[PART I – FINANCIAL INFORMATION](index=2&type=section&id=PART%20I%20%E2%80%93%20FINANCIAL%20INFORMATION) This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for Banner Corporation [Item 1 – Financial Statements](index=2&type=section&id=Item%201%20%E2%80%93%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements of Banner Corporation and its subsidiaries, including the Statements of Financial Condition, Operations, Comprehensive Income, Changes in Shareholders' Equity, and Cash Flows, along with selected notes detailing accounting policies, securities, loans, deposits, fair value measurements, and other financial instruments [Consolidated Statements of Financial Condition](index=4&type=section&id=Consolidated%20Statements%20of%20Financial%20Condition) The company's total assets increased by $1.09 billion to $16.12 billion at March 31, 2021, from $15.03 billion at December 31, 2020, driven by increases in cash and cash equivalents and total securities, partially offset by a decrease in loans held for sale, with total liabilities also increasing significantly due to a rise in deposits **Financial Condition Highlights (March 31, 2021 vs. December 31, 2020):** | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------- | :---------------------------- | :------------------------------- | | Total assets | $16,119,792 | $15,031,623 | | Total cash and cash equivalents | $1,649,927 | $1,234,183 | | Total securities | $3,456,656 | $2,769,286 | | Loans held for sale | $135,263 | $243,795 | | Net loans receivable | $9,791,643 | $9,703,703 | | Total deposits | $13,548,867 | $12,567,296 | | Total liabilities | $14,500,975 | $13,365,359 | | Total shareholders' equity | $1,618,817 | $1,666,264 | [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations) Net income for the three months ended March 31, 2021, significantly increased to $46.9 million, or $1.33 per diluted share, compared to $16.9 million, or $0.47 per diluted share, for the same period in 2020, primarily driven by a recapture of provision for credit losses and higher non-interest income, despite a slight decrease in net interest income **Key Income Statement Metrics (Three Months Ended March 31):** | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (in thousands) | Change (%) | | :------------------------------------ | :------------------ | :------------------ | :-------------------- | :--------- | | Total interest income | $124,521 | $131,665 | $(7,144) | (5.4%) | | Total interest expense | $6,860 | $12,407 | $(5,547) | (44.7%) | | Net interest income | $117,661 | $119,258 | $(1,597) | (1.3%) | | (Recapture)/Provision for credit losses | $(9,251) | $23,470 | $(32,721) | (139.4%) | | Total non-interest income | $24,272 | $19,165 | $5,107 | 26.6% | | Total non-interest expense | $93,527 | $93,463 | $64 | 0.1% | | Net income | $46,855 | $16,882 | $29,973 | 177.5% | | Basic EPS | $1.34 | $0.48 | $0.86 | 179.2% | | Diluted EPS | $1.33 | $0.47 | $0.86 | 183.0% | [Consolidated Statements of Comprehensive Income](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) The company reported a comprehensive loss of $9.2 million for the three months ended March 31, 2021, a significant decline from a comprehensive income of $63.7 million in the prior year, primarily due to substantial unrealized holding losses on available-for-sale securities during the period **Comprehensive Income (Three Months Ended March 31):** | Metric | 2021 (in thousands) | 2020 (in thousands) | | :--------------------------------------------------------------------------------- | :------------------ | :------------------ | | Net income | $46,855 | $16,882 | | Unrealized holding (loss) gain on available-for-sale securities arising during the period | $(73,107) | $42,178 | | Other comprehensive (loss) income | $(56,103) | $46,823 | | Comprehensive (loss) income | $(9,248) | $63,705 | [Consolidated Statements of Changes in Shareholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) Shareholders' equity decreased by $47.4 million from December 31, 2020, to March 31, 2021, mainly attributed to a significant decrease in accumulated other comprehensive income (driven by unrealized losses on available-for-sale securities) and common stock repurchases, partially offset by net income for the period **Changes in Shareholders' Equity (January 1, 2021 to March 31, 2021):** | Metric | January 1, 2021 (in thousands) | March 31, 2021 (in thousands) | | :--------------------------------------------------------------------------------- | :----------------------------- | :---------------------------- | | Common Stock and Paid in Capital | $1,349,879 | $1,326,269 | | Retained Earnings | $247,316 | $279,582 | | Accumulated Other Comprehensive Income | $69,069 | $12,966 | | Total Shareholders' Equity | $1,666,264 | $1,618,817 | - Repurchase of common stock amounted to **$25.3 million** for 500,000 shares during Q1 2021[19](index=19&type=chunk) - Accrual of dividends on common stock was **$14.6 million** ($0.41/share) in Q1 2021[19](index=19&type=chunk) [Consolidated Statements of Cash Flows](index=10&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash provided by operating activities significantly increased to $322.5 million in Q1 2021 from $52.6 million in Q1 2020, driven by higher net income and changes in other liabilities, while investing activities resulted in a substantial net cash outflow of $829.5 million, primarily due to large purchases of available-for-sale securities, and financing activities provided $922.7 million, largely from a significant increase in deposits **Cash Flow Summary (Three Months Ended March 31):** | Metric | 2021 (in thousands) | 2020 (in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Net cash provided from operating activities | $322,481 | $52,563 | | Net cash used in investing activities | $(829,456) | $(190,862) | | Net cash provided from financing activities | $922,719 | $125,565 | | Net change in cash and cash equivalents | $415,744 | $(12,734) | | Cash and cash equivalents, end of period | $1,649,927 | $295,001 | - Purchases of available-for-sale securities were **$1.23 billion** in Q1 2021, significantly higher than **$144.0 million** in Q1 2020[20](index=20&type=chunk) - Increase in deposits, net, was **$981.6 million** in Q1 2021, compared to **$400.9 million** in Q1 2020[20](index=20&type=chunk) [Selected Notes to the Consolidated Financial Statements](index=12&type=section&id=Selected%20Notes%20to%20the%20Consolidated%20Financial%20Statements) This section provides detailed disclosures on the company's accounting policies, recent accounting standards, and specific financial statement line items, covering securities, loans, real estate owned, intangible assets, deposits, fair value measurements, income taxes, EPS calculation, stock-based compensation, commitments, contingencies, derivatives, and revenue recognition [Note 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES](index=12&type=section&id=Note%201%3A%20BASIS%20OF%20PRESENTATION%20AND%20SIGNIFICANT%20ACCOUNTING%20POLICIES) The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim reporting and SEC regulations, encompassing Banner Corporation and its wholly-owned subsidiary, Banner Bank, with management relying on estimates and assumptions for key accounting policies, including interest income, credit losses, fair value, intangibles, and deferred taxes, with no significant changes in application during Q1 2021 - Financial statements are prepared in accordance with GAAP for interim financial information and SEC regulations[26](index=26&type=chunk) - Key accounting policies involve estimates for credit losses, fair value of financial instruments, and valuation of intangibles like goodwill and mortgage servicing rights[27](index=27&type=chunk) [Note 2: ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED](index=13&type=section&id=Note%202%3A%20ACCOUNTING%20STANDARDS%20RECENTLY%20ISSUED%20OR%20ADOPTED) The company adopted ASU 2020-04 and ASU 2021-01, which provide optional guidance for the transition away from LIBOR (Reference Rate Reform), offering relief for accounting analysis and impacts related to contract modifications and hedge accounting, with the discontinuation of U.S. dollar LIBOR extended to June 30, 2023, and no material impact expected on the company's financial statements - FASB issued ASU 2020-04 and ASU 2021-01 to address the discontinuation of LIBOR, extending to June 30, 2023[30](index=30&type=chunk)[32](index=32&type=chunk) - The company will use expedients in this guidance for loans and leases, with no material impact expected on financial statements[33](index=33&type=chunk) [Note 3: