BANNER CORP 10-Q

ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations Executive Overview Banner is a bank holding company incorporated in the State of Washington, which wholly owns one subsidiary bank, Banner Bank. The Bank is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington, and as of June 30, 2024, it had 135 branch offices and 13 loan production offices located in Washington, Oregon, California, Idaho and Utah. Banner is subject to regulation by the Federal Reserve. The Bank is subject to regulation by the Washington State Department of Financial Institutions-Division of Banks (the DFI) and the Federal Deposit Insurance Corporation (the FDIC). As of June 30, 2024, we had total consolidated assets of $15.82 billion, total loans of $11.14 billion, total deposits of $13.08 billion and total shareholders’ equity of $1.69 billion. The Bank is a regional bank that offers a wide variety of commercial banking services and financial products to individuals, businesses and public sector entities in its primary market areas. The Bank’s primary business is that of traditional banking institutions, accepting deposits and originating loans in locations surrounding our offices in Washington, Oregon, California, Idaho and Utah. The Bank is also an active participant in secondary loan markets, engaging in mortgage banking operations through the origination and sale of one- to four-family residential loans. Lending activities include commercial business and commercial real estate loans, agriculture business loans, construction and land development loans, one- to four-family and multifamily residential loans, SBA loans and consumer loans. The Company’s successful execution of its super community bank model and strategic initiatives has delivered solid core operating results and profitability over the last several years. The Company’s longer term strategic initiatives continue to focus on originating high quality assets and client acquisition, which we believe will continue to generate strong revenue while maintaining the Company’s moderate risk profile. Second Quarter 2024 Financial Highlights • Revenue was $149.7 million for the second quarter of 2024, compared to $144.6 million in the preceding quarter. • Adjusted revenue* (the total of net interest income and total non-interest income adjusted for the net gain or loss on the sale of securities and the net change in valuation of financial instruments) was $150.5 million in the second quarter of 2024, compared to $150.4 million in the preceding quarter. • Net interest income was $132.5 million in the second quarter of 2024, compared to $133.0 million in the preceding quarter. • Net interest margin, on a tax equivalent basis, was 3.70%, compared to 3.74% in the preceding quarter. • Mortgage banking operations revenue was $3.0 million for the second quarter of 2024, compared to $2.3 million in the preceding quarter. • Return on average assets was 1.02%, compared to 0.97% in the preceding quarter. • Net loans receivable increased 3% to $10.99 billion at June 30, 2024, compared to $10.72 billion at March 31, 2024. • Non-performing assets were $33.3 million, or 0.21% of total assets, at June 30, 2024, compared to $29.9 million, or 0.19% of total assets at March 31, 2024. • The allowance for credit losses - loans was $152.8 million, or 1.37% of total loans receivable, as of June 30, 2024, compared to $151.1 million, or 1.39% of total loans receivable, at March 31, 2024. • Total deposits decreased to $13.08 billion at June 30, 2024, compared to $13.16 billion at March 31, 2024. Core deposits represented 88% of total deposits at June 30, 2024. • Available borrowing capacity was $4.73 billion at June 30, 2024, compared to $5.05 billion at March 31, 2024. • On balance sheet liquidity was $2.83 billion at June 30, 2024, compared to $2.77 billion at March 31, 2024. • Dividends paid to shareholders were $0.48 per share in the quarter ended June 30, 2024. • Common shareholders’ equity per share increased 1% to $49.07 at June 30, 2024, compared to $48.39 at the preceding quarter end. • Tangible common shareholders’ equity per share* increased 2% to $38.12 at June 30, 2024, compared to $37.40 at the preceding quarter end. *Non-GAAP Financial Measures: Management has presented non-GAAP financial measures in this discussion and analysis because it believes that they provide useful and comparative information to assess trends in our core operations and to facilitate the comparison of our performance with the performance of our peers. However, these non-GAAP financial measures are supplemental and are not a substitute for any analysis based on GAAP. Where applicable, we have also presented comparable earnings information using GAAP financial measures. For a reconciliation of these non-GAAP financial measures, see the tables below. Because not all companies use the same calculations, our presentation may not be comparable to other similarly titled measures as calculated by other companies. 