Good day and welcome to the Banner Corporation's Second Quarter 2021 Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mark Grescovich, President and CEO. Please go ahead.

Thank you, Riley and good morning everyone. I would also like to welcome you to the second quarter 2021 earnings call for Banner Corporation. As is customary, joining me on the call today is Peter Conner, our Chief Financial Officer; Jill Rice, our Chief Credit Officer; and Rich Arnold, our Head of Investor Relations. Rich would you please read our forward-looking Safe Harbor statement.

Sure Mark. Good morning. Our presentation today discusses Banner's business outlook and will include forward-looking statements. Those statements include descriptions of management's plans, objectives, or goals for future operations, products or services, forecast of financial or other performance measures, and statements about Banner's general outlook for economic and other conditions. We also may make other forward-looking statements in the question-and-answer period following management's discussion. These forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ are available from the earnings press release that was released yesterday and a recently filed Form 10-Q for the quarter ended March 31st, 2021. Forward-looking statements are effective only as of the date they are made and Banner assumes no obligation to update information concerning its expectations. Mark?

Thank you, Rich. First of all I hope you and your families are well as we all continue to battle the COVID virus, its variants, and its effects on our communities and the economy. Today we will cover four primary items with you. First, I will provide you high-level comments on Banner's second quarter performance. Second, the actions Banner continues to take to support all of our stakeholders including our Banner team, our clients, our communities, and our shareholders. Third, Jill Rice will provide comments on the current status of our loan portfolio. And finally, Peter Conner will provide more detail on our operating performance for the quarter. I want to begin by thanking all of my 2,000 colleagues in our company that are working extremely hard to assist our clients and communities during these difficult times. Banner has lived our core values, summed up as doing the right thing for 130 years. It is critically important that we continue to do the right thing for our clients, our communities, our colleagues, our company, and our shareholders to provide a consistent and reliable source of commerce and capital through all economic cycles and change events. I am pleased to report that is exactly what we continue to do. I am very proud of the entire Banner team that are living our core values. Now, let me turn to an overview of our second quarter performance. As announced Banner Corporation reported a net profit available to common shareholders of $54.4 million or $1.56 per diluted share for the quarter ended June 30th, 2021. This compared to a net profit to common shareholders of $1.33 per share for the first quarter of 2021 and $0.67 per share for the second quarter of 2020. This quarter's earnings were impacted by the allowance for…

Thank you, Mark, and good morning, everyone. As you read in our press release, Banner's credit metrics have remained stable as we continue to work through the economic impact of the pandemic. While we acknowledge the potential for future COVID-related business interruption, due to the pace of spread related to the Delta variant as of June 30, I am happy to note that all of our markets are currently fully reopened and business sentiment is positive. Banner's delinquent loans as of June 30 represent 0.24% of total loans, a decrease of 19 basis points from the prior quarter and compared to 0.35% as of June 30, 2020. Non-performing assets are comprised of non-performing loans of $28.8 million, down $6.5 million for the quarter and REO and other assets of $780,000 and represent a nominal 0.20% of total assets. Adversely classified loans represent 2.83% of total loans as of June 30, down from 3.11% in the linked-quarter and compared to 3.45% as of June 30, 2020. The improvement in adversely classified loans in the quarter reflects the continued success our Special Assets group has had in de-banking our classified relationships, as well as risk rating upgrades, as more of our borrowers have returned to more normalized operations. Similar to last quarter, the upgrades were spread across commercial and small business relationships, as well as both owner and investor commercial real estate. As of June 30, our ACL reserve totaled $148 million or 1.53% of total loans, down from 1.57% reported as of March 31, and compared to 1.66% of total loans as of June 30, 2020. Excluding loans held for sale and the Paycheck Protection loans our current ACL reserve continues to provide significant coverage at 1.68% of total loans or 181% coverage of nonperforming loans and 627% coverage of delinquent…

