value increase on financial instruments carried at fair value, partially offset by a loss of $1.2 million on the sale of securities. Total noninterest expense was $1.5 million lower than the prior quarter, with decreases in occupancy and equipment, marketing and legal expense being partially offset by an increase in salary and benefits. Our strong capital and liquidity levels continue to position us well to support our existing clients and to add new clients.

This concludes my prepared comments. Now I will turn it back to Mark. Mark?

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

[Operator Instructions] Your first question comes from the line of Jeff Rulis with D.A. Davidson.

This is Ryan Payne on for Jeff Rulis. Just starting on the margin, had some deposit fluctuations and lower CD balances this quarter benefiting the NIM. But just trying to gauge your thoughts on expectations for the margin ahead.

Yes, sure. This is Rob. So we typically see an increase in funding costs during the second quarter as clients start to use deposit balances to make tax payments early in the quarter, and we supplement that temporary decline in deposit balances with some FHLB advances. We think that this should be mostly offset by an increase in loan yields as adjustable rate loans continue to reprice up and the new loans coming on are still coming on at higher yields than the average overall portfolio yield, which suggests that NIM would be relatively flat probably in the second quarter, which is similar to what we saw last year where the Q2 NIM was flat compared to the first quarter.

We could see some expansion in NIM in the third quarter due to funding costs coming back down as FHLB advances are replaced by deposit increases in the typical seasonality we see in the third quarter. And in addition, we would expect that loan yields would increase in the third quarter as well as long as the Fed remains on pause. So we would expect some net interest margin expansion in the second half of the year.

Helpful. With the loan production impacted by payoffs this quarter, where do you see payoffs trending from here and maybe your overall expectations for growth?

Sure, Ryan. So we had anticipated that the headwinds of commercial real estate payoffs would potentially offset growth into 2026. I expect that they will slow. I'm not prepared to tell you that they're done coming in, but I think that the rate of payoffs will slow down. Still, the loan production volumes, which were solid and indicative of future loan growth, the strong backlog of construction fundings we have is meaningful and our pipelines are strong. So we're still sticking with the mid-single-digit growth rate for 2026.

Got it. Last for me, capital priorities. We have the dividend increase and buyback. What's your appetite for continued buybacks here? And where would you see M&A on the list of priorities?

Yes. It's Rob again. So as you know, we did increase the core dividend by 4% this quarter, which was the second increase we've done in the last 3 quarters. Our goal from a dividend perspective is to pay out 35% to 40% of earnings as a core dividend. And in addition, we did do those share repurchases again in the first quarter. That's the third quarter in a row that we've done that.

As we think about capital priorities, we always look at the different opportunities we have there, which certainly include additional share repurchases that we could consider in the second quarter. But ultimately, it's really depending on market conditions on where the stock price is trading and other things as we evaluate the best use of our capital. And as always, we just continue to look at different ways we can deploy capital. Mark, as far as M&A, do you have any?

Yes. Thanks for the question, Ryan. Our position on M&A hasn't changed since I've been here, which is we look and try to partner with folks that will be a great fit for Banner, add additional density to our market and be very good core deposit franchises. and it has to be very opportunistic. And so we're very selective on the M&A front. We feel very good about our organic opportunities to continue to grow the bank and improve profitability. But if an opportunity exists in which we can add additional density with a good core deposit franchise and a strong bank, we certainly would look to do that.

Your next question comes from the line of Matthew Clark with Piper Sandler.

Good morning. On the funding side of the equation for the margin outlook, on the deposit side, if you had the spot rate on deposits at the end of March? And then how are you thinking about deposit pricing going forward with the Fed on hold, do you think you'll just be managing as best you can to hold that level? Or do you feel like there are opportunities to trim exception-based pricing in CD rates?

Sure. Thanks, Matthew. It's Rob. So the spot price the cost of deposits from March was the same as the quarter. It was pretty much across the board at that 135 basis points. Early in the quarter in January, we did make some additional rate reductions really in response to the December Fed rate cut that we saw, and we did that in early January. So really, the whole quarter benefited from that.

As we think about going forward, while the Fed is on pause, I don't think you're going to see much change in our core deposit pricing for our core products. Where we might get a little bit of benefit is on the CD pricing side of it just because the cost of our CD book, we would expect to continue to trend down for the next few quarters as the lag effect of the rate cuts that we saw the Fed do in the fourth quarter. The average rate of the new CDs coming on is around 3% right now. The CDs rolling off are around 330. Approximately 40% of our CD book matures in the second quarter. So we would expect some there.

But what I'd say is what happened is now that the expectation is the Fed will be on pause through the remainder of the year, maybe seeing the rate cut late in the year, fourth quarter or something like that. We are seeing some additional pressure on deposit pricing right now where we are seeing some competitors start to increase some of their promotion specials on deposits right now. So I'll caveat with that as we ultimately we'll have to respond to what the market is doing.

Okay. Great. And then on the service charges and fees line this quarter, up pretty nicely in a quarter with 2 less days. Did you do anything -- did you change your product pricing there at all? Or what can you attribute that to? And is that sustainable?

Yes. So we didn't change any of our pricing there. We did renegotiate our MasterCard contract. So we're seeing a little bit of benefit from that from the first quarter. So otherwise, I think if you look at the trending there, the first quarter is probably a pretty good trending when you look at that.

Okay. And then on the noninterest expense run rate, down nicely pretty broad-based outside of the seasonal increase in comp. Anything unusual there? Is that more partly a seasonal decline relative to the fourth quarter? I'm just trying to get a sense for that run rate going forward.

Yes, there certainly is some seasonality to that. Typically, the first quarter, we have lower advertising and marketing expense in the first quarter than the campaigns that we run throughout the year start to ramp up. So that's a bit lower. And the fourth quarter did have kind of a legal settlement charge in there of around $1 million that didn't carry forward into the first quarter.

If you think about the remainder of the year, we've talked about expecting normal inflationary increase in '26 compared to '25. And I think if you look at the full year, that's still my expectation. And Q2 will be higher from a salary and standpoint and benefits just because we do our annual salary increases really in mid-March. So you didn't really see that impact in the first quarter. So I would expect expenses to be a bit higher as we move throughout the year.

Okay. Last one for me, just back to M&A. Have there been -- have you seen or heard of an increase among sellers or maybe being more willing to talk. Just trying to get a sense for a change relative to last quarter.

I don't -- Matthew, this is Mark. Thank you for the question. I don't think that there's been a change in behavior. I think there are a number of folks that are trying to strategically figure out what the best next step is. And as you might expect, given my earlier comments about who we think would be a good partner with Banner in which we could leverage our balance sheet to service their clients in a more robust way.

The universe is still fairly limited. on the West Coast. And we know that the partners that would make a lot of sense for Banner. So I wouldn't suggest that there's been an increase in conversations, but I wouldn't be surprised if folks as they go through and are delivering on their first quarter strategic plan are trying to figure out what the best thing to do for their organizations are.

Your next question comes from the line of David Feaster with Raymond James.

I wanted to maybe touch on, I guess, two things. From -- on the loan growth side, originations have held up pretty well. How is demand? Like have you seen any -- I mean, obviously, there's a lot of macro uncertainty. I'm curious if that has impacted demand and pipelines at all from your standpoint? And then just -- I was hoping you could give some color on the payoffs and paydowns that you're seeing. Like what's driving that? Is it deleveraging, asset sales, competition and losing some deals? Just kind of curious on those two fronts.

So in terms of pipelines, David, -- everybody is telling me that they're busy. They're having good conversations and moving things forward, whether it's early on in the discussions or whether it's my credit team busy working through deals. So demand is out there. I can't say that the level of economic uncertainty doesn't cause -- give some pause, but there is still demand.

And as we move through them, we certainly see pricing being pushed and multiple banks going for these same deals. So it's tough out there, I guess, I would say, in terms of getting to the close, and I feel good about what we have been pulling through in terms of originations and what that means for our future growth. As to -- what was the second part driving the payoff...

Yes. So if you think about it, they're just delayed. Many of these loans we ultimately expected to pay off, we expected them to pay off 18 months ago, and they sat waiting for what was going to be the lower rate environment in those mini perm loans that we offer at the end of the construction and/or as they were stabilizing and getting stronger. So it is delayed payoffs, not losing because we don't want them or to competition, but to the secondary market that offer terms that most regional banks don't offer, long-term interest only, nonrecourse, those sorts of things. So again, expected, they just are lumpy because of the delay from 18 months ago.

Okay. That's helpful. And then there's been a lot of disruption across your footprint. I mean, over the past 12, 18 months, I mean, really from top to bottom, right? I wanted to get a sense of how you've been capitalizing on that, your appetite for new hires potentially coming out of some of those deals or just hires in general? And what markets or segments you might be interested in adding talent to?

So I'll start and then if Mark or Rob want to jump in behind me. If you think back to the last several quarters, we've talked about the personnel we've added because of the disruption in the -- across the footprint. And really, when we find good strong bankers in the markets, we want to add them. This last quarter, we've added a commercial banking center manager. We've added multiple portfolio managers and some treasury management personnel. So it isn't about one business line or one market. When we find the right people, we're adding to improve our talent.

