Banner Corp Q1 FY2021 Earnings Call

Good day and welcome to the Banner Corporation's First Quarter 2021 Conference Call and Webcast. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mark Grescovich, President and Chief Executive Officer. Please go ahead.

Thank you, Tom, and good morning, everyone. I would also like to welcome you to the first quarter and 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 statements.

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, forecasts of financial or other performance measures, and statements about Banner's general outlook for economic and other conditions. We also may make other forward-looking statements in the question-and-answer period following management's discussion. Additionally, we provided an investor presentation that could be found in the Investor Relations section of our website, bannerbank.com. These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ is available from the earnings press release that was released yesterday and a recently filed Form 10-K for the year ended December 31, 2020. Forward-looking statements are effective only as of the date that 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 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 first quarter performance. Second, the actions Banner continues to take to support all of our stakeholders, including our Banner team, our clients, our communities, and our shareholders. Third, Jill Rice will provide comments on the current status of our loan portfolio. And finally, Peter Conner will provide more detail on our operating performance for the quarter. I want to begin by thanking all of my 2,100 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 first quarter performance. As announced, Banner Corporation reported a net profit available to common shareholders of $46.9 million or $1.33 per diluted share for the quarter ended March 31, 2021. This compared to a net profit to common shareholders of $1.10 per share for the fourth quarter of 2020 and $0.47 per share for the first quarter of 2020. This quarter's earnings were impacted by the allowance for credit losses released, a continued inflow of liquidity coupled with very low interest rates, our strategy to maintain a moderate risk profile, and continued strong mortgage banking revenue. Peter will discuss these items in more detail shortly. Directing your attention to pretax pre-provision earnings and excluding the impact of merger and acquisition expenses, COVID expenses, gains and losses on the sale of securities, and changes in fair value of financial instruments, earnings were $49.8 million for the first quarter of 2021 compared to $47.2 million in the previous quarter, an increase of 5.5%. This measure, I believe, is helpful for illustrating the core earnings power of Banner. First quarter 2021 revenue from core operations increased 3% to $141.9 million compared to $138.4 million in the first quarter of 2020. We benefited from a larger earning asset mix, a good net interest margin, and strong mortgage banking fee revenue. Overall, this resulted in a return on average assets of 1.24% for the quarter. Once again, our core performance this quarter reflects continued execution on our super community bank strategy, even with the challenges of a pandemic, that is growing new client relationships, adding to our core funding position by growing core deposits, and promoting client loyalty and advocacy through our responsive service model. To that point, our core deposits increased 36% compared to March 31, 2020 and represent 93% of total deposits. Further, we continued our strong organic generation of new client relationships in the quarter. Reflective of this solid performance, coupled with our strong tangible common equity ratio, we issued a dividend of $0.41 per share in the quarter and repurchased 500,000 shares of our common stock. While our branches are fully operational, other areas of our workforce have been mobilized with nearly 60% working effectively remotely and the remainder available for in-person meetings by appointment, ensuring our ATMs remain accessible and functioning and others are performing operational duties. We have also created special programs for our employees deemed work site essential, and we are providing additional paid time off for exposure or sickness. To provide support for our clients through this crisis, we have made available several assistance programs. Banner has provided SBA payroll protection funds totaling nearly $1.6 billion for approximately 13,000 clients. Also, we made an important $1.5 million commitment to support minority-owned businesses in our footprint, a $1 million equity investment in Broadway Federal Bank, the largest African-American depository financial institution in the United States; significant contributions to local and regional nonprofits; and have provided financial support for emergency and basic needs in our footprint. Let me now turn the call over to Jill to discuss trends in our loan portfolio and her comments on Banner's credit quality and loan book. Jill?

