Banner (BANR) Q1 2022 Earnings Call Transcript

Banner (BANR -0.04%)
Q1 2022 Earnings Call
Apr 21, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Thank you for joining and being present at the Banner Corporation's first quarter 2022 conference call and webcast. My name is Irene, and I will be coordinating today's call. [Operator instructions] I will now hand you over to your host, Mark Grescovich, president and CEO, to begin.

Mark, please go ahead.

Mark Grescovich -- President and Chief Executive Officer

Thank you, Irene, and good morning, everyone. I would also like to welcome you to the first quarter 2022 earnings call for Banner Corporation. As is customary, joining me on the call today is Peter Conner, our 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?

Rich Arnold -- Head of Investor Relations

Sure, Mark. 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.

Additionally, we provided an investor presentation that can be found in the Investor Relations section of our website, bannerbank.com. These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ are available from the earnings press release that was released yesterday and a recently filed Form 10-K for the year ended December 31st, 2021. Forward-looking statements are effective only as of the date they are made and Banner assumes no obligation to update information concerning its expectations.

Back to you, Mark.

Mark Grescovich -- President and Chief Executive Officer

Thank you, Rich. Today, we will cover four primary items with you. First, I will provide you high-level comments on Banner's first quarter performance; second, the actions Banner continues to take to support all of our stakeholders, including our Banner team, our clients, our communities, and our shareholders; third, Jill Rice will provide comments on the current status of our loan portfolio; and finally, Peter Conner will provide more detail on our operating performance for the quarter and an update on our strategic initiative we are calling Banner Forward. As a reminder, the focus of Banner Forward is to accelerate growth in commercial banking, deepen relationships with retail clients, advanced technology strategies, and streamline our back office.

I want to begin by thanking all of my 2,000 colleagues in our company that have helped develop Banner Forward and are working extremely hard to assist our clients and communities. Banner has lived our core values, summed up as doing the right thing for 131 years. It is critically important that we continue to do the right thing for our clients, our communities, our colleagues, our company, and our shareholders to provide a consistent and reliable source of commerce and capital through all economic cycles and change events. I am pleased to report 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 $44 million or $1.27 per diluted share for the quarter ended March 31st, 2022. This compared to a net profit to common shareholders of $1.33 per share for the first quarter of 2021 and $1.44 per share for the fourth quarter of 2021.

The earnings comparison is impacted by the allowance for credit losses recaptured, a continued inflow of liquidity coupled with very low-interest rates, our strategy to maintain a moderate risk profile, continued good mortgage banking revenue, and the acceleration of deferred loan fee income associated with the SBA loan forgiveness of Paycheck Protection loans. Peter will discuss these items in more detail shortly. Directing your attention to pre-tax pre-provision earnings and excluding the impact of merger and acquisition expenses, COVID expenses, gains and losses on the sale of securities, Banner Forward expenses, and changes in fair value of financial instruments, earnings were $49.7 million for the first quarter of 2022 in line with the first quarter of 2021 at $49.5 million. This measure, I believe, is helpful for illustrating the core earnings power of Banner.

Banner's first quarter 2022 revenue from core operations decreased 3% to $137.6 million, compared to $141.4 million for the first quarter of 2021, primarily due to the increase in mortgage banking revenues, which were down $6.9 million when compared to the same period last year. We continue to benefit from a larger earning asset mix, a good net interest margin, solid mortgage banking fee revenue, and good core expense control. Overall, this resulted in a return on average assets of 1.06% for the first quarter of 2022. Once again, our core performance reflects continued execution on our super community bank strategy, that is growing new client relationships, adding to our core funding position by growing core deposits, and promoting client loyalty and advocacy through our responsive service model.

To that point, our core deposits increased 9% compared to March 31st, 2021, and represent 94% of total deposits. Further, we continued our strong organic generation of new relationships and our loans outside of PPP loans increased 5% over the same period last year. Reflective of the solid performance, coupled with our strong tangible common equity ratio, we announced a core dividend in the quarter of $0.44 per share. Our branches continue to be fully operational and given the recent release of mass mandates in our region, we have reinstated our return to the workplace policies.

To provide support for our clients through this crisis, we made available several assistance programs. Banner has provided SBA payroll protection funds totaling more than $1.6 billion for approximately 13,000 clients. Also, we made an important $1.5 million commitment to support minority-owned businesses in our footprint, a $1 million equity investment in City First Bank, the largest black-led depository financial institution in the United States, significant contributions to local and regional nonprofits, and it provided financial support for emergency and basic needs in our footprint. Finally, we continue to receive marketplace recognition and validation of our business model and our value proposition.

J.D. Power & Associates announced this quarter that they have again ranked Banner the No. 1 bank in the Northwest for client satisfaction for the 6th time. Banner has been named one of the top-performing US public banks of 2021 by S&P Global Market Intelligence.

We have been recognized by Forbes as one of America's 100 Best Banks and again, Banner recently was named one of the world's best banks in 2022 by Forbes. And finally, Banner Bank has received an outstanding CRA rating. Let me now turn the call over to Jill to discuss the trends in our loan portfolio and our comments on Banner's credit quality. Jill?