And David, I would just follow up with that. This is Mark. It's been across the geography. So it's not specific to any particular area. I think we've done a very good job of adding talent into the organization. And as you've heard me say before, we tend to do this as a rifle shot, not a shotgun shot, right? So that we end up doing this because we know who the good bankers are, we court them over time. And when the timing is right, because there is disruption, we find that we are a good source for them to join our organization.

Okay. And Mark, maybe just another higher-level one. I'm curious how you and your team are thinking about technology. I think investors, when I have conversations and there's a lot of conversations around AI and stable coin or digital deposits in general. I'm just kind of curious, how are you thinking about those two issues today? And what are some of the things that you're working on? And how do you see this kind of playing out for Banner?

Thank you for the question, David. I'm going to ask Rob to answer that because we've made some -- a series of investments. But at the same time, we've set up a governance structure, I think, that will help guide us as a lot of this technology and AI infrastructure is evolving. Rob?

Yes. Thanks for the question, David. So as Mark mentioned, we do have a fintech council committee that we have internally that evaluates all the different kind of new AI type technology or even different technology products that are being offered by fintechs out there. And so we try to stay on top of what the current pulse is on that stuff. And we have started to adopt some AI technology. At this point, it's more turning on AI within existing software platforms.

And of course, we've made some significant investments that we've talked about recently with the new loan and deposit origination system that went fully live last year. And then we also have a lot of conversations around tokenized deposits, stable coin, that type of stuff as well. We -- as part of our annual strategic planning process, we've brought in different experts in those fields to talk to our executive committee to make sure we understand what's out there. And so while we haven't necessarily have any plans to roll that out in the short term, we're really staying on top of what all the different kind of payment channels are out there and keeping our pulse on that kind of stuff.

So David, just to follow up on that. When you think about regional banks like us have to -- we want to be very cautious and make sure that we're protecting the data integrity of our clients. So examples of AI would be BSA AML in which you can really utilize some of the tools there and certainly the call center which will allow you to be more responsive to your client base over a 24 period of time. So those are the kinds of things, I think, when you think of regional banks, the investments we'll be making in AI.

Your next question comes from the line of Andrew Terrell with Stephens Inc.

Most of mine were addressed already, but just on the margin, and you guys have kind of consistently been outperforming the kind of margin expectations you laid out. I know in the past, we've talked about no rate cuts better for kind of the near, medium-term margin trajectory. It seems like kind of the backdrop we're getting now, but still sounds like relatively flattish in 2Q and maybe some back half expansion opportunities. I guess the question is why not more constructive on the margin? And can you walk us through the puts and takes and specifically kind of the limiting factors for the margin term?

Yes. Thanks, Andrew. It's Rob. So if you think about the second quarter, and I talked about it a little bit, I'm just looking at normal seasonality there. We always see deposit outflows early in the quarter. You have to supplement those with FHLB advances. And typically, the second quarter has been a little bit better for us from a loan growth standpoint as well, and we're going to be funding those loans with FHLB advances. So I think just naturally, you're going to see funding cost increase in the second quarter.

And some of that will be offset by the repricing of loan portfolio. So that's why I'm thinking more flat for the second quarter. And if you look at last year, it's the same seasonality we saw last year. First quarter last year, we saw net interest margin expansion. Second quarter was flat. Third quarter is typically one of the better margin expansion quarters for us. So I think that's where you're going to see some additional expansion again, would be in the third quarter because funding costs will come back down as deposit flow in.

So we'll pay off FHLB advances. We'll get the benefit of the asset growth that we saw in the second quarter. And so -- and then in addition, naturally, you're going to see loan yields also increase in the third quarter. So I think the third quarter will probably be the strongest quarter for the remainder of the year from a net interest margin expansion standpoint. And we -- if the Fed is on pause, then we would expect some additional margin expansion in the fourth quarter. But I don't think you're going to see the benefit on the funding side at that point. What you're going to see is just kind of the loan yield continuing to reprice up, which is repricing up about 3 basis points a quarter right now while the Fed is on pause.

Great. No, I really appreciate it. And then last question for me. Just I guess, looking back, last time you were generating a comparable, call it, 130-ish ROA consistently was back in 2018, 2019. Your stock was trading 4x higher on an earnings multiple, call it, 40%, 50% higher on tangible book value multiple then. Your capital is 200-plus basis points better today, your allowance is 30 basis points higher. The growth environment feels a little bit slower than then. I guess with that as a backdrop, why not get more aggressive on the buyback here?

I mean I think any time you look at the capital priorities, we're weighing all the different options there, Andrew. We've certainly had the conversations around the level of share repurchases and where they should be, where we repurchased shares at last quarter.

The earnback on that is attractive. The multiple is attractive. So we're just trying to balance the different ones. But to your point, if we think about the TCE ratio right now approaching 10%, that's above where we'd like it to be. So we will have to address that over time as we think about different capital actions. Ideally, we'd like that to be about 100 basis points lower than it is today. So we're continuing to have those conversations and think about the best use.

Your next question comes from the line of Charlie Driscoll with KBW.

This is Charlie on for Kelly. Most of mine have been answered. Just kind of want to give you guys the opportunity to take a step back on credit here and talk about what you're seeing. It feels like NPAs kind of stabilize here, but just any color you can give us on what's in that portfolio? Any areas of concern if things do take a downturn? Just high level here.

So I'll just start by saying that when the portfolio is as clean as it is, you're going to see fits and starts of things moving in and out of adversely classified and NPAs. When you look at the nonperforming loans, relatively flat this quarter, but centered in consumer and small business and ag-related businesses.

Average loan size of nonaccrual loans is less than $250,000 and the largest loan is approximately $3 million. So nothing that is extremely worrisome in terms of that portfolio. And in the substandard, we're early to downgrade. We work them as fast as we can. And so some of them may sit there a little longer because we're slower to move them on up and out. We don't want them bouncing around.

But when you think about that portfolio, the changes when they've gone in there, it's idiosyncratic. There's no one industry that's raising alarms. And we just are beginning to see the impact of the higher interest rates and wage inflation and other economic factors strained certain business operations.

That concludes our question-and-answer session. I will now turn the call back over to Mark Grescovich for closing remarks.

Great. Thank you, Tiffany, and thank you all for your questions and your attention today. As I stated, we are very proud of the Banner team in our first quarter 2026 performance. It's been a strong kickoff to the full year. Thank you for your interest in Banner for joining our call today. We look forward to reporting our results to you again in the future. Thank you, again, everyone, and have a wonderful day.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

Hello, everyone, and thank you for joining the Banner Corporation Fourth Quarter 2025 Conference Call and Webcast. My name is Lucy, and I'll be coordinating your call today. [Operator Instructions]

It is now my pleasure to hand over to President and CEO, Mark Grescovich, to begin. Please go ahead.

Thank you, Lucy, and good morning, and Happy New Year, everyone. I would also like to welcome you to the Fourth Quarter and Full Year 2025 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, 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 a recently filed Form 10-Q for the quarter ended September 30, 2025. Forward-looking statements are effective only as of the date they are made, and Banner assumes no obligation to update information concerning its expectations.

Mark?

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 fourth quarter and full year 2025 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 wanted 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 $51.2 million or $1.49 per diluted share for the quarter ended December 31, 2025. This compares to a net profit to common shareholders of $1.54 per share for the third quarter of 2025 and $1.34 per share for the fourth quarter of 2024. For the full year ended December 31, 2025, Banner reported net income available to common shareholders of $195.4 million or $5.64 per diluted share compared to $168.9 million or $4.88 per share for the year ended December 31, 2024.

Our strategy to maintain a moderate risk profile and the investments we have made and continue to make in order to improve our operating performance have positioned the company well for the future. Rob will discuss these in more detail shortly.

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. 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, changes in fair value of financial instruments and building and lease exit costs. For the full year 2025, core earnings were $255 million compared to $223.2 million for the full year of 2024. Banner's fourth quarter 2025 revenue from core operations was $170 million compared to $169 million for the prior quarter and $160 million for the fourth quarter of 2024. The full year 2025 core revenue was $661 million compared to $615 million for the full year of 2024, an increase of 8%.

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 1.24% for the fourth 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. Reflective of this performance, coupled with our strong regulatory capital ratios, and the fact that we increased our tangible common equity per share by 14% from the same period last year, we announced a core dividend of $0.50 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 again, 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.

Our company was also recently certified by 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, as we've 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?

Thank you, Mark, and good morning, everyone. In spite of the solid level of loan originations, up 9% compared to the linked quarter and 8% when compared to the quarter ending 12/31/2024, we experienced negligible loan growth during the quarter. Loan production was offset by higher-than-expected affordable housing credit tax -- housing tax credit paydowns, a small number of both CRE and shared national credit payoffs and significantly lower C&I line utilization, down 3% in the quarter and 4% year-over-year. Year-over-year, portfolio loan balances increased 3.2%.