SECURITIES](index=14&type=section&id=Note%203%3A%20SECURITIES) Total securities increased by $687.4 million to $3.46 billion at March 31, 2021, from December 31, 2020, primarily due to increased available-for-sale securities, with the company experiencing significant unrealized holding losses on available-for-sale securities during Q1 2021, mainly attributable to changes in interest rates and market spreads, and an increase in the number of securities with unrealized losses **Total Securities (March 31, 2021 vs. December 31, 2020):** | Category | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------- | :---------------------------- | :------------------------------- | | Trading securities | $25,039 | $24,980 | | Available-for-sale securities | $2,989,760 | $2,322,593 | | Held-to-maturity securities | $441,857 | $421,713 | | **Total securities** | **$3,456,656** | **$2,769,286** | - Unrealized holding loss on available-for-sale securities was **$(73.1) million** in Q1 2021, compared to a gain of **$42.2 million** in Q1 2020[10](index=10&type=chunk) - The number of available-for-sale securities with unrealized losses increased from 54 at December 31, 2020, to 81 at March 31, 2021, primarily due to changes in interest rates[41](index=41&type=chunk) [Note 4: LOANS RECEIVABLE AND THE ALLOWANCE FOR CREDIT LOSSES - LOANS](index=18&type=section&id=Note%204%3A%20LOANS%20RECEIVABLE%20AND%20THE%20ALLOWANCE%20FOR%20CREDIT%20LOSSES%20-%20LOANS) Total loans receivable increased by $76.7 million to $9.95 billion at March 31, 2021, primarily driven by originations of Paycheck Protection Program (PPP) loans, while the allowance for credit losses - loans decreased, reflecting an $8.0 million recapture of provision due to improved forecasted economic indicators and a decrease in loan balances (excluding PPP loans), with non-performing loans slightly increasing **Loans Receivable by Class (March 31, 2021 vs. December 31, 2020):** | Loan Class | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | Change (%) | | :------------------------------------------------- | :---------------------------- | :------------------------------- | :--------- | | Commercial real estate | $3,650,566 | $3,684,223 | (0.9%) | | Construction, land and land development | $1,314,301 | $1,291,189 | 1.8% | | Commercial business (incl. PPP) | $2,376,594 | $2,178,461 | 9.1% | | Small business scored | $717,502 | $743,451 | (3.5%) | | Agricultural business (incl. PPP) | $262,410 | $299,949 | (12.5%) | | One- to four-family residential | $655,627 | $717,939 | (8.7%) | | Consumer | $570,697 | $605,770 | (5.8%) | | **Total loans receivable** | **$9,947,697** | **$9,870,982** | **0.8%** | - PPP loans included **$1.28 billion** at March 31, 2021, up from **$1.04 billion** at December 31, 2020[51](index=51&type=chunk) **Allowance for Credit Losses - Loans (Three Months Ended March 31):** | Metric | 2021 (in thousands) | 2020 (in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Beginning balance | $167,279 | $100,559 | | Provision/(recapture) for credit losses | $(8,035) | $21,713 | | Net (charge-offs)/recoveries | $(3,190) | $404 | | Ending balance | $156,054 | $130,488 | - Non-performing loans were **$36.6 million** at March 31, 2021, compared to **$35.6 million** at December 31, 2020[203](index=203&type=chunk) [Note 5: REAL ESTATE OWNED, NET](index=34&type=section&id=Note%205%3A%20REAL%20ESTATE%20OWNED%2C%20NET) Real estate owned (REO) decreased significantly to $340,000 at March 31, 2021, from $816,000 at December 31, 2020, primarily due to proceeds from dispositions of REO and gains on sales, which exceeded any additions from loan foreclosures during the period **REO Activity (Three Months Ended March 31):** | Metric | 2021 (in thousands) | 2020 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Balance, beginning of period | $816 | $814 | | Additions from loan foreclosures | — | $1,588 | | Proceeds from dispositions of REO | $(783) | — | | Gain on sale of REO | $307 | — | | Balance, end of period | $340 | $2,402 | [Note 6: GOODWILL, OTHER INTANGIBLE ASSETS AND MORTGAGE SERVICING RIGHTS](index=34&type=section&id=Note%206%3A%20GOODWILL%2C%20OTHER%20INTANGIBLE%20ASSETS%20AND%20MORTGAGE%20SERVICING%20RIGHTS) Goodwill remained stable at $373.1 million, with no impairment identified after a quantitative test as of December 31, 2020, while core deposit intangibles (CDI) decreased due to amortization, and mortgage servicing rights (MSRs) increased slightly, with no impairment charges or recoveries recorded for MSRs during the period **Goodwill and CDI (March 31, 2021 vs. December 31, 2020):** | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------- | :---------------------------- | :------------------------------- | | Goodwill | $373,121 | $373,121 | | CDI | $19,715 | $21,426 | | **Total** | **$392,836** | **$394,547** | - Mortgage servicing rights increased to **$15.4 million** at March 31, 2021, from **$15.2 million** at December 31, 2020[125](index=125&type=chunk) - No impairment charges or recoveries against mortgage servicing rights were recorded in Q1 2021 or Q1 2020[123](index=123&type=chunk) [Note 7: DEPOSITS](index=35&type=section&id=Note%207%3A%20DEPOSITS) Total deposits increased significantly by $981.6 million to $13.55 billion at March 31, 2021, from December 31, 2020, primarily driven by increases in non-interest-bearing accounts and interest-bearing transaction and savings accounts, while interest-bearing certificates experienced a slight decrease, with core deposits representing 93% of total deposits **Deposits by Type (March 31, 2021 vs. December 31, 2020):** | Deposit Type | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | Change (%) | | :------------------------------------ | :---------------------------- | :------------------------------- | :--------- | | Non-interest-bearing | $5,994,693 | $5,492,924 | 9.1% | | Interest-bearing transaction & savings | $6,647,196 | $6,159,052 | 7.9% | | Interest-bearing certificates | $906,978 | $915,320 | (0.9%) | | **Total deposits** | **$13,548,867** | **$12,567,296** | **7.8%** | - Core deposits (non-interest-bearing and interest-bearing transaction and savings accounts) represented **93%** of total deposits at March 31, 2021[255](index=255&type=chunk) - Weighted average interest rate for total certificates of deposit was **0.81%** at March 31, 2021[129](index=129&type=chunk) [Note 8: FAIR VALUE OF FINANCIAL INSTRUMENTS](index=36&type=section&id=Note%208%3A%20FAIR%20VALUE%20OF%20FINANCIAL%20INSTRUMENTS) The company measures and discloses certain financial instruments at fair value, categorized into Level 1, 2, or 3 based on the observability of inputs, with significant Level 3 assets including corporate bonds (Trust Preferred Securities) and interest rate lock commitments, while Level 3 liabilities primarily consist of junior subordinated debentures, and the fair value of these instruments is estimated using discounted cash flow methodologies with unobservable inputs like discount rates and pull-through rates - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[131](index=131&type=chunk)[132](index=132&type=chunk) **Level 3 Fair Value Assets and Liabilities (March 31, 2021 vs. December 31, 2020):** | Instrument | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :--------------------------------- | :---------------------------- | :------------------------------- | | **Assets:** | | | | Securities—trading (Corporate bonds) | $25,039 | $24,980 | | Interest rate lock commitments | $2,937 | $5,221 | | Loans individually evaluated | $627 | $3,482 | | REO | $340 | $816 | | **Liabilities:** | | | | Junior subordinated debentures | $117,248 | $116,974 | - The discount rate for Level 3 corporate bonds (TPS securities) and junior subordinated debentures was **4.19%** at March 31, 2021[140](index=140&type=chunk) [Note 9: INCOME TAXES AND DEFERRED TAXES](index=41&type=section&id=Note%209%3A%20INCOME%20TAXES%20AND%20DEFERRED%20TAXES) The company accounts for income taxes using the asset and liability method, determining deferred tax assets and liabilities based on enacted tax rates, and as of March 31, 2021, $450,000 of unrecognized tax benefits for uncertain tax positions were recognized, with the company also investing in low-income housing tax credit funds, amortizing these investments over their life, with the expense included in the provision for income taxes - The company recognized **$450,000** of unrecognized tax benefits for uncertain tax positions as of March 31, 2021[150](index=150&type=chunk) **Tax Credit Investments and Benefits (March 31, 2021 vs. December 31, 2020):** | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :------------------------------------ | :---------------------------- | :------------------------------- | | Tax credit investments | $32,613 | $33,528 | | Unfunded commitments | $15,383 | $18,306 | **Tax Credits and Amortization Expense (Three Months Ended March 31):** | Metric | 2021 (in thousands) | 2020 (in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Tax credits and other tax benefits recognized | $1,068 | $1,007 | | Tax credit amortization expense | $915 | $809 | [Note 10: CALCULATION OF WEIGHTED AVERAGE SHARES OUTSTANDING FOR EARNINGS PER SHARE (EPS)](index=42&type=section&id=Note%2010%3A%20CALCULATION%20OF%20WEIGHTED%20AVERAGE%20SHARES%20OUTSTANDING%20FOR%20EARNINGS%20PER%20SHARE%20%28EPS%29) This note provides the reconciliation of basic to diluted weighted average shares outstanding used to calculate earnings per share, with diluted EPS significantly increasing to $1.33 for the three months ended March 31, 2021, compared to $0.47 for the same period in 2020, reflecting higher net income **EPS Calculation (Three Months Ended March 31):** | Metric | 2021 | 2020 | | :------------------------------------ | :--------- | :--------- | | Net income (in thousands) | $46,855 | $16,882 | | Basic weighted average shares outstanding | 34,973,383 | 35,463,541 | | Diluted weighted shares outstanding | 35,303,483 | 35,640,463 | | Basic EPS | $1.34 | $0.48 | | Diluted EPS | $1.33 | $0.47 | [Note 11: STOCK-BASED COMPENSATION PLANS](index=42&type=section&id=Note%2011%3A%20STOCK-BASED%20COMPENSATION%20PLANS) The company operates the 2014 and 2018 Omnibus Incentive Plans to attract and retain highly skilled employees, officers, and directors, with total expense associated with restricted stock grants being $2.2 million for the three months ended March 31, 2021, and $18.5 million in unrecognized compensation expense remaining to be amortized over the next 36 months - Stock-based compensation expense was **$2.2 million** for Q1 2021, up from **$1.9 million** for Q1 2020[159](index=159&type=chunk) - Unrecognized compensation expense for awards was **$18.5 million** as of March 31, 2021, to be amortized over 36 months[159](index=159&type=chunk) [Note 12: COMMITMENTS AND CONTINGENCIES](index=43&type=section&id=Note%2012%3A%20COMMITMENTS%20AND%20CONTINGENCIES) The company has various off-balance-sheet financial instruments, including commitments to extend credit totaling $3.36 billion, standby letters of credit, and commitments to originate and sell loans, with the allowance for credit losses for unfunded loan commitments being $12.1 million at March 31, 2021, and no pending legal proceedings expected to have a material adverse effect **Off-Balance-Sheet Commitments (March 31, 2021 vs. December 31, 2020):** | Commitment Type | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :------------------------------------------------ | :---------------------------- | :------------------------------- | | Commitments to extend credit | $3,357,135 | $3,207,072 | | Standby letters of credit and financial guarantees | $21,493 | $18,415 | | Commitments to originate loans | $134,759 | $101,426 | | Commitments to originate loans held for sale | $165,236 | $169,653 | | Commitments to sell loans | $82,963 | $79,414 | | Commitments to sell securities | $199,500 | $204,000 | - The allowance for credit losses - unfunded loan commitments was **$12.1 million** at March 31, 2021, compared to **$13.3 million** at December 31, 2020[163](index=163&type=chunk) [NOTE 13: DERIVATIVES AND HEDGING](index=44&type=section&id=NOTE%2013%3A%20DERIVATIVES%20AND%20HEDGING) The company utilizes derivative instruments, primarily interest rate swaps and forward sales contracts, for asset and liability management and to meet client financing needs, with derivatives designated in hedge relationships having a notional value of $248,000 at March 31, 2021, and derivatives not designated as hedges, including interest rate swaps and mortgage banking commitments, having a total notional/contract amount of $880.2 million, with recognized gains of $727,000 in Q1 2021 - Derivatives designated in hedge relationships (interest rate swaps) had a notional value of **$248,000** at March 31, 2021[174](index=174&type=chunk) **Notional/Contract Amounts of Derivatives Not Designated in Hedge Relationships (March 31, 2021 vs. December 31, 2020):** | Derivative Type | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :------------------------------------ | :---------------------------- | :------------------------------- | | Interest rate swaps | $458,118 | $451,760 | | Mortgage loan commitments | $139,668 | $140,390 | | Forward sales contracts | $282,463 | $79,414 | | **Total** | **$880,249** | **$671,564** | - Gains recognized in income on derivatives not designated in hedge relationships totaled **$727,000** for Q1 2021, compared to a loss of **$(1.34) million** for Q1 2020[178](index=178&type=chunk) [NOTE 14: REVENUE FROM CONTRACTS WITH CLIENTS](index=47&type=section&id=NOTE%2014%3A%20REVENUE%20FROM%20CONTRACTS%20WITH%20CLIENTS) Deposit fees and other service charges decreased by 8.8% to $8.9 million in Q1 2021 compared to Q1 2020, primarily due to reduced transaction deposit account activity, with this note detailing the recognition policies for various fee types, including transaction-based fees, non-transactional monthly maintenance fees, debit/credit card interchange income, and merchant services income **Deposit Fees and Other Service Charges (Three Months Ended March 31):** | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (%) | | :------------------------------------ | :------------------ | :------------------ | :--------- | | Deposit service charges | $4,113 | $4,832 | (14.9%) | | Debit and credit card interchange fees | $5,290 | $4,884 | 8.3% | | Merchant services income | $3,142 | $3,002 | 4.7% | | **Total deposit fees and other service charges** | **$8,939** | **$9,803** | **(8.8%)** | [Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations](index=47&type=section&id=Item%202%20%E2%80%93%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides a comprehensive analysis of Banner Corporation's financial condition and results of operations for the three months ended March 31, 2021, compared to prior periods, covering an executive overview, critical accounting policies, detailed comparisons of financial condition and operating results, asset quality, liquidity, and capital resources [Executive Overview](index=47&type=section&id=Executive%20Overview) Banner Corporation reported significantly increased net income of $46.9 million ($1.33 diluted EPS) for Q1 2021, up from $16.9 million ($0.47 diluted EPS) in Q1 2020, driven by a recapture of provision for credit losses, increased mortgage banking income, and decreased funding costs, despite a low interest rate environment and ongoing COVID-19 impacts, with total assets growing to $16.12 billion, and PPP loans and core deposit growth contributing to balance sheet expansion - Net income for Q1 2021 was **$46.9 million** (**$1.33** diluted EPS), a significant increase from **$16.9 million** (**$0.47** diluted EPS) in Q1 2020[197](index=197&type=chunk) - The current quarter was positively impacted by increased production of one- to four-family held-for-sale loans, decreased funding costs, and a recapture of provision for credit losses[197](index=197&type=chunk) - Total assets were **$16.12 billion**, total loans **$9.95 billion**, total deposits **$13.55 billion**, and total shareholders' equity **$1.62 billion** as of March 31, 2021[191](index=191&type=chunk) - Net interest income decreased by **$1.6 million** (1%) to **$117.7 million** for Q1 2021, due to lower yields on interest-earning assets, partially offset by decreased funding costs[198](index=198&type=chunk) - Total non-interest income increased to **$24.3 million** for Q1 2021, up from **$19.2 million** in Q1 2020, primarily due to a **$4.6 million** reduction in fair value losses in the prior year[200](index=200&type=chunk) - An **$8.0 million** recapture of provision for credit losses was recorded in Q1 2021, compared to a **$21.7 million** provision in Q1 2020, reflecting improved economic indicators and decreased loan balances (excluding PPP)[203](index=203&type=chunk) **Adjusted Financial Metrics (Three Months Ended March 31):** | Metric | 2021 (in thousands) | 2020 (in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Adjusted Revenue (non-GAAP) | $141,389 | $142,941 | | Adjusted Earnings (non-GAAP) | $46,988 | $21,376 | | Diluted Adjusted EPS (non-GAAP) | $1.33 | $0.60 | | Adjusted Efficiency Ratio (non-GAAP) | 63.85% | 62.26% | **Tangible Common Equity Ratios (March 