Jill Rice -- Chief Credit Officer

Thank you, Mark, and good morning, everyone. I am pleased to be able to once again report strong and improving credit metrics this morning. Banner's delinquent loans as of March 31st remained nominal at 0.21% of total loans, flat when compared to the prior quarter, and down from 0.43% as of March 31st, 2021. Adversely classified loans totaled 1.96% of total loans, down from 2.18% as of the linked quarter and compared to 3.13% of total loans as of March 31st, 2021.

Nonperforming assets remained low at $19.1 million and include nonperforming loans of $18.6 million and REO and other assets of $446,000. This represents 0.11% of total assets, down three basis points from the linked quarter and 12 basis points when compared to March 31st, 2021. Gross loan losses in the quarter were nominal and were more than offset by recoveries of prior charge-offs with a net recovery of $748,000 posted as of March 31st. Based on the continued improvement in asset quality, we released an additional $7.4 million from our reserve for credit losses as of March 31st.

This was partially offset by an increase in our reserve for unfunded loan commitments of $428,000 for a net release of $7 million. After the release, our ACL reserve totaled $125.5 million or 1.38% of total loans as of March 31st, down seven basis points from the linked quarter and compares to a reserve of 1.57% as of March 31st, 2021. The reserve provides 674% coverage of our nonperforming loans. Looking at the loan portfolio, we again reported strong loan originations.

Our commercial and commercial real estate pipelines are solid, and for the quarter, we reported core portfolio loan growth, excluding PPP loans of $100 million or 1.12% for the quarter and 4.6% on an annualized basis. Looking at specific product lines, C&I activity was strong in the first quarter. While the utilization rate within this category remains approximately seven basis points lower than historical norms. C&I balances nonetheless increased by $68 million, 3.7% quarter over quarter or 15% on an annualized basis and are 5% higher than that reported as of March 31st, 2021.

This growth was spread across the footprint and was diversified in product type as well as by industry. In spite of solid originations, commercial real estate totals continue to be hampered by property sales as well as refinancing and are down $14 million in the quarter or 1% on an annualized basis. On a year-over-year basis, however, commercial real estate totals are up 5%. The majority of the decline in the quarter is located within the small balance CRE totals, down $120 million or 9%.

Much of this decline was offset by increases in the multifamily portfolio, which grew by $68 million in the quarter, in part due to retaining a small number of the for-sale originations closed within our footprint. Additionally, owner-occupied CRE balances grew by $41 million in the first quarter. Construction and development loan balances also reflected strong production, especially when considered in light of the continued rapid payoff of our residential construction loans. Commercial construction balances grew by $12 million or 7% in the quarter and multifamily construction balances grew by $15 million or 6% in the quarter.

The residential construction outstandings declined by $12 million or 2% in the quarter. The year-over-year changes in these portfolios detailed in the release reflect anticipated payoffs and the expected conversion to permanent loan status upon construction completion as well as the replenishment of land inventory within our residential builder portfolio. While we anticipate that the recent increase in mortgage rates will have an impact on the velocity of home sales within our residential spec portfolio, I will reiterate what you have heard for the past several quarters. The housing markets in which we do business continue to be very strong and the inventory of completed unsold homes remains at all-time lows.

Demand continues to outstrip supply in many areas and affordable housing continues to be undersupplied across the footprint. Consistent with prior periods, our total residential construction exposure remains acceptable at 6.1% of the portfolio and of that, nearly 40% is the balance outstanding within our custom one to four-family residential mortgage loan portfolio. When you include multifamily commercial construction and land, the total construction exposure remains at 14.6% of total loans. The decline in agricultural loans down $35 million quarter over quarter or 12.4% is seasonal in nature and to be expected.

When compared to the prior year, ag loan balances were up 11.5%, reflecting both new and expanding relationships. Consumer mortgage and home equity lines also added to the growth in the quarter, up $63 million or 6%, which reflects increased mortgage loan production held in the portfolio as well as the result of a successful home equity campaign to replace those balances that were paid off with home refinances over the course of 2021. Looking at asset quality briefly. Adversely classified loans declined $20 million in the quarter and are down $133 million or 43% year over year.

This includes nearly $85 million in adversely classified loans that were paid off over the past 12 months. Overall, adversely classified loans are down 58% since the pandemic-induced high reported in September of 2020 and continue to be centered in the recreation and hospitality industries. I noted last quarter that our clients have adjusted to the ever-changing operating conditions and are continuing to perform well. That remains true today.

Still, I am not yet ready to declare the credit cycle over rather, in addition to any lingering impacts from COVID variants that may impact our clients over the next several months, we are also closely monitoring the impacts of sustained inflation, commodity price increases, supply chain disruption, and labor shortages as well as the impact that the Ukraine crisis may have on the overall economy. Notwithstanding these uncertain economic drivers, our moderate risk profile remains intact. Our credit metrics continue to be strong. We have a solid reserve for loan losses, especially in light of the portfolio performance and our capital levels continue to be well in excess of regulatory requirements.

We remain well-positioned for the future. With that, I'll turn the microphone over to Peter for his comments. Peter?

