Banner Corp Q4 FY2025 Earnings Call

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. 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 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.

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.

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, regarding the competitive landscape, it appears that production is performing well. Is that presenting any significant challenges? It seems like a positive development, and I just wanted to 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.

I appreciate it. Rob, could you provide your thoughts on the margin outlook considering the 4% and some deposit fluctuations throughout the year? What are your expectations for margins going forward?

Yes, thanks, Jeff. I believe the situation will be heavily influenced by the actions taken by the Federal Reserve. In the past, we mentioned that if there is no Fed action in a quarter, we might expect some net interest margin expansion as adjustable rate loans continue to reprice upwards. Currently, new production is being issued at higher rates than the overall portfolio average. If there is a 125 basis point cut in a quarter or just before the beginning of a quarter, we would anticipate that the net interest margin would remain relatively flat as the repricing of deposits would mainly counterbalance the effects of the floating rates, along with the advantages of adjustable rates. Should there be multiple rate cuts in a quarter, we would likely observe some compression in the net interest margin. We rely on Moody's for our interest rate forecasting, and their latest prediction from January included three rate cuts in the first half of the year—March, June, and July. If that turns out to be accurate, it could indicate a mostly flat first half, a slight decline in the third quarter, and growth in the fourth quarter. However, there is significant uncertainty surrounding the Fed's actions, as recent market indicators suggest no rate cuts next year. This creates a scenario where no rate cuts would imply higher net interest margin expansion, while three rate cuts would lead to a flatter environment. I’ll allow everyone to form their own outlook regarding the Fed's actions.

The next question comes from Matthew Clark from Piper Sandler.

Can you provide information on deposits at the end of December and the average margin for that month?

Matthew, could you repeat the question? Glad to have you on the call. I don't think I caught that.

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 regarding expenses, there were a couple of unusual items this quarter. It also seemed like there might have been some temporary expenses. How do you view that in terms of the core run rate heading into the first quarter?

Yes, it's common for expenses to fluctuate from quarter to quarter. We experienced an increase in IT expenses due to the full rollout of the new loan and deposit origination system early in the fourth quarter. Additionally, we observed higher medical claims, which is typical for this period; however, for the first nine months of the year, medical expenses were lower than usual, and the fourth quarter compensated for that. Overall, medical expenses for the year were in line with expectations but more concentrated in the latter part of the year. We also incurred higher legal expenses this quarter, with one legal matter concluding during this period, and capitalized loan costs decreased slightly. Looking ahead to 2025 and 2026, I anticipate full-year expenses for 2025, and for 2026, I expect regular inflation in the range of 3% compared to 2025.

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?

Certainly, Andrew. I'll begin with the capital aspect. Over the past few quarters, we've made several capital decisions, including the repayment of $100 million in subordinated debt and an increase in the core dividend last quarter. As you noted, we've also repurchased approximately 250,000 shares in the last two quarters, and we currently have around 1.2 million shares remaining under the repurchase authorization. In the last two quarters, our repurchases have been around the $63 level, which we believe is an appealing price for buybacks. Based on yesterday's closing price, which is slightly above that level, we still see it as attractive. In the first quarter, we will closely monitor market activity, conditions, and the stock price to determine if continuing the buyback makes sense. Our current capital levels suggest that we are at the upper end of our target range, and if market conditions are favorable, we would consider ongoing share repurchases.

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.

I appreciate it. Rob, regarding the margin, I'm curious about the reasons behind the cautious outlook. You mentioned that successive rate cuts could negatively impact margins, but when I look at the fourth quarter of this year, your margin improved even after most cuts were implemented, and the same is true for the fourth quarter of '24, which also experienced significant cuts while maintaining an uptick in margin. So, what is leading to this conservative stance? Are you suggesting that there might be a delay in how loans are repriced monthly, possibly resulting in margin pressures in the first quarter? I'd like to explore this further.

I don't anticipate any significant challenges to margin in the first quarter. The Fed rate cut in December hasn’t fully impacted the first quarter run rate yet. We're primarily focused on the adjustable rate loans that have been repricing over time and the new loans being issued at higher yields. The volume of adjustable rate loans that are repricing is decreasing. Approximately 1.5 years ago, we were seeing about 9 basis points a quarter from that, but now it's down to around 4 basis points a quarter. Additionally, the average yield on new loans compared to the overall portfolio yield is also tightening. Even with a flat rate environment, the repricing of the loan portfolio seems to yield about 4 basis points a quarter currently. If the Fed maintains its rates and we keep our funding costs steady, we could see about 4 basis points of expansion while the Fed is on pause. However, different scenarios arise when the Fed begins to cut rates, given that 30% of our loans are floating rate, with 10% currently at their floors. This means that 90% of that portion will continue to repricing down by 25 basis points with each Fed cut. This is the general outlook we have 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 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. In terms of other fees, it appears there was some disruption as well. I know there were some building lease exit costs included. Is there anything else significant that we should be aware of as we start to consider 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.

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. Yes, if you examine the situation, there's always some seasonal variation in deposits. At our core, we are a relationship bank. Therefore, as we attract new clients, we anticipate that these clients will not only engage in loan relationships but also in deposit relationships. Additionally, we have been concentrating on developing our small business relationships. Typically, small businesses have a wealth of deposits, often surpassing the loans we provide them. I believe this contributes to our success, and as Jill mentioned earlier, the bankers we've brought on in the past two years are starting to yield results, particularly on the small business front.

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.