Within the commercial real estate portfolio, we reported solid growth year-over-year with investor CRE increasing 5% and owner-occupied CRE increasing 11%. This growth was diversified both in product type and geography and was granular in nature with our small business teams providing nearly 40% of the owner-occupied originations by dollar. As mentioned earlier, the fourth quarter results were impacted by prepayments. The decline year-over-year in the multifamily portfolio is primarily the result of stabilized properties moving to the secondary market.

Looking at the construction portfolio. Construction lending has long been a core competency at Banner and it continues to be a source of strength. In aggregate, it remains well balanced at 15% of total loans. The growth in commercial construction, one- to four-family construction and land and land development reported in the quarter reflects the continued funding of previously approved projects. The decline reflected in the multifamily construction was primarily driven by the affordable housing tax credit paydowns mentioned earlier.

In spite of the housing affordability crisis, our residential construction portfolio at 5% of the total continues to perform well. It remains geographically dispersed and is diversified by product mix and price point with levels of completed inventory continuing to be manageable. Sales activity within the general market as well as by submarket continues to be monitored closely.

The decline reflected in C&I is driven largely by a continued reduction in line utilization down 3% in the quarter and 4% when compared to last December. Additionally, the year-over-year decline includes the exiting of several classified relationships, the refinancing off balance sheet of multiple shared national credits as well as the payoff of certain relationships that we chose not to retain based on underwriting terms offered by others.

The decline was offset in part by continued growth in the small business segment, up 8% year-over-year, which continues to be a focus of our Community Banking division. The modest increase in agricultural balances year-over-year is the result of expanding a select number of existing relationships. The decline reflected in the one- to four-family portfolio year-over-year is the result of slightly lower mortgage rates as we closed out 2025, resulting in home refinances. And the growth in home equity lines of credit, both in the current quarter and year-over-year represent new originations versus an increase in line utilization.

As reported, our overall credit metrics remain strong. Delinquent loans increased modestly due primarily to a spike in the one- to four-family portfolio and now represent 0.54% of total loans, up 15 basis points from the linked quarter. This compares to 0.49% reported as of December 31, 2024. Adversely classified loans increased by $19 million in the quarter and now represent 1.65% of total loans. And total nonperforming assets at $51.3 million continue to represent a modest 0.31% of total assets.

The net provision for credit losses for the quarter was $2.4 million, including a $1.5 million provision for loan losses and a $945,000 provision related to unfunded loan commitments. Loan losses in the quarter totaled $1.2 million and were offset in part by recoveries totaling $310,000, with net charge-offs for the year, representing a nominal 6 basis points of average total loans. After the provision, the allowance for credit losses totaled $160.3 million, providing 1.37% coverage of total loans consistent with prior quarters.

I will close by again saying Banner's moderate risk profile with stable and strong credit metrics, a solid reserve for loan losses and robust capital levels continues to be a significant source of strength. We are well positioned to manage through the balance of this economic cycle and the market uncertainty that comes with it.

With that, I will hand the microphone over to Rob for his comments. Rob?

Thank you, Jill. We reported $1.49 per diluted share for the fourth quarter compared to $1.54 per diluted share for the prior quarter. For the full year 2025, we reported $5.64 per diluted share compared to $4.88 per diluted share for 2024. The decrease in earnings per share compared to the prior quarter was primarily due to a decrease in the valuation of financial instruments carried at fair value, a loss on the disposal of assets related to software no longer being used as well as an increase in medical and IT expenses, partially offset by an increase in net interest income. Compared to 2024, the increase in the full year 2025 earnings per share was primarily due to an 8.5% increase in net interest income due to higher net interest margin and growth in earning assets.

Core pretax pre-provision income for the current quarter increased 9% or $5.5 million compared to the quarter ended December 2024, while core pretax preprovision income for the current year increased 14% or $32 million compared to the prior year. Our performance metrics remain solid as we reported a return on tangible common equity for the current quarter of 13.11% and a return on tangible common equity for the full year 2025 of 13.16%.

As Jill previously mentioned, loan growth was limited during the quarter as the increase in production was mostly offset by an increase in payoffs and reduced line utilization. The loan-to-deposit ratio ended the quarter at 86%, giving us ample capacity to continue to support existing clients and add new clients. Total securities decreased $13 million during the quarter as normal portfolio cash flows were partially offset by security purchases.

Deposits decreased by $273 million during the quarter, primarily due to normal seasonal activity as clients use deposits to pay down lines of credit and larger deposit clients started to deploy excess liquidity. Core deposits ended the quarter at 89% of total deposits. Total borrowings increased $40 million during the quarter as we continue to have a low reliance on wholesale borrowings. The tangible common equity ratio increased from 9.5% to 9.84%. As a reflection of our robust capital and strong liquidity positions, Banner repurchased approximately 250,000 shares during the quarter and declared a quarterly dividend of $0.50 per share.

Net interest income increased $2.5 million from the prior quarter due to a 5 basis point increase in net interest margin as well as average earning assets increasing $60 million during the quarter. The increase in average earning assets was due to average loan balances increasing $115 million, partially offset by total average interest-bearing cash and investment balances decreasing $55 million. The tax equivalent net interest margin was 4.03% for the current quarter compared to 3.98% for the prior quarter. Earning asset yields decreased 4 basis points due to a 7 basis point decrease in loan yields as floating rate loans repriced down as a result of the 75 basis point reduction in the Fed funds rate. Average rate on new loan production for the current quarter was 6.88% compared to 7.35% for the prior quarter. Funding costs decreased 10 basis points due to average borrowings decreasing $137 million and deposit costs decreasing 7 basis points as deposit pricing was reduced due to the reduction in the Fed funds rate.

Noninterest-bearing deposits ended the quarter at 33% of total deposits. Total noninterest income increased $5.5 million or decreased $5.5 million from the prior quarter, primarily due to recording a loss of $1.4 million on the disposal of assets, which included the write-off of $1 million for software no longer being used as compared to a $1.4 million gain on the sale of assets in the prior quarter. In addition, the current quarter had a fair value decrease of $2 million on financial instruments carried at fair value. Total noninterest expense was $2.1 million higher than the prior quarter with increases in medical claims, software expense and legal expense as well as lower capitalized loan origination costs. Our strong capital and liquidity levels position us well for 2026.

This concludes my prepared comments. Now I'll turn it back to Mark. Mark?

Thank you, Jill and Rob for your comments on the operating performance of Banner. That concludes our prepared remarks. And Lucy, we will now open the call and welcome questions.

[Operator Instructions] The first question comes from Jeff Rulis of D.A. Davidson.

I appreciate the detail on the loan front. It sounds like some payoffs and line utilization impact. Jill, thinking about '26 and the outlook, payoffs is tough to gauge, but you're thinking on kind of net growth in the coming year?

Yes, Jeff, certainly payoffs are tough to gauge, and I would expect that the commercial real estate payoffs are likely to continue to be a headwind this next year. Still, our pipelines are again building. You saw decent growth this last quarter. We've seen positive impact from new bankers hired in the last 2 years. So all in, if the economy holds up, I'm going to say we would expect to grow our loan book in the mid-single digits again over the course of this next year.

And Jill, just to kind of the competitive landscape. It seems like the production side is originations pretty strong. Is that much of a headwind, if you will? I mean that sounds pretty positive if -- just want to kind of check in on the competitive environment?

Well, it's always been competitive in the spaces that we engage in, Jeff. So I mean, certainly, some banks, as I indicated, we lost over the course of the year some credits because we just weren't going to stretch on some of the terms that people are offering to expand their loan book. But all in, I think we compete well both in the product offering suite we have and in pricing.

Appreciate it. Maybe a similar question for Rob on the margin and the outlook as you talk 4% -- some deposit fluctuations into the year, but your expectations for margin ahead?

Yes. Thanks, Jeff. So I mean, what I'd say is, ultimately, I think it's going to be largely influenced by the level of actions from the Federal Reserve. We've talked about in the past that if there's no Fed action in a quarter, then we'd likely expect some NIM expansion as adjustable rate loans continue to reprice up. And even at this point, new production is coming on at higher rates than the average rate of the overall portfolio. If there's 125 basis point cut in a quarter or just at the end of the quarter before a quarter, then we would expect that NIM would be more of a flat scenario as deposit repricing would mostly offset the impacts of the floating rates and we also have the benefit of the adjustable rates. If you get multiple rate cuts in a quarter, then that's where we would expect that we would see some net interest margin compression.

We use Moody's for our interest rate forecasting. Most recently in January, they had 3 rate cuts really in the first half of the year, March, June and July. If that's correct, that would suggest somewhat of a flat first half of the year potentially down a bit in the third quarter and expansion in the fourth quarter. But I think the Fed actions is -- there's a lot of uncertainty around that right now because the most recent market stuff, I saw the market was expecting no rate cuts next year. So somewhere between no rate cuts, which would suggest higher net interest margin expansion and three rate cuts, which would suggest more of a flattish type environment. So I'll let everybody pick their own Fed scenario there.