Peter Conner -- Executive Vice President and Chief Financial Officer

Thank you, Jill, and good morning, everyone. As discussed previously and as announced in our earnings release, we reported net income of $44 million or $1.27 per diluted share for the first quarter, compared to $49.9 million or $1.44 per diluted share for the fourth quarter. The $0.17 decline in earnings per share was due to a decline in net interest income and lower noninterest income, partially offset by a larger provision release this quarter. Core revenue, excluding gains and losses on securities and changes in fair value of financial instruments carried at fair value decreased $5.8 million from the prior quarter.

Due to the wind down of the PPP loan program, lower miscellaneous income from gains on branch sales from the prior quarter, write-downs on closed branches this quarter, along with lower mortgage gain on sale. Core noninterest expenses, which exclude Banner Forward, debt extinguishment, M&A, and COVID-related expenses declined $300,000 due primarily to lower advertising and marketing costs. Turning to the balance sheet. Total loans increased $30 million from the prior quarter-end as a result of increases in held-for-portfolio loans, partially offset by a $75 million decline in PPP loans.

Excluding PPP loans and held-for-sale loans, portfolio loans increased $100 million or 4.6% on an annualized basis. Ending core deposits increased $235 million from the prior quarter-end due to continued growth in the level of client deposit liquidity. Time deposit balances declined by $38 million from the prior quarter-end, ending at $800 million as higher-cost CDs continue to roll over at lower retention rates. Turning to net interest income.

Net interest income declined by $2.9 million from the prior quarter due to fewer calendar days, a decline in SBA PPP loan forgiveness, which were partially offset by higher securities income and lower funding costs. Compared to the prior quarter, loan yields decreased seven basis points due to a decline in PPP loan forgiveness processing fees. Excluding the impact of PPP loan forgiveness, prepayment penalties, interest recoveries, and acquired loan accretion. The average loan coupon increased three basis points from the prior quarter due to a smaller balance of low yielding 1% SBA PPP loans.

The average interest-bearing cash and investment balances declined $44 million from the prior quarter, while the average yield on the combined cash and investment balances increased 10 basis points due to a lower mix invested in overnight funds and higher yields on both the securities portfolio and overnight funds. Total cost of funds declined one basis point to 12 basis points as a result of lower deposit and borrowing costs. The total cost of deposits declined from seven to six basis points in the first quarter due to declines in interest-bearing retail deposit rates and ongoing repricing of the CD book, while borrowing costs declined due to the payoff of higher cost junior subordinated debentures. The ratio of core deposits to total deposits was 94% in the first quarter, the same as the previous quarter.

The net interest margin increased one basis point to 3.18% on a tax-equivalent basis. The increase was driven by better yields on securities and overnight cash and lower funding costs offsetting lower PPP loan forgiveness income. In the coming quarters, we anticipate the pace of margin expansion to increase as a function of market interest rate increases, loan growth, and stabilization of excess deposit liquidity inflows. As we've guided in previous quarters, we anticipate laddering the excess deposit liquidity into securities portfolio at a measured pace, while remaining flexible to shifts in loan demand and the yield curve.

Turning to noninterest income. Total noninterest income declined $5 million from the prior quarter. The prior quarter benefited from a $2.6 million fair gain on the FinTech investment and accounting adjustment related to an increase in the value of the company's SBA servicing asset and gains on branch sales. Core noninterest income, excluding gains on the sale of securities, changes in investments carried at fair value decreased $2.9 million.

Deposit fees increased modestly by $800,000, while mortgage banking income declined by $1.2 million due to lower production and gain on sale spreads. Residential mortgage loan spreads compressed in the current quarter with a steepening yield curve, while loan production was down 18% from the fourth quarter. Within residential mortgage production, the percentage of refinance volume remains steady at 36% of total production, the same as the prior quarter. Multifamily loan sales and gain on sale premiums were muted due to the steepening of the yield curve.

Miscellaneous fee income declined $3 million due to gains on sale of closed branch locations and an accounting adjustment related to the increasing the value of the company's SBA servicing asset in the prior quarter, along with modest declines in swap and SBA gain on sale fee income in the current quarter. Turning to noninterest expense. Total noninterest expense decreased $600,000 from the prior quarter, primarily due to lower debt extinguishment costs and lower marketing expense. Loss on the redemption of certain junior subordinated debt liabilities carried at fair value declined by $1.5 million to $800,000, while Banner Forward implementation costs increased $1.3 million to $2.5 million in the current quarter.

Excluding Banner Forward, debt extinguishment, M&A, and pandemic-specific operating costs, core noninterest expense declined $300,000. Compensation expense increased by $1.7 million due to higher severance costs, elevated payroll taxes, and medical claims expense, partially offset by a lower salary driven by FP reductions under Banner Forward. The credit for capitalized loan origination expense declined by $1.3 million due to lower held-for-sale residential mortgage and multifamily loan production. Advertising and marketing expense declined due to seasonal declines and charitable contributions, direct mail, web-based advertising, and printed media expense.

In addition, as part of ongoing capital management, the company redeemed an additional $49 million of its outstanding trust junior subordinated debentures increased its BOLI holdings by $50 million and rolled off a $50 million long-term FHLB borrowing advance. I'm pleased to report continuing progress on Banner Forward. We just completed the third quarter of implementation and are seeing evidence of the results in lower core operating expense, improving deposit fee income while setting the stage for continued improvement in core operating expense and accelerating revenue growth in the coming quarters. Approximately 44% of the initiatives from a program value perspective have been executed and are reflected in the current quarter core run rate with the majority of those now in place, driving expense efficiency.