Thank you, Mark, and good morning, everyone. As you read in our press release, Banner's credit metrics continue to remain stable as we move through the current pandemic-induced credit cycle, and as such, I will keep my comments relatively brief this morning. Banner's delinquent loans as of March 31 represent 0.43% of total loans, an increase of 6 basis points since year-end and compared to 0.66% as of March 31, 2020. Nonperforming assets represent 0.23% of total assets, a decrease of 1 basis point when compared to the linked quarter. Nonperforming assets are comprised of nonperforming loans totaling $36.9 million, up $1.3 million in the quarter, and REO and other assets of $377,000. Adversely classified loans represent 3.11% of total loans as of March 31, down from 3.45% as of year-end and compared to 1.36% as of March 31, 2020. As was the case last quarter, the majority of the improvement in risk ratings is due to risk rating upgrades as borrowers continue to show a return to more normalized operations. These upgrades were not centered in any one asset class, rather were spread across commercial businesses as well as both owner and investor commercial real estate and small business relationships. As of March 31, our ACL reserve totals $156.1 million or 1.57% of total loans, down from 1.69% reported as of December 31 and compared to 1.41% as of March 31, 2020. Excluding loans held for sale and the Paycheck Protection loans, our current ACL reserve continues to provide significant coverage at 1.81% of total loans or 143% coverage of nonaccrual loans and 367% coverage of delinquent loans. Loan losses during the quarter totaled $4.7 million and were offset by recoveries of $1.5 million. With the continued decline in portfolio loan balances, down $195 million quarter-over-quarter net of PPP loans, we released $8 million of our reserve for credit losses as of March 31. As we have discussed previously, Banner maintains a consistent and conservative approach to reserving. Releasing reserves of this magnitude is a function of the requirements within the CECL methodology. Our reserve was still early in the pandemic with proactive downgrading of credits impacted by the economic downturn. Now as we see some improvement in asset quality, our market is slowly beginning to reopen, economic indicators reflecting improving trends, additional financial support available through recently approved fiscal stimulus programs, vaccine distribution expanding rapidly, and in light of the declining portfolio balances, the 12 basis point reduction in our reserve for credit losses is considered modest and our overall reserve remains robust. Like many of our peers, our loan portfolio continued to decline in the first quarter. A reflection of the continued strong residential refinance market, healthy borrower liquidity, and muted loan demand. Loans held for investment are down 2.2% net of PPP loans in the quarter and 7% year-over-year. Looking at specific product lines and excluding the PPP loans, the decline in C&I loan totaled in the current quarter, down 3.3% is primarily the result of not chasing looser structures on one large relationship. The year-over-year reduction reflects, in large part, the continuation of lower line utilization resulting from excess liquidity borrowers have obtained over the past 12 months. Commercial credit line utilization is down 8% year-over-year. Residential mortgage loans outstanding continue to be impacted by the strong refinance market and are down 8.7% for the quarter and 25.6% year-over-year. The active refinance market has continued to reduce our home equity credits as well, down 5.2% for the quarter and 10.6% year-over-year. The decline noted in the agricultural portfolio of 