47 Table of Contents Adjusted revenue, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average equity and adjusted efficiency ratio are non-GAAP financial measures. To calculate these non-GAAP measures, we make adjustments to our GAAP revenues and expenses as reported on our Consolidated Statements of Operations. Management believes that these non-GAAP financial measures provide information to investors that is useful in evaluating the operating performance and trends of financial services companies, including the Company (dollars in thousands except per share data). Quarters Ended Six Months Ended June 30, Jun 30, 2024 Mar 31, 2024 Jun 30, 2023 2024 2023 ADJUSTED REVENUE Net interest income (GAAP) $ 132,546 $ 132,959 $ 142,518 $ 265,505 $ 295,830 Non-interest income (GAAP) 17,199 11,591 8,422 28,790 17,699 Total revenue (GAAP) 149,745 144,550 150,940 294,295 313,529 Exclude: Net loss on sale of securities 562 4,903 4,527 5,465 11,779 Net change in valuation of financial instruments carried at fair value 190 992 3,151 1,182 3,703 Adjusted revenue (non-GAAP) $ 150,497 $ 150,445 $ 158,618 $ 300,942 $ 329,011 Quarters Ended Six Months Ended June 30, Jun 30, 2024 Mar 31, 2024 Jun 30, 2023 2024 2023 ADJUSTED EARNINGS Net income (GAAP) $ 39,795 $ 37,559 $ 39,591 $ 77,354 $ 95,146 Exclude: Net loss on sale of securities 562 4,903 4,527 5,465 11,779 Net change in valuation of financial instruments carried at fair value 190 992 3,151 1,182 3,703 Banner Forward expenses (1) — — 195 — 338 Related net tax benefit (180) (1,415) (1,890) (1,595) (3,797) Total adjusted earnings (non-GAAP) $ 40,367 $ 42,039 $ 45,574 $ 82,406 $ 107,169 Diluted earnings per share (GAAP) $ 1.15 $ 1.09 $ 1.15 $ 2.24 $ 2.76 Adjusted diluted earnings per share (non-GAAP) $ 1.17 $ 1.22 $ 1.32 $ 2.39 $ 3.11 Return on average assets 1.02 % 0.97 % 1.02 % 1.00 % 1.23 % Adjusted return on average assets (2) 1.04 % 1.08 % 1.18 % 1.06 % 1.39 % Return on average equity 9.69 % 9.14 % 10.25 % 9.42 % 12.57 % Adjusted return on average equity (3) 9.83 % 10.24 % 11.80 % 10.03 % 14.16 % Quarters Ended Six Months Ended June 30, Jun 30, 2024 Mar 31, 2024 Jun 30, 2023 2024 2023 ADJUSTED EFFICIENCY RATIO Non-interest expense (GAAP) $ 98,128 $ 97,641 $ 95,405 $ 195,769 $ 190,026 Exclude: Banner Forward expenses (1) — — (195) — (338) CDI amortization (724) (723) (991) (1,447) (2,041) State and municipal tax expense (1,394) (1,304) (1,229) (2,698) (2,529) REO operations (297) 220 (75) (77) 202 Adjusted non-interest expense (non-GAAP) $ 95,713 $ 95,834 $ 92,915 $ 191,547 $ 185,320 Net interest income (GAAP) $ 132,546 $ 132,959 $ 142,518 $ 265,505 $ 295,830 Non-interest income (GAAP) 17,199 11,591 8,422 28,790 17,699 Total revenue (GAAP) 149,745 144,550 150,940 294,295 313,529 Exclude: Net loss on sale of securities 562 4,903 4,527 5,465 11,779 Net change in valuation of financial instruments carried at fair value 190 992 3,151 1,182 3,703 Adjusted revenue (non-GAAP) $ 150,497 $ 150,445 $ 158,618 $ 300,942 $ 329,011 Efficiency ratio (GAAP) 65.53 % 67.55 % 63.21 % 66.52 % 60.61 % Adjusted efficiency ratio (non-GAAP) (4) 63.60 % 63.70 % 58.58 % 63.65 % 56.33 % (1) Included in miscellaneous expenses in the Consolidated Statement of Operations. (2) Adjusted earnings (non-GAAP) divided by average assets. (3) Adjusted earnings (non-GAAP) divided by average equity. (4) Adjusted non-interest expense (non-GAAP) divided by adjusted revenue. 