BANNER CORP

Comparison of Results of Operations for the Three Months Ended March 31, 2025 and December 31, 2024, and March 31, 2024

For the quarter ended March 31, 2025, net income was $45.1 million, or $1.30 per diluted share, compared to $46.4 million, or $1.34 per diluted share, for the preceding quarter and $37.6 million, or $1.09 per diluted share for three months ended March 31, 2024. The decrease in net income for the current quarter compared to the preceding quarter was primarily due to a decrease in non-interest income as well as an increase in non-interest expense, partially offset by an increase in net interest income. The increase in net income for the current quarter compared to the prior year quarter was primarily due to increases in net interest income and non-interest income, partially offset by increases in non-interest expense and the provision for credit losses.

The increase in net interest income compared to the preceding quarter reflects an overall increase in the yield on interest-earning assets and a decrease in funding costs, partially offset by a decrease in the average balance of interest-earning assets. Net interest margin for the current quarter benefited from decreased funding costs, primarily due to decreases in market interest rates, and increased yields on loans, primarily due to new loans being originated at higher interest rates and adjustable rate loans repricing higher. In 2024, the Federal Open Market Committee (“FOMC”) of the Federal Reserve lowered the target range for the federal funds rate three times, resulting in a target range of 4.25% to 4.50% at March 31, 2025. The increase in net interest income compared to the prior year quarter reflects an increase in both the yield and average balance of interest-earning assets, partially offset by an increase in funding costs.

We recorded a $3.1 million provision for credit losses for the quarter ended March 31, 2025, compared to a $3.0 million provision for credit losses in the preceding quarter and a $520,000 provision for credit losses for the three months ended March 31, 2024. The provision for credit losses for the current quarter primarily reflected loan growth in the construction portfolio and to a lesser extent risk rating migration and qualitative adjustments applied to address economic uncertainty.

Total non-interest income decreased for the quarter ended March 31, 2025, compared to the preceding quarter and increased compared to the same period a year ago. The decrease in non-interest income during the current quarter compared to the preceding quarter was primarily due to decreases in mortgage banking operations revenue and miscellaneous income, partially offset by an increase in bank owned life insurance income. The increase in non-interest income during the current quarter compared to the prior year quarter was primarily due to a decrease in the net loss recognized on the sale of securities and an increase in the fair value adjustments on financial instruments carried at fair value during the current quarter.

Total non-interest expense increased for the quarter ended March 31, 2025, compared to the preceding quarter and the same period a year ago. The increase in non-interest expense for the current quarter compared to the preceding quarter reflects an increase in salary and employee benefits, primarily resulting from increased medical premiums expense and payroll tax expense, and a decrease in capitalized loan costs, partially offset by a decrease in advertising and marketing expenses. The increase in non-interest expense for the current quarter compared to the same quarter a year ago primarily reflects increases in salary and employee benefits and professional and legal expenses.

Net Interest Income. Net interest income increased for the quarter ended March 31, 2025, compared to the preceding quarter and the same period one year earlier. The increase in net interest income compared to both comparable periods reflects an overall increase in net interest margin for the current period.

Net interest margin on a tax equivalent basis increased ten basis points to 3.92% for the first quarter of 2025, compared to 3.82% in the preceding quarter and increased 18 basis points compared to 3.74% for the same period in the prior year. Net interest margin for the current quarter, compared to the preceding quarter, benefited from decreased funding costs, primarily due to a decrease in market rates, partially offset 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, and higher yields on interest earning assets, primarily due to an increase in the average loan yield. Net interest margin for the current quarter, compared to the prior year quarter, benefited from an increase in both the yield and the average balance of interest-earning assets, partially offset by higher funding costs.

Interest Income. Interest income for the quarter ended March 31, 2025 was $193.9 million, compared to $196.4 million for the preceding quarter and $184.7 million for the same period in the prior year. The decrease in interest income during the current quarter compared to the preceding quarter primarily reflects two fewer interest earning days in the current quarter and a decrease in the average balance of interest-earning assets due to a decrease in the average balance of investment securities. The increase in interest income during the current quarter compared to the prior period a year ago reflects an increase in interest income on loans due to an increase in the overall average loan yield, mostly due to the high interest rate environment. In addition, the increase reflects growth in the average balance of loans, partially offset by a decreases in both the yield and average balance of investment securities.