12.5% quarter-over-quarter is seasonal in nature and to be expected. The decline of nearly 25% year-over-year net of PPP loans, however, reflects the proactive debanking of several relationships as well as the strategic decision to not chase looser structures and low pricing on others. Commercial construction total reflect a decline of 13.1% for the quarter due in large part to being converted to permanent CRE, and are now spread among the commercial real estate and multifamily buckets. The declining portfolios were somewhat offset by the strong growth in the residential ADC portfolios. Within the markets we serve, the housing market remains very robust with demand outstripping the supply of available homes in most areas, and affordable housing continues to be undersupplied. Consistent with prior periods, our total residential construction exposure represents 5.5% of our portfolio. And when we include multifamily, commercial construction and land, the total construction exposure is 13.3% of total loans, in line with our moderate risk profile. I think it's important to note that our relationship managers are remaining engaged with clients and the commercial and commercial real estate pipelines are continuing to exhibit strong growth. Looking forward, we continue to anticipate that commercial investment will begin to pick up in the second half of the year as borrowers begin to make delayed capital investments and build inventories, recognizing that they will utilize much of their on-balance sheet liquidity before tapping into their credit lines and/or closing on new borrowings. Regarding asset quality, loans rated substandard declined 8.4% in the quarter or $28.7 million. As mentioned earlier, the majority of the decline was due to upgrading credits. Nearly 35% of the total adversely classified credits are within the hospitality industry, and these credits represent 44% of the hospitality book. As I have stated previously, these relationships are classified due to the long-term impact to their primary repayment source. That said, as of March 31, only three hotel loans totaling $3.8 million remained on active deferral. And as we continue to monitor activity in the sector, we are beginning to see occupancy rates increase in many of our markets with the start of this spring season. The next largest segment of adversely classified loans is recreation and leisure at approximately 20% of the total. These credits are almost exclusively fitness and recreational facilities, many of which have been significantly shut down for the past year. I will note that while they remain classified as of March 31, no loans in this segment were operating under an active deferral. Nearly 10% of the adversely classified loans are located in the healthcare-related industries, restaurant and foodservice relationships account for 6% of the adversely classified, and approximately 5% are located within the retail book. The balance of substandard credits are not located within an at-risk segment and are not concentrated in any one business line. Loans under active deferral continued to decline, dropping to $33.9 million as of March 31, of which $25.7 million are mortgage loans under forbearance and the balance of $8.2 million are commercial loans under active deferral, $7.3 million of which are paying interest monthly. I will wrap up by stating that our moderate risk profile remains intact. While it is too early to declare this credit cycle over, our credit metrics and balance sheet continue to be strong, reserves for credit losses remain robust, and capital levels continue significantly in excess of regulatory requirements. We remain well-positioned for the future. And with that, I will hand the microphone over to Peter for his comments.

