Banner Corp Q1 FY2023 Earnings Call

Good morning and thank you for attending today's First Quarter 2023 Earnings Call for Banner Corporation. My name is Jason and I'll be the moderator for today's call. I would now like to pass the conference over to our host, Mark Grescovich, President and CEO.

Thank you, Jason and good morning, everyone. I would also like to welcome you to the first quarter 2023 earnings call for Banner Corporation. Joining me on the call today is Peter Conner, Banner Corporation's Chief Financial Officer; Jill Rice, our Chief Credit Officer; and Rich Arnold, our Head of Investor Relations. Also joining our call today is Rob Butterfield, our recently announced Chief Financial Officer of Banner Bank. 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. Those 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. Actual results may differ materially from those discussed today. Information on the risk factors of actual results differ are available from our earnings press release that was released yesterday and a recently filed Form 10-K for the year ended December 31st, 2022. 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 2023 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, Peter Conner and 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 again thank all of my 2,000 colleagues in our company that continue implementing our Banner Forward initiatives and 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 133 years. Our overarching goal continues to be, 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 $55.6 million or $1.61 per diluted share for the quarter ended March 31st, 2023. This compares to a net profit to common shareholders of $1.27 per share for the first quarter of 2022 and $1.58 per share for the fourth quarter of 2022. The earnings comparison is impacted by the provision or recapture of credit losses, the rapid change in interest rates, our strategy is to maintain a moderate risk profile, and the performance improvement resulting from our Banner Forward initiatives that we started in the third quarter of 2021. Peter and Rob will discuss these items in more detail shortly. To illustrate the core earnings power of Banner, I would direct your attention to pre-tax pre-provision earnings, excluding gains and losses on the sale of securities, Banner Forward expenses, loss on the extinguishment of debt, and changes in fair value of financial instruments. First quarter 2023 core earnings were $75.9 million compared to $49.7 million for the first quarter of 2022. Banner's first quarter 2023 revenue from core operations increased 24% to $170.4 million compared to $137.6 million for the first quarter of 2022. We continue to benefit from a strong core deposit base and improving net interest margin and core expense control. Overall, this resulted in a return on average assets of 1.44% for the first quarter of 2023. 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 represent 93% of total deposits. Further, we continued our strong organic generation of new relationships and our loans increased 11% over the same period last year. Reflective of the solid performance, coupled with our strong regulatory capital ratios, we announced a core dividend of $0.48 per common share. As announced last quarter, Banner published our inaugural environmental, social, and governance highlights report in December, which I hope you have had an opportunity to review. This report reflects the many ways in which we continually strive to do the right thing in support of our clients, our communities, and our colleagues and provides an outline of the level of commitment Banner has to the many communities it serves. 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 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 in our most recent CRA examination. Let me now turn the call over to Jill to discuss the trends in our loan portfolio and her comments on Banner's credit following. Jill?