The next question comes from Matthew Clark from Piper Sandler.

[Audio Gap] on deposits at the end of December and the average margin in the month of December?

Matthew, could you repeat the question? Glad to have you on the call. I don't think [indiscernible] through.

Sure. Just looking for the spot rate on deposits at the end of the year, either interest-bearing or total? And then if you had the average margin in the month of December.

Yes. Matthew, it's Rob. So spot deposit cost for the month of December were 1.39%. Margin was, for December was essentially the same as the quarter, right around 4.03%.

Okay. And the 1.39% for the month of December, not year-end?

That's correct. That's the average for the month, yes.

Got it. Okay. And then just on expenses, a couple of unusual items there this quarter. It also seemed like there might have been some transitory expenses. How do you think about that not -- kind of core run rate going into the first quarter?

Yes, sure. So it's not -- I'd just say, in general, it's not unusual for expenses to bounce around a little bit quarter-to-quarter. And we saw some of those -- we saw an increase in IT expenses as the new loan and deposit origination system was fully rolled out early in the fourth quarter. And then we also saw higher medical claims, which isn't unusual for the fourth quarter, but I'd just say they were even for the first 9 months of the year on medical expenses, they are running lower than typical. And then the fourth quarter kind of made up the difference. So probably medical expenses for the full year were kind of as expected. It was just more back-end loaded than normal. And then we had some higher legal expenses during the current quarter as well. We have one legal matter that concluded this quarter and then the capitalized loan costs were down a little bit. As I think about that going into 2025 or 2026, I would look at the full year 2025 expenses. And then above that for '26, I would just expect normal inflationary, whatever you want to call that, in that 3% range as far as total expenses in '26 compared to '25.

Okay. Great. And last one for me. On Special Mention and substandard, it looked like about a 55 basis point increase. Can you give us some color on what drove those changes this quarter?

Sure, Matthew. When you look at Special Mention, the largest drivers of the increase were related to downgrading a couple of alcoholic beverage related enterprises due to declining cash flows. Within that category, the largest relationship is approximately $25 million and the average Special Mention loan size is modest to $2 million. If we shift over to substandard, we saw a modest increase, up $19 million. Within the commercial and construction segments, downgrades continue to be idiosyncratic and the largest substandard relationship has approximately $19 million outstanding. The average substandard loan remains well under $1 million. There's nothing screaming about a certain industry or segment that we should be worried about.

The next question comes from Andrew Terrell from Stephens.

If I could go just quickly to capital. I mean you're obviously still in a very good capital position. Just hoping you could refresh us. I think you still got 1 million or so shares or maybe a little more on the buyback authorization. You've been somewhat active. Just where the valuation is at today, talk about the appetite for buyback or potentially increasing the buyback? And then just any update on how you're approaching M&A right now?

Sure, Andrew. I'll start with the capital aspect of it. So I mean, I think as you saw over the last couple of quarters, we've taken a number of capital actions middle of the year, repaying the $100 million of sub debt and then increase in the core dividend last quarter. And then as you mentioned, we have repurchased around 250,000 shares over the last 2 quarters in a row. And we still have about 1.2 million shares that are available under the repurchase authorization right now. We think if you look at the last 2 quarters, we've repurchased the shares right around that $63 level. And so we think that's an attractive point to be repurchasing shares. So based on where we ended the day yesterday, it's a little bit above that. We still think that is attractive. So ultimately, what we'll be doing during the first quarter here is really monitoring market activity and market conditions and then also the price of the stock to see if it makes sense to continue to do that. But I think if you look at our capital levels right now, we think the capital -- we target capital more of in a range than a specific number, but we're probably still in that upper end of the capital right now. And so that would suggest that the market conditions are right, we would continue to look at repurchasing shares.

Yes, Andrew, and this is Mark. As it relates to M&A, our posture has not changed. We continue to have conversations with parties that we think would be a great combination for Banner. And given the strong capital position we have, the strong core earnings power of the company, and our market reputation, we think we would continue to be an excellent partner. So as you know, those are a matter of timing. When things work out appropriately, it's not necessarily something that you could force. So we continue to have very good dialogue with folks that we think would be great partners for Banner.

Okay. I appreciate it. And then, Rob, just on the margin. I guess the question is what's kind of driving some of the conservatism around -- you referenced getting successive rate cuts could lead to margin down. But when I look at fourth quarter of this year, your margin was up when we digested most of the cuts and then same 4Q of '24, we had a lot of cuts in that quarter, and your margin was still up in that quarter. So I guess, what's kind of driving the conservatism? Are you trying to kind of imply that maybe there's some lag to the loan repricing on a monthly basis, and we should expect some margin headwinds in the first quarter? Just wanted to unpack that maybe a little bit more.

Yes. So I wouldn't expect some headwinds against margin necessarily in the first quarter. If you think we did get the Fed rate cut in December, that's not fully baked in necessarily to the run rate in the first quarter. But I think if you think about it, the one thing that we're looking at is those adjustable rate loans that have been repricing through the cycle and then also the new loans coming out at higher yields. The backlog of those adjustable rate loans that have been repricing is coming down. At one point, I think if you look at 1.5 years ago, we might have been getting 9 basis points a quarter from that. And at this point, it may be a benefit of 4 basis points a quarter. And then also the average loan yield -- new loan yields compared to the average yield of the portfolio is also kind of narrowing as well. So I think the repricing aspect of the loan portfolio, even under a flat rate environment, I think it's more, call it, 4 basis points a quarter at this point. So if the Fed is on pause and we're able to maintain funding costs where they're at right now, and we get that backlog then you're looking at maybe 4 basis points a quarter of expansion while the Feds on pause. But I've gone through the other scenarios that is just different once the Fed starts to cut rates because we still have 30% of the book that floating rate and -- of that 30%, 10% are on their floors right now. So 90% of that continues to reprice down 25 basis points as the Fed cut. So that's just the way we're looking at it at a high level.

The next question is from Kelly Motta of KBW.

I apologize if this has been asked earlier. I joined a little late, but just -- on the tax rate, it looked a bit lower in the fourth quarter, understanding there can sometimes be catch up or adjustments for the full year. Maybe, Rob, if you could provide what you're expecting here for the tax rate next year as a normalized number?

Yes. Thanks, Kelly. So on that one, you are correct. So the fourth quarter, we just had some annual year-end true-up of some of the tax items there. But the rate that we're expecting is right around 19%, I think that's what we were for the first 9 months of the year. So I think if you're looking at 2026, it's probably right around 19%.

Got it. That's helpful. And then in terms of -- it looks like there was some noise too in other fees. I know there was some building lease exit costs that ran through. Was there anything else of note that we should keep in mind as we kind of start to think about a normalized fee rate?

Yes. So the other item in there, so we had a total of $1.4 million loss on the disposal of assets, and part of that was building related, which we adjusted out of our core numbers to get to the $1.55 earnings per share for the quarter. But it also included a $1 million write-off of software-related assets that we're no longer using. And that's not typically an item that we back out of our core number. So that's a $1 million nonrecurring item in there that I wouldn't expect to see going forward.

Got it. Maybe last one, and I apologize again if this was taken. But for Jill, it seems like payoffs in the move of construction to permanent financing weighed on some growth this quarter. What's your expectation there? I know that's been something you've been talking about for a while. Is this a continued potential headwind here as we look to '26?

Yes, Kelly, I did note that I do expect that commercial real estate payoffs will continue to be a headwind as we move into this next year. Still, we're going to project that we're going to grow our loan book as long as the economy holds up in the mid-single digits over 2026 as well given the kind of numbers that we're showing in production, the strength of the new relationship managers we've brought on and the activities they're bringing to the table as well.

[Operator Instructions] The next question comes from Liam Coohill of Raymond James.

Liam on for David. So just to take it at a higher level, you've noted the core deposit seasonality in your prepared remarks, but deposits have increased year-on-year across all of your geographies. Could you discuss some of the key drivers behind that year-on-year growth? And could we maybe expect some similar core deposit growth in '26 given the new banker adds?

Liam, it's Rob. So -- yes, I think if you look at it, there's always some seasonality to deposits. At our core, we are a relationship bank. So as we're bringing in new clients, we expect those clients not only come with the loan relationship, but also the deposit relationship. And then also, we're -- we've been heavily focused on small -- building our small business relationships. And small businesses typically are deposit rich in nature, where oftentimes, their deposits are larger than the loans that we're giving them. So I think that part of the success, and Jill talked about it earlier, the bankers that we've added over the last 2 years, starting to get some traction there, and then also seeing some traction on the small business side.

I appreciate it. And just one more for me. How are you thinking about deposit betas in 2026, given your already low-cost core deposit base?

Yes. It's Rob again. So we've been modeling 28% for the deposit beta, and that's essentially, I think, what we've seen through the cycle, specifically here in the fourth quarter and the activity that we saw there. We do think that over time, that will start to trend down some. At this point, we've been able to take that 28% deposit beta by really taking even the full 25 basis points on some of the exception price clients and also on CDs and then a higher amount even on some of our high-yield savings accounts. But as time goes by, we think that will continue to narrow some. So we might get that full 28% on the next cut or two, but I see it trending down in '26 depending on the level of effect to activity.