Thank you, Jill, and good morning, everyone. As discussed previously and as announced in our earnings release, we reported net income of $46.9 million or $1.33 per diluted share for the first quarter compared to $39 million or $1.10 per diluted share in the prior quarter. The $0.23 increase in per share earnings was driven as a result of an $8 million loan loss provision recapture, an increase in core noninterest income, and lower noninterest expense. Core revenue, excluding gains and losses on securities and changes in fair value of financial incidents carried at fair value, decreased $1.7 million from the prior quarter, primarily as a result of a decline in the yield on earning assets due to the low rate environment. Core expenses, including unfunded loan commitment provision expense decreased $1.7 million due primarily to a decline in legal, marketing, and branch consolidation expense from the prior quarter. Turning to the balance sheet. Total loans decreased $32 million from the prior quarter end as a result of a decline in multifamily loans held for sale, the reduction in held for investment portfolio loan outstandings, partially offset by an increase in SBA PPP loans. Excluding PPP loans and held for sale loans, portfolio loans declined $195 million due primarily to elevated prepayments in the one-to-four mortgage portfolio, seasonal declines in agricultural loan outstandings, and lower line utilization in the commercial business portfolios. Held for sale loans decreased by $109 million due to a bulk sale of multifamily loans during the quarter. Ending core deposits increased $990 million from the prior quarter end due to new deposits from the latest round of SBA PPP loan fundings, fiscal stimulus payments, and continued increases in average client deposit balance liquidity. Core deposits have grown an unprecedented $3.4 billion or 36% over the last 12 months, reflecting the effectiveness and execution of Banner's super community business model during this period of elevated systemic liquidity. Time deposit balance declined modestly by $8.3 million from prior quarter end, ending at $907 million. Turning to the income statement. Net interest income decreased by $3.8 million as a 23 basis point decline in average earning asset yields offset a $619 million or 4.6% increase in average earning asset balances during the first quarter. Compared to the prior quarter, loan yields decreased 10 basis points due to repricing of existing portfolio loans and higher levels of prepayment and interest recovery-related income in the fourth quarter. Excluding the impact of prepayments, interest recoveries, and acquired loan accretion, the average loan coupon declined 6 basis points from the prior quarter. While the pace of core loan yield decline has slowed, modest headwinds to loan yields continue as new fixed-rate loans are originated at lower rates, and adjustable-rate loans with floors mature. Total average investment and security balances increased by $785 million over the prior quarter, funded by deposit growth and loan payoffs. While the average yield on the combined balance declined 12 basis points due to a larger mix invested in overnight funds at low rates with elevated prepayments on higher-yielding mortgage-backed securities. Total cost of funds declined 3 basis points to 21 basis points as a result of lower deposit costs. Total deposits declined from 14 basis points to 11 basis points in the first quarter due to declines in interest-bearing retail deposit rates. The ratio of core deposits to total deposits remained at 93% in the first quarter, the same as the prior quarter. The net interest margin declined 20 basis points to 3.44% on a tax-equivalent basis. The decline was driven by the substantial increase in excess of deposit liquidity invested at overnight rates, along with the decline in average loan outstandings. In the coming quarter, we anticipate an acceleration in the pace of PPP loan forgiveness activity, which will increase the effective yield on this portfolio. We anticipate continuing to ladder the excess liquidity into the securities portfolio at a measured pace while remaining flexible to shifts in market conditions. Total noninterest income increased $763,000 from the prior quarter. Core noninterest income, excluding gains on the sales of securities and changes in securities carried at fair value, increased $2.1 million. Deposit fees increased $646,000 due to annual card servicer rebates and plastics expense-related reduction on debit card income in the prior quarter. Total mortgage banking income increased by $750,000 due to an increase in gains on multifamily loan sales closed during the quarter, while residential mortgage-related income remained effectively even with the fourth quarter. Within residential mortgage, the percentage of refinance volume declined to 46% of total production, down from 49% in the prior quarter. Miscellaneous fee income increased $736,000, primarily due to asset write-downs on branches closed in the fourth quarter. Total noninterest expense declined $4.5 million from the prior quarter. Excluding merger costs and pandemic-specific operating costs, core noninterest expense declined $4.3 million. Salary and benefits expense increased by $3.9 million, primarily due to severance expense related to a reduction in staff, seasonal increases in payroll taxes, and a $1.2 million adjustment to the liability recorded for deferred compensation. The credit for capitalized loan origination costs increased by $300,000 in the first quarter due to increased SBA PPP loan production, partially offset by lower residential mortgage production. Occupancy expense declined $1.3 million as a result of the branch closure exit costs in the fourth quarter and seasonal declines in building maintenance. Advertising and marketing costs decreased by $1.6 million, reflecting the cost of a marketing campaign in the fourth quarter and lower levels of CRA and charitable contribution expense in the current quarter. Professional and legal expenses decreased by $2.3 million due to an accrual for pending litigation in the prior quarter. Provision expense for unfunded loan commitments decreased by $2.4 million due to a recapture of the reserve as a result of improved economic conditions. Merger costs remained even in the prior quarter at $570,000, reflecting the consummation of the Islanders Bank subsidiary merger into the Banner Bank subsidiary during the first quarter. As indicated, the company successfully integrated the Islanders Bank subsidiary into Banner Bank during the first quarter, and we are on track to achieve the expense synergies we have guided to. The combined impact of the Islanders merger, the reduction in branch count, and implementation of other efficiency initiatives are anticipated to reduce the core expense run rate in the coming quarter. In addition, as part of ongoing capital management, the company repurchased 500,000 shares during the quarter. This concludes my prepared remarks. Mark?