31, 2021 vs. December 31, 2020):** | Metric | March 31, 2021 | December 31, 2020 | | :------------------------------------------------ | :------------- | :---------------- | | Tangible common shareholders' equity (non-GAAP) | $1,225,981 | $1,271,717 | | Total tangible assets (non-GAAP) | $15,726,956 | $14,637,076 | | Tangible common shareholders' equity to tangible assets (non-GAAP) | 7.80% | 8.69% | | Tangible common shareholders' equity per share (non-GAAP) | $35.29 | $36.17 | [Summary of Critical Accounting Policies and Estimates](index=52&type=section&id=Summary%20of%20Critical%20Accounting%20Policies%20and%20Estimates) Management identifies several critical accounting policies that require significant judgment and are susceptible to changes in economic conditions and assumptions, including interest income recognition, provision and allowance for credit losses, fair value valuation, intangibles valuation (goodwill, CDI, MSR), real estate held for sale valuation, and deferred tax assets/liabilities valuation or recognition, with no significant changes in application during Q1 2021 - Critical accounting policies include the methodology for interest income recognition, determination of provision and allowance for credit losses, valuation of financial assets/liabilities at fair value, valuation of intangibles (goodwill, CDI, MSR), valuation of REO, and valuation/recognition of deferred tax assets/liabilities[213](index=213&type=chunk) - The allowance for credit losses is a critical policy due to the high degree of judgment, subjectivity of assumptions, and potential for economic changes[216](index=216&type=chunk) - Loans acquired in business combinations are recorded at fair value, with significant judgment involved in determining credit discounts[227](index=227&type=chunk) [Comparison of Financial Condition at March 31, 2021 and December 31, 2020](index=57&type=section&id=Comparison%20of%20Financial%20Condition%20at%20March%2031%2C%202021%20and%20December%2031%2C%202020) Total assets increased by $1.09 billion to $16.12 billion at March 31, 2021, driven by growth in retail deposits and PPP loan originations, with loans receivable increasing by $76.7 million, primarily due to PPP loans, while investment securities grew by $687.4 million, total deposits rose by $981.6 million, mainly in core deposits, and shareholders' equity decreased by $47.4 million, largely due to a decline in accumulated other comprehensive income and common stock repurchases - Total assets increased **$1.09 billion** to **$16.12 billion** at March 31, 2021, from **$15.03 billion** at December 31, 2020[238](index=238&type=chunk) - Total loans receivable increased **$76.7 million** during Q1 2021, primarily due to PPP loan originations; excluding PPP loans, total loans decreased **$195.4 million**[238](index=238&type=chunk) **Loan Portfolio Composition (March 31, 2021 vs. December 31, 2020):** | Loan Type | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | Change (%) | | :------------------------------------------------- | :---------------------------- | :------------------------------- | :--------- | | Commercial business (incl. PPP) | $2,376,594 | $2,178,461 | 9.1% | | Agricultural business (incl. PPP) | $262,410 | $299,949 | (12.5%) | | One- to four-family residential | $655,627 | $717,939 | (8.7%) | | **Total loans receivable** | **$9,947,697** | **$9,870,982** | **0.8%** | - Total investment in securities increased **$687.4 million** to **$3.46 billion** at March 31, 2021[250](index=250&type=chunk) - Total deposits increased **$981.6 million** to **$13.55 billion** at March 31, 2021, with core deposits increasing by **$989.9 million**[253](index=253&type=chunk) - Shareholders' equity decreased **$47.4 million** to **$1.62 billion**, primarily due to a **$56.1 million** decrease in accumulated other comprehensive income and **$25.3 million** in common stock repurchases[257](index=257&type=chunk) [Comparison of Results of Operations for the Three Months Ended March 31, 2021 and 2020](index=60&type=section&id=Comparison%20of%20Results%20of%20Operations%20for%20the%20Three%20Months%20Ended%20March%2031%2C%202021%20and%202020) Net income for Q1 2021 was $46.9 million, a substantial increase from $16.9 million in Q1 2020, primarily driven by a $9.3 million recapture of provision for credit losses and increased mortgage banking income, however, net interest income decreased by $1.6 million (1%) due to lower yields on average interest-earning assets, partially offset by decreased funding costs and growth in average interest-earning assets - Net income was **$46.9 million** for Q1 2021, up from **$16.9 million** for Q1 2020[258](index=258&type=chunk) - Net interest income decreased by **$1.6 million** (1%) to **$117.7 million**, due to lower yields on average interest-earning assets (3.64% vs. 4.69% YoY), partially offset by decreased funding costs (0.21% vs. 0.46% YoY) and a **$2.69 billion** increase in average interest-earning assets[261](index=261&type=chunk)[262](index=262&type=chunk)[264](index=264&type=chunk) - A **$9.3 million** recapture of provision for credit losses was recorded in Q1 2021, compared to a **$23.5 million** provision in Q1 2020[259](index=259&type=chunk) - Average loan balances increased **$573.3 million** (6%) to **$10.08 billion** for Q1 2021[262](index=262&type=chunk) - Average deposit balances increased to **$12.92 billion** for Q1 2021, from **$10.14 billion** for Q1 2020[265](index=265&type=chunk) [Provision and Allowance for Credit Losses](index=63&type=section&id=Provision%20and%20Allowance%20for%20Credit%20Losses) The company recorded an $8.0 million recapture of provision for credit losses - loans in Q1 2021, reflecting improved economic indicators and decreased loan balances (excluding PPP loans), with net loan charge-offs of $3.2 million, and the allowance for credit losses - loans standing at $156.1 million, representing 1.57% of total loans, with no allowance recorded for SBA-guaranteed PPP loans, and a recapture of provision for unfunded loan commitments also recorded - A recapture of provision for credit losses - loans of **$8.0 million** was recorded in Q1 2021, compared to a **$21.7 million** provision in Q1 2020[270](index=270&type=chunk) - Net loan charge-offs were **$3.2 million** for Q1 2021, compared to net loan recoveries of **$404,000** in Q1 2020[271](index=271&type=chunk) - The allowance for credit losses - loans was **$156.1 million** (1.57% of total loans) at March 31, 2021, down from **$167.3 million** (1.69%) at December 31, 2020[271](index=271&type=chunk) - No allowance for credit losses was recorded on PPP loans (**$1.32 billion**) as they are fully guaranteed by the SBA[270](index=270&type=chunk) - A recapture of provision for credit losses - unfunded loan commitments of **$1.2 million** was recorded in Q1 2021, compared to a **$1.7 million** provision in Q1 2020[273](index=273&type=chunk) [Non-interest Income](index=64&type=section&id=Non-interest%20Income) Total non-interest income increased by $5.1 million (26.6%) to $24.3 million in Q1 2021, primarily due to a significant improvement in fair value adjustments (a net gain of $59,000 compared to a net loss of $4.6 million in Q1 2020) and increased mortgage banking operations income, while deposit fees and other service charges decreased due to reduced transaction activity **Non-Interest Income (Three Months Ended March 31):** | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (%) | | :----------------------------------------------------- | :------------------ | :------------------ | :--------- | | Deposit fees and other service charges | $8,939 | $9,803 | (8.8%) | | Mortgage banking operations | $11,440 | $10,191 | 12.3% | | Net gain on sale of securities | $485 | $78 | nm | | Net change in valuation of financial instruments carried at fair value | $59 | $(4,596) | (101.3%) | | **Total non-interest income** | **$24,272** | **$19,165** | **26.6%** | - Mortgage banking revenues increased **$1.2 million**, driven by higher gains on sales of multifamily loans (**$1.7 million** vs. **$189,000** YoY) and one- to four-family loans (**$9.8 million** vs. **$9.6 million** YoY)[276](index=276&type=chunk) [Non-interest Expense](index=65&type=section&id=Non-interest%20Expense) Total non-interest expense remained stable at $93.5 million in Q1 2021 compared to Q1 2020, achieved as increased capitalized loan origination costs (primarily from PPP loans) offset higher salary and employee benefits, and professional and legal expenses, with COVID-19 related expenses decreasing during the period **Non-Interest Expense (Three Months Ended March 