BANNER CORP

Comparison of Results of Operations for the Three Months Ended September 30, 2024 and June 30, 2024, and for the Nine Months Ended September 30, 2024 and 2023

For the quarter ended September 30, 2024, net income was $45.2 million, or $1.30 per diluted share, compared to $39.8 million, or $1.15 per diluted share, for the preceding quarter. For the nine months ended September 30, 2024, net income was $122.5 million, or $3.54 per diluted share, compared to $141.0 million, or $4.09 per diluted share for the same period a year earlier. The increase in net income for the current quarter compared to the preceding quarter was primarily due to an increase in revenue with increases in both net interest income and non-interest income as well as decreases in non-interest expense and the provision for credit losses. Net income for the nine months ended September 30, 2024, included a decrease in net interest income and an increase in non-interest expense, partially offset by an increase in non-interest income and a decrease in the provision for credit losses.

The increase in net interest income compared to the preceding quarter reflects an increase in interest-earning assets and net interest margin. Net interest margin for the current quarter benefited from increased yields on loans due to new loans being originated at higher interest rates and adjustable rate loans repricing higher, partially offset by increased funding costs. On September 18, 2024, the Federal Open Market Committee of the Federal Reserve System decreased the target range for the federal funds rate by 50 basis points, and as the change occurred late in the third quarter of 2024, it had minimal impact on our current quarter net interest margin.

We recorded a $1.7 million provision for credit losses for the quarter ended September 30, 2024, compared to a $2.4 million provision for credit losses in the preceding quarter. The provision for credit losses for the current quarter primarily reflected an increase in the reserve for collateral dependent loans. The provision for credit losses for the preceding quarter primarily reflected loan growth and an increase in the reserve for collateral dependent loans. We recorded a $4.6 million provision for credit losses for the nine months ended September 30, 2024, compared to an $8.3 million provision for credit losses for the same period a year ago.

Total non-interest income increased for the quarter ended September 30, 2024, compared to the preceding quarter and increased during the nine months ended September 30, 2024, compared to the same period a year ago. The increase in non-interest income during the current quarter compared to the preceding quarter was primarily due to decreases in the net loss recognized on the sale of securities and in the net loss recognized for fair value adjustments on financial instruments carried at fair value. The increase in non-interest income during the nine months ended September 30, 2024, compared to the same period last year was also primarily due to a reduction in the net loss recognized on the sale of securities and a decrease in the net loss recognized for fair value adjustments on financial instruments carried at fair value as well as an increase in mortgage banking operations revenues.

Total non-interest expense decreased for the quarter ended September 30, 2024, compared to the preceding quarter and increased during the nine months ended September 30, 2024, compared to the same period a year ago. The decrease in non-interest expense for the current quarter compared to the prior quarter reflects a decrease in salary and employee benefits, primarily resulting from decreased medical premiums expense and unemployment and workers compensation expense. The increase in non-interest expense compared to the same period a year ago primarily reflects increases in salary and employee benefits, occupancy and equipment expense, payment and card processing services expense and deposit insurance expense, partially offset by a decrease in professional and legal expenses.

Net Interest Income. Net interest income increased for the quarter ended September 30, 2024, compared to the preceding quarter. The increase was primarily due to increases in the average yields on loans, partially offset by an increase in the cost of funding liabilities.

Net interest margin on a tax equivalent basis increased two basis points to 3.72% for the third quarter of 2024, compared to 3.70% in the preceding quarter. Net interest margin for the current quarter benefited from increased yields on loans due to new loans being originated at higher interest rates and adjustable rate loans repricing higher, partially offset by increased funding costs. The increase in the overall cost of funding liabilities was primarily due to the increase in rates across all deposits and other borrowings due to competition for deposits in the higher rate environment, as well as an increase in the average balances of higher costing interest-bearing checking accounts and savings accounts.

Net interest income decreased for the nine months ended September 30, 2024, compared to the same period one year earlier, primarily due to increased funding costs, partially offset by an increase in the average yields on interest-earning assets. The higher funding costs and average yields on interest-earning assets compared to same period a year ago was primarily the result of higher interest rates. The higher funding costs was also impacted by a shift in the average balance of non-interest-bearing deposits to higher costing interest-bearing checking accounts, savings accounts and certificates of deposit. The net interest margin on a tax equivalent basis decreased to 3.72% for the nine months ended September 30, 2024, compared to 4.07% for the same period in the prior year.