As we discussed previously, the remaining efficiency-related initiatives are anticipated to be implemented sequentially over the next 2 quarters with implementation of the revenue initiatives ramping up in the second half of the year and into 2023. We continue to guide toward a core spend quarterly run rate in the mid- to high $80 million range, before any effects of elevated wage or vendor cost inflation above historical norms. That said, our prospects for improved operating leverage remains strong as any elevated inflationary pressure on our reduced expense base will be more than offset by corresponding expansion in the bank's net interest margin. In closing, the company has begun to benefit from rising rates, and we anticipate benefiting further from additional monetary tightening as we enter the current rate cycle.

This concludes my prepared remarks. Mark?

Mark Grescovich -- President and Chief Executive Officer

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

Questions & Answers:

Operator

Thank you. [Operator instructions] And now our first question comes from Jeff Rulis from D.A. Davidson. Jeff, your line is open.

Please go ahead.

Jeff Rulis -- D.A. Davidson -- Analyst

Thank you. Good morning, everyone.

Mark Grescovich -- President and Chief Executive Officer

Good morning, Jeff.

Jeff Rulis -- D.A. Davidson -- Analyst

Question on the -- maybe, Peter, what is the remaining upfront Banner Forward cost, I guess, relative to the $2.5 million we saw this quarter, I can't remember what the original amount was. But is there some remaining there?

Peter Conner -- Executive Vice President and Chief Financial Officer

Yeah. Hi, Jeff. Yes. There's -- we're pretty much through the majority of the implementation costs and restructuring costs at this stage.

I'd anticipate $1 million to $2 million more of implementation costs spread out over the next two quarters, but it's going to continue to decline as we go forward into the rest of '22.

Jeff Rulis -- D.A. Davidson -- Analyst

And Peter, your core expense that down $300,000, what is that exact level on a core rate?

Peter Conner -- Executive Vice President and Chief Financial Officer

Yeah. In terms of the kind of what our expectations for quarterly expense run rate? Is that your question?

Jeff Rulis -- D.A. Davidson -- Analyst

Well, for -- Yes, for what was the core for this quarter, and I heard your commentary about turning to the mid-to-high $80 million range per quarter. But just what was the core this quarter?

Peter Conner -- Executive Vice President and Chief Financial Officer

Yeah. We -- a good reference, Jeff, as actually at the last page of our earnings release. We disclosed our adjusted core expense, excluding the Banner Forward and any other fair value or gain-related impacts to the expense base. And if you look at that schedule, excluding those items, we've been running right around the mid-to-high $80 million range.

So it's -- we reported $85.4 million in the way we define core expense, that also excludes B&O tax of $1.1 million and core deposit intangible amortization of another $1.4 million. So you'd add those two back, which are about $2.5 million. So we're right around $88 million on a core basis, the way we would normally define in Q1.

Jeff Rulis -- D.A. Davidson -- Analyst

Great. Thanks. And maybe for Jill, just wanted to get a sense for the payoff activity linked quarter out of the portfolio, kind of the headwinds there? And then if you could comment on the pipeline or outlook on growth. I think there's some seasonality this quarter, but just to color up the outlook for.

It sounds fairly positive but just wanted to kind of get a little more detail there.

Jill Rice -- Chief Credit Officer

Yeah. Jeff, good morning. So our expectations for loan growth continue to feel good, strong about reaching that upper single-digit growth rate by the end of the year. And as you called out, some of the downward trend in that first quarter is seasonal in nature, especially in the ag portfolio.

The payoffs, we would expect to slow down somewhat with the change in the rate environment. And the reasons we continue to feel positive about loan growth are that we're in the strong markets, strong economic engines, the business models working, the loan originations continue to be strong quarter over quarter, had one of the best quarters this quarter in terms of production. Pipelines remain solid. The ag utilization will pick back up the commercial real estate, the spec construction and A&D utilization is way low as well because of the rebuilding of that portfolio.

So that will draw down over the quarter, I mean, over the year as well. So everything there bodes well for continued loan growth.

Jeff Rulis -- D.A. Davidson -- Analyst

Jill, just to follow that up, the payoffs linked quarter were up or down from the fourth quarter. And then given that outlook of return to growth, could you comment on the provision levels at all? Do we expect to see a more modest, an end of the reverse provision and/or eventually a positive provision or expense? Thanks.

Jill Rice -- Chief Credit Officer

So pay off quarter to quarter, Jeff, I'd have to get back to you for sure. I don't have that off the top of my head. They seem to be slowing, but I could be missing that. So let me shoot you a note on that to clear that up.

As to the reserve, I'm going to start with what I say every time, we don't really guide to where we're going to end with our reserve but our approach has been to be as measured as we can be within the bounds of CECL in terms of releasing reserves as we've continued through what has been a good economic environment and continued improvement in asset quality. I would anticipate that as loan growth continues, we would begin to start provisioning again. And then what I would say in terms of coverage is that that ratio is going to really ultimately be dependent upon how the economic environment plays out now throughout 2022.