31):** | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (%) | | :------------------------------------ | :------------------ | :------------------ | :--------- | | Salaries and employee benefits | $64,819 | $59,908 | 8.2% | | Less capitalized loan origination costs | $(9,696) | $(5,806) | 67.0% | | Professional and legal expenses | $3,328 | $1,919 | 73.4% | | Advertising and marketing | $1,263 | $1,827 | (30.9%) | | COVID-19 expenses | $148 | $239 | (38.1%) | | **Total non-interest expense** | **$93,527** | **$93,463** | **0.1%** | - Salary and employee benefits increased **$4.9 million**, including **$1.3 million** severance and a **$1.2 million** adjustment for deferred compensation plans[280](index=280&type=chunk) - Capitalized loan origination costs increased **$3.9 million**, primarily due to PPP loan originations[280](index=280&type=chunk) - The efficiency ratio improved to **65.90%** in Q1 2021 from **67.52%** in Q1 2020; the adjusted efficiency ratio was **63.85%** in Q1 2021, compared to **62.26%** in Q1 2020[281](index=281&type=chunk) [Income Taxes](index=65&type=section&id=Income%20Taxes) For the three months ended March 31, 2021, the company recognized $10.8 million in income tax expense, resulting in an effective tax rate of 18.7%, which reflects the normal statutory tax rate, reduced by the effect of tax-exempt income, certain tax credits, and tax benefits related to restricted stock vesting, and was lower than the 21.4% effective tax rate in Q1 2020 **Income Tax Expense and Effective Tax Rate (Three Months Ended March 31):** | Metric | 2021 (in thousands) | 2020 (in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Income before provision for income taxes | $57,657 | $21,490 | | Provision for income taxes | $10,802 | $4,608 | | Effective tax rate | 18.7% | 21.4% | [Asset Quality](index=66&type=section&id=Asset%20Quality) Non-performing assets slightly increased to $37.0 million (0.23% of total assets) at March 31, 2021, from $36.5 million (0.24%) at December 31, 2020, but decreased from $46.1 million (0.36%) at March 31, 2020, with the allowance for credit losses - loans being $156.1 million, covering 426% of non-performing loans, and substandard loans decreasing due to payoffs and risk rating upgrades **Non-Performing Assets (March 31, 2021 vs. December 31, 2020 vs. March 31, 2020):** | Metric | Mar 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | Mar 31, 2020 (in thousands) | | :--------------------------------------------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Nonaccrual Loans | $35,031 | $32,560 | $40,284 | | Loans more than 90 days delinquent, still on accrual | $1,561 | $3,054 | $3,378 | | REO, net | $340 | $816 | $2,402 | | Other repossessed assets held for sale | $37 | $51 | $47 | | **Total non-performing assets** | **$36,969** | **$36,481** | **$46,111** | - Non-performing assets were **0.23%** of total assets at March 31, 2021[287](index=287&type=chunk) - The allowance for credit losses - loans was **$156.1 million**, representing **426%** of non-performing loans at March 31, 2021[285](index=285&type=chunk) - Substandard loans decreased during Q1 2021 due to payoffs and risk rating upgrades as certain industries stabilized from COVID-19 impacts[290](index=290&type=chunk) [Liquidity and Capital Resources](index=67&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity is primarily sourced from deposits, loan payments, and securities maturities, with total deposits increasing by $981.6 million in Q1 2021, mainly from core deposits, FHLB advances decreasing, while other borrowings increased, and the company maintaining significant credit facilities with FHLB-Des Moines and FRBSF, with capital levels significantly exceeding regulatory requirements, despite a $47.4 million decrease in total shareholders' equity - Total deposits increased by **$981.6 million** during Q1 2021, with core deposits increasing by **$989.9 million**[295](index=295&type=chunk) - FHLB advances decreased **$50.0 million** to **$100.0 million** in Q1 2021[296](index=296&type=chunk) - Other borrowings increased **$31.5 million** to **$216.3 million** at March 31, 2021[296](index=296&type=chunk) - The company had **$2.28 billion** of available credit capacity with FHLB-Des Moines and **$1.01 billion** with FRBSF at March 31, 2021[297](index=297&type=chunk) - Total shareholders' equity decreased **$47.4 million** to **$1.62 billion** during Q1 2021[298](index=298&type=chunk) [Capital Requirements](index=68&type=section&id=Capital%20Requirements) Both Banner Corporation and its subsidiary, Banner Bank, maintained capital levels significantly above the "Well-Capitalized" thresholds at March 31, 2021, exceeding all regulatory capital requirements, including the capital conservation buffer, demonstrating strong financial stability and compliance with federal regulations **Regulatory Capital Ratios (March 31, 2021):** | Metric | Banner Corporation (Actual Ratio) | Banner Bank (Actual Ratio) | "Well-Capitalized" Minimum | | :------------------------------------ | :------------------------------ | :------------------------- | :------------------------- | | Total capital to risk-weighted assets | 14.74% | 13.63% | 10.00% | | Tier 1 capital to risk-weighted assets | 12.56% | 12.38% | 8.00% | | Tier 1 leverage capital to average assets | 9.10% | 8.95% | 5.00% | | Common equity tier 1 capital | 11.24% | 12.38% | 6.50% | - Both Banner Corporation and Banner Bank exceeded all regulatory capital requirements, including the capital conservation buffer of **2.5%** above minimums[300](index=300&type=chunk) [Item 3 – Quantitative and Qualitative Disclosures About Market Risk](index=70&type=section&id=Item%203%20%E2%80%93%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section details the company's exposure to market risk, primarily interest rate risk, which arises from mismatches in the repricing characteristics of assets and liabilities, with the company employing asset/liability simulation modeling and economic value analysis to quantify and manage this risk, aiming to reduce vulnerability to interest rate fluctuations [Market Risk and Asset/Liability Management](index=70&type=section&id=Market%20Risk%20and%20Asset%2FLiability%20Management) The company's financial condition and operations are significantly influenced by interest rate risk, which is the primary market risk, stemming from mismatches in the maturity or repricing intervals of rate-sensitive assets and liabilities, with the Asset/Liability Management Committee actively managing this exposure to reduce the vulnerability of earnings and capital to changes in interest rates, consistent with regulatory guidelines - Interest rate risk is the primary market risk, stemming from mismatches in maturity or repricing intervals of assets and liabilities[305](index=305&type=chunk) - The Asset/Liability Management Committee actively manages interest rate risk to reduce vulnerability of earnings and capital to interest rate changes[307](index=307&type=chunk) [Sensitivity Analysis](index=70&type=section&id=Sensitivity%20Analysis) The company assesses interest rate risk using asset/liability simulation modeling and economic value analysis, and as of March 31, 2021, a +100 basis point increase in interest rates was estimated to increase net interest income by 4.2% over 12 months and 5.4% over 24 months, with a minor decrease in economic value of equity, and the one-year cumulative interest sensitivity gap was positive at $4.55 billion (28.20% of total assets), indicating a favorable position in a rising rate environment - Asset/liability simulation modeling and economic value analysis are primary tools for assessing interest rate risk[308](index=308&type=chunk) **Estimated Impact of Interest Rate Changes (March 31, 2021):** | Change in Interest Rates (Basis Points) | Net Interest Income Next 12 Months (Change %) | Net Interest Income Next 24 Months (Change %) | Economic Value of Equity (Change %) | | :-------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :---------------------------------- | | +400 | 10.5% | 13.2% | (12.6)% | | +300 | 9.8% | 12.2% | (8.8)% | | +200 | 7.6% | 9.6% | (4.3)% | | +100 | 4.2% | 5.4% | (0.9)% | | -25 | (0.4)% | (0.7)% | (0.5)% | - The one-year cumulative interest sensitivity gap was **$4.55 billion**, representing **28.20%** of total assets at March 31, 2021, indicating a positive gap[315](index=315&type=chunk) [Item 4 – Controls and Procedures](index=74&type=section&id=Item%204%20%E2%80%93%20Controls%20and%20Procedures) This section addresses the company's internal controls over financial reporting and disclosure controls and procedures, with management, including the