Interest Income. Interest income for the quarter ended September 30, 2024 was $195.8 million, compared to $189.1 million for the preceding quarter. The increase in interest income primarily reflects increases in both the average yields and average balances of loans. The increased yield on interest-earning assets was primarily a result of average yields on total interest-earning assets increasing eight basis points.

The increased interest income on loans for the current quarter compared to the preceding quarter was due to the average loan yields increasing to 6.04% for the quarter ended September 30, 2024, from 5.96% in the preceding quarter, as the loan portfolio continued to reprice to higher interest rates for the majority of the quarter. The average balance of loans receivable for the quarter ended September 30, 2024 increased compared to the preceding quarter, primarily reflecting increases in the average balances of mortgage loans, specifically commercial real estate and multifamily loans.

Interest and dividend income on total investment securities for the current quarter decreased from the preceding quarter due to a lower average yield earned on total investment securities during the current quarter compared to the preceding quarter and a decrease in the average balance of total investment securities. The average balance of total investment securities decreased to $3.63 billion for the quarter ended September 30, 2024 (excluding the effect of fair value adjustments), compared to $3.71 billion for the preceding quarter. The average yield on the combined portfolio decreased to 3.12% for the quarter ended September 30, 2024, from 3.14% in the preceding quarter.

Interest income for the nine months ended September 30, 2024 was $569.7 million, compared to $517.8 million for the same period in the prior year, primarily reflecting an increase in the average yield on interest-earning assets, mostly due to the high interest rate environment, as well as an increase in the average balance of interest-earning assets.

Interest Expense. Interest expense for the quarter ended September 30, 2024 increased $3.6 million, or 6%, compared to the preceding quarter. The increase occurred as a result of a seven basis-point increase in the average cost of all funding liabilities to 1.73% and an increase in the average balance of funding liabilities during the current quarter. The average balance of funding liabilities increased primarily due to higher average balances of interest-bearing transaction and savings accounts, partially offset by a decrease in the average balance of non-interest-bearing deposits and FHLB advances.

Interest expense for the nine months ended September 30, 2024 was $168.5 million, compared to $80.2 million for the same period in the prior year. The increase occurred as a result of an increase in the average cost of all funding liabilities compared to the same period in the prior year, partially offset by a decrease in average balances of funding liabilities. The decrease in the overall average balance of funding liabilities primarily reflects decreases in non-interest-bearing deposits, money market accounts and other borrowings, partially offset by higher average balances of interest-bearing transaction checking and savings accounts and certificates of deposit.

Deposit interest expense for the quarter ended September 30, 2024 increased $4.9 million, or 10%, compared to the preceding quarter. The increase was the result of a larger percentage of core deposits being in interest-bearing accounts and an increase in higher cost certificates of deposit, as well as an overall increase in the average rate paid on interest-bearing deposits. The cost of interest-bearing deposits increased to 2.45% for the quarter ended September 30, 2024, compared to 2.32% in the preceding quarter. The increase in the average cost of interest-bearing deposits was primarily the result of an increase in the cost of interest-bearing checking and savings accounts. The average rate paid on total deposits, which includes non-interest-bearing deposits, was 1.61% for the quarter ended September 30, 2024, compared to 1.50% in the preceding quarter. Average deposit balances increased to $13.32 billion for the quarter ended September 30, 2024, from $13.10 billion for the preceding quarter.

Deposit interest expense for the nine months ended September 30, 2024 increased to $147.2 million, compared to $60.8 million for the same period in the prior year. The average cost of interest-bearing deposits increased to 2.31% for the nine months ended September 30, 2024, compared to 1.07% in the same period a year earlier. The increase in the cost of interest-bearing deposits was the result of an overall increase in the average rate paid on interest-bearing deposits, reflecting the increase in market interest rates. Average total deposit balances increased to $13.16 billion for the nine months ended September 30, 2024, from $13.14 billion for the same period a year earlier, while the average rate paid on total deposits increased to 1.49% for the nine months ended September 30, 2024 from 0.62% for the same period in the prior year.