Thank you, Peter, and Jill, for your comments. That concludes our prepared remarks today. And Tom, we will now open the call and welcome your questions.

And the first question comes from Jeff Rulis with D.A. Davidson. Please go ahead.

I wanted to follow-up on the branch closures. I'd be interested in just from your perspective, the customer retention and the impact that you've had? And based on maybe favorable results, additional closures, is that something that's being discussed?

Yes, Jeff. This is Peter. I can address that. We consolidated 21 branch locations in the third and fourth quarters of last year, and we monitor client attrition related to those branches. So far, in the first quarter, the total deposit attrition for those 21 locations is less than 5%, even with some branches being quite far from their nearest counterparts. This is performing better than we anticipated. I believe it's a sign that clients have remained loyal to Banner and have adjusted to other channels that don't depend on the branch network. Regarding your second question, we are still exploring opportunities to consolidate branches in our current network, but I would say the pace of branch consolidations will be slower than what we experienced last year.

Okay. As you reflect on what you've accomplished, Peter, I understand you expect a lower expense run rate. I assume we can exclude merger costs from this quarter. So, we're looking at something within that. You mentioned we're aiming for the targeted cost efficiencies. Will all of that be included in the Q2 run rate? And is it dependent on growth, or will it take a few quarters to phase out given the closures?

Yes. We expect to see improvements in the second quarter regarding the core expense run rate due to the branch closures and the reduced costs of supporting a smaller branch network, as well as the advantages from the Islanders merger, which was finalized in the middle of the quarter. The expense synergies from the Islanders merger will start to become evident in the second quarter, alongside the expense initiatives we've previously discussed. We'll begin to notice the cumulative effects of these changes in the second quarter. There are still additional efficiencies being implemented that will yield benefits later in the year, as we currently foresee. I would describe this situation as a soft landing. Additionally, factors like the pace of business activity, particularly in mortgage and commission expenses, will influence the variable costs within the company, along with the seasonal patterns we regularly observe, especially in the fourth quarter, which affect some of the expense line items.

Okay. And my last one is on the margin, Peter, you kind of walk through the push and pull of a few of those items. And I guess if we continue to look at securities investment to kind of grow spread income dollars, but it sounds like maybe that could leave the margin, maybe some compression in the short term. Is that the message that I got right?

There are currently more variables impacting the margin than we have seen in the past. There are four main factors that will influence the margin over the next three to four quarters. First is the rate of PPP loan forgiveness. We expect a significant increase in loan forgiveness activity in the second quarter, which will allow us to accelerate the unamortized loan pricing fee into interest income as these loans are forgiven. Consequently, we anticipate that the average yield on the PPP portfolio will increase as these loans are paid off. The second factor is the level of average client deposit liquidity, which saw nearly a $1 billion increase in the first quarter. The key question is whether this liquidity will remain or start to move off the balance sheet as the economy improves. The third factor is loan demand; we have seen strong loan production, and the pace of prepayments on existing loans appears to be slowing. Therefore, the resumption of loan demand and line utilization will also play a role. Lastly, the pace at which we ladder the excess deposit liquidity into the securities book will impact the margin. Overall, I expect the margin will remain stable in the second quarter, mainly due to the PPP balance. Throughout the rest of the year, we anticipate some forgiveness, but the loan coupon on a static balance sheet is repricing at a modest rate of about 2 to 3 basis points down. If the yield curve stays flat, we can recapture some of that, as we are seeing a reduction in the cost of funds by about 2 basis points each quarter or two. Therefore, on a static basis, while we face a mild headwind to margin, it is really the liquidity and balance sheet mix that will drive the margin in the upcoming three quarters. I hope this clarifies our thought process and the factors contributing to the margin in the next few quarters.

The next question comes from Andrew Liesch with Piper Sandler. Please go ahead.

So last quarter, the commentary around loan growth was that balances would end this year basically flat from the end of 2020. And it sounds like pipelines are going in core types and they'll be offset by PPP paydowns as the year goes on. Is that still a reasonable target to have basically loans end up flat relative to the end of 2020?