CEO and CFO, concluding that disclosure controls were effective as of March 31, 2021, and reporting no material changes in internal control over financial reporting during the quarter [Evaluation of Disclosure Controls and Procedures](index=74&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) As of March 31, 2021, the Chief Executive Officer and Chief Financial Officer, along with senior management, evaluated the company's disclosure controls and procedures, concluding that these controls were effective in ensuring that all required information is accumulated, communicated, recorded, processed, summarized, and reported in a timely manner according to SEC rules and forms - CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2021[322](index=322&type=chunk) [Changes in Internal Controls Over Financial Reporting](index=74&type=section&id=Changes%20in%20Internal%20Controls%20Over%20Financial%20Reporting) During the quarter ended March 31, 2021, there were no changes in the company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting - No material changes in internal control over financial reporting occurred in Q1 2021[323](index=323&type=chunk) [PART II – OTHER INFORMATION](index=75&type=section&id=PART%20II%20%E2%80%93%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity sales, and other disclosures for the reporting period [Item 1 – Legal Proceedings](index=75&type=section&id=Item%201%20%E2%80%93%20Legal%20Proceedings) The company is involved in various legal proceedings and other contingent matters that arise in the normal course of business, and while these matters are often contested, management believes that none of the pending legal proceedings would have a material adverse effect on the company's financial condition, operations, or cash flows - No pending legal proceedings are expected to have a material adverse effect on the company's financial condition, operations, or cash flows[325](index=325&type=chunk) [Item 1A – Risk Factors](index=75&type=section&id=Item%201A%20%E2%80%93%20Risk%20Factors) There have been no material changes in the risk factors previously disclosed in Part 1, Item 1A of the company's Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes to risk factors since the 2020 Form 10-K[326](index=326&type=chunk) [Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds](index=75&type=section&id=Item%202%20%E2%80%93%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During the quarter ended March 31, 2021, the company repurchased 500,000 shares of common stock for a total cost of $25.3 million under a renewed authorization, leaving 1,257,781 shares available for future repurchase under the program, and additionally, employees surrendered 49,003 shares to satisfy tax withholding obligations upon the vesting of restricted stock grants **Common Share Repurchases (Q1 2021):** | Period | Total Number of Common Shares Purchased | Average Price Paid per Common Share | | :----------------------------------- | :------------------------------------ | :---------------------------------- | | January 1, 2021 - January 31, 2021 | 537 | $45.30 | | February 1, 2021 - February 28, 2021 | 369,315 | $49.69 | | March 1, 2021 - March 31, 2021 | 179,151 | $53.67 | | **Total for quarter** | **549,003** | **$50.99** | - The company repurchased **500,000 shares** under its publicly announced authorization, leaving **1,257,781 shares** available[328](index=328&type=chunk) [Item 3 – Defaults upon Senior Securities](index=75&type=section&id=Item%203%20%E2%80%93%20Defaults%20upon%20Senior%20Securities) This item is not applicable to the company for the reporting period - This item is not applicable[329](index=329&type=chunk) [Item 4 – Mine Safety Disclosures](index=75&type=section&id=Item%204%20%E2%80%93%20Mine%20Safety%20Disclosures) This item is not applicable to the company for the reporting period - This item is not applicable[329](index=329&type=chunk) [Item 5 – Other Information](index=75&type=section&id=Item%205%20%E2%80%93%20Other%20Information) This item is not applicable to the company for the reporting period - This item is not applicable[329](index=329&type=chunk) [Item 6 – Exhibits](index=76&type=section&id=Item%206%20%E2%80%93%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including organizational documents (Amended and Restated Articles of Incorporation, Bylaws), employment agreements, Omnibus Incentive Plans (2014 and 2018), various equity-based award agreements, and certifications from the Chief Executive Officer and Chief Financial Officer, along with Inline XBRL documents - The exhibits include Amended and Restated Articles of Incorporation, Bylaws, Employment Agreements, Omnibus Incentive Plans, and certifications (CEO/CFO)[330](index=330&type=chunk) [SIGNATURES](index=78&type=section&id=SIGNATURES) This section contains the official signatures of the company's principal executive and financial officers, affirming the report's submission [SIGNATURES](index=78&type=section&id=SIGNATURES) The report is duly signed on May 5, 2021, by Mark J. Grescovich, President and Chief Executive Officer (Principal Executive Officer), and Peter J. Conner, Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer), affirming its submission in accordance with the Securities Exchange Act of 1934 - Report signed by President and CEO Mark J. Grescovich and EVP, Treasurer, and CFO Peter J. Conner on May 5, 2021[335](index=335&type=chunk)

Financial Data and Key Metrics Changes - Banner Corporation reported a net profit available to common shareholders of $46.9 million or $1.33 per diluted share for Q1 2021, compared to $1.10 per share in Q4 2020 and $0.47 per share in Q1 2020, indicating significant year-over-year growth [9][25] - Pretax pre-provision earnings were $49.8 million for Q1 2021, up 5.5% from $47.2 million in the previous quarter [10] - Core revenue from operations increased 3% to $141.9 million compared to $138.4 million in Q1 2020 [11] Business Line Data and Key Metrics Changes - Core deposits increased by 36% year-over-year, representing 93% of total deposits [12] - Total loans decreased by $32 million from the prior quarter, with a notable decline in multifamily loans held for sale [26] - Loans held for investment decreased by 2.2% quarter-over-quarter and 7% year-over-year, reflecting a strong residential refinance market and muted loan demand [18] Market Data and Key Metrics Changes - Delinquent loans as of March 31 represented 0.43% of total loans, a decrease from 0.66% a year ago [14] - Nonperforming assets represented 0.23% of total assets, a slight decrease from the previous quarter [14] - Commercial credit line utilization decreased by 8% year-over-year, indicating reduced borrowing activity [19] Company Strategy and Development Direction - The company continues to focus on maintaining a moderate risk profile while supporting clients and communities during the pandemic [8] - Banner has committed $1.5 million to support minority-owned businesses and provided nearly $1.6 billion in SBA payroll protection funds [13] - The company anticipates a pickup in commercial investment in the second half of the year as borrowers begin to make delayed capital investments [21] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism regarding the economic recovery, noting that the West Coast is lagging in reopening compared to other regions [52] - The company expects to return to a normal mid-single-digit growth rate in 2022 after targeting flat loan balances for 2021 [47] - Management highlighted the importance of maintaining a robust reserve for credit losses, which remains strong despite releasing $8 million of reserves [16][24] Other Important Information - The company repurchased 500,000 shares during the quarter as part of ongoing capital management [33] - Total noninterest income increased by $763,000 from the prior quarter, driven by higher deposit fees and mortgage banking income [30][31] - The net interest margin declined by 20 basis points to 3.44%, influenced by increased liquidity and lower loan outstandings [30] Q&A Session Summary Question: Impact of branch closures on customer retention - Management reported that deposit attrition from closed branches is running less than 5%, indicating effective customer retention strategies [37] Question: Expectations for expense run rate post-merger - Management anticipates improvements in the core expense run rate in Q2 due to branch closures and synergies from the Islanders merger [39] Question: Loan growth expectations for 2021 - Management confirmed that they are targeting flat loan balances for 2021, with expectations for mid-single-digit growth in 2022 [47] Question: Drivers of originations growth - Management noted that growth in originations was driven by various product lines and strong demand across different markets [51] Question: Capital management and share repurchase strategy - Management indicated a preference for share repurchases as a form of capital deployment, with sufficient authorization remaining for further repurchases [66]