Interest expense on total borrowings for the quarter ended September 30, 2024 decreased $1.4 million, or 18%, compared to the prior quarter, primarily due to a decrease in the average balance of total borrowings. The average balance of total borrowings decreased to $499.9 million for the quarter ended September 30, 2024, compared to $614.2 million for the preceding quarter, primarily due to a $98.1 million decrease in the average balance of FHLB advances. The average rate paid on total borrowings for the quarter ended September 30, 2024 increased to 5.08% from 5.07% for the preceding quarter.

Interest expense on total borrowings for the nine months ended September 30, 2024 increased to $21.2 million from $19.5 million for the same period a year earlier due to an increase in the rate paid on total borrowings, partially offset by a decrease in the average balance of total borrowings. The average balance of total borrowings was $562.9 million for the nine months ended September 30, 2024, compared to $610.4 million for the same period a year earlier. The decrease was primarily due to a $32.1 million decrease in the average balance of other borrowings. The average rate paid on total borrowings for the nine months ended September 30, 2024 increased to 5.04% from 4.26% for the same period a year earlier.

Analysis of Net Interest Spread. The following table presents for the periods indicated our condensed average balance sheet information, together with interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities with additional comparative data on our operating performance (dollars in thousands). Average balances are computed using daily average balances.

(1)Average balances include loans accounted for on a nonaccrual basis and accruing loans 90 days or more past due. Amortization of net deferred loan fees/costs is included with interest on loans.

(2)Average other non-interest-bearing liabilities include fair value adjustments related to junior subordinated debentures.

(3)Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $2.3 million and $2.2 million for the quarters ended September 30, 2024 and June 30, 2024, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $1.0 million for both the quarter ended September 30, 2024 and June 30, 2024.

(4)Represents non-GAAP financial measures. See non-GAAP financial measure reconciliations presented above following Third Quarter 2024 Highlights.

(1)Average balances include loans accounted for on a nonaccrual basis and accruing loans 90 days or more past due. Amortization of net deferred loan fees/costs is included with interest on loans.

(2)Average other non-interest-bearing liabilities include fair value adjustments related to junior subordinated debentures.

(3)Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $6.5 million and $5.4 million for the nine months ended September 30, 2024 and 2023, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $3.1 million and $3.4 million for the nine months ended September 30, 2024 and 2023, respectively.

(4)Represents non-GAAP financial measures. See non-GAAP financial measure reconciliations presented above following Third Quarter 2024 Highlights.

Provision and Allowance for Credit Losses. Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. These factors include, among others, changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions. The following table sets forth an analysis of our allowance for credit losses - loans for the periods indicated (dollars in thousands):

The provision for credit losses - loans reflects the amount required to maintain the allowance for credit losses - loans at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. During both the quarter ended September 30, 2024 and the preceding quarter, we recorded a provision for credit losses - loans of $2.0 million. The provision for credit losses - loans for the current quarter primarily reflects an increase in the reserve for collateral dependent loans. The provision for credit losses - loans for the preceding quarter primarily reflected loan growth and an increase in the reserve for collateral dependent loans. Future assessments of the expected credit losses will not only be impacted by changes in both the composition and amount of loans, and to the reasonable and supportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required changes in the reasonable and supportable forecast reversion period.

The provision for credit losses - unfunded loan commitments reflects the amount required to maintain the allowance for credit losses - unfunded loan commitments at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. The following table sets forth an analysis of our allowance for credit losses - unfunded loan commitments for the periods indicated (dollars in thousands):

The decrease in the allowance for credit losses - unfunded loan commitments for the current quarter primarily reflects a decrease in unfunded loan commitments in the one- to four-family construction, construction, land and land development, and agricultural loan portfolios.

Non-interest Income. The following table presents the key components of non-interest income for the periods indicated (dollars in thousands):

The increase in non-interest income during the current quarter compared to the preceding quarter was primarily due to decreases in the net loss recognized on the sale of securities and the net loss recognized on the valuation of financial instruments carried at fair value, partially offset by a decrease in miscellaneous income. The increase in non-interest income for the nine months ended September 30, 2024, compared to the same period a year earlier was primarily due to decreases in the net loss recognized on the sale of securities and the net loss recognized on the valuation of financial instruments carried at fair value, as well as increases in revenue from mortgage banking operations and miscellaneous income.