Thank you. We have no further questions at this time. So I'd like to hand back to Mark for closing remarks.

Thank you, Lucy. As I've stated, we are very proud of the Banner team and our full year 2025 performance, a significant improvement over 2024. Thank you, again, for your interest in Banner and for joining the call today. We look forward to reporting our results again to you in the future. Have a great day, everyone. Thank you for attending.

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

Hello, everyone, and thank you for joining the Banner Corporation Third Quarter 2025 Conference Call and Webcast. My name is Claire and I will be coordinating your call today. [Operator Instructions]

I will now hand over to Mark Grescovich, President and CEO of Banner Corporation to begin. Please go ahead

Thank you, Claire, and good morning, everyone. I would also like to welcome you to the third 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, 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 from the earnings press release that was released yesterday and the most recently filed Form 10-Q for the quarter ended June 30, 2025. Forward-looking statements are effective only as of the date they are made, and Banner assumes no obligation to update information concerning its expectations. Mark?

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 third 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 wanted 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'm 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 $53.5 million or $1.54 per diluted share for the quarter ended September 30, 2025. This compares to a net profit to common shareholders of $1.30 per share for the third quarter of 2024 and $1.31 per share for the second 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 and position 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 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, changes in fair value of financial instruments and building and lease exit costs. Our third quarter 2025 core earnings were $67.8 million compared to $62.5 million in the prior quarter and $57.4 million in the third quarter of 2024.

Banner's third quarter 2025 revenue from core operations was $169 million compared to $163 million for the prior quarter and $154 million for the third 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 1.3% for the third 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 and core deposits, both increasing 4% over the same period last year. Reflective of this solid performance, coupled with our strong regulatory capital ratios and the fact that we increased our tangible common equity per share by 9% from the same period last year, we announced an increase of 4% in the core dividend to $0.50 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 -- in one of the best banks in the world by Forbes. Newsweek named Banner Bank, 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. Our company was also recently certified by -- 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've noted before, 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?

Thank you, Mark, and good morning, everyone. As reported, our overall credit metrics remained strong. Delinquent loans improved slightly and now represents 0.39% of total loans, down 2 basis points from the linked quarter and compared to 0.40% reported as of September 30, 2024.

Adversely classified loans declined by $16 million quarter-over-quarter and now represent 1.49% of total loans down 13 basis points from June 30, and our total nonperforming assets down $4.5 million represent a modest 0.27% of total assets.

Loan losses in the quarter totaled $3.2 million and were offset in part by recoveries totaling $1 million. The net provision for credit losses for the quarter was $2.7 million, including a $1.4 million provision for loan losses and a $1.3 million provision related to unfunded loan commitments.

After the provision, the allowance for credit losses totaled $159.7 million and provide coverage of 1.36% of total loans, which compares to 1.37% as of the linked quarter and 1.38% as of September 2024. After recording very strong second quarter loan growth, I indicated that we expected a pullback this quarter. And as anticipated, loan originations were $172 million lower than that reported for the quarter ending June 30.

Additionally, new production was offset by material payoffs and paydowns on adversely classified relationships, as well as reduced commercial line utilization and a small handful of anticipated commercial real estate and C&I payoffs. Still, portfolio loan balances, while basically flat when compared to the linked quarter, remained up 4% year-over-year.

The decline in the commercial construction portfolio reflects the net effect of additional construction advances offset by the transition of both completed owner-occupied and investor real estate projects to the permanent portfolio. The residential construction portfolio at 5% of total loans continues to be diversified across markets and product mix and while days on market has increased again slightly this quarter, the level of completed and unsold inventory continues to remain below historical norms.

Consistent with prior quarters, the total construction portfolio remains balanced at 15% of total loans when you aggregate all business lines. The decline reflected in C&I is driven in part by reduced loanization, down 2% quarter-over-quarter as well as the previously mentioned exiting of adversely classified relationships.

The decline was offset in part by continued growth in the small business segment, up 8% year-over-year. And as expected, agricultural balances increased again this quarter due to line utilization, up 3% compared to last quarter and up 2% year-over-year.

Lastly, I will just note that commercial pipelines remain solid. Fourth quarter loan growth is typically strong, and we expect the same to be true this year. As such, we still anticipate reporting a mid-single-digit growth rate for the full year. Banner's moderate risk profile with stable and strong credit metrics remains a significant source of strength.

With that, I will hand the microphone over to Rob for his comments. Rob?

Great. Thank you, Jill. We reported $1.54 per diluted share for the third quarter compared to $1.31 per diluted share for the prior quarter. The $0.23 increase in earnings per share was primarily due to an increase in net interest income, a lower provision for credit losses, as well as the current quarter, including a gain of $1.4 million on the disposal of assets, while the prior quarter included a loss of $919,000 on the disposable of assets.

We experienced strong positive operating leverage during the quarter compared to both the prior quarter and the quarter ended September 30, 2024. As core pretax pre-provision income increased 8.5% or $5.3 million compared to the prior quarter and increased 18% or $10.4 million compared to the year ago quarter.

Held-for-investment loan balances increased $12 million from the prior quarter, as pipelines rebuilt after the strong pull-through we experienced in the second quarter. In addition, we saw higher prepayments in the third quarter. The loan-to-deposit ratio ended the quarter at 84%, giving us ample capacity to continue to add new clients.

Total securities decreased $56 million due to a combination of normal portfolio cash flows and some securities being called early. Deposits increased by $489 million during the quarter, primarily due to core deposits increasing $426 million, as well as time deposits increasing $63 million during the quarter.

Core deposits ended the quarter at 89% of total deposits. Total borrowings decreased $459 million during the quarter as the growth in deposits was used to pay off short-term FHLB advances. Banner's liquidity and capital profile continue to remain strong with a robust core funding base, a low reliance on wholesale borrowings and significant off-balance sheet borrowing capacity.

As a reflection of our robust capital and strong liquidity positions, Banner repurchased 250,000 shares during the quarter and announced a 4% increase in its declared dividend to common shareholders. Net interest income increased $5.6 million from the prior quarter due to a 6 basis point increase in net interest margin, as well as average earning assets increasing $151 million and one more interest earning day in the current quarter.

The increase in average earning assets was due to average loan balances increasing $33 million, and total average interest-bearing cash and investment balance is increasing $118 million. Tax equivalent net interest margin was 3.98% for the quarter compared to 3.92% for the prior quarter. Earning asset yields increased 3 basis points due to a 5 basis point increase in loan yields as adjustable loans continue to reprice higher and new loans are being originated at rates higher than the average yield on the loan portfolio. Average on new loan production for the quarter was 7.35%, compared to 7.27% for the prior quarter.

Funding costs decreased by 3 basis points as a result of using the increase in deposit balances to reduce higher costing borrowings. Deposit costs were 1.50% for the quarter, which was 3 basis points higher than the prior quarter, as the deposit growth during the quarter was mostly in interest-bearing accounts and noninterest-bearing deposits ended the quarter at 33% of total deposits.

Total noninterest income increased $3 million from the prior quarter, primarily due to the current quarter, including a gain of $1.4 million on the disposal of assets, while the prior quarter included a loss of $919,000 on the disposal of assets. Both of these related to back office consolidation.

In addition, the current quarter had a net gain of $377,000 on security sales and a positive fair value adjustment of $223,000 on financial instruments carried at fair value.

Total noninterest expense was $674,000 higher than the prior quarter with increases in marketing, employee-related expense, occupancy expense and business and use tax. And partially offset by lower salary and benefit expense. The current quarter occupancy expense included $1 million of lease termination costs associated with the back office space consolidation compared to $834,000 in the prior quarter. Our strong capital and liquidity levels position us well to continue to execute on our super community bank business model.

This concludes my prepared comments. Now I will turn it back to Mark. Mark?

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

[Operator Instructions] We have our first question from Jeff Rulis from D.A. Davidson.

I wanted to check in on the margin. I guess, kind of 2-part question is the first kind of the timing of those FHLB payoffs, I mean, I guess I'm kind of centering on. Is there a tale of benefit that came later in the quarter in terms of the go-forward margin? And then maybe just checking in on Rob, maybe the impact of rate sensitivity as you see the cut we had and the expected cuts ahead?

Sure, Jeff. So on the first part of it, we started to see the deposits come in fairly early in the quarter. So I would say probably FHLB advances were paid down to their ending level. I would say, probably halfway through the quarter. So there could be a little bit of additional benefit there from just an overall funding cost standpoint.

If I think about kind of the impact of the Fed rate cuts on our margin overall, I think the story is kind of the same that we've been talking about essentially in a quarter where the Fed -- there's no Fed actions at all. We would expect margin to expand like we saw in the second -- or the third quarter here. As those adjustable rate loans continue to reprice up in general, absent what we saw as far as the pay down borrowings, we would expect funding cost to be relatively flat.