48 Table of Contents The ratio of tangible common shareholders’ equity to tangible assets is also a non-GAAP financial measure. We calculate tangible common equity by excluding goodwill and other intangible assets from shareholders’ equity. We calculate tangible assets by excluding the balance of goodwill and other intangible assets from total assets. We believe that this is consistent with the treatment by our bank regulatory agencies, which exclude goodwill and other intangible assets from the calculation of risk-based capital ratios. Management believes that this non-GAAP financial measure provides information to investors that is useful in understanding the basis of our capital position (dollars in thousands except share and per share data). TANGIBLE COMMON SHAREHOLDERS’ EQUITY TO TANGIBLE ASSETS June 30, 2024 December 31, 2023 June 30, 2023 Shareholders’ equity (GAAP) $ 1,690,766 $ 1,652,691 $ 1,542,513 Exclude goodwill and other intangible assets, net 377,358 378,805 380,520 Tangible common shareholders’ equity (non-GAAP) $ 1,313,408 $ 1,273,886 $ 1,161,993 Total assets (GAAP) $ 15,816,194 $ 15,670,391 $ 15,584,736 Exclude goodwill and other intangible assets, net 377,358 378,805 380,520 Total tangible assets (non-GAAP) $ 15,438,836 $ 15,291,586 $ 15,204,216 Common shareholders’ equity to total assets (GAAP) 10.69 % 10.55 % 9.90 % Tangible common shareholders’ equity to tangible assets (non-GAAP) 8.51 % 8.33 % 7.64 % TANGIBLE COMMON SHAREHOLDERS’ EQUITY PER SHARE Shareholders’ equity (GAAP) $ 1,690,766 $ 1,652,691 $ 1,542,513 Tangible common shareholders’ equity (non-GAAP) $ 1,313,408 $ 1,273,886 $ 1,161,993 Common shares outstanding at end of period 34,455,752 34,348,369 34,344,627 Common shareholders’ equity (book value) per share (GAAP) $ 49.07 $ 48.12 $ 44.91 Tangible common shareholders’ equity (tangible book value) per share (non-GAAP) $ 38.12 $ 37.09 $ 33.83 Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial condition and results of operations. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Selected Notes to the Consolidated Financial Statements contained in Item 1 of this Form 10-Q. Summary of Critical Accounting Estimates Our critical accounting estimates are described in detail in the Critical Accounting Estimates section of our 2023 Form 10-K. The condensed consolidated financial statements are prepared in conformity with GAAP and follow general practices within the financial services industry in which the Company operates. This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements. As this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Certain estimates inherently have a greater reliance on the use of assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Management believes that the allowance for credit losses and fair value require significant judgements and assumptions which are susceptible to significant changes based on the current environment. There have been no significant changes in our application of critical accounting estimates since December 31, 2023. Comparison of Financial Condition at June 30, 2024 and December 31, 2023 General : Total assets increased $145.8 million to $15.82 billion at June 30, 2024, from $15.67 billion at December 31, 2023. The increase was primarily due to loan growth, partially offset by a decrease in the securities portfolio resulting from principal repayments, maturities and sales of securities. Loans and lending: Loans are our most significant and generally highest yielding earning assets. We attempt to maintain a total loans to total deposits ratio at a level designed to enhance our revenues, while adhering to sound underwriting practices and appropriate diversification guidelines in order to maintain a moderate risk profile. Our loan to deposit ratio at June 30, 2024 was 85%. We offer a wide range of loan products to meet the demands of our clients. Our lending activities are primarily directed toward the origination of real estate and commercial loans. Total loans receivable (gross loans less deferred fees and discounts and excluding loans held for sale) increased $333.4 million at June 30, 2024, compared to December 31, 2023, primarily reflecting increased one-to-four family residential loans, multifamily construction loans, commercial business loans and home equity revolving lines of credit, partially offset by decreased one-to-four family construction loans. At June 30, 2024, our loans receivable totaled $11.14 billion compared to $10.81 billion at December 31, 2023. 