Thank you, Jill. As discussed previously and as announced in our earnings release, we reported net income of $54.4 million or $1.56 per diluted share for the second quarter compared to $46.9 million or $1.33 per diluted share in the prior quarter. The $0.23 increase in per share earnings was a result of an increase in net interest income driven by PPP loan forgiveness, an increase in earning assets and a recapture of the loan loss provision. Core revenue excluding gains and losses on securities and changes in fair value of financial instruments carried at fair value increased $8.4 million from the prior quarter, primarily as a result of an acceleration of PPP loan forgiveness activity and growth in average core deposits. Core expenses which exclude M&A and COVID-related expense decreased $380,000 due primarily to lower compensation costs, partially offset by higher professional services expense. Turning to the balance sheet. Total loans decreased $357 million from the prior quarter end as a result of a $492 million decline in SBA PPP loans and a $63 million decline in loans held for sale, partially offset by an increase in held for investment loans. Excluding PPP loans and held-for-sale loans portfolio loans increased $198 million due to an increase in portfolio loan production, higher levels of line utilization and slower prepayments on fixed term loans. Held for sale loans decreased due to an acceleration in the pace of multifamily bulk loan sales and fewer residential mortgage loans for sale carried over quarter end. Ending core deposits increased $122 million from prior quarter end due to a combination of growth in average deposit client balances and new client acquisition. More significantly, average core deposits grew $713 million in the second quarter as much of the deposit growth occurred at the end of the…

Thank you, Peter, and Jill for your comments and color on the company's performance for the second quarter. That concludes our prepared remarks. And Riley we will now open the call and welcome your questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Andrew Liesch with Piper Sandler.

Hi, everyone. Good morning.

Good morning Andrew.

Just one quick question on the loan growth, certainly encouraging this quarter. And I know your guidance had been for balances to be flat through year-end. Is that still a good guidance to be using? And I guess what other things are you hearing from your clients? Anything specific to make you think that growth will come back or will continue to accelerate from this point?

Good morning, Andrew, this is Jill. Yes, we're still holding to the flat guidance for 2021 for the balance of the year, although given the uptick we saw in the line utilization that started this quarter and the positive business sentiment we have everybody being reopened, we do believe that we will have low single-digit growth for the balance of the year, which is what will get us to a flat landing for 2021 after the PPP paydown. In terms of what we're hearing from our borrowers, it's very positive in our markets, because we finally just reopened. So everyone's feeling really good about that. That has to be countered a little bit with what we are seeing in terms of the Delta variant and discussions now about masking up inside and where does that take us. But as we ended the quarter, things are feeling good in the markets we serve.

Got it. And then on the -- in the presentation on the -- I believe it's Page 22 with the $23.7 million remaining of unamortized fees do you guys have any sense on the timing on how that's going to be realized? It will all be done this year, or is there going to be any spill over into 2022?

Yes. This is Peter. I can address that. So yes, we -- it's really a function of the pace of remaining loan forgiveness on the balance of the $825 million that existed in the portfolio at the end of the quarter. Given what we did in the second quarter we forgave $558 million. So we had a big quarter of forgiveness. That will slow down a bit going into the third quarter. And I would anticipate based on what we're seeing early in this quarter that we'll see 30% to 40% of that $825 million remaining balance forgiven in Q3, and then it will tail down and have a gradual soft landing to some core amount that won't get forgiven. But I would anticipate that kind of gradual decline in the pace of forgiveness quarter-to-quarter as we go out through the rest of this year. And there'll be some small residual amount of the PPP portfolio that won't get forgiven and will ultimately term out at their five-year maturity.

Okay. That's very helpful. Thanks for taking the question. I’ll go back.

Thank you, Andrew.

Our next question comes from Jeff Rulis with D.A. Davidson.

Thanks. Good morning.

Good morning, Jeff.

Just checking in on the expenses. I don't think I've kind of checked it -- given the branch consolidation some of the administrative takeouts that you've had and I guess excluding kind of the comp adjustments, could you kind of get us to where you sit on expenses? And are there some detail that you could provide in terms of what -- I don't know if it's a want to hold to a run rate or kind of looking at the catalysts ahead of you some of those cost savings that you've had in the past has that been achieved? And now it's just we're back to hoping to moderate expense growth? Thanks.