Thank you, Mark and good morning everyone. Given the continued negative economic sentiment and the recent market volatility, I am pleased to be able to report that Banner's credit metrics remain healthy. Delinquent loans as of March 31st remained low at 0.37% of total loans, up five basis points when compared to the prior quarter and compared to 0.21% as of March 31st, 2022. Adversely classified loans represent 1.46% of total loans, up slightly from 1.35% as of the linked quarter and compared to 1.95% as of March 31st, 2022. The increase in adversely classified loans this quarter is primarily driven by the downgrade of an owner-occupied industrial property. Non-performing assets remained modest at 0.17% of total assets and continue to be comprised almost exclusively of non-performing loans totaling $27 million. Loan losses in the quarter totaled $1.5 million and were offset in part by recoveries of $698,000. We posted a modest provision for loan losses of $774,000, which was offset by a release of $1.3 million in the reserves for unfunded loan commitments for a net recapture of $524,000. As anticipated, loan growth slowed in the first quarter. Within our reserve modeling, the impact of the negative economic sentiment was offset in large part by continued strong portfolio metrics with the provision for credit losses in essence covering net charge-offs. After the provision, our ACL reserve totaled $141.5 million or 1.39% of total loans as of March 31st, flat with the linked quarter and compares to coverage of 1.37% as of March 31st, 2022. The reserve currently provides 528% coverage of our nonperforming loans. A review of the loan activity reflects origination volumes were down when compared to the linked quarter, with portfolio loan balances essentially flat when compared to year end and up 11% when compared to March 31st, 2022. C&I line utilization was down 1% from the linked quarter and the overall muted C&I activity in the quarter reflects the general negative economic sentiment in the market. This, coupled with the reaction to the higher interest rates, have many clients pausing on capital expenditures and prior expansion plans. Still, commercial business loans are up 14% year-over-year. I will note that we did not see any unusual line activity as a result of the financial institution failures that occurred late in the quarter. Excluding multifamily, our commercial real estate balances declined 2% in the quarter and are down 4% when compared to March 31st, 2022, primarily in the non-owner-occupied investment property category. Given the current rate environment, the changing economic conditions, and general market dynamics, I will provide a little more color on two of the asset classes in the CRE portfolio that are currently getting a lot of press. However, before I do, I will start by saying that the entire CRE portfolio continues to perform well with less than 2% of the total adversely classified at this time. Looking at office properties specifically, the office portfolio continues to perform well. As noted in prior calls, this segment is relatively small at 7% of the entire loan book. The geographic distribution of the portfolio aligns very closely to that of our entire loan book as detailed in the earnings release and the granularity of the loan limits our exposure. Drilling specifically to the metropolitan areas, approximately 10% of the office book is located within the city of Seattle. However, only 1% is within the core business district. The average loan size in the city of Seattle is $2.6 million, dropping to less than $1.5 million within the business district. 6% of the office portfolio is located in Sacramento with less than 1% in the core business district. The average loan size in this market is $3.5 million. 2% of the office book is located in Bellevue with an average loan size of under $2 million. 1% is in Los Angeles with an average loan size of $1.5 million. Less than 1% of the portfolio is located in Portland, Oregon, with an average loan size of under $1 million. And we currently have only one office property in San Francisco with a balance of under $1.5 million. Approximately 10% of the office book will have a rate reset within the next 24 months. Our review of loans to a de minimis of $1 million reflects no significant concerns with repayment ability based on the most recent operating statements if rates were to reset at today's rate. Additionally, we have not become aware of any material vacancy or shadow vacancy issues within the investor office portfolio. Shifting to retail properties, the retail portfolio is also performing well. Retail commercial real estate represents approximately 10% of the loan book, is well-distributed geographically, and very granular in nature with an average loan size of under $1 million. Similar to the office portfolio, roughly 10% of the retail CRE book will have a rate reset in the next 24 months. And we, again, note no meaningful concerns at this time as to our clients' ability to service debt if they were to reprice today. Moving to multifamily. We again reported solid growth in the multifamily portfolio, which is up 8% over the prior quarter and 16% year-over-year. The growth this quarter was split roughly 70% new originations and 30% conversion of completed construction projects. In total, the multifamily portfolio continues to be approximately 50% affordable housing and 50% market rate and as I have commented before, the average loan size is less than $1.5 million with balances spread across our footprint. Approximately 5% of the permanent multifamily portfolio will reprice over the next two years, with the most recent operating statement suggesting adequate room to cover the rate resets, were they to occur today. Construction and development loan balances declined by 1% in the quarter, a function of continued sales of completed residential construction projects, coupled with the slowdown of replacement starts within this product line, as mentioned last quarter. When compared to March of 2022, construction and land development loans reflect an increase of 8%, driven primarily by the growth in the multifamily construction portfolio, up 32% year-over-year. And to a lesser extent, commercial construction as well as land development loans up 6% and 4%, respectively. Of the multifamily construction portfolio, nearly 75% is currently associated with affordable housing projects, the vast majority currently located in various California submarket. While the volume of residential construction starts have slowed and we acknowledge the slowing of home sales across our footprint, I continue to be pleased with our portfolio performance. The portfolio remains diversified, both in product mix and price point, starts to spread across our geography, and completed homes are still being sold and closed in spite of the rising rate environment. As I reported last quarter, we have remained consistent in our underwriting and our land exposure continues to be limited to our strongest sponsors. Acknowledging that we are beginning to see completed homes taking longer to be sold and moved off balance sheet, although still within historical norms, we continue to see our builders being proactive with concessions, upgrades, and rate buydowns in order to keep their finished products moving. Most importantly, they remain well capitalized and prepared to absorb the longer sales cycle. In total, residential construction exposure remains acceptable at 6% of the portfolio, was slightly over 40% consisting of our custom 1-4 family residential mortgage loan product. When you include multifamily commercial construction and land, the total construction exposure is 14% of total loans, down 1% from the linked quarter. Agricultural loans, down 8% from the linked quarter, reflect normal seasonal declines that are to be anticipated. Balances are up 11% year-over-year. And as noted in the earnings release, we again reported growth in the consumer mortgage portfolio, up 7% in the quarter, continuing the trend of moving completed all-in-one custom construction loans on balance sheet. I will close by recapping one of our strategic pillars, which is to maintain a moderate risk profile. As I have said before, our credit culture is designed for success through all business cycles. Our consistent underwriting and robust portfolio review process remains a source of strength and stability in these turbulent times, so too does our solid reserve for loan losses and capital base. Our credit metrics remain strong, and our moderate risk profile remains intact, positioning us well to navigate whatever this economic cycle brings. With that, I'll turn the microphone over to Peter for his comments. Peter?