49 Table of Contents The following table sets forth the composition of the Company’s loans receivable by type of loan as of the dates indicated (dollars in thousands): Percentage Change Jun 30, 2024 Dec 31, 2023 Jun 30, 2023 Year End Prior Year Qtr. Commercial real estate: Owner-occupied $ 950,922 $ 915,897 $ 894,876 4 % 6 % Investment properties 1,536,142 1,541,344 1,558,176 — (1) Small balance CRE 1,234,302 1,178,500 1,172,825 5 5 Total Commercial real estate 3,721,366 3,635,741 3,625,877 2 3 Multifamily real estate 717,089 811,232 699,830 (12) 2 Construction, land and land development: Commercial construction 173,296 170,011 183,765 2 (6) Multifamily construction 663,989 503,993 433,868 32 53 One- to four-family construction 490,237 526,432 547,200 (7) (10) Land and land development 352,184 336,639 345,053 5 2 Total Construction, land and land development 1,679,706 1,537,075 1,509,886 9 11 Commercial business: Commercial business 1,298,134 1,255,734 1,313,226 3 (1) Small business scored 1,074,465 1,022,154 982,283 5 9 Total Commercial business 2,372,599 2,277,888 2,295,509 4 3 Agricultural business, including secured by farmland 334,583 331,089 310,120 1 8 One- to four-family residential 1,603,266 1,518,046 1,340,126 6 20 Consumer: Consumer—home equity revolving lines of credit 611,739 588,703 577,725 4 6 Consumer—other 103,500 110,681 113,334 (6) (9) Total Consumer 715,239 699,384 691,059 2 3 Total loans receivable $ 11,143,848 $ 10,810,455 $ 10,472,407 3 % 6 % Commercial real estate loans totaled $3.72 billion, or 33% of our loan portfolio, and multifamily real estate loans totaled $717.1 million, or 6% of our loan portfolio, at June 30, 2024. Commercial real estate loans increased by $85.6 million during the first six months of 2024, while multifamily real estate loans decreased by $94.1 million, primarily due to certain affordable housing loans transferring to small balance commercial real estate. Our construction, land and land development loans totaled $1.68 billion, or 15% of our loan portfolio, at June 30, 2024, compared to $1.54 billion at December 31, 2023. The largest shifts in our construction, land and land development portfolio occurred in multifamily and one- to four-family construction loans. Multifamily construction loans increased $160.0 million, or 32%, to $664.0 million at June 30, 2024, compared to December 31, 2023. Multifamily construction loans represented approximately 6% of our total loan portfolio at June 30, 2024 and was comprised of affordable housing projects and, to a lesser extent, market rate multifamily projects across our footprint. One- to four-family construction loans decreased $36.2 million, or 7%, to $490.2 million at June 30, 2024, compared to $526.4 million at December 31, 2023. One- to four-family construction loans represented approximately 4% of our total loan portfolio at June 30, 2024, and included speculative construction loans, as well as “all-in-one” construction loans made to owner occupants that convert to permanent loans upon completion of the homes that, depending on market conditions, may be subsequently sold into the secondary market. Our commercial business lending is directed toward meeting the credit and related deposit needs of various small- to medium-sized business and agribusiness borrowers operating in our primary market areas. Our commercial and agricultural business loans were $2.71 billion at June 30, 2024 and $2.61 billion at December 31, 2023. Commercial and agricultural business loans represented approximately 24% of our loan portfolio at June 30, 2024. Our commercial business lending also includes participation in certain syndicated loans, including shared national credits, which totaled $226.0 million, or 2% of our loan portfolio, at June 30, 2024, compared to $239.0 million, or 2% of our loan portfolio, at December 31, 2023. 50 Table of Contents We are active originators of one- to four-family residential loans in most communities where we have established offices in Washington, Oregon, California, Idaho and Utah. Most of the one- to four-family residential loans we originate in normal market conditions are sold in secondary markets with net gains on sales and loan servicing fees reflected in our revenues from mortgage banking operations. At June 30, 2024, one- to four-family residential loans retained in our portfolio increased $85.2 million, to $1.60 billion, compared to $1.52 billion at December 31, 2023. The increase in one- to four-family residential loans was primarily the result of a higher percentage of one- to four-family construction loans converting to one- to four-family residential loans. One- to four-family residential loans represented 14% of our loan portfolio at June 30, 2024. Our consumer loan activity is primarily directed at meeting demand from our existing deposit clients. At June 30, 2024, consumer loans, including home equity revolving lines of credit, increased $15.9 million to $715.2 million, compared to $699.4 million at December 31, 2023. The following table shows the commitment amount