Jeff Rulis -- D.A. Davidson -- Analyst

OK. Thank you.

Mark Grescovich -- President and Chief Executive Officer

Thank you, Jeff.

Operator

Thank you. Ladies and gentlemen, our next question comes from Andrew Liesch from Piper Sandler. Andrew, your line is open. Please go ahead.

Andrew Liesch -- Piper Sandler -- Analyst

Thanks. Good morning, everyone. Jill, just a follow-up on some of the loan growth questions and loan growth outlook here. I'm curious what drove the owner-occupied CRE increase this quarter?

Jill Rice -- Chief Credit Officer

I can't just say exactly what -- I mean, we've had new business activity expansion of activity, new property purchases, but it -- I can't tell you exactly where it was.

Andrew Liesch -- Piper Sandler -- Analyst

OK. Got it. And that just goes along the lines of kind of my next question is on C&I borrowers. I mean, what are they saying about their demand and capex needs? Are they expanding? And clearly, there's a lot of room for utilization to rise, but I'm just trying to get a sense of what they're telling you and how they're feeling about their businesses?

Jill Rice -- Chief Credit Officer

They're certainly being impacted by the increased commodity prices and so that is driving a little bit of increased utilization and demand. So while we've got that continued lower utilization rate. We have added lines of credit. We have increased lines of credit.

We're seeing the needs for larger lines to carry more inventory, they're trying to get more inventory in as the prices are rising to the best they can to counter the supply chain issues as well. So we are seeing existing borrowers borrow and, at the same time, increase the size of the line, keeping that utilization down.

Andrew Liesch -- Piper Sandler -- Analyst

Got it. OK. That's helpful.

Mark Grescovich -- President and Chief Executive Officer

Andrew, this is Mark. Let me just add on to Jill's comments. There's other factors at play here obviously, you already know about, which as energy prices continue to increase, you've got wage inflation and labor constraints that are also weighing on businesses in terms of inflation. So the pipelines are considering capital expansion to try to improve productivity, given all those factors.

The one drawback or the thing that's weighing on their minds, though, is obviously the political uncertainty as to where the economy goes from here. So there are positive forces for C&I that they're going to make additional investments. It's just going to be muted a bit in some of the uncertainty. So I just wanted to add that.

Andrew Liesch -- Piper Sandler -- Analyst

Got it. That's very helpful. And then just a follow-up, construction demand, it sounds like there was clearly some this quarter. More projects are going to start to fund up as we move into the summer months.

I guess, what's the pipeline look there for new projects coming online or new opportunities to extend at least a construction line before those funds later this year?

Jill Rice -- Chief Credit Officer

The construction lines are refreshing and continuing the demand is strong for that. I would say that we do anticipate that with the rising rates, it could slow the pull -- it could slow the homebuilder sales as they're building out and affordability continues to be a concern but the supply of available homes remains low. So they're still coming in and building them, and we're not seeing any real disruption in terms of unsold inventory. It's really a low-standing inventory and strong employment conditions that make the market conditions remain good to continue that product.

Andrew Liesch -- Piper Sandler -- Analyst

Got it. OK. That all makes sense. Thanks for taking the questions.

Mark Grescovich -- President and Chief Executive Officer

Thank you, Andrew.

Operator

The next question comes from David Feaster from Raymond James. David, your line is open. Please go ahead.

David Feaster -- Raymond James -- Analyst

Hey, good morning, everybody.

Mark Grescovich -- President and Chief Executive Officer

Good morning, David.

David Feaster -- Raymond James -- Analyst

It's great to see you guys have made tremendous progress on the Banner Forward initiative. And it sounds like the majority of the next steps are really on the revenue improvement side. Could you just maybe talk to some of the initiatives that are on the docket and the road map for those? And then just how effective you've been in the growth that you generated this quarter, how much was from the new client growth and deepening relationships and maybe moving upstream as part of this initiative that you guys laid out?

Peter Conner -- Executive Vice President and Chief Financial Officer

Hi, David. This is Peter. I'll address those questions around Banner Forward. As we've guided to the sequential nature of how Banner Forward will begin impacting our performance as you mentioned, was front-loaded around expense efficiencies first.

We do and we have recognized the benefits of some of the initial expense efficiency initiatives in the fourth and first quarter, as you know, we consolidated seven branch locations in the first quarter. That was mid-quarter, so we're not going to see the full benefit in the run rate of those consolidations until the second quarter due to severance and exit costs and so forth that were still in the first quarter numbers. We also announced the sale of four more branches in the second quarter that will be executed toward the end of the second quarter that will reduce expense, all those branches are small relative to the rest of our portfolio branch locations and will be accretive to ROA when we execute them. In addition to that, there's a series of smaller incremental expense saves as we implement some efficiency initiatives across some of the support units and some of the spans and layer-related reductions across our retail and commercial functions.

Again, those will continue to manifest into the second quarter and ultimately in the third quarter where we really see our core base of the run rate post Banner Forward on the expense side. On the revenue side, we've begun implementing some of the fee-related initiatives mid-first quarter. So we're not seeing the full carry of those deposit fee initiatives show up yet. We'll see them show up more in the second quarter and then even more in the third quarter, two or three initiatives that are being implemented over the course of the second quarter that we'll see the benefits in the full third and fourth quarter, the second half of this year.