Yes, Jeff, it's Peter. So yes, we -- as I noted in my prepared remarks, we had some elevation in our professional services line item this quarter principally due to settlement of some recent litigation that emerged late last year. And then we still had some what I'd call tail of severance and some restructuring costs related to some recent downsizing. As we go into the second half of this year, we continue to mine some opportunities for reduced expenses both branch consolidations and staff-related costs that we've already effected, but we'll have some benefits to the run rate as we go out the rest of this year. If we were to look at our $92.4 million expense number in this quarter, there's somewhere around $2 million to potentially $3 million out of that that would represent our core run rate. So I'd kind of use that as a benchmark. But then there's always some volatility for the timing of professional services costs and some ongoing restructuring costs that get laid on top of that number. But that's how I'd characterize it. So we're getting through a lot of the benefits of what's been done. There's still some additional reductions that are in the pipeline for the second half of this year that will continue to have a positive effect on the core operating expense.

Okay. And if I read you right, I mean, it sounds as if that can approach more of a $90 million kind of core kind of as you -- ?

Yeah. Yeah. That's fair. And I think the other piece here is the capitalized loan origination cost. That obviously has a big effect on that number. And that's a function of loan production. And we – again, that's been volatile because of the PPP program we had a very big quarter of originations in Q1 in the PPP program. That's effectively ended. We just had a very small amount of originations in this quarter. And so that's the other element to the expense basis. The pace of loan production going forward should it continue or increase, we'd see a bigger benefit from the capitalized loan origination costs on our core expense number.

Great. Thanks. And Mark, on the kind of the capital management front the buyback has continued. I want to just check in on the appetite going forward on that front as well as I think in recent months you've talked about M&A interest there – obviously there was a lot of activity in Northern California. But just an update on how you feel about the buyback as well as M&A appetite for now? Thanks.

Yeah. Thank you for the question, Jeff. I think our view of capital deployment has not changed. If anything with the pullback in the market, it probably is more consistent than where it's been in recent history. So if you think about the authorization we have of 1.7 million shares, and we've repurchased 750,000 we have plenty of room there. Obviously, the waterfall of capital deployment does include the core dividend itself, stock repurchase and/or special dividends. Obviously in this market, repurchase tends to favor any kind of special dividend, and continued investment in the franchise as well as M&A opportunities. On the M&A front, look conversations continue. We – our style has been very consistent and that we do negotiated transactions. We don't do auction transactions. So as we enter into the second half of the year and into 2022, it really comes down to who is the right partner and what's the right franchise combination that's going to help Banner continue to be successful over the course of the next three to five years. So the conversation continues, but you know as well as I do those have to be opportunistic and timing is always in question as to when those can happen.

Great. Thank you.

Thank you, Jeff.

Our next question comes from Jackie Bohlen with KBW.

Hi. Good morning.

Good morning, Jackie.

Hi, Mark. I just wanted to start off with the improvement in criticized assets this quarter kind of look forward. If I understood correctly, it sounds like roughly 40% of that relates to hospitality. And I realize that, this is somewhat dependent on the geography of the hospitality loans. But it sounds like anecdotally, we're off to a really good vacation season this summer. And so I'm wondering, if that is in fact the case, what kind of migration trends you would expect from those risk grades? And how that might impact forward reserve necessity?

Good morning, Jackie. Certainly, we are off to a great vacation season. And as I think I indicated last quarter, we were expecting to see our hospitality numbers pick up starting with spring break and run forward and we have. So we are running now approximately, on whole at a 60% occupancy rate for the portfolio with – and this is as of I think May numbers, we would be down in the – on the low end you'd have people still running at 20%, and some fully occupied. And it really is a function of where they're located and from where they started in terms of the increase. And we've kept that portfolio adversely classified, because of the impact of the primary repayment source. So do I think we're going to see it improve? Yes. Can I guide to where that's going to go? I'm not prepared to tell you how quickly those will roll off, but we are continuing to see improvement in the portfolio quarter-over-quarter. As you look – as you think about that and the reserve, we don't give guidance as to where our reserve will be. But one could expect that with continued economic improvement, solid credit metrics and loan growth, you'd expect the reserve level to – as a percentage of total loans to trend downward over time.

Okay. That's good color. And are you – still are you seeing anything that would indicate or anything you're closely watching that would indicate just an uptick in charge-offs? I mean performance has just been tremendous throughout the entire pandemic.