for loan origination activity (excluding loans held for sale) for the periods indicated (in thousands): Three Months Ended Six Months Ended Jun 30, 2024 Mar 31, 2024 Jun 30, 2023 Jun 30, 2024 Jun 30, 2023 Commercial real estate $ 102,258 $ 67,362 $ 94,640 $ 169,620 $ 170,408 Multifamily real estate 2,774 385 3,441 3,159 38,961 Construction and land 546,675 437,273 488,980 983,948 736,822 Commercial business 167,168 154,715 128,404 321,883 260,230 Agricultural business 22,255 34,406 28,367 56,661 51,548 One-to four- family residential 34,498 17,568 52,618 52,066 86,883 Consumer 120,470 66,145 112,555 186,615 173,443 Total commitment amount for loan originations (excluding loans held for sale) $ 996,098 $ 777,854 $ 909,005 $ 1,773,952 $ 1,518,295 Loans held for sale increased to $13.4 million at June 30, 2024, compared to $11.2 million at December 31, 2023. Originations of loans held for sale decreased to $107.2 million for the six months ended June 30, 2024, compared to $110.4 million for the same period last year. The volume of one- to four-family residential mortgage loans sold was $140.9 million during the six months ended June 30, 2024, compared to $103.1 million in the same period a year ago. The following table presents loans by geographic concentration at the dates indicated (dollars in thousands): Jun 30, 2024 Dec 31, 2023 Jun 30, 2023 Percentage Change Amount Percentage Amount Amount Year End Prior Year Qtr. Washington $ 5,182,378 47 % $ 5,095,602 $ 4,945,074 2 % 5 % California 2,787,190 25 2,670,923 2,537,121 4 10 Oregon 2,072,153 19 1,974,001 1,913,929 5 8 Idaho 641,209 6 610,064 595,065 5 8 Utah 80,295 1 68,931 62,720 16 28 Other 380,623 2 390,934 418,498 (3) (9) Total loans receivable $ 11,143,848 100 % $ 10,810,455 $ 10,472,407 3 % 6 % Investment Securities: Total securities decreased $212.1 million to $3.22 billion at June 30, 2024, from $3.43 billion at December 31, 2023, primarily due to securities sales, paydowns and maturities. Securities sales, paydowns and maturities exceeded purchases during the six-month period ended June 30, 2024. Purchases during the six months ended June 30, 2024, consisted primarily of state and local government obligations and agency commercial mortgage-backed securities. The average effective duration of the Company’s securities portfolio was 6.5 years at both June 30, 2024 and December 31, 2023. Fair value adjustments for securities designated as available-for-sale decreased $24.1 million for the six months ended June 30, 2024, which was included, net of the associated tax benefit of $5.8 million, as a component of other comprehensive income, and largely occurred as a result of increases in market interest rates during the six months ended June 30, 2024. Deposits: Deposits, client retail repurchase agreements and loan repayments are the major sources of our funds for lending and other investment purposes. We compete with other financial institutions and financial intermediaries in attracting deposits and we generally attract deposits within our primary market areas. Much of the focus of our branch strategy and marketing efforts over the last several years have been directed toward attracting additional deposit client relationships and balances. This effort has been particularly directed towards emphasizing core deposit activity in non-interest-bearing and other transaction and savings accounts. Despite rate sensitive deposits shifting out of non-interest-bearing deposits due to clients seeking higher yields on their deposits, our strategy of focusing on relationship banking remains intact. 51 Table of Contents The following table sets forth the Company’s deposits by type of deposit account as of the dates indicated (dollars in thousands): Percentage Change Jun 30, 2024 Dec 31, 2023 Jun 30, 2023 Year End Prior Year Qtr. Non-interest-bearing $ 4,537,803 $ 4,792,369 $ 5,369,187 (5) % (15) % Interest-bearing checking 2,208,742 2,098,526 1,908,402 5 16 Regular savings accounts 3,192,036 2,980,530 2,588,298 7 23 Money market accounts 1,615,549 1,680,605 1,876,569 (4) (14) Interest-bearing transaction & savings accounts 7,016,327 6,759,661 6,373,269 4 10 Total core deposits 11,554,130 11,552,030 11,742,456 — (2) Interest-bearing certificates 1,525,133 1,477,467 1,356,600 3 12 Total deposits $ 13,079,263 $ 13,029,497 $ 13,099,056 — % — % Total deposits increased $49.8 million at June 30, 2024, compared to December 31, 2023, with core deposits increasing $2.1 million and certificates of deposit