If the Fed does 1 rate cut in the quarter, then we're expecting that our margin would be relatively flat. It doesn't mean it can't be plus or minus a basis point or 2, but relatively flat overall. And if you think about the fourth quarter here, we have the rate cut in September, the market and Moody's who we use for interest rate forecast is forecasting another cut at the end of October here and then the third cut in the middle of December.

And under that scenario where we have essentially multiple rate cuts in 1 quarter, then we would expect some margin compression in that quarter. So moderate in nature, what we would expect because we will have those adjustable rate loans that are 29% of our portfolio. Those will essentially reprice down.

So as soon as the Fed cuts, and we want that second rate cut, we won't have necessarily the benefit of the adjustable rate loans repricing up because that's already offsetting the first rate cut. And we will get some improvement in funding cost, obviously, because we will take some additional deposit rate reductions, but it won't be enough to offset the full impact of the variable floating rates repricing down.

Appreciate it. Did you have a September average for the margin?

Margin was pretty -- it was pretty flat. So I would say September margin is really close to at least on the quarter.

Got it. Okay. And Mark, I guess just checking in on capital on several fronts, you're pretty active with the dividend. And the buyback, I guess the first question is sort of the sensitivity on price. I mean, I think you -- just below where you were on average, the buybacks in the third quarter. So checking in on buyback activity or appetite versus also the ongoing question on the M&A side, if you care to opine on your interest there?

Yes. Thank you, Jeff. Look, I think it's pretty evident that we thought we were confident in repurchasing shares at an average rate of $63.50 the current pricing structure would suggest that we would be confident continuing to repurchase shares.

We continue to build capital, our TCE ratio at 9.5%. We're continuing to build capital. The company's earnings momentum is very strong. Obviously, there's some momentum with M&A and I would think that if an opportunity presented itself, we would certainly be in a position to combine and do some additional fill-in acquisitions.

Again, my philosophy on this is, I don't think we need to do anything. I think our -- the earnings performance that we've demonstrated this quarter and will continue to demonstrate suggest we don't need to do an acquisition to have improved earnings power. But to the extent that there's an opportunity that presents itself, I think it would be a great combination, and we have ample capital to accomplish that.

Our next question comes from Kelly Motta from KBW.

I might just follow up in terms of how you guys are thinking about the buyback. Notably, this was one of the first quarters you guys have repurchased shares in quite a while. Wondering if you can remind us any sort of like what you look at in terms of valuation, how you guys are viewing the buyback? It seems like the door to M&A is open. So just wondering how we should be thinking through greater activity on that versus keeping dry powder ahead.

Thank you, Kelly. Rob, would you like to address that?

Sure, Mark. So yes, Kelly, I mean, we're always looking at the different alternatives for capital deployment. You saw at the end of the second quarter, we essentially paid off the $100 million of sub debt out there and then the current quarter where we had the repurchase of the 250,000 shares and then also announced the increase in our core dividend by 4%.

And I think the range that you saw in this current quarter as far as share repurchases, certainly that's a price where we think it's attractive and beneficial to shareholders and the tangible book value earn-back makes sense. I think could extend a bit above where that's at right now.

I think as we look at the fourth quarter, we'll look at all the different alternatives for capital deployment, which clearly, the share repurchases is on the table. We do have the share repurchase authorization in place right now that would allow us to continue to do that. But ultimately, it's going to be based on an assessment of the market conditions and what's going on in the market at the time. Right now, we are in a blackout period, so we wouldn't consider that until after we're out of our blackout period.

Got it. That's helpful. Maybe turning to the balance sheet. Your deposit growth was really strong and you were able to pay down some of that FHLB that you backfilled last quarter -- in the prior quarter. Just wondering if you could let us know if there was any -- what was the drivers of that if you were running any specials? And how you guys are thinking through deposit pricing here after the Fed's cut in September?

Yes. So a couple of things. I mean, if you look back even last year, Q3 is our strongest growth from a deposit standpoint from a seasonality standpoint. That is when the crops come in and the cash comes in from our ad clients. So it is a strong quarter for us. We weren't running any particular promotions or specials, just the standard hard work that all of our teams do in going out and trying to get existing clients to bring additional deposits on balance sheet and continuing to prospect for new clients.

On the pricing side of things, so post Fed rate cut, we did reduce our advertised CD specials, which, as you know, are generally below market already, but we pretty much took the full 25 basis points and a reduction of the advertised CD rates. And then we also reduced our high-yield savings account, the different tiers there as well. And that probably -- let's say that range from 5 to 20 basis points depending on what the pier was. And then we also looked at our exception price clients and took some reduction there as well.

Got it. Last question for me, if I can just sneak it in related. Your cash -- average cash balances were elevated in part in light of the great deposit growth you had. Just wondering how we should be thinking about the liquidity position on balance sheet and just kind of optimizing that?

Yes. We were holding throughout the quarter, the majority of the quarter, we were holding more cash on average than we typically would. The way we're thinking about that is -- and I'll let Jill talk about loan growth in the fourth quarter here. But in general, when we look at that as kind of dry powder we have right now where we can use that cash to fund loan growth in the fourth quarter instead of using any kind of wholesale borrowings.

Our next question comes from David Feaster from Raymond James.

I wanted to maybe touch on the competitive landscape a bit. I mean originations declined a bit quarter-over-quarter. Obviously, there's some noise. But I'm curious, what in your mind drove the decrease in originations. Is that just -- is that weaker demand or slower pull through the pipelines or just -- is there more competition? We're hearing more competition from -- especially the larger banks that are moving down market a bit, and that's leading to some pricing competition.

Just kind of curious what you're seeing on the demand side. Obviously, we iterated the mid-single-digit loan growth guidance, but just hoping you could touch on, again, what you're seeing on the demand originations and the competitive landscape?

Sure, David. So I think I'm pretty consistent in the message that the competitive landscape is it's not really unchanged. We're competing all the time for all of the deals that we book. Certainly, there are players who are coming back in offering some maybe different terms than we would. But by and large, competitive landscape is the same.

I would suggest that the decline in originations this quarter was multifaceted, right? We had that really strong pull-through in the second quarter. Our pipelines have built and are continuing to build. So they're really strong going into the fourth quarter. the reaction to the 25 basis point rate cut was really rather muted on the credit side where people were saying, great, but when is the next one coming expecting a little bit more. So I think as we start to see that, it will pull some of the fourth quarter pipeline through a little bit faster.

And again, fourth quarter is generally a strong quarter for us. I feel like I missed one piece of your question there, David. So it was competition, it was pipeline and did I get it? Or is there something else?

Yes, that was pretty much it. And I guess maybe just following up on that, like sort of the competitive landscape, maybe touching on -- you've got two sides of it. We hear mostly the competition has been on the pricing side. Is that -- I guess where are you seeing new origination yields and spreads. And then have you started to see that stretch the competitive landscape, maybe stretch more into underwriting and structures and standards? Or has that held up pretty well from your standpoint?

Mostly held up well. I mean we are seeing a little bit more stretching in terms of ask for longer interest-only periods, while people wait for rate cuts to come down and take that term P&I amortizing loan structure. So there's that ask, and I think some of the banks are more inclined to give longer terms than we would be. But generally, the underwriting is holding up.

Yes. Okay. And then maybe just last one for me. In your prepared remarks, you talked about and even some of the commentary at the beginning of the call, you talked about the strategic investments that you guys have been making paying off and generating some pretty meaningful returns.

I'm curious if you could touch on maybe where are you seeing the most benefit from those investments where you're investing currently, whether it be technology, is it new talent? There's obviously been a lot of disruption around you. Expansion plans or investment into other business lines. Just kind of curious where your strategic investments have -- you're starting to see some of the fruits pay off? And then where are you investing currently? And what are you excited about on the horizon?

To address some of our investment. And then, Jill, if you want to talk about some of the talent we've added.

Sure, Mark. So David, yes, we've talked about some of the investments we're making. I would say the largest investments we're making is on the technology side. We've talked about the new deposit loan origination system, which went live with the initial modules earlier this year, and we expect the rest of the modules to go live here in the fourth quarter.

And the way we're thinking about that is that it will provide the organization with additional scalability, allowing us to grow loans and deposits into the future with adding less expenses into it. So we think the payoff for that is a longer-term payoff initially any time you implement a new system, of course, your expenses are typically going to go up temporarily related to it. And then over time, you'll get those efficiencies and be able to have that scalability.

Other areas that we continue to invest in is fraud-related technology, which, I mean, we've talked about multiple times that our fraud costs outpace our credit losses. So fraud is something you're continuing to look at. And then, I mean, we -- like everyone, AI is on top of mind on everyone as our part of our moderate risk profile. We spent probably at the beginning of it taking -- doing a lot of governance-related activities, making sure that we were not taking any additional risk for the organization if we're going to implement different types of AI as we've been heading down that path.

We've started to implement or turn on different AI features on existing software and technology that we have right now. And then we're also working on kind of a longer-term strategic AI road map right now as well. But when we think about AI, we don't think about it as immediate cost reductions. We think about AI as being a longer-term investment that will give the scalability to the organization.