The decreased interest income on loans for the current quarter compared to the preceding quarter was primarily driven by two fewer days in the quarter. The increase in interest income on loans for the current quarter compared to the same period in the prior year was due to an increase in both the average balance and yield on loans. Loan yields increased five basis points to 6.07% for the quarter ended March 31, 2025, from 6.02% in the preceding quarter and increased 20 basis points compared to 5.87% in the first quarter a year ago, due to new loans being originated at higher interest rates and adjustable rate loans repricing higher. The average balance of loans receivable for the quarter ended March 31, 2025 increased compared to both comparable periods, primarily reflecting increases in the average balances of mortgage loans, specifically commercial real estate and construction loans.

Interest and dividend income on total investment securities for the current quarter decreased from both the preceding and prior year quarters due to a lower average yield earned on total investment securities during the current quarter and a decrease in the average balance of total investment securities. The average balance of total investment securities decreased to $3.52 billion for the quarter ended March 31, 2025 (excluding the effect of fair value adjustments), compared to $3.61 billion for the preceding quarter and $3.78 billion for same period in the prior year. The average yield on the combined portfolio decreased to 3.02% for the quarter ended March 31, 2025, from 3.07% for the preceding quarter and 3.11% for the same period in the prior year.

Interest Expense. Interest expense for the quarter ended March 31, 2025 decreased $3.1 million, or 6%, to $52.8 million compared to $55.9 million for the preceding quarter, and increased compared to $51.7 million for the same period in the prior year. The decrease compared to the preceding quarter occurred as a result of a five basis-point decrease in the average cost of all funding liabilities to 1.55% for the quarter ended March 31, 2025. The increase compared to the prior year occurred as a result of an increase in both the average cost and balance of total funding liabilities.

Deposit interest expense for the quarter ended March 31, 2025 decreased $3.5 million, or 7%, to $48.7 million compared to $52.2 million for the preceding quarter, and increased compared to $44.6 million for the same period in the prior year. The decrease in deposit costs in the current quarter compared to the prior quarter was primarily due to the lagging effect of interest rate decreases in the prior quarter. The average cost of interest-bearing deposits decreased to 2.22% for the quarter ended March 31, 2025, compared to 2.33% in the preceding quarter and increased compared to 2.15% for the same period a year earlier. The decrease in the cost of interest-bearing deposits compared to the preceding quarter reflects the interest rate decreases implemented on our interest-bearing deposits in the prior quarter. The increase in the cost of interest-bearing deposits compared to the same period a year earlier was primarily the result of an overall increase in the average rate paid on interest-bearing deposits. The average rate paid on total deposits, which includes non-interest-bearing deposits, was 1.47% for the quarter ended March 31, 2025, compared to 1.53% in the preceding quarter and 1.37% for the same period in the prior year. Average deposit balances decreased to $13.45 billion for the quarter ended March 31, 2025, from $13.56 billion for the preceding quarter and increased from $13.06 billion for the same period a year earlier.

Interest expense on total borrowings for the quarter ended March 31, 2025 increased 10%, to $4.0 million compared to $3.7 million for the prior quarter, primarily due to an increase in the average balance of total borrowings, and decreased from $7.1 million for the same period a year earlier, primarily due to decreases in both the rate paid and the average balance of total borrowings. The average balance of total borrowings increased to $379.7 million for the quarter ended March 31, 2025, compared to $320.3 million for the preceding quarter, primarily due to a $67.8 million increase in the average balance of FHLB advances, and decreased compared to $575.3 million for the same period a year earlier, primarily due to a $137.7 million decrease in the average balance of FHLB advances and $45.9 million decrease in the average balance of other borrowings. The average rate paid on total borrowings for the quarter ended March 31, 2025 decreased to 4.32% from 4.57% for the preceding quarter and 4.98% 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 $2.2 million for both the quarters ended March 31, 2025 and December 31, 2024, and $2.0 million for the quarter ended March 31, 2024. The tax equivalent yield adjustment to interest earned on tax exempt securities was $1.0 million for the quarters ended March 31, 2025, December 31, 2024, and March 31, 2024.