increasing $47.7 million. The increase in certificates of deposit is a result of higher rates attracting clients to these deposit types. We had $105.3 million of brokered deposits at June 30, 2024, compared to $108.1 million at December 31, 2023. Core deposits represented 88% of total deposits at both June 30, 2024 and December 31, 2023. Competition for deposits in our market areas remains strong. The following table sets forth the number and average account balance of the Company’s deposit accounts as of the dates indicated (dollars in thousands): Jun 30, 2024 Dec 31, 2023 Jun 30, 2023 Number of deposit accounts 460,107 463,750 467,490 Average account balance per account $ 29 $ 29 $ 28 The following table presents deposits by geographic concentration at the dates indicated (dollars in thousands): Jun 30, 2024 Dec 31, 2023 Jun 30, 2023 Percentage Change Amount Percentage Amount Amount Year End Prior Year Qtr. Washington $ 7,171,699 55 % $ 7,247,392 $ 7,255,731 (1) % (1) % Oregon 2,909,838 22 2,852,677 2,914,267 2 — California 2,331,793 18 2,269,557 2,257,247 3 3 Idaho 665,933 5 659,871 671,811 1 (1) Total deposits $ 13,079,263 100 % $ 13,029,497 $ 13,099,056 — % — % Borrowings: We had $398.0 million of FHLB advances at June 30, 2024, compared to $323.0 million at December 31, 2023. Other borrowings, consisting of retail repurchase agreements primarily related to client cash management accounts, decreased $16.9 million to $166.0 million at June 30, 2024, compared to $182.9 million at December 31, 2023. The increased borrowings were primarily used to fund loan growth. At June 30, 2024, the Company’s off-balance sheet liquidity included additional borrowing capacity of $3.02 billion at the FHLB and $1.59 billion at the Federal Reserve as well as federal funds line of credit agreements with other financial institutions of $125.0 million. Junior subordinated debentures totaled $66.8 million at June 30, 2024, compared to $66.4 million at December 31, 2023. Subordinated notes, net of issuance costs were $89.6 million at June 30, 2024, compared to $92.9 million at December 31, 2023. Shareholders’ Equity: Total shareholders’ equity increased $38.1 million to $1.69 billion, or 10.69% of total assets, at June 30, 2024, compared to $1.65 billion, or 10.55% of total assets, at December 31, 2023. The increase in shareholders’ equity was primarily due to a $43.9 million increase in retained earnings as a result of $77.4 million in net income, partially offset by the accrual of cash dividends during the six months ended June 30, 2024. In addition, accumulated other comprehensive loss increased by $8.4 million, primarily due to an increase in the unrealized losses on the security portfolio. There were no shares of common stock repurchased during the six months ended June 30, 2024. Tangible common shareholders’ equity, which excludes goodwill and other intangible assets and is a non-GAAP financial measure, increased $39.5 million to $1.31 billion, or 8.51% of tangible assets, at June 30, 2024, compared to $1.27 billion, or 8.33% of tangible assets at December 31, 2023. A reconciliation of this non-GAAP financial measure to its comparable GAAP financial measure is presented above following “Second Quarter 2024 Financial Highlights.” 52 Table of Contents Comparison of Results of Operations for the Three Months Ended June 30, 2024, and March 31, 2024, and for the Six Months Ended June 30, 2024 and 2023 For the quarter ended June 30, 2024, net income was $39.8 million, or $1.15 per diluted share, compared to $37.6 million, or $1.09 per diluted share, for the preceding quarter. For the six months ended June 30, 2024, our net income was $77.4 million, or $2.24 per diluted share, compared to $95.1 million, or $2.76 per diluted share for the same period a year earlier. The increase in net income for the current quarter compared to the preceding quarter primarily was due to increased non-interest income, partially offset by an increase in the provision for credit losses. The increase in non-interest income was primarily the result of a decrease in the net loss recognized on the sale of securities and, to a lesser extent, a decrease in the net loss recognized for fair value adjustments on financial instruments carried at fair value. Our net income for the six months ended June 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. Net interest margin for the current quarter was impacted by an increase in funding costs due to the high interest rate environment