So Jill, anything on the talent side?

Yes. The talent story is, David, the same as before and that we continue to add talent in the commercial and commercial real estate teams up and down the West Coast primarily this quarter, but we've added team leaders, RMs, commercial real estate lenders as well. And they're coming from different organizations that are experiencing, whether it's changes in the management structure and/or just an overall feel that the way Banner is operating open for business, they just resonate with our current operating model.

Our next question comes from Andrew Terrell from Stevens.

Rob, if I could start just maybe a question on deposit costs. I'd love to hear maybe some color on just your approach. I heard moving some of the promotional rates down, some of the exception pricing down following the 25 basis points from the Fed. I'm curious from a magnitude perspective, how you're approaching the rate cuts this time versus the 100 basis points we got late last year?

Are -- you're approaching the cuts magnitude-wise similarly to last year and trying to get at, ultimately, from a beta perspective on interest-bearing deposits, would you expect something similar to this go around to the first 100 basis points? Or do you feel like client behavior has changed or gotten more sensitive at all?

Sorry. Sorry, Mark. Yes. So Andrew, I guess what I'd start with is from a modeling perspective, we're modeling a 28% deposit beta. But from an overall, what we're expecting on this set of rate cuts compared to last time.

Right now, our expectation is that we would get a similar deposit beta that we got last time on it. And that deposit beta has always lagged. We've taken initial cut at it and reduction and then we evaluate what we're seeing in the marketplace and determine if we can layer in some additional rate reductions related to that. So it's generally a lag impact.

And then the other piece of it, of course, is your CD book, the CD book doesn't reprice right away. So even though we've reduced our advertised specials by 25 basis points, it takes some time for that to flow through. Probably about 2/3 of our CD book typically matures within a 6-month period of time. So it will take a little bit for us to see the impact on the CD side of things.

Understood. I appreciate it. And then just on the -- the kind of customer sensitivity. Do you feel like that's changed much relative to prior experiences?

We haven't seen that at this point. I mean we implemented the reduction in rates shortly after the Fed made their move in September and we haven't received any kind of feedback from clients necessarily as far as their sensitivity to that deposit cut.

I mean, keep in mind, a lot of our largest depositors are commercial depositors and those same clients saw a reduction in some of their loans at the same time. So they're seeing kind of a benefit on one side of it even if they're getting a reduction on what we're paying them. So I think they're sophisticated enough to understand that as rates come down, the rate that they're earning on the deposits, all market deposit rates are going to come down. So we haven't seen any unusual sensitivity at this point.

Yes. Okay. Great. I appreciate it. And then just sticking kind of overall on the margin. I heard your comments about just expectations in a static quarter versus a quarter where the Fed cuts. But if I look back over the past year, your margin is up, I think it's right at 25 basis points relative to 3Q of last year. We digested 100 basis points of rate cuts over that time frame.

Just when I look at the next 12 months, I think consensus margin is up only 6 basis points over the next 12 months. And then historically, you've been able to operate in that 4.25% to 4.5% margin range. So I guess my two questions are, one, do you feel like the 6 basis points is kind of conservative on the NIM forecasting over the next 12 months? And then just over the medium term, do you feel like a 4.25% to 4.50% kind of margin range is still achievable?

Yes. So Andrew, I guess, in general, what I'd say is, I mean, ultimately, it's going to be dependent on how aggressive the Fed gets and how they approach any kind of reductions. And so it's a bit hard to predict what they're going to do if you're going out longer term. At 3.98% right now, I mean, I think we're happy to see us approaching 4%. I haven't necessarily considered the idea of getting back to 4.25% or 4.30%. It's going to depend on the Fed actions, but I don't see that as being something. I think if you're saying 6 basis points is what the market is expecting, I mean, I think that's a more reasonable number certainly than getting up to 4.25% or 4.30%.

Our next question comes from Tim Coffey from Janney.

I had a couple of questions -- a couple of questions I want to start with Jill. Jill, can you kind of give us maybe a thumbnail sketch or a high-level overview of how the company incorporates monitoring personal guarantees, appraising collateral on an ongoing basis as a way to maintain the solid credit quality you have and have shown over the recent past?

Sure, Tim. So as to reappraising properties, that is not an ongoing annual updated type of action. What we do as we're going into these credits and then through the life of the loan is considered changes to the environment, contemplate changes to cap rates using original appraisals and current operating income and kind of use that as a basis to test where we think we are, recognizing that the originating on the values that we go into are generally much lower than some of the other lending institutions out there.

And so we've got room for some valuation drop, certainly where things still continue to work. We also are continually contemplating what might happen to top line and revenue changes. So we're stressing in the income side we're stressing the cap rates and that sort of thing to look at the collateral. When you go back to guarantees, I would suggest to you that the vast majority, and I'm talking north of 95% of our loans have personal or corporate guarantees that add significant secondary sources of repayment to backstop losses. Did I get all of your questions?

That's great. Sorry. Yes, it was. Yes. And I just want to clarify, I wasn't so much asking about the -- how often you reprice collateral. It's more of how are you ensuring that the borrowers are doing what they told you they were going to do, right? So the personal guarantees does that, monitoring the collateral for sure, actually does that as well. So yes, but that...

Sorry, I was covenant testing financial statement, we require ongoing reporting from our borrowers. So -- and then testing covenants is the key there to what are they doing? And are they maintaining their properties, annual site inspections, that sort of thing.

Okay. great. That's helpful. And then my question for you, Jill. So look at the loan-to-deposit ratio solidly mid-80s, which is a good number to be at. Is there any thought to taking it higher? And did you see -- do you have any line of sight to that loan deposit ratio being higher than 90?

We have in the past certainly been higher than that. I would I would say that if we were to approach 95% would be okay, I don't think we'd go above that.

Okay. And then for Rob, I had a question about kind of the overall deposit pipeline. So in parts of the Western region Bay Area specifically, we started to see clients move around, and you started to see deposits start to change banks. Are you seeing any change in the sales cycle to bring in new deposits? Is it getting shorter? Are you seeing any kind of momentum with long-time bank customers now looking for a new place to deposit the funds?

So Tim, overall, what I'd say is, I mean, we have a lot of clients that are very loyal to Banner. Our deposit base is one where half of it is what I would call rural in nature, and then half of it is more metro. So we have a sticky client base that tends not to want to move around that values -- the value of the relationship and the long-term value that we provide. So we haven't necessarily seen more movement in clients.

And we have been successful in adding new clients and bringing those relationships in and part of that is our focus on small business, which tends to bring in more deposits and loan balances. So, I still think it's a lot of hard work by our relationship folks to bring in those quality new clients. And I wouldn't say it's changed as far as seeing clients moving from bank to bank in a shorter cycle.

Okay. Okay. Well, the core deposit growth year-over-year has been very strong at Banner. So good job. And then, Mark, if I can ask a question about a special dividend. Now I understand your capital priorities. I understand your comments about M&A. But I also see kind of the anticipated capital growth on your income statement over the next, say, 12 months or so. Is it possible that a special dividend could be on the table discussion this time next year?

Well thanks for the question, Tim. I don't think we rule out any options on capital deployment. We've done special dividends in the past. I would suggest to you that the reason you do a special dividend is to do a blunt force reduction in your capital position and you can do it very quickly and with little execution risk.

I don't suspect that is our top priority to do a special dividend. I think our core focus is making sure that we focus on the core dividend itself. We'll continue to deploy capital through share repurchases as appropriate and certainly M&A. But we've done special dividends in the past. It's less likely that we will do one going forward, unless we really need to reduce capital for some reason.

We have a follow-up question from Jeff Rulis from D.A. Davidson.

Hello. Mark, can you hear me?

I can hear you now, Jeff.

Okay. Sorry, just a follow-up. On the consolidating of office space, I want to kind of see if we're at the sort of the tail end of that in terms of some of the lease termination costs and the gains and losses on that. Is that at the tail end of that or kind of continue to nipple away at those as it comes up?

Thanks, Jeff, it's Rob. So Yes, we'll see a couple more quarters of those back office consolidation lease termination costs come through. So I would say we're going to see a potentially through the middle of '26. So maybe over the next 3 quarters, just depending on how quickly we can get through the space that we're exiting. So we'll see a few more quarters of it.

[Operator Instructions] We currently have no further questions. So I will hand back to Mark for any closing remarks.

Right. Thank you, Claire. As I stated, we're very proud of the Banner team and our third quarter 2025 performance, even though it doesn't appear that the market is reflecting the value of Banner or some of the other bank stocks, but in particular, Banner, we're very proud of our performance and how we are viewing the future of performance for Banner. So thank you for your interest in our company and joining the call today. We look forward to reporting our results to you again in the future. Have a great day, everyone.

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

Hello, everyone, and welcome to the Banner Corporation Second Quarter 2025 Conference Call and Webcast. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions]

I will now hand over to your host, Mark Grescovich, President and CEO, to begin. Mark, please go ahead.