Revenue from mortgage banking operations increased $174,000 for the quarter ended September 30, 2024, compared to the preceding quarter and increased $2.1 million for the nine months ended September 30, 2024, compared to the same period a year earlier. The volume of one- to four-family loans sold during the current quarter and the nine months ended September 30, 2024 increased relative to the comparable periods, although overall volumes remained low due to reduced refinancing and purchase activity in the current rate environment. The increase was also impacted by increases in the pricing on the one- to four-family loans sold during the current period. The current year also benefited from a $284,000 gain related to the sale of $19.8 million of one- to four-family portfolio loans during the second quarter of 2024. In addition, the prior year period reflected a downward lower of cost or market adjustment on multifamily loans held for sale. In 2023, the Bank discontinued the origination of multifamily loans for sale into the secondary market. All of the multifamily loans held for sale were transferred to the held for investment loan portfolio and the related lower of cost or market adjustment was reversed in the fourth quarter of 2023. Gains on sales of one- to four-family loans resulted in income of $2.1 million and $5.4 million for the quarter and nine months ended September 30, 2024, respectively, compared to $2.0 million in the preceding quarter, and $4.2 million for the nine months ended September 30, 2023. Home purchase activity accounted for 88% of one- to four-family mortgage loan originations in the third quarter of 2024, compared to 89% in the preceding quarter.

Miscellaneous income increased for the nine months ended September 30, 2024, compared to the same period a year earlier, primarily as a result of an increase in the gain on sale of SBA loans.

There were no sales of securities during the current quarter and the net loss on the sale of securities recognized for the prior periods reflected strategic sales of securities to minimize the impact of increasing rates on our securities portfolio. The net loss for fair value adjustments for changes in the valuation of financial instruments carried at fair value for the prior quarter and the nine months ended September 30, 2023 were due to declines in the current market valuation of limited partnership investments. The net loss for fair value adjustments for changes in the valuation of financial instruments carried at fair value for the nine months ended September 30, 2023 was also impacted by declines in the market valuation of investment securities held for trading.

Non-interest Expense. The following table represents key elements of non-interest expense for the periods indicated (dollars in thousands):

The decrease in non-interest expense for the current quarter compared to the prior quarter reflects a decrease in salary and employee benefits. The increase in non-interest expense for the nine months ended September 30, 2024, compared to the same period a year earlier primarily reflects increases in salary and employee benefits as well as payment and card processing services expense, partially offset by a decrease in professional and legal expenses. Salary and employee benefits increased for the nine months ended September 30, 2023, primarily as a result of normal annual salary and wage increases and an increase in loan production related commission expense.

Other notable changes included payment and card processing services expense, which increased for the nine months ended September 30, 2024, compared to the same period a year earlier, primarily due to an increase in online banking costs and fraud losses. Professional and legal expense decreased for the nine months ended September 30, 2024, compared to the same period a year ago primarily due to a reduction in legal and consulting expenses as well as one-time reductions in litigation settlement costs.

Our efficiency ratio was 62.63% for the current quarter, compared to 65.53% in the preceding quarter. Our adjusted efficiency ratio, a non-GAAP financial measure, was 61.27% for the current quarter, compared to 63.60% in the preceding quarter. The efficiency ratio for the current quarter reflects an increase in total revenues in addition to the decrease in non-interest expenses. See non-GAAP financial measure reconciliations presented above under “Third Quarter 2024 Financial Highlights.”

Income Taxes. For the quarter ended September 30, 2024, we recognized $10.6 million in income tax expense for an effective tax rate of 19.0%, which reflects our blended statutory tax rate reduced by the effect of tax-exempt income, certain tax credits, and tax benefits related to restricted stock vesting. Our statutory income tax rate is 23.7%, representing a statutory federal income tax rate of 21.0% and apportioned effects of the state income tax rates. For the quarter ended June 30, 2024, we recognized $9.5 million in income tax expense for an effective tax rate of 19.2%. For the nine months ended September 30, 2024, we recognized $28.9 million in income tax expense for an effective tax rate of 19.1%, compared to $32.8 million in income tax expense for an effective tax rate of 18.9% for the same period in the prior year.