And then there's a series of marketing and digital marketing-related initiatives in terms of customer and account acquisition that we expect to result in an acceleration of loan growth, new client acquisitions that will ramp up prospectively over the second half of this year. And then there's some additional loan growth on the commercial and CRE side that we're beginning to see just the very beginnings in the first quarter related to some higher hold limits, some focus on our metro and higher-growth markets, middle market. We expect those to really show up in the second half of this year and carry into '23. So again, it's going to be expense efficiency first followed by revenue acceleration second.

And we're right on track with where we expected to be in Banner Forward, and we'll continue to report our progress as we go quarter to quarter.

David Feaster -- Raymond James -- Analyst

That's helpful. I appreciate that. And then I appreciate your commentary too, in the prepared remarks talking about the rate sensitivity and expectations for margin expansion just in light of the rising rates. And looking at the slide, you've talked in the past about half of your -- the impact of floors and that half of your floors are at the floors.

Just curious how far before you get -- could you just remind us where those floors are? And how far before you get through the majority of those and start seeing the more full impact from rising rates?

Peter Conner -- Executive Vice President and Chief Financial Officer

Yeah. Yes. So in terms of the -- as we disclosed in our investor deck, a little over 60% of our loan book is floating and adjustable and about a little over 60% of those loans, floating adjustable have floors on them. If we look at the weighted average strike to index spread on those loans with floors, we're down to about 30 basis points of remaining spread recapture on a weighted balance basis.

So there's still some additional short-end rate movement we need to fully reprice the loans going forward. That being said, based on our current balance sheet mix and kind of a static mix going forward, the way to think about our margin relationship to interest rates is about one-third of the change in the yield curve, assuming a parallel shift shows up as an increase to our margins. So in other words, for each 25 basis points of Fed funds hike, we expect about seven to eight basis points of margin improvement, right? All things equal, assuming our current balance sheet mix of securities, cash and loans. So that kind of gives you a sense.

Once we cross the 100 basis point threshold with Fed funds, our loan yields improvement will accelerate because we'll have cleared all the floors, and we actually expect to see loan yields move up at a faster pace once all those floors are cleared during the first 100 basis points of tightening.

David Feaster -- Raymond James -- Analyst

That's extremely helpful. Thank you for that. And then maybe just switching gears to touch on credit a bit more broadly, asset quality. You guys do a phenomenal job, a very conservative approach to credit.

Just kind of hearing the commentary, it sounds like you're still a bit cautious on maybe the more macroeconomy. Just curious what keeps you up at night? What you're watching closely as you manage credit and whether the macro environment, the inflationary trends that you talked about, has that led to any tightening of the credit box at all?

Jill Rice -- Chief Credit Officer

It hasn't led to tightening of the credit box. I think the way I would summarize the way Banner has worked in my 20-year career here is to try to be as stable through all economic cycles as we can be. We don't try to shift with the wind necessarily and/or the broader economy, and it comes down to the sound underwriting going in. So certainly, we stress credits and anticipate in a rising rate environment, how we're stressing these credits at origination is just with a higher rate to make sure that they can work through the cycle.

So in terms of what keeps me up at night, it isn't our loan portfolio. It is just what's going on in the world today and how that ultimately is going to impact all of us. But I feel good about our borrowers and our credit quality.

David Feaster -- Raymond James -- Analyst

OK. Thank you.

Mark Grescovich -- President and Chief Executive Officer

Thank you, David.

Operator

Our next question comes from Andrew Terrell from Stephens. Andrew, your line is open. Please go ahead.

Andrew Terrell -- Stephens, Inc. -- Analyst

Thank you. Good morning.

Mark Grescovich -- President and Chief Executive Officer

Good morning, Andrew.

Andrew Terrell -- Stephens, Inc. -- Analyst

Peter, I wanted to go back to just the rate sensitivity discussion. And I'm looking at Slide 17 of the presentation. The first 100 basis points you disclosed plus 7% to NII. The second 100 basis points for 200 basis point scenario, NII is up 11.6%.

And I heard your commentary on just working past the loan floors and you should become more asset sensitive after you kind of -- with the second 100 basis points, I guess, the disclosure here wouldn't suggest that those. So I'm just trying to get a sense of like do you assume higher deposit bases for the second 100 basis point assumption. Just any color there would be helpful.

Peter Conner -- Executive Vice President and Chief Financial Officer

Yeah. No, your intuition is correct. So my comments were around the loan yield itself. On the funding side, we have accelerated -- our betas increase as rates move further up the curve.

So our expectation is that deposit betas will be very low and the first 100 are tightening, but they begin to accelerate in the second 100 of tightening. So our funding costs begin to move up at a much higher pace proportionate to the first 100 as rates tighten. And if you look back at what Banner did in the last tightening cycle in 2017 and '18, Banner didn't change -- move its deposit rates up at all until the -- after the first 100 basis points of tightening the last time. And we think that's a pretty good barometer for what's likely to happen in this cycle given that, that's what we did last time and this time, we've got quite a bit more deposit liquidity going into the cycle than we had last time.