Financial Data and Key Metrics Changes - Banner Corporation reported a net profit available to common shareholders of $39 million or $1.10 per diluted share for Q4 2020, compared to $1.03 per share in Q3 2020 and $0.95 per share in Q4 2019 [10] - For the full year 2020, net income available to common shareholders was $115.9 million, down from $146.3 million in 2019, impacted by credit loss allowances due to COVID-19 [10] - Pre-tax pre-provision earnings for 2020 were $211.9 million, a 5% increase from $201.6 million in 2019, indicating core earnings power [11] Business Line Data and Key Metrics Changes - Core revenue from operations increased by 5% to $579.6 million in 2020, compared to $551 million in 2019, driven by a larger earning asset mix and strong mortgage banking revenue [11] - Core deposits increased by 31% year-over-year, representing 93% of total deposits, reflecting strong organic growth in client relationships [12] Market Data and Key Metrics Changes - The loan portfolio saw a quarter-over-quarter decline of 2.9% excluding PPP loans, and a year-over-year decline of 5.1%, primarily due to strong residential purchase and refinance activity [19] - Credit line utilization decreased nearly 5% compared to year-end 2019, indicating borrowers are maintaining liquidity [21] Company Strategy and Development Direction - The company continues to execute its super community bank strategy, focusing on growing client relationships and core funding through deposits [12] - Banner Corporation is committed to assisting clients during the pandemic, providing various assistance programs including $1.15 billion in SBA Payroll Protection Funds [13] Management's Comments on Operating Environment and Future Outlook - Management anticipates normalized loan growth rates to return in the second half of 2021 as the economy stabilizes with vaccine distribution [21] - The company expects a flat year in terms of loan growth overall for 2021, with potential modest growth in the latter half [43] Other Important Information - The company has maintained a strong balance sheet with a robust reserve for credit losses, well above regulatory requirements [26] - Banner Corporation has consolidated 21 branch locations, representing a 12% reduction in branches since the second quarter [35] Q&A Session Summary Question: What are the expectations for core expenses in 2021? - Management expects a continued decline in core expenses due to branch consolidations and efficiency initiatives, with a soft landing anticipated by the fourth quarter [39][41] Question: What is the outlook for loan growth in 2021? - Management indicated that normalized growth rates are expected to return in the second half of 2021, with a flat year overall due to the pandemic's impact [43][44] Question: How is the company managing asset sensitivity? - The company has become more asset sensitive, keeping excess deposit liquidity invested in short-term instruments, which will benefit from rising rates [55] Question: What is the status of the mortgage business? - The mortgage business remains strong, with a robust pipeline expected to continue into the first quarter of 2021, despite seasonal declines [59] Question: What is the status of PPP loan forgiveness? - The company is processing a steady pace of loan forgiveness, with expectations for higher forgiveness in Q2 2021 compared to Q1 [63] Question: How does the company view capital allocation? - The company is agnostic on the use of excess capital, considering share repurchases, acquisitions, and special dividends based on the best opportunities [87]

[PART I – FINANCIAL INFORMATION](index=2&type=section&id=PART%20I%20%E2%80%93%20FINANCIAL%20INFORMATION) [Item 1 – Financial Statements](index=4&type=section&id=Item%201%20%E2%80%93%20Financial%20Statements) This section presents Banner Corporation's unaudited condensed consolidated financial statements as of September 30, 2020, and for the three and nine months then ended, detailing financial condition, operations, and cash flows, alongside notes on accounting policies and financial instruments [Consolidated Statements of Financial Condition](index=4&type=section&id=Consolidated%20Statements%20of%20Financial%20Condition) As of September 30, 2020, total assets increased to **$14.64 billion** from **$12.60 billion** at year-end 2019, driven by growth in loans and deposits, with shareholders' equity rising to **$1.65 billion** Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | **Total Assets** | **$14,642,075** | **$12,604,031** | | Total Loans, Net | $9,995,952 | $9,204,798 | | Total Deposits | $12,215,341 | $10,048,641 | | **Total Liabilities** | **$12,995,546** | **$11,009,997** | | **Total Shareholders' Equity** | **$1,646,529** | **$1,594,034** | [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations) Net income for Q3 2020 decreased to **$36.5 million** from **$39.6 million** in Q3 2019, primarily due to a significantly higher provision for credit losses, while nine-month net income also declined to **$77.0 million** Key Operating Results (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $121,026 | $116,621 | $359,864 | $349,420 | | Provision for Credit Losses | $13,641 | $2,000 | $64,917 | $6,000 | | Non-interest Income | $28,222 | $20,866 | $75,107 | $61,667 | | Non-interest Expense | $91,567 | $87,308 | $276,389 | $264,038 | | **Net Income** | **$36,548** | **$39,577** | **$76,971** | **$112,623** | | **Diluted EPS** | **$1.03** | **$1.15** | **$2.17** | **$3.23** | [Consolidated Statements of Cash Flows](index=11&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended September 30, 2020, operating activities generated **$138.2 million** in cash, while investing activities used **$1.65 billion**, largely offset by **$1.91 billion** from financing activities, resulting in a **$397.8 million** net increase in cash Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $138,162 | $68,492 | | Net Cash used in Investing Activities | ($1,650,717) | ($27,292) | | Net Cash from Financing Activities | $1,910,358 | $11,060 | | **Net Change in Cash** | **$397,803** | **$52,260** | [Selected Notes to the Consolidated Financial Statements](index=14&type=section&id=Selected%20Notes%20to%20the%20Consolidated%20Financial%20Statements) The notes detail significant accounting policies, including the adoption of the CECL standard which reduced shareholders' equity by **$11.2 million** after-tax, and provide extensive information on the AltaPacific acquisition, financial instrument portfolios, and regulatory capital - The company adopted the new credit loss standard, ASU 2016-13 (Topic 326 or CECL), on January 1, 2020, replacing the incurred loss methodology with an expected loss model[56](index=56&type=chunk) Pre-Tax Impact of Adopting CECL (in thousands) | Account | Impact of Topic 326 Adoption | | :--- | :--- | | Allowance for credit losses on loans | $7,812 | | Allowance for credit losses on unfunded loan commitments | $7,022 | | Allowance for credit losses on held-to-maturity debt securities | $63 | | **Total Pre-Tax Impact** | **$14,897** | - On November 1, 2019, the Company completed the acquisition of AltaPacific Bancorp, which added **$425.7 million** in assets, **$332.4 million** in loans, and **$313.4 million** in deposits, resulting in **$34.0 million** of goodwill[58](index=58&type=chunk)[59](index=59&type=chunk) [Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations](index=60&type=section&id=Item%202%20%E2%80%93%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the COVID-19 pandemic's impact on operations, including loan deferrals and PPP, noting strengthened financial condition with **$14.64 billion** in assets, a decline in Q3 2020 net income to **$36.5 million** due to higher credit loss provisions, and maintained strong asset quality, liquidity, and capital [Executive Overview](index=60&type=section&id=Executive%20Overview) Banner Corporation reported Q3 2020 net income of **$36.5 million**, a decrease from Q3 2019 primarily due to a **$13.6 million** provision for credit losses, while actively managing COVID-19 impacts through loan deferrals and **$1.15 billion** in PPP loans - The company is actively responding to the COVID-19 pandemic by offering payment relief programs, deferring