No. I think if I had anything in my quiver towards charge-off, given how clean we were this quarter, you would have seen me take it because when we identify it, we take it. It's just our conserved methodology to act quickly on those problems.

Okay. Thank you. And then a bit of a – a little bit of a technical question. If I heard correctly, it sounds like there was a gain from a closed branch location in non-interest income this quarter. I was just wondering, if I could get that quantified.

Yes, Jackie, it was roughly around $1 million give or take. There were several that were part of that group. It was closed last year. They take a bit of time to sell and settle or gain.

Okay. And then I realize these are unrelated but it sounds like that pretty much offset the excess litigation expense in the quarter?

Yes, a little less I would say. But yes, that's true.

Okay. Thanks, Peter and thank you, everyone.

Thank you, Jackie.

[Operator Instructions] Our next question comes from Andrew Terrell with Stephens.

Hey, thanks, good morning.

Good morning, Andrew.

Jill maybe just to drill into kind of the growth guidance from a different perspective or an organic perspective. If I assume the 30% to 40% kind of forgiveness on the remaining $850 million or so of PPP balances I guess that would imply kind of organic growth for the next two quarters steps up to a low kind of $300 million number about 13% annualized. Does that sound right to you?

You mean the – can you say that annualized again growth rate?

Yes, it would be kind of a low teens type annualized growth rate. I'm just trying to make sure I'm thinking about this correctly.

Yes, I'd have to double check the math. But I'm – if you go back and think about what we did just even in the C&I this last quarter, the annualized growth rate was 10%. So in these segments, we are seeing some decent uptick as people – line utilization has room to grow. That was up 1%, when we think about it historically. The average utilization rate as of June was 59%, compared to a 2019, average utilization rate of 64%. So when we start to see those actually come back to being drawn, residential construction up and commercial as well, again it will net out to low single-digit for the rest of the year. But I don't know if that answered your question.

Yes. No that was helpful. I appreciate it. And then Mark I was just curious, I wanted to get kind of an update on any attrition that you might have seen from the branch closures we saw late last year. I think when we spoke last it was less than 5% last quarter. But have you seen any notable kind of change in customer attrition over the past three months?

I'll let Peter comment on that. Let me just add on to Jill's comments on the loan portfolio and projected growth. Obviously, we caution everything with the new variants and whatever may happen in terms of its impact on the economy and the ability to continue to be reopened strong. So I just want to make sure we stay cautionary on that front. Peter do you want to comment on the attrition rates?

Yes. Yes. So, yes, as we've commented in the past, we do monitor and measure account attrition in the closed locations and track that pretty closely and have an expectation of what we think will happen and we continue to see very low rates of attrition and deposit balances. So again, it's running about -- still running about 5% of those closed locations. And what we find is, some of the smaller balance clients do a trip, but a lot of the larger clients, especially the business clients with larger balances tend to stick with the remaining branch. And so, we were pretty much through the attrition experience of what we closed last year at this point. It's really tailed off and we don't expect any more material attrition there.

Understood. Thank you. And then, Peter, one last one. Just, do you have the net kind of PPP revenue that was recognized through NI this quarter? And then, what the average balance of PPP loans was?

Yes, I've got the -- so in terms of the -- just the second quarter impact of the PPP portfolio, including the coupon and the accelerated deferred interest income from the forgiveness was -- it was just under $18 million. It was $17.8 million for the second quarter. So the effective average yield on the portfolio, the PPP portfolio was 6.42%. So we did benefit quite a bit from the forgiveness acceleration this quarter. And just, by way of reference, the first quarter number for the PPP program was $8 million. So we more than doubled the impact to interest income from Q1 to Q2.

Okay. Perfect. Thank you for taking my questions.

Thank you, Andrew.

This concludes our question-and-answer session. I'd like to turn the call back over to Mark Grescovich for any closing remarks.

Thank you, Eillie. As I've stated, we're very proud of the Banner team, as we continue to do the right thing as we battle the COVID virus and its variants and its impacts on our communities and the economy and one another. Thank you all for your interest in Banner and for joining our call today. We look forward to reporting our results to you again in the future. Have a great day everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.