Banner(BANR) - 2021 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for Banner Corporation Item 1 – Financial Statements 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 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 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 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 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] - Accrual of dividends on common stock was $14.6 million ($0.41/share) in Q1 2021[19] Consolidated Statements of Cash Flows 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] - Increase in deposits, net, was $981.6 million in Q1 2021, compared to $400.9 million in Q1 2020[20] Selected Notes to the Consolidated Financial Statements 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 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] - Key accounting policies involve estimates for credit losses, fair value of financial instruments, and valuation of intangibles like goodwill and mortgage servicing rights[27] Note 2: ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED 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][32] - The company will use expedients in this guidance for loans and leases, with no material impact expected on financial statements[33] Note 3: SECURITIES 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] - 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] Note 4: LOANS RECEIVABLE AND THE ALLOWANCE FOR CREDIT LOSSES - LOANS 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] 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] Note 5: REAL ESTATE OWNED, NET 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 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] - No impairment charges or recoveries against mortgage servicing rights were recorded in Q1 2021 or Q1 2020[123] Note 7: DEPOSITS 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] - Weighted average interest rate for total certificates of deposit was 0.81% at March 31, 2021[129] Note 8: FAIR VALUE OF FINANCIAL INSTRUMENTS 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][132] 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] Note 9: INCOME TAXES AND DEFERRED TAXES 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] 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) 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 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] - Unrecognized compensation expense for awards was $18.5 million as of March 31, 2021, to be amortized over 36 months[159] Note 12: COMMITMENTS AND CONTINGENCIES 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] NOTE 13: DERIVATIVES AND HEDGING 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] 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] NOTE 14: REVENUE FROM CONTRACTS WITH CLIENTS 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 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 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] - 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] - 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] - 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] - 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] - 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] 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 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] - 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] - Loans acquired in business combinations are recorded at fair value, with significant judgment involved in determining credit discounts[227] Comparison of Financial Condition at March 31, 2021 and December 31, 2020 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] - 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] 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] - Total deposits increased $981.6 million to $13.55 billion at March 31, 2021, with core deposits increasing by $989.9 million[253] - 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] Comparison of Results of Operations for the Three Months Ended March 31, 2021 and 2020 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] - 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][262][264] - 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] - Average loan balances increased $573.3 million (6%) to $10.08 billion for Q1 2021[262] - Average deposit balances increased to $12.92 billion for Q1 2021, from $10.14 billion for Q1 2020[265] Provision and Allowance for Credit Losses 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] - Net loan charge-offs were $3.2 million for Q1 2021, compared to net loan recoveries of $404,000 in Q1 2020[271] - 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] - No allowance for credit losses was recorded on PPP loans ($1.32 billion) as they are fully guaranteed by the SBA[270] - 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] Non-interest Income 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] Non-interest Expense 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] - Capitalized loan origination costs increased $3.9 million, primarily due to PPP loan originations[280] - 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] Income Taxes 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 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] - The allowance for credit losses - loans was $156.1 million, representing 426% of non-performing loans at March 31, 2021[285] - Substandard loans decreased during Q1 2021 due to payoffs and risk rating upgrades as certain industries stabilized from COVID-19 impacts[290] Liquidity and Capital Resources 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] - FHLB advances decreased $50.0 million to $100.0 million in Q1 2021[296] - Other borrowings increased $31.5 million to $216.3 million at March 31, 2021[296] - 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] - Total shareholders' equity decreased $47.4 million to $1.62 billion during Q1 2021[298] Capital Requirements 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] Item 3 – Quantitative and Qualitative Disclosures About Market Risk 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 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] - The Asset/Liability Management Committee actively manages interest rate risk to reduce vulnerability of earnings and capital to interest rate changes[307] Sensitivity Analysis 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] 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] Item 4 – Controls and Procedures 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 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] Changes in Internal Controls Over Financial Reporting 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] PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and other disclosures for the reporting period Item 1 – Legal Proceedings 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] Item 1A – Risk Factors 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] Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 3 – Defaults upon Senior Securities This item is not applicable to the company for the reporting period - This item is not applicable[329] Item 4 – Mine Safety Disclosures This item is not applicable to the company for the reporting period - This item is not applicable[329] Item 5 – Other Information This item is not applicable to the company for the reporting period - This item is not applicable[329] Item 6 – Exhibits 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] SIGNATURES This section contains the official signatures of the company's principal executive and financial officers, affirming the report's submission 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]