Yes, Andrew, this is Jill. That's still what we are targeting, that we'll be able to be flat. That's going to be a good year for us given the rapid repayments that we're having in the residential refinancing and the offset there. But for 2021, we're still indicating that we anticipate flat and would expect that we'll return to our normal mid-single-digit growth rate in 2022.

Got it. Great. Can you provide a breakdown of the $11.4 million in gain on sale revenue, specifically indicating the dollar amount from multifamily compared to the dollar amount from residential?

Yes, this is Peter. The multifamily component was right at $1 million of that total. We had a successful quarter in gain on sale and sales activity. In general, we are seeing renewed demand for our product, with both credit and pricing perspective back to full pre-pandemic levels. The main factors affecting that line item from quarter to quarter are the pace of new originations and the completion of sales, which can vary depending on timing and execution dates. Overall, that line of business has returned to its full pre-pandemic levels.

The next question comes from David Feaster with Raymond James. Please go ahead.

I wanted to start on originations. It's really encouraging to see the acceleration in originations, exclusive of PPP. Just curious, maybe some detail as to what drove that. How much of it was new client growth from maybe PPP activity or just more activity from your existing client base? And then I guess, with the stronger pipeline, you kind of gave some guidance on where we end up in the year. But do you think 1Q represents the trough or maybe expect and start growing in the second quarter? Or do you think maybe there could be some additional runoff just given payoffs and paydowns?

David, this is Jill. The growth we experienced in the first quarter stems from various product lines rather than being concentrated in a single market or industry. Commercial and industrial growth was robust, and we've also seen some owner-occupied transactions, along with multifamily construction. Overall, we're noticing solid growth in our pipeline, and the production reflects this across different product types and regions. I can't predict with certainty whether we've reached the lowest point. It's important to consider the current phase of reopening in our markets, which is still inconsistent. This variability will affect business confidence and the timing of when businesses begin to expand their inventories. Therefore, I would anticipate more growth in the second half of the year. Here on the West Coast, we are beginning to reopen, but we are not fully back to where we need to be yet.

Yes, David, this is Mark. Let me just add that a lot of our assumption here is that the efficacy of the vaccines are going to take effect. And the West Coast is lagging other parts of the country in terms of reopening. So I think Jill's commentary and caution about growth occurring in the second half of the year is warranted based on just the uncertainty that we're seeing right now in terms of reopening.

Yes, that's fair. Could you share what you're observing in the market for new hires and how the hiring pipeline is looking? With bonuses being paid out, have you noticed more opportunities? Are there specific regions where you are looking to add talent and strengthen the team?

Yes, David, this is Mark. The good news is that Banner has a strong reputation in our markets. Our regional executives maintain relationships with many bankers in our area who they believe would positively contribute to our organization and align with our culture. We've found opportunities to add more talent even during the pandemic, and we've been quite successful in doing so. Those are all positive aspects. I would suggest that the chance to engage with other bankers has increased, primarily due to some frustrations in their own institutions. Banner presents a compelling option for commercial bankers looking to join our organization and effectively serve their client base. We have noticed an uptick in activity.

Okay. That's encouraging. And then just in the prepared remarks, you talked about not chasing looser structures or aggressive pricing. I guess maybe could you elaborate what segments that you maybe you see more of that and whether it's coming from the larger regionals or the smaller community banks stretching for growth? And then just on new loan yields, has there been any reprieve just given the steepening of the yield curve, has that helped pricing at all?

So in terms of the looser structure and low pricing, it's not limited to any specific product type. We observed this in both the agricultural portfolio and commercial and industrial sectors. We're seeing the loosening primarily among regional and large banks. However, there is still a strong demand for loans, which is leading to a relaxation in structure and a decline in pricing from all of our competitors. I think I might have missed part of your question; could you please repeat that again?

Well, Peter, you might want to address the yield compression.