Thank you, Jill. This quarter, I'm happy to introduce Rob Butterfield as CFO of Banner Bank as part of our previously announced transition. Rob and I will share prepared commentary on the company's financial performance for the first quarter. I will begin with commentary on the balance sheet, capital, and liquidity, and Rob will follow with remarks on earnings and profitability before handing it back to Mark. Turning to the balance sheet. Total loans increased $6 million from the prior quarter end as a result of increases in held for portfolio loans, partially offset by an $8 million decline in held for sale loans. Excluding PPP loans and held for sale loans, portfolio loans increased $16 million or just under 1% on an annualized basis. 1-4 family real estate loans grew $79 million, primarily as a result of residential custom construction loans originated last year converting to conventional 1-4 mortgage loans this quarter upon completion. Declines in CRE construction and ag loan outstandings partially offset the growth in 1-4 mortgage loan outstandings. We anticipate a slower pace of balance sheet mortgage production in the coming quarters as market rates on new originations begin to shift the economics towards more sales and less portfolio retention. Ending core deposits decreased $692 million from the prior quarter end due to outflows of rate-sensitive balances. The decline in core deposits was partially offset by a $226 million increase in CD balances, resulting in a total deposit decline of $466 million or 3.4% from the prior quarter. The declines in core balances were primarily driven by clients moving non-operating balances to off-balance sheet treasury and money market fund investments. The bank's use of exception pricing and selective CD deposit rate specials was effective in retaining a portion of the core deposit outflow on balance sheet within the bank's total deposit balance. It's relevant to note that the bank's total deposit decline in the first quarter was $148 million less than the previous quarter, despite higher market rates and recent industry turmoil that occurred in early March. We anticipate further declines in core deposit balances, partially offset with growth in time deposits in the coming quarters as a function of both, seasonal deposit declines the bank normally experienced in the second quarter and the timing and magnitude of future Fed fund monetary actions. As noted in our earnings release, with a 77% loan to deposit ratio, Banner's liquidity and capital profile remain robust as evidenced by the significant off-balance sheet borrowing capacity, liquidity coverage of our uninsured deposits, the granular nature of our deposit portfolio, resilient to the bank's diversified deposit base, and increase in the net interest margin this quarter. With that, I turn the call over to Rob, who will discuss the company's earnings and profitability outlook. Rob?