That being said, we did see our deposit rates begin to move up more aggressively in the second 100 of tightening in the last cycle, and we expect the same relationship to hold through this time. And so that's really what's causing the diminished amount of net interest income growth as we go into the 200 and 300. We have accelerating betas and further up you go in the rate curve in our models. And so that's what's causing some of the more limited growth in NII.

Andrew Terrell -- Stephens, Inc. -- Analyst

OK. Very good. That's really helpful. I appreciate it.

And then I heard your comments on kind of continuing to take a measured pace to laddering the liquidity into the bond book. I know you obviously mentioned you monitor the yield curve level and just overall loan demand of the bank as well when you're making the consideration of putting liquidity to work, I guess just with the improvement we've seen over the past few months on yields, does that make you more apt to get a bit more aggressive in terms of putting some liquidities work? Or is it more about considering maybe the acceleration of loan demand that you might be expecting?

Peter Conner -- Executive Vice President and Chief Financial Officer

Yeah. I look all things equal, given we still have an ample amount of cash sitting with the Fed, and last quarter we laddered in about $160 million of cash into the securities portfolio. This quarter, we expect to have a higher number given the sharp increase in long end of the yield curve, and we want to take advantage of that. So you could anticipate they will be somewhat more aggressive this quarter than we were last quarter in laddering some additional cash into the securities book.

We have ample cash to support accelerated loan demand and potential deposit liquidity runoff, although we're not seeing any signs of deposit outflow yet with increased rates. But all things equal, we expect to be a bit more aggressive in laddering cash into the securities book this quarter.

Andrew Terrell -- Stephens, Inc. -- Analyst

Got it. OK. And then relative to that 2.25% yield, I think it was around 2.25%, maybe 2.22% you're buying at in the first quarter. Where are you buying at today just from a yield perspective?

Peter Conner -- Executive Vice President and Chief Financial Officer

Yeah. We're closer to 3% now. So we're seeing -- we're looking at securities on a basket average basis in the right high 2s, maybe 3% at this stage.

Andrew Terrell -- Stephens, Inc. -- Analyst

OK. And if I can just sneak one more in. I might have missed it, but did you have the net dollars of expense saves you would expect from the announced branch sale?

Peter Conner -- Executive Vice President and Chief Financial Officer

Yes. We didn't disclose the amount of expenses. Just for reference, those branches hold a little over $200 million in deposits. So we'll expect that debt balance to go out.

And as I said earlier, these are smaller branches relative to the rest of our footprint. And so from ROA accretion perspective and an efficiency ratio perspective, this will be a net benefit to the go-forward profitability metrics of the company once they're shown.

Andrew Terrell -- Stephens, Inc. -- Analyst

OK. I understand. I appreciate you taking my questions.

Mark Grescovich -- President and Chief Executive Officer

Thank you, Andrew.

Operator

Our next question comes from Kelly Motta from KBW. Kelly, your line is open. Please go ahead.

Kelly Motta -- Keefe, Bruyette and Woods -- Analyst

Thank you. Good morning.  Most of my questions have been answered, but I did want to touch on loan yields, and I wanted to ask how new origination yields were coming in, and if you've seen a nice pickup there? And we've seen loan growth across your footprint pickup. Are you seeing any competitors getting a bit more aggressive or extending a bit more on terms and standards in order to get the liquidity to work? Just interested in the competitive dynamics of what you're seeing there. Thanks.

Jill Rice -- Chief Credit Officer

Peter, I'll start with the competition, and then I'll let you come back in with the loan yields. Competition, Kelly, is as crazy as it has ever been in terms of pricing and structure. Yes, competition is stretching the amortization period, longer interest-only periods, low rates, and it comes from everyone. It's community banks, it's credit unions, it's insurance companies, non-bank lenders, everyone out there is looking to put the quality assets on their balance sheet.

As to yield, I'm going to throw it to Peter, and I'm not sure if there was something else in there that I forgot, but we'll circle back if I did.

Peter Conner -- Executive Vice President and Chief Financial Officer

Yeah. Kelly, in terms of loan yields, we're seeing some modest improvements in the average loan yield of new production depending on the low floors right now, and we expect that to continue to improve, right, as the yield curve continues to move up. And the loan yields that we're putting on now are free to the average portfolio yield. So as we've always said, we've remain, as Jill said in the past, we remain disciplined on not just credit structure but also pricing.

And so we -- we have turned away deals for price and remain disciplined around that. But we are seeing yields coming on that are accretive to the portfolio.

Kelly Motta -- Keefe, Bruyette and Woods -- Analyst

That's super helpful. And maybe just kind of a high-level question about Banner Forward. I know you're still working on expanding your customer base and penetration of existing customers. And I was just wondering if that's led mostly with the credit side or the loan side or if we should expect kind of increases in deposits from that as well, which could potentially help mitigate the slower deposit growth that we're all expecting with liquidity getting put to work?

Peter Conner -- Executive Vice President and Chief Financial Officer

Yeah. I'll take a response there. Kelly, as we talked about, there's many -- there's a number of initiatives that comprise Banner Forward, and you've heard us discuss several of those are in the commercial banking and small business banking arena with an emphasis on accelerating new client acquisition and deepening our relationships in that line of business. And as part of that, we expect to bring in the entire relationship with the client, which would be not just the loan, but their operating accounts and including treasury management needs, which would bring with it some additional deposits and funding.