Yes, David, from a pricing perspective, we observe that while the yield curve has steepened and offers some support on the term loan side, this is countered by the heightened competitive pressures impacting loan growth. We're maintaining a disciplined approach to pricing and not chasing yield for the sake of increasing loan growth. We prefer to avoid creating excessive duration and locking in low rates too quickly. Overall, we're not seeing significant improvements in new loan pricing due to the competitive pressures offsetting the rising and steepening yield curve.

The next question comes from Jackie Bohlen with KBW. Please go ahead.

A little bit of a housekeeping question, but I want to make sure that I'm starting with the right base given the impact of net deferred fees. Peter, do you have the end-of-period PPP dollar value for the loan portion?

The loan portion was $1.3 billion in PPP loan outstandings at the end of the quarter, as mentioned on Page 21 of our investor deck. This portfolio also included $34.1 million of unamortized loan processing fees. We expect these amounts to contribute to our income based on the pace of loan forgiveness and paydowns, and we anticipate seeing an acceleration of this in the second quarter.

Okay. Yes, I did see that number. So that's already net of the unamortized fees, the $1.3 billion on there?

It is not actually. So it's a gross number.

Okay. Sorry, I can't locate the slide I pulled it from. The loan yield of 4.52% was excluding PPPs, if I've noted that correctly, from Slide 16. Do you have that figure for last quarter?

I will need to follow up on that because I don't have the information readily available, but what we're referring to is a 10 basis point reduction in loan yields from the fourth quarter to the first quarter, which includes the PPP loans. We did have some forgiveness activity in both quarters, and the impact of the PPP loans on the change in loan yields was minimal. If we exclude the elevated interest recoveries and prepayment penalty-related interest income from the fourth quarter and focus solely on the loan coupon, there was a 6 basis point decline, which reflects the core portfolio outside of the PPP loans.

Okay. That's helpful. And sorry for the technicality of my questions. Touching on kind of a more broad topic. Just in terms of how you're thinking about capital management, and you obviously had some repurchases in the quarter putting the new authorization to use how are you thinking about capital deployment going forward? And do you have a particular ratio that you're targeting?

Yes. Our guidance on capital allocation remains steady. We announced a $1.7 million share repurchase authorization in December, and we still have ample capacity under that authorization for additional repurchases this year. Given the current environment, we prioritize repurchases as our preferred method of capital deployment due to Banner's relative valuation and other uses for that capital. Considering this year's outlook, our ability to generate retained earnings, and the reduced pressure on reserves, we believe there is room for continued capital deployment throughout the year, in line with our capital ratios. We do not provide specific capital targets as we did in the past; however, tangible common equity is currently low because of the increase in deposits and assets, while our risk-weighted capital ratios have remained stable compared to the fourth quarter. We are concentrating on a mix of metrics in this environment. I want to emphasize that we do not expect a significant decline in the risk-based capital ratio, as we view that as a more accurate measure of capital adequacy than tangible common equity at this time. Therefore, you can anticipate that we will not aim to decrease the risk-based capital ratio following any capital decisions, which gives you an idea of our approach to capital management.

The next question comes from Andrew Terrell with Stephens. Please go ahead.

Jill, maybe a quick one for you. I was looking at the reserve against the commercial real estate portfolio. I think it stepped up about 4 basis points this quarter. Were there any sub portfolios or specific industry verticals within CRE that led to that step up? Or maybe just any other color you can share on just the puts and takes there.

I would take a cautious approach regarding the developments in the office space as we move forward, considering the economic shifts affecting retail properties and our perspective on potential future changes. We need to ensure that we have adequate reserves due to the situation within that portfolio and the classified assets still present in the commercial real estate sector.

We actually have no further questions. Andrew, do you have something else to say? Just wanted to check, then this concludes our question-and-answer session. I will now turn it back over to Mark Grescovich for any closing remarks.

Thanks, Tom. As I stated, we're very proud of the Banner team as we continue to do the right thing as we battle this COVID virus and the changes in the economic climate, while servicing our clients, our communities each other, and our shareholders. Thank you 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, and be safe.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.