Thank you, Peter. As announced in our earnings release, we reported $1.61 per diluted share for the first quarter compared to $1.58 per diluted share for the prior quarter. The $0.03 increase in earnings per share was due to a lower provision for credit losses and lower non-interest expense, partially offset by lower net interest income and lower non-interest income. Core revenue, excluding losses on the sale of securities and changes in investments carried at fair value, decreased $5.3 million from the prior quarter due to a decrease in net interest income. Non-interest expense decreased $4.4 million, primarily due to lower legal expense and lower occupancy and equipment expense. Net interest income decreased $5.8 million from the prior quarter, due to an increase in funding cost and a decline in average interest earning assets. Compared to the prior quarter, loan yields increased 24 basis points due to increases on floating and adjustable rate loans as well as new production coming on at higher interest rates. The average interest bearing cash and investment balances declined $506 million from the prior quarter, while the yield on the combined cash and investment balances increased 18 basis points due to higher yields on both, the security portfolio and overnight funds, driven by higher market rates. The total cost of funds increased 22 basis points to 40 basis points due to increases in deposit rates and borrowing costs. The total cost of deposits increased 18 basis points to 28 basis points, reflecting increases in CD and money market rates as well as a shift in the mix of deposits, with some non-interest bearing deposits moving into CDs and other interest bearing accounts. Net interest margin increased seven basis points to 4.30% on a tax equivalent basis. The increase was driven by higher yields on earning assets coupled with a larger mix of loans and a lower mix of overnight cash and investments. Going forward, the pace of yield increases on earning assets is not anticipated to outpace the increase in the cost of funds. We anticipate the margin to be range bound by deposit flows, the trajectory of market rates, and the competitive environment. Looking forward, we anticipate loan growth and deposit outflows will be funded by a combination of maturing investments in security sales as well as borrowings. The total non-interest income declined $3.8 million from the prior quarter. The current quarter included a $7.3 million loss on the sale of securities. The payback on these trades is estimated to be 2.25 years. Core non-interest income, excluding loss on the sale of securities and changes in investments carried at fair value, increased $447,000, primarily due to a $380,000 increase in mortgage banking income due to an increase in residential mortgage gain on sale income, partially offset by lower multifamily gain on sale income. Total residential mortgage production, including both loans held for investment and those held for sale, declined by 17% from the prior quarter, reflecting the continued headwinds of higher rates and a slowdown in home sales. Purchases accounted for 88% of the mortgage loan production. The current quarter benefited from an increase in interest rate lock commitments towards the end of the quarter as mortgage rates fall back. We sold $8 million of multifamily held for sale loans during the quarter. Production of these loans was muted during the quarter as demand is limited at the current rates. Lastly, miscellaneous income increased $258,000 due to an increase in the fair value of SBA servicing rates. Total non-interest expense decreased $4 million from the prior quarter due to lower legal expense and lower occupancy and equipment expense, partially offset by higher salary and benefit expense and a lower deduction for capitalized loan origination costs. The $4.2 million reduction in professional legal expense was primarily due to the prior quarter, including an accrual for the pending settlement of a legal matter. The $1.5 million decline in occupancy and equipment expense was a result of increased facility's exit costs and weather-related building maintenance in the prior quarter. Compensation expense increased by $1 million due to normal annual salary and wage adjustments, increased medical insurance expense and normal higher payroll taxes during the first quarter of the year, partially offset by lower incentive accruals. Capitalized loan origination costs decreased by $1.5 million due to lower loan production compared to the prior quarter. This decrease was partially offset by lower commission and other variable loan production expenses. We continue to benefit from our granular diversified low-cost deposit base that has and will continue to support a strong net interest margin throughout the rate cycle. This concludes my prepared comments. I will turn it back to Mark.

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

Our first question is from David Feaster with Raymond James. Your line is now open.

Hey, good morning everybody.

Good morning David.

Maybe just starting on the deposit side, I was hoping to walk through some of the flows that you saw in the quarter and just help us think about how much was from seasonality, maybe with tax payments versus customers just utilizing cash to pay down higher cost floating rate debt, some of the migration to higher cost accounts? And how much was actually do you think from the turmoil, the bank failures? And then just on the NIB side, have you seen balances stabilized yet here in the second quarter, or are you still seeing pressure there?