Thank you, Nadia, and good morning, everyone. I would also like to welcome you to the second quarter earnings call for Banner Corporation. Joining me on the call today is Rob Butterfield, Banner Corporation's Chief Financial Officer. 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, 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 risk factors that could cause actual results to differ are available from the earnings press release that was released yesterday and our recently filed Form 10-Q for the quarter ended March 31, 2025.

Forward-looking statements are effective only as of the date they are made, and Banner assumes no obligation to update information concerning its expectations. Mark?

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, Joe Rice will provide comments on the current status of our loan portfolio. And finally, Rob Butterfield will provide more detail on our operating performance for the quarter as well as comments on our balance sheet.

Before I get started, I want to thank all of my 2,000 colleagues in our company who are working extremely hard to assist our clients and communities. Banner has lived our core values, summed up as doing the right thing for the past 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 a number of these items in more detail shortly.

To illustrate the core earnings power of Banner, I would direct your attention to pretax pre-provision earnings excluding gains and losses on the sale of securities, building and lease exit costs and changes in fair value of financial instruments. 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 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?

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 1-4 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 relationships, increased line utilization and meaningful small business originations. The residential construction portfolio at 5% of total loans continues to be diversified across markets and product mix and the level of complete and unsold inventory remains below historical norms as builders have become more cautious with replacement starts in this extended high rate environment. 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 1-to-4 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.

[ OREO ] 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 office 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 caused. 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?

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 adjusted for loans continue to reprice higher and lose 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.

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

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

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.

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 generally slower than Q2 and Q4. So the tariff noise that happened at the end of Q1 certainly slowed things down there and the policy changes. That opened back up a little bit, pulled some of that through.

So what was muted loan growth in Q1 came in, in Q2 and I guess at the end of the day, what I would say to you is that I'm still expecting us to hit that mid-single-digit growth rate for the year. I expect we'll see a little bit of a pullback in Q3 but we had a 5% annualized year-over-year in Q1. We had a 5% annualized year-over-year in Q2, and that's roughly what we're projecting for the year of 2025.

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

Yes, David. So just from a -- this is Rob. So just from a overall pressure on deposits. We're not necessarily seeing competition teed up on deposits at this point. We're not seeing kind of competitive peer banks increasing rate specials right now, everything seems to be a bit more static. I mean deposits are always highly competitive. So let's just keep that in mind. But the ultra competitive department are environment that we experienced really a year ago is not quite what we're seeing right now. I mean, really, I mean, our whole philosophy all along has been relationship banking.

And so our expectation is, is that as we are bringing in new clients, we expect it to come with the total relationship, not only the loans, but also the deposits. And we've also talked about that we're heavily focused on small business and small business tend to be deposit-rich in their relationships. So that tends to help as well.

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

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

And just kind of to the extent that, again, growth exceeds core deposit growth, is the FHLB advance as kind of a plug or just -- kind of curious how you think about funding your growth going forward?

Yes, it was a plug for this quarter certainly. And I think that's why we saw that increase in funding costs during the quarter was deposit costs were flat, but funding cost was up because of the combination of 2, both the really strong loan growth that we had for the quarter, but then also just normal seasonal deposit outflows that we experienced during the first 2 months of the quarter. And so that's why you saw FHLB advances increase.

If normal seasonality returns, we would expect that we would see deposit growth happen in the third quarter. and deposit growth could very well outpace loan growth in the third quarter of historical kind of trends come in line. And so I mean, usually, during the third quarter, that's when we see our ag clients their crops come in, cash comes in from that. So historically, we've already seen increases in deposits during the third quarter.

The next question goes to Andrew Terrell of Stephens.

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

Yes. The cost on that at the time, so it was 5%, but then there is also amortization of some of the original debt issuance costs there. So it was it was -- about 550 was the all-in cost on that sub debt. And so we would expect some pick-up reduction in funding costs because -- now effectively, if you move that from the 550 to FHLB advances at least temporarily, I mean they're in the 450 range. So maybe we pick up 100 basis points on that.

Yes. Got it. Okay. I appreciate it. And then maybe sticking with you, Rob, on just the expense base. You definitely had maybe a little bit of a benefit this quarter from the deferred origination costs. It sounds like maybe loan growth is a little bit slower in the 3Q. Just hoping to get a sense of kind of the puts and takes of the expense base into the back half of the year and if you have kind of an expected quarterly run rate?

Yes. So Andrew, on the expense side of the equation, we continue to go live with some of the different modules on the new deposit and loan origination system. So in the second half of the year, we would expect IT expenses to increase. And what we're looking at is we're looking at kind of over the longer term offsetting a portion of that with consolidation of some additional back office space I think you saw some of those nonrecurring expenses come through during the current quarter, but we would probably expect that we continue to see some nonreocurring expenses come through probably over the next 3 or 4 quarters related to that specific initiative.

And if you think about our run rate, what we talked about is the first quarter was probably a decent run rate that we would expect and then if you kind of layer in just normal inflationary changes as you go forward from there. As you mentioned, the second quarter was down, and that was partially driven really by the higher capitalized loan costs, higher origination just due to the higher originations. But if you think about Q1 was really low originations historically as well. So we would expect capitalized loan costs probably to be somewhere in between those two.

Got it. Okay. And then I just wanted to ask maybe, maybe for Mark, the M&A environment, it seems like it's maybe a little more amicable today. And we've seen quite a few deals announced. Just curious if anything has changed in terms of your view on M&A how palatable you see it being today? And then just any update on kind of status of discussions or how M&A kind of fits into the banner strategy over the kind of near to medium term?

Thank you, Andrew, for the question. Clearly, there's been a number of transactions that have been announced. I think certainly, the M&A environment has picked up and conversations have picked up. But what I would remind you is that our organization is totally focused on our organic business operation. And as you can see by the numbers that we put up quarter-over-quarter and year-over-year, the organic business model and our execution, we're very focused on it and it's very successful.

So opportunistic M&A is something we will continue to look at. But I don't feel compelled that we have to do anything. It is simply something that I think the entire industry is going to continue to look to some consolidation to get additional efficiencies, but we remain very focused on our organic business model.

The next question goes to Jeff Rulis of D.A. Davidson.

Jill, I had a question about that. Mark, the loan growth comment you made about a pullback in the third quarter. Was that a pullback from the 9% pace from 2Q or a net runoff? My guess is it still positive, correct?

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

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

Yes, I think that's right, Jeff. As long as the Fed is on pause, which we use Moody's, I think last forecast I saw from them, they were going to -- assuming no rate cut until September, that's a long time from now. So we'll see what really happens and then an additional one in December. And under that scenario, we would expect loan yields to continue to increase 4 to 5 basis points in the quarter. So in the third quarter, we'd see that kind of the same clip that we experienced during the second quarter as far as loan yield expansion.

And the funding sites where there's probably a little less predictability but if we do assume that deposit costs would remain flat, but where we could see the improvement in the funding cost would be that normal seasonal activity if that third quarter seasonal increase comes in deposits, then we'd have a lower reliance on FHLB advances, which would reduce the funding cost.

Got it. Last 1 for me was maybe on the credit side, where the risk rating downgrades or additions not we assume, Jill, you're cautious on the small business and consumer are those the areas that added to the balance for this quarter?

So you kind of faded out on me, Jeff, but the decrease in substandard this quarter was really a mix. We had several upgrades, a couple of payoffs and then a handful of downgrades into substandard for that net change of $8.3 million. The agricultural sector has experienced more downgrades due to the pressure on commodities prices and input costs. So we are seeing some continued pain in the ag sector. So I'll remind you it's 3% of the loan portfolio, 50% operating lines and 50% real estate secured.

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

Actually, no, that was substandard. Sorry, Jeff. The bump in nonperforming is almost exclusively 1-to-4 family residential properties due to that extended time period and what -- the way we have to work with them with consumer protection laws, it's -- they take a long time to work their way through.

[Operator Instructions] And the next question goes to Kelly Motta of KBW.

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

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

Got it. I think, Rob, the commentary on prior calls have been like roughly a 5 basis point increase in loan yields absent Fed cut which would cut into that. I'm wondering if that kind of rough rule of thumb still holds in terms of modeling from the NIM perspective.

Yes. I think that's right. I would say 4 to 5 basis points is what I would expect. And I think the modeling is showing that, that would continue as long as the Fed is on pause for the next handful of quarters. But over time, that backlog of adjustable rate loans that haven't repriced through the cycle continues to dwindle. So over time, we would expect that to trend down over time. But in the near term, we would expect in that 4 to 5 basis point range.

Got it. That's helpful. Maybe last question for me on loan growth. Obviously, it was a really good quarter. Wondering, Jill, are you seeing any particular markets where there's been better opportunities or the activity is holding up a bit better. Just wondering if there's any sort of regional differences that -- or color on that front that you could provide?

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

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

Thank you, Nadia. As I stated, we're very proud of the Banner team and our second quarter 2025 performance. Thank you for your interest in Banner and joining our call today. We look forward to reporting our results again to you in the future. Have a great day, everyone.

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