payments on **3,370 loans** totaling **$1.09 billion** year-to-date, with **$239.6 million** remaining on deferral as of September 30, 2020[224](index=224&type=chunk) - Banner participated in the Paycheck Protection Program (PPP), funding **9,103 applications** totaling **$1.15 billion** in loans as of September 30, 2020[225](index=225&type=chunk) Adjusted Earnings (Non-GAAP, in thousands) | Metric | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income (GAAP) | $36,548 | $39,577 | $76,971 | $112,623 | | **Adjusted earnings (non-GAAP)** | **$36,626** | **$40,275** | **$81,692** | **$115,281** | [Comparison of Financial Condition](index=68&type=section&id=Comparison%20of%20Financial%20Condition) Total assets grew by **$2.04 billion** to **$14.64 billion** at September 30, 2020, driven by an **$858.6 million** increase in loans, including **$1.15 billion** in PPP loans, and a **$2.17 billion** increase in deposits, with shareholders' equity rising to **$1.65 billion** Loan Portfolio Composition (in thousands) | Loan Type | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Commercial real estate | $3,639,106 | $3,618,493 | | Construction & land | $1,270,278 | $1,234,116 | | Commercial business (incl. PPP) | $3,107,443 | $2,137,307 | | One- to four-family residential | $771,431 | $925,531 | | Consumer | $622,831 | $664,251 | | **Total loans receivable** | **$10,163,917** | **$9,305,357** | Deposit Composition (in thousands) | Deposit Type | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Non-interest-bearing | $5,412,570 | $3,945,000 | | Interest-bearing transaction & savings | $5,887,419 | $4,983,238 | | Interest-bearing certificates | $915,352 | $1,120,403 | | **Total deposits** | **$12,215,341** | **$10,048,641** | [Comparison of Results of Operations](index=71&type=section&id=Comparison%20of%20Results%20of%20Operations) Q3 2020 net interest income rose **4%** to **$121.0 million** despite margin compression to **3.72%**, while the provision for credit losses significantly increased to **$13.6 million**, non-interest income grew **35%** to **$28.2 million**, and non-interest expense rose **5%** to **$91.6 million** - Net interest margin on a tax equivalent basis decreased to **3.72%** for Q3 2020 from **4.29%** in Q3 2019, primarily due to lower yields on interest-earning assets, including low-yield PPP loans and excess liquidity[283](index=283&type=chunk) - Mortgage banking operations revenue increased by **150%** to **$16.6 million** in Q3 2020 from **$6.6 million** in Q3 2019, driven by higher loan sale volumes and wider gain-on-sale margins amid lower interest rates[303](index=303&type=chunk)[305](index=305&type=chunk) - Non-interest expense increased to **$91.6 million** in Q3 2020 from **$87.3 million** in Q3 2019, partly due to a **$3.2 million** year-over-year swing in deposit insurance expense, as Q3 2019 included a large FDIC credit[281](index=281&type=chunk)[306](index=306&type=chunk) [Asset Quality](index=79&type=section&id=Asset%20Quality) Asset quality remained manageable with non-performing assets decreasing to **$36.7 million** (**0.25%** of total assets), while the allowance for credit losses on loans significantly increased to **$168.0 million**, representing **482%** of non-performing loans, reflecting CECL adoption and COVID-19 provisions Non-Performing Assets (in thousands) | Category | Sep 30, 2020 | Dec 31, 2019 | Sep 30, 2019 | | :--- | :--- | :--- | :--- | | Nonaccrual Loans | $31,568 | $37,501 | $15,769 | | Loans 90+ Days Past Due & Accruing | $3,255 | $2,097 | $2,487 | | **Total Non-Performing Loans** | **$34,823** | **$39,598** | **$18,256** | | REO, net & Other Repossessed Assets | $1,832 | $936 | $343 | | **Total Non-Performing Assets** | **$36,655** | **$40,534** | **$18,599** | - The allowance for credit losses on loans to non-performing loans ratio increased significantly to **482%** at Q3 2020, compared to **254%** at year-end 2019, indicating a strengthened reserve position[311](index=311&type=chunk) [Liquidity and Capital Resources](index=81&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity and capital, with deposits growing by **$2.17 billion**, FHLB advances reduced, and **$100.0 million** in subordinated notes issued, ensuring all regulatory capital ratios remain significantly above 'Well-Capitalized' thresholds - At September 30, 2020, Banner Bank had **$2.36 billion** of available credit capacity with the FHLB and **$990 million** with the Federal Reserve Bank, providing substantial liquidity[325](index=325&type=chunk) Banner Corporation Regulatory Capital Ratios | Ratio | Sep 30, 2020 Actual | 'Well-Capitalized' Minimum | | :--- | :--- | :--- | | Total capital to risk-weighted assets | 14.65% | 10.00% | | Tier 1 capital to risk-weighted assets | 12.47% | N/A | | Tier 1 leverage capital to average assets | 9.56% | N/A | | Common equity tier 1 capital | 11.13% | N/A | [Item 3 – Quantitative and Qualitative Disclosures About Market Risk](index=85&type=section&id=Item%203%20%E2%80%93%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate risk, managed via simulation modeling, with the balance sheet positioned to benefit from rising rates, as a **100 basis point** increase is estimated to increase net interest income by **4.3%** over 12 months Interest Rate Sensitivity Analysis (as of Sep 30, 2020) | Change in Interest Rates (Basis Points) | Estimated % Change in Net Interest Income (Next 12 Months) | Estimated % Change in Economic Value of Equity | | :--- | :--- | :--- | | +200 | +7.5% | +8.0% | | +100 | +4.3% | +6.9% | | -25 | (0.8)% | (2.3)% | [Item 4 – Controls and Procedures](index=89&type=section&id=Item%204%20%E2%80%93%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2020, with CECL implementation being the only significant internal control change - The CEO and CFO concluded that as of September 30, 2020, the company's disclosure controls and procedures were effective[349](index=349&type=chunk) [PART II – OTHER INFORMATION](index=90&type=section&id=PART%20II%20%E2%80%93%20OTHER%20INFORMATION) [Item 1 – Legal Proceedings](index=90&type=section&id=Item%201%20%E2%80%93%20Legal%20Proceedings) The company is involved in various legal proceedings, none of which are expected to have a material adverse effect on its financial condition or operations - Management does not believe any pending legal proceedings would have a material adverse effect on the company's financial condition or operations[352](index=352&type=chunk) [Item 1A – Risk Factors](index=90&type=section&id=Item%201A%20%E2%80%93%20Risk%20Factors) This section supplements previous disclosures by focusing on COVID-19 related risks, including adverse effects on operations, loan demand, borrower repayment, PPP loan administration, goodwill impairment, and subsidiary dividend capacity - The COVID-19 pandemic has adversely affected business operations, loan demand (excluding PPP), and borrowers' ability to make payments, which could lead to increased delinquencies and charge-offs[353](index=353&type=chunk)[356](index=356&type=chunk) - The company faces risks related to its **$1.15 billion** PPP loan portfolio, including administrative complexities and the loan forgiveness process[357](index=357&type=chunk) - Adverse economic conditions and a decrease in the company's stock price due to the pandemic could trigger goodwill impairment charges[358](index=358&type=chunk) [Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds](index=91&type=section&id=Item%202%20%E2%80%93%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company did not repurchase shares in Q3 2020, as its authorization expired in March 2020 and will not be renewed due to the pandemic, though **479 shares** were surrendered for tax obligations - The company's share repurchase authorization expired in March 2020 and has not been renewed due to the pandemic and market conditions[362](index=362&type=chunk) [Item 6 – Exhibits](index=92&type=section&id=Item%206%20%E2%80%93%20Exhibits) This section provides an index of exhibits filed with the Form 10-Q, including corporate governance documents, material contracts, and required CEO and CFO certifications

Banner Corporation (NASDAQ:BANR) Q3 2020 Earnings Conference Call October 22, 2020 11:00 AM ET Company Participants Mark Grescovich - President and CEO Rich Arnold - Investor Relations Rick Barton - Chief Credit Officer Jill Rice - EVP and Senior Credit Officer Peter Conner - EVP and Chief Financial Officer Conference Call Participants Jeff Rulis - D.A. Davidson Andrew Liesch - Piper Sandler David Feaster - Raymond James Jacquelynne Bohlen - KBW Tim Coffey - Janney Montgomery Scott Operator Good morning, a ...