Yes. Hi David, this is Peter. I'll answer that. The first thing to note is that our deposit decline in Q1 was $148 million, which is actually less than what we saw in Q4. The reasons for the decline in Q1 were quite similar to those in the previous quarter, primarily involving non-operating balances with clients. This included small businesses and some commercial clients moving excess balances off-balance sheet into higher-yielding treasuries or money market funds, while still maintaining their primary relationship and operating business with Banner. We observed the same behavior again this quarter. Therefore, we haven’t seen any change in the pattern of the drivers for deposit outflows this quarter. The bank failures in early March didn’t have any significant impact on our clients’ deposit behavior. We have reciprocal deposit products like ICS and SEDAR for clients wanting to maintain insured balances with the bank, which means we don't lose deposits using that product. There were no significant outflows related to safety and soundness concerns following the bank failures. What we continue to observe is that non-operating balances will show some rate-sensitive outflows. Our response has been consistent throughout this rate cycle, using a mix of exception pricing for clients who are seeking higher rates, while also retaining them with negotiated deposit rates at Banner, along with a few selected CDs that offer good rates without being at the top of the market. We have noticed that we don’t need to offer the highest rates to achieve good deposit retention and attract new money into those CD products. Our strategy will continue in this regard. Clients are looking for fair rates in relation to the service and value they receive at Banner. The circumstances in Q1 are very much as they were in Q4. Moving forward, we anticipate further deposit outflows, which will still be rate-driven, depending on the yield curve and any additional tightening from the Fed. As we've indicated before, a lot of the rate-sensitive money moved early in this cycle, and we expect the rate-driven outflows to lessen sequentially throughout the year, with one exception being Q2. Typically, in a normal year, which we haven’t had in three years due to the pandemic, we usually see deposit outflows in the second quarter due to tax payments, both property and income tax, as well as some seasonality from agricultural clients who start using their deposits for production. Therefore, we will see some seasonal outflows in Q2 that are expected to rebound at the end of the quarter and continue into the third quarter as is customary.

Okay, that's extremely helpful. I appreciate that. And then maybe just curious your thoughts on the loan growth side and where you're still seeing good risk-adjusted returns at this point in the cycle? Obviously, construction has been strong as Jill, you talked to, and look at the originations, it's been a big driver. But I'm just curious, your thoughts on loan growth demand in the market for growth at this point? And then again, you talked, Rob, about funding that with some cash flows from the securities book. If you could just remind us of the cash flows that you're expecting of the securities book.

So, yes, David, I'll start with the loan growth expectations. So, as I indicated last quarter, our expectations have moderated given the economic pessimism and the increasing rate environment. And as noted in the release, our origination volumes dropped significantly. Offsetting that though towards the loan growth, we are very optimistic regarding new client acquisition based on the current market disruption. We've seen a significant drop in the refinance activity, so that holds balances. We'll see our construction commitments continue to fund up. Our ag lines will continue to draw down over the course of the year, also increasing outstanding. And all of that coupled with our super community bank model, which, again, I've said it before, but designed to remain open through all business cycles should keep us in that low single-digit growth rate through the year, even with the somewhat muted demand right now from commercial clients.

Yes. As far as the cash flows from the investment portfolio, David. So, we normally see about $25 million a month, so that would be $75 million for next quarter. And in addition, we have that $150 million repo that's scheduled to mature in May. And then beyond that, we would explore additional investment sales as long as we stay within that three-year earn-back period.

Got it, that's helpful. And then maybe, Mark, just maybe a high-level question for you. You've been at the helm through several cycles here. Curious how this current environment maybe feels from your perspective? And maybe some of the past lessons you've learned and how that might be influencing how you're positioning the bank here now? Obviously, you're very conservatively positioned. But just curious, your thoughts.

Yes, thank you for the question. I believe my long tenure here has allowed us to navigate through many cycles. In 2010, we established a strategy focused on maintaining a moderate risk profile to succeed across all economic conditions. This approach shapes our balance sheet, product offerings, and delivery channels. The rapid inflow of deposits and the failures of some banks serve as a testament to our organization's resilience, supported by our strong capital position and robust reserve strategies. This enables us to capitalize on the current market disruptions that have been mentioned, which are expected to persist. I anticipate that this economic cycle will have a longer impact than many realize, and our moderate risk profile will create significant opportunities for us moving forward. We are well-prepared and eager to embrace these disruptions to continue our growth and success as a company.

Yes. No, that was extremely helpful. I appreciate it. Thanks everybody.

Thanks David.

And our next question is from Kelly Motta with KBW. Your line is now open.

Hi, thank you for the question. I apologize if anything is repetitive as I joined a bit late. Looking at your deposit costs, they have increased. However, an interest rate of 51 basis points for interest-bearing accounts still compares favorably to most banks. I’m curious if there are any updated thoughts on how we should view deposit betas throughout the economic cycle.

