Banner Corp
NASDAQ:BANR
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Banner Corp
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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. [Operator Instructions]
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 tax to loan 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 Jason, we will now open the call, and we welcome your questions.
[Operator Instructions] 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. Yes, so we -- I guess the first thing to note is our deposit decline in Q1 was $148 million, actually less than we saw in Q4. And a lot of the drivers of the decline we saw in Q1 were very similar to what we saw in the prior quarter, which were primarily non-operating balances with clients, especially our small business and some of our commercial clients moving those excess balances off balance sheet into higher yielding treasuries or money market funds, but retaining that primary relationship and operating business with Banner. And a lot of that, we saw that similar behavior again this quarter. So, we really aren't seeing any change in the pattern of the drivers of the deposit outflow this quarter.
We didn't see any material impacts from the bank failures in early March affect our client deposit behavior. And I think we have ICS and SEDAR, those are reciprocal deposit products for clients that wanted to keep an insured balance with the bank, but we don't lose any deposits using that reciprocal product.
So, we didn't see any material outflows related to the safety and soundness questions that emerged after the bank failures. What we continue to see is that those non-operating balances, there'll continue to be some rate-sensitive outflows.
And we do have -- our response has been what it's been all the way through this rate cycle, which is a mix of exception pricing for clients that have won a higher rate, but we can retain them with a negotiated deposit rate at Banner, along with a few selected CD specials that are good rates, but they're not top of market.
And one of the things we've noticed and observed is that we don't need to offer the highest rate in the market to generate not only good deposit retention, but bring new money in on those CD products. So, we'll continue to do that.
What you want to see us do is chase deposits with the highest rate in our markets. We don't need to do that. Our clients simply want a fair rate, given the service and value they're provided at Banner.
So, the story is very similar in Q1 as it was in Q4. Going forward, we expect to see some additional deposit outflows that are again still rate driven that will be more of a function of where the yield curve goes, the remaining tightening of the Fed.
But as we guided to in the past, a lot of the rate-sensitive money moved early and often in this rate cycle and we expect the rate-driven outflows to diminish sequentially as we go forward through the rest of the year with one exception, which is Q2.
Normally, in a normal year, which we haven't had in three years, given the pandemic, we normally experience deposit outflows in the second quarter related to tax payments, both property and income tax, along with some ag client seasonality that those clients begin to use some of their deposit balances for production. And so we'll see some seasonal outflows in Q2 that begin to rebound at the end of the second quarter and rebound into the third quarter as we normally do.
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 increase in 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, David, thank you. Thank you for the question. And yes, I suppose that means I've just been here a long time. We've gone through so many cycles. But I think the point is we instilled that strategic pillar in 2010 of having a moderate risk profile, so that we can be successful through all economic cycles. And that's how we position the balance sheet, that's how we positioned our product offering, and our delivery channels.
So, the fact that we've entered this unprecedented speed of deposit flows and banks -- some of the bank failures of speed with which they failed really proves out our resiliency as an organization, coupled with our strong capital position, our very strong reserve methodology really positions us well to take advantage of the current market conditions going forward in terms of disruption that Jill mentioned, which there will continue to be.
I also believe that from this cycle, what we're seeing, my view is that this is going to have a longer tail to it than people realize. And that in and of itself, given our moderate risk profile, we'll present great opportunities for Banner going forward.
So, I think we're well-positioned and we're actually excited to take advantage of some of this disruption, so that we can continue to grow and thrive as an organization. Hopefully, that's helpful, David?
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 so much for the question. I apologize if anything is redundant. I had to join a little bit late. Just looking at your deposit costs, they accelerated. Although at 51 basis points for interest bearing is -- compares still pretty favorably to most banks out there. Just wondering if there's any updated thoughts on how we should be thinking about deposit betas through the 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. So, we -- in terms of the quarter itself, we actually saw deposit flows higher in January than we did in the last two months of the quarter. So, we didn't see any material effects from the bank failures or safety and concerns.
In March at Banner, in part because all of our large deposit relationships had direct outreach by our bankers in terms of communication. And then we've had, obviously, a very conservative risk profile for all of market tenure here, so there's is no surprise in terms of our capital liquidity position going into this -- into these events.
In terms of what we expect going forward in terms of non-interest bearing, as I mentioned earlier in our prepared comments, we typically see some seasonal outflows in Q2 related to tax payments that we're seeing here normally in a normal year without the fiscal stimulus impact.
But overall, we're not seeing any real material change in the cadence of outflows related to rate-sensitive clients moving up the balance sheet. The tactics we've employed to retain those deposits in terms of exception pricing and a couple of selective CD specials have been effective.
I mean, retaining those deposits on balance sheet maybe not in non-interest bearing or lower yielding account, but they're staying on balance sheet in some of those higher yielding products and we've been effective with that. And our clients are really just looking for a fair rate, they're not looking for the highest rate out there.
Okay, I appreciate that. And maybe just thinking on kind of margin topics. At kind of the onset of the Fed raising rates, I remember the way we talked about the margin and its response to higher rates as the margin beta would be around 33% to the change in Fed funds. You guys have actually performed relatively in line with that kind of expectation even though the world has changed quite a bit.
If we look at just the forward curve, there's quite a few cuts in there. I guess the question is, would you expect a similar net margin beta around 33% on the way down? Or do you think some kind of -- some of the laden kind of asset repricing within those adjustable and fixed rate loan buckets could help to keep that kind of net margin beta lower on the way down than what you've experienced on the way up?
Yes, Andrew, as we've guided to previously, we -- our goal through this rate cycle was to reduce our asset sensitivity as we got towards the top of the rate cycle through a combination of organically migrating the loan portfolio for more duration and putting loan floors in on the floating and adjustable-rate loans as we went up.
And we're in a good position now as we get towards what we presume as the top of the rate cycle. And in the way down, we're going to have a slower pace of repricing on the loan book when rates do begin to come down.
And so we -- our goal is to hold this -- the range of our margin where it is with just a little compression going forward, given the fact that we put in this asymmetry into our asset sensitivity as rates have gone up organically.
And so we feel pretty confident that, that margin -- that range of margin will hold here in the near-term, even as the Fed stops tightening rates. And even if there's some additional inversion along into the yield curve because of all the organic work we've done that not just treasury but all of our bankers in working with our clients to price and structure the loans to preserve our margin on the way down.
All right. David -- Andrew, the only thing I would add to that, Peter's comments is two-thirds of our loan book is variable and adjustable. About 60% of that is adjustable, that hasn't necessarily adjusted through this rate cycle at this point. 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.
Hey, thanks for the follow-up. I apologize if I missed this. It looks like the 1Q expenses were in kind of squarely in that low to mid $90 million a quarter range that we talked about.
Last quarter -- I was just hoping to get updated kind of expectations for the expense base moving forward. And if that low to mid-$90 million a quarter is still a good way to think about the expense run rate from here?
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.
[Operator Instructions] 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. No, Mark covered it really well. The only thing I would add and I touched on it a little bit earlier was that in -- after the bank failures, we've had more conversations with more potential new clients reaching out because of the safety and soundness and our propensity to be open through all 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.