(4)Represents non-GAAP financial measures. See non-GAAP financial measure reconciliations presented above following First Quarter 2025 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 the quarter ended March 31, 2025, we recorded a provision for credit losses - loans of $4.5 million, compared to a provision for credit losses - loans of $3.2 million during the preceding quarter. The provision for credit losses for the current quarter primarily reflected loan growth in the construction portfolio and to a lesser extent risk rating migration and qualitative adjustments applied to address economic uncertainty. The provision for credit losses for the preceding quarter primarily reflected risk rating downgrades as well as growth in loan balances. Future provisions for credit losses will continue to be influenced by changes in the amount and composition of the loan portfolio, updates to the reasonable and supportable forecast of future economic conditions, revisions to qualitative factor assessments, and any necessary changes to the reversion period applied in estimating expected credit losses.

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 construction portfolio.

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

The decrease in non-interest income during the current quarter compared to the preceding quarter was primarily due to decreases in mortgage banking operations revenue and miscellaneous income, partially offset by an increase in bank owned life insurance income. The increase in non-interest income during the current quarter compared to the prior year quarter was primarily due to a decrease in the net loss recognized on the sale of securities and an increase in the fair value adjustments on financial instruments carried at fair value during the current quarter

Revenue from mortgage banking operations decreased $583,000 for the quarter ended March 31, 2025, compared to the preceding quarter and increased $768,000 compared to the same period a year earlier. The volume of one- to four-family loans sold during the current quarter decreased compared to the preceding quarter and increased compared to the prior year quarter. While the volume of one- to four-family loans sold increased compared to the prior year quarter, overall volumes remained low due to reduced refinancing and purchase activity in the current interest rate environment. The decrease in mortgage banking operations revenue from the preceding quarter reflects a $508,000 gain related to the pooled loan sale of $34.8 million of one- to four-family loans during the fourth quarter of 2024 and a decrease in the market value of our hedge, partially offset by an increase in the pricing of one- to four-family loans sold during the current quarter. Gains on sales of one- to four-family loans totaled $2.1 million for the quarter ended March 31, 2025, compared to $2.6 million in the preceding quarter and $1.3 million for the three months ended March 31, 2024. Home purchase activity accounted for 84% of one- to four-family residential mortgage loan originations in the first quarter of 2025, compared to 79% in the preceding quarter.

Bank owned life insurance income increased for the three months ended March 31, 2025, compared to the preceding and prior year quarters due to the receipt of death benefit proceeds during the current quarter.

Miscellaneous income decreased for the three months ended March 31, 2025, compared to the prior quarter, primarily due to a gain recognized on the sale of a non-performing loan during the fourth quarter of 2024, and increased compared to same period a year earlier, primarily as a result of an increase in the gain on sale of SBA loans.

The net loss on the sale of securities recognized for the three months ended March 31, 2024 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 three months ended March 31, 2024 were due to declines in the current market valuation of limited partnership investments.

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

The increase in non-interest expense for the current quarter compared to the prior quarter reflects an increase in salary and employee benefits and a decrease in capitalized loan costs, partially offset by a decrease in advertising and marketing expenses. The increase in non-interest expense for the three months ended March 31, 2025, compared to the same period a year earlier primarily reflects increases in salary and employee benefits and professional and legal expenses.

Salary and employee benefits increased compared to the prior quarter, primarily as a result of increased medical premiums expense, as well as payroll tax expense that typically increases in the first quarter due to the reset of payroll tax wage bases. The increase compared to the same period a year earlier was primarily the result of normal salary and wage increases.

Advertising and marketing expense decreased for the quarter ended March 31, 2025, primarily due to decreases in printed media marketing and community development expenses.

Professional and legal expense decreased for the three months ended March 31, 2025, compared to the preceding quarter primarily due to a decrease in consultant and audit expenses due to the timing of these engagements. The increase compared to the same period a year ago was primarily due to an increase in legal expenses as the prior period reflected a one-time true-up.

Our efficiency ratio was 63.21% for the current quarter, compared to 61.95% in the preceding quarter. Our adjusted efficiency ratio, a non-GAAP financial measure, was 62.18% for the current quarter, compared to 60.74% in the preceding quarter. The efficiency ratio for the current quarter reflects a decrease in total revenues in addition to the increase in non-interest expenses. See non-GAAP financial measure reconciliations presented above under “First Quarter 2025 Financial Highlights.”

Income Taxes. For the quarter ended March 31, 2025, we recognized $10.7 million in income tax expense for an effective tax rate of 19.1%, 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 December 31, 2024, we recognized $11.7 million in income tax expense for an effective tax rate of 20.1%. For the three months ended March 31, 2024, we recognized $8.8 million in income tax expense for an effective tax rate of 19.0%.