Yes. So, Kelly, this is Rob. The deposit beta for the interest bearing deposits was about 25% for the last rate cycle and at this point, we are expecting to experience something similar to the cycle. And then as far as the changes in the cost to deposits over the quarter, I would say it increased kind of pretty much the same rate throughout the quarter. So, there wasn't any spikes in it necessarily.

Got it, that's helpful. And kind of as we look ahead with deposit balances, you guys clearly have a lot of flexibility on balance sheet still, although this is the second quarter of declines. How should we be thinking about the movement of deposits out to maybe wealth management or treasuries? And when do you expect kind of pressure from that to start to abate here?

Yes, Kelly, this is Peter. As we mentioned earlier, our deposit outflows in Q1 were actually less than they were in the fourth quarter. And the drivers were very similar to what they were in the fourth quarter, which were outflows of non-operating balances, primarily with small businesses and commercial clients moving some portion of their operating balance to treasuries or money market fund off the balance sheet for higher yields while we retain the core relationship. Going forward, we expect some continued outflows related to rate drivers, how we expect that the pace of outflows will decline as we get towards the bedrock of our core deposit base, which by the way, is very granular. Our average deposit size is $20,000, and our diversification of deposits across both, metro and rural markets, along with a very diversified client segmentation, gives us confidence that that bedrock floor on our core deposits is not that far out into the future. So, again, we're not a bank that will chase deposits for the highest rate in the land, but we will offer a fair rate to our clients as a function of our value proposition and client service model. And as we mentioned earlier, we have plenty of dry powder to fund any additional high-rate sensitive deposit outflows with our securities portfolio and some other on-balance sheet cash. And we'll do that as long as it's accretive to margin and ROA and EPS. And that's been the case for the last two quarters, and we expect to carry that view going forward on the deposit outflows.

Great. Thanks for taking my questions.

Thanks Kelly.

Our next question is from Andrew Terrell with Stephens. Your line is now open.

Hey, good morning.

Good morning Andrew.

I wanted to start maybe just on the deposit front. I was hoping just to get a sense of kind of deposit flows throughout the quarter. Did you see any kind of acceleration in flows or outflows during the month of March? And then more specifically, can you just talk about how deposits have fared thus far in April, both for overall deposits? And then have you seen the cadence of non-interest bearing compression slow quarter-to-date?

Yes, Andrew, this is Peter. In the quarter, we actually observed higher deposit flows in January compared to the last two months of the quarter. We did not experience any significant impact from the bank failures or safety concerns. In March at Banner, this was partly because our bankers directly reached out to all of our large deposit relationships. Additionally, we maintain a very conservative risk profile, so our capital liquidity position going into these events was expected. Looking ahead to non-interest bearing deposits, as I mentioned earlier, we generally see some seasonal outflows in Q2 related to tax payments, which align with what we would expect in a typical year without fiscal stimulus. However, we are not seeing any significant changes in the pace of outflows due to rate-sensitive clients moving their balances. The strategies we have implemented to retain deposits, such as exception pricing and selective CD specials, have proven effective. While we may not retain those deposits in non-interest bearing or lower yielding accounts, they are staying on our balance sheet within higher yielding products, and we have been successful with this approach. Our clients are primarily seeking fair rates, rather than the highest rates available.

I appreciate your insights. Reflecting on margin topics, at the start of the Fed raising rates, we discussed the margin's response to higher rates with an expected margin beta of about 33% regarding changes in Fed funds. You have performed quite in line with that expectation, despite significant changes in the economic environment. If we examine the forward curve, it indicates several cuts ahead. My question is whether you anticipate a similar net margin beta of around 33% as rates decrease or if you believe that the adjustments in asset pricing for adjustable and fixed rate loans might keep the net margin beta lower during the decline compared to what you experienced during the increase.

Yes, Andrew, as we previously indicated, our objective during this rate cycle was to decrease our asset sensitivity as we approached the peak of the rate cycle. We achieved this by organically adjusting the loan portfolio for longer durations and implementing loan floors on our floating and adjustable-rate loans. Now, as we reach what we believe to be the peak of the rate cycle, we anticipate a slower repricing of our loan book when rates start to decline. Our aim is to maintain our margin range with just a slight compression going forward, especially since we've introduced some asymmetry into our asset sensitivity as rates increased. We are confident that this margin range will hold in the near term, even if the Fed ceases to tighten rates, and regardless of any further inversion in the yield curve. This is due to the collective efforts of our bankers and our initiatives with clients to price and structure loans in a way that preserves our margin as rates decline.