So those initiatives that are focused on accelerating revenue and production in the commercial side and small business banking will bring with them deposits. Although I would tell you overall, there's going to be more of a loan focus overall. So I would characterize that the loan-to-deposit ratio of that new business has a more balanced loan-to-deposit mix than our existing portfolio. So we expect that the overall benefit will be to improve our earning asset mix across those initiatives.

And then there's a series of other initiatives on the retail and consumer side that also contemplate bringing in additional accounts and clients that will bring both loan and deposits right through many of our digital and marketing initiatives. This will bring in a full relationship as well. But again, those are, again, focused on the loan side, and we expect the mix of the overall business to be very balanced between loan and deposit growth across those new clients.

Kelly Motta -- Keefe, Bruyette and Woods -- Analyst

That's so helpful. Thank you so much.

Mark Grescovich -- President and Chief Executive Officer

Thank you, Kelly.

Operator

[Operator instructions] We have a follow-up question from Andrew Terrell from Stephens. Andrew, your line is open. Please go ahead. 

Andrew Terrell -- Stephens, Inc. -- Analyst

Hey. Thanks for taking the follow up. I just wanted to ask, there's been a lot of M&A really kind of across your footprint over the past year or so, both completed and just announced. Are you starting to see any kind of accelerated ability to attract either customers or new talent to the bank just as a result of maybe some of the M&A disruption?

Mark Grescovich -- President and Chief Executive Officer

Yes, Andrew. This is Mark. I'll answer that question and ask others to follow in. Look, I think at the end of the day, there's been enough uncertainty that's going on in some of the institutions that are combining, and it's created a large number of conversations as to what the next steps for bankers are, clients are taking notice.

Their clients are taking notice of what may be a transitioning, decision-making, and/or relationship managers. So it's at the beginning phase, I would characterize of us being able to take advantage of it. We are doing so right now in terms of building pipelines, both talent pipelines as well as client pipelines. But the real just of us being able to take advantage of it, it's going to be around conversion dates.

And as new structures are rolled out, decision-making bodies are changed that's when we're going to have the real opportunity. As you would expect, a lot of the institutions that are in the process of orchestrating a combination have locked up some of the key players in terms of retention bonuses and just waiting to see until all those -- that conversion takes place or the structure, the new structure takes place. I would expect that to accelerate for us -- the benefit to accelerate for us at exactly the right time that Banner Forward initiatives will take hold, which will be nearing the second half of this year.

Andrew Terrell -- Stephens, Inc. -- Analyst

Understood. OK. And then maybe just one last as well. Just kind of given some of those comments, maybe the organic kind of opportunity both from Banner Forward and then some may be potential hiring or customer acquisition as well.

Does that lead you to be, I guess, more inclined to focus organically at the franchise as opposed to looking to do M&A yourself? Or are you still -- do you still remain kind of open to M&A?

Mark Grescovich -- President and Chief Executive Officer

We're -- look, our M&A strategy has not changed. It hasn't changed through the cycle or coming out of the pandemic or right as of right now. We have always been opportunistic in how we've approached M&A. We've been very disciplined and how we look at the combination and how it will affect our business model that's clearly been successful through some of the outside recognition that you'll identify in our investor deck.

So the business model is working well. What we don't want to do is do something that's going to be fraught with execution risks that will jeopardize the momentum of that business model. And we are right now taking advantage of it. It's not just through the combination or disruption that's occurring in our footprint.

We're also taking advantage. We've hired some great talent from the larger institutions, larger financial institutions, specifically in the California market. So I think all the way around, we're looking at both a dual strategy of organic growth, adding additional talent that can accelerate our banner forward organic growth. But at the same time, we're very open to opportunistic combinations.

And we have -- as you'll recall, we do have a very talented integration team internally, obviously, led by our executive vice president, Cindy Purcell who's done over eight of our integrations. So we stand ready to do something should the opportunity arise.

Andrew Terrell -- Stephens, Inc. -- Analyst

OK. Very good. I really appreciate the color and thank you all for taking my questions. 

Mark Grescovich -- President and Chief Executive Officer

You bet, Andrew. Thank you.

Operator

Currently, we have no further questions. Therefore, I will now hand back to your host, Mark Grescovich for any closing remarks. Mark, please go ahead.

Mark Grescovich -- President and Chief Executive Officer

Thank you, Irene. And as I've stated, we are very pleased and proud of the Banner team and our solid first quarter performance. Thank you very much for your interest in Banner and for joining us on our call today. We look forward to reporting our results to you again in the future.

Thank you, everyone, and have a wonderful day.

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

Mark Grescovich -- President and Chief Executive Officer

Rich Arnold -- Head of Investor Relations

Jill Rice -- Chief Credit Officer

Peter Conner -- Executive Vice President and Chief Financial Officer

Jeff Rulis -- D.A. Davidson -- Analyst

Andrew Liesch -- Piper Sandler -- Analyst

David Feaster -- Raymond James -- Analyst

Andrew Terrell -- Stephens, Inc. -- Analyst

Kelly Motta -- Keefe, Bruyette and Woods -- Analyst

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