Andrew, the only thing I would add to Peter's comments is that two-thirds of our loan book is variable and adjustable. About 60% of that is adjustable, and it hasn't necessarily adjusted through this rate cycle yet. So we will see some further upward adjustments on those.

Right. Okay. Very good. I'll go back in the queue. Thanks for taking the questions.

Thanks Andrew.

Our next question is from Andrew Liesch with Piper Sandler. Your line is now open.

Hey good morning everyone. Just a question here. I know you mentioned funding loan growth of cash flows from the securities portfolio or borrowings. But just a couple of quarters now where you've sold securities at a loss. I guess, how are you looking at the securities portfolio and managing capital? And the valuations of those securities are now improving, should we see more security sales? Or is it really just going to be borrowings and maybe some core deposit growth or higher rates that you guys are offering to fund loan growth?

Yes. Andrew, this is Rob. So, yes, from a wholesale borrowing standpoint, we're planning on using it on a tactical basis, really have an infilter funding needs based on the level of loan growth and deposit outflows. As far as looking at the future investment sales, that's something that we'll continue to consider based on those similar deposit flows. Our criteria is the earn back. So, as long as we have an earn back within three years and then we're willing to do that from a capital perspective. And then I think the other part of it is just the current quarter probably is, I would say, going forward that might be similar levels or a little bit lower than that. But again, it's going to really depend on deposit flows.

Got it. Okay. You've already covered most of my questions. I'll step back. Thank you.

Thanks Andrew.

Our next question is from Andrew Terrell with Stephens. Your line is now open.

Thank you for the follow-up. I apologize if I missed this. It appears that the first quarter expenses were consistently in the low to mid $90 million range that we previously discussed. I was hoping to get an update on the expectations for expenses moving forward and whether the low to mid-$90 million is still a reasonable estimate for the expense run rate going forward.

Yes, Andrew, this is Rob. So, our guidance really hasn't changed there. We're still guiding to that mid- to lower 90s run rate, something similar to what we experienced this quarter.

Okay, very good. I appreciate it.

Thank you.

Great. Thanks. Our next question is from Tim Coffey with Janney. Your line is now open.

Great. Thanks. Morning everybody.

Morning Tim.

Mark, a question about your loan to deposit ratio. Is there a level at which you think you would feel comfortable with it getting up to, because it seems like it's heading up towards 80% and probably mid-80s is what I'm thinking? But what are your thoughts there?

Yes, Tim, as you might recall, since you covered the company for quite a bit of time now, we did operate this company in that 90% to 95% loan to deposit ratio for a long time, maximizing our revenue lines. So, I think it really depends on current market conditions and how sensitive the liquidity is today that we're probably not going to get up there, but I could see our loan to deposit ratio gravitating up to the mid-80% range.

Okay. And then just kind of a high level question here. Can you describe in what way your business has changed since mid-March with the bank failures? Have you seen a material difference in customer behavior at the back half of 1Q relative to the period before that?

Well, I'll ask Jill to comment on customer behavior, but we really haven't seen a major shift. As you might suspect, given our client base concentration in middle market and small business as well as the consumers in our footprint, when you're a good corporate citizen and you behave in a very consistent and reliable manner, there is confidence in the bank itself. That being said, I think I'll turn it over to Jill in terms of client sentiment, but there is certainly caution out there more around economic activity than it would be a safety and soundness concern for our organization. Jill?

Yes. Mark covered it really well. The only thing I would add, which I mentioned earlier, is that after the bank failures, we've had more conversations with potential new clients reaching out due to our reputation for safety and reliability and our willingness to remain open throughout various business cycles.

Okay. All right. Great. Those were my questions. Thank you very much for the time.

Thanks Tim.

There are no further questions. I'll pass the call back over to the management team for closing remarks.

Thanks Jason. As I stated, we're very proud of the Banner team and our first quarter 2023 performance. And I think our first quarter performance demonstrates the strength of our organization and how all of our colleagues are driving the performance of the company for the first quarter. Thank you for your interest in Banner and joining our call. We look forward to talking to you next quarter. Have a great day everyone.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.