and its effect on deposit costs, partially offset by increased yields on loans due to new loans being originated at higher interest rates and adjustable rate loans repricing higher. Total revenue for the quarter ended June 30, 2024, increased compared to the preceding quarter primarily due to a decrease in the net loss recognized on the sale of securities. Total revenue decreased during the six months ended June 30, 2024, compared to the same period a year earlier due to increased funding costs, partially offset by increased interest income, a decrease in the net loss on the sale of securities recorded during the current period and a decrease in the net loss recognized for fair value adjustments on financial instruments carried at fair value. We recorded a $2.4 million provision for credit losses for the quarter ended June 30, 2024, compared to a $520,000 provision for credit losses in the preceding quarter. The provision for credit losses for the current quarter primarily reflected loan growth and an increase in the reserve for collateral dependent loans. The provision for credit losses for the preceding quarter was primarily related to the loan growth in the construction and one- to four-family loan portfolios, partially offset by a reduction in unfunded loan commitments in the construction portfolio. We recorded a $2.9 million provision for credit losses for the six months ended June 30, 2024, compared to a $6.2 million provision for credit losses for the same period a year ago. Total non-interest income increased for the quarter ended June 30, 2024, compared to the preceding quarter and increased during the six months ended June 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 six months ended June 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. Total non-interest expense increased for the quarter ended June 30, 2024, compared to the preceding quarter and increased during the six months ended June 30, 2024, compared to the same period a year ago. The increase in non-interest expense for the current quarter compared to the prior quarter reflects an increase in salary and employee benefits, primarily resulting from normal annual salary and wage increases and an increase in loan production related commission expense, partially offset by an increase in capitalized loan origination costs, also due to increased loan production. The increase in non-interest expense compared to the same period a year ago primarily reflects increases in salary and employee benefits, payment and card processing services expense and deposit insurance expense, partially offset by a decrease in professional and legal expenses. 53 Table of Contents OPERATING DATA: Quarters Ended Six Months Ended (In thousands) June 30, 2024 March 31, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Interest income $ 189,138 $ 184,688 $ 171,809 $ 373,826 $ 338,770 Interest expense 56,592 51,729 29,291 108,321 42,940 Net interest income 132,546 132,959 142,518 265,505 295,830 Provision for credit losses 2,369 520 6,764 2,889 6,240 Net interest income after provision for credit losses 130,177 132,439 135,754 262,616 289,590 Deposit fees and other service charges 10,590 11,022 10,600 21,612 21,162 Mortgage banking operations 3,006 2,335 1,686 5,341 4,377 Net loss on sale of securities (562) (4,903) (4,527) (5,465) (11,779) Net change in valuation of financial instruments carried at fair value (190) (992) (3,151) (1,182) (3,703) All other non-interest income 4,355 4,129 3,814 8,484 7,642 Total non-interest income 17,199 11,591 8,422 28,790 17,699 Salary and employee benefits 63,831 62,369 61,972 126,200 123,361 All other non-interest expenses 34,297 35,272 33,433 69,569 66,665 Total non-interest expense 98,128 97,641 95,405 195,769 190,026 Income before provision for income tax expense 49,248 46,389 48,771 95,637 117,263 Provision for income tax expense 9,453 8,830 9,180 18,283 22,117 Net income $ 39,795 $ 37,559 $ 39,591 $ 77,354 $ 95,146 PER COMMON SHARE DATA: Quarters Ended Six Months Ended June 30, 2024 March 31, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Net income: Basic $ 1.15 $ 1.09 $ 1.15 $ 2.25 $ 2.77 Diluted 1.15 1.09 1.15 2.24 2.76 Net Interest Income. Net interest income decreased for the quarter ended June 30, 2024, compared to the preceding quarter. The decrease was primarily due to an increase in the cost of funding liabilities, partially offset by increases in the average yields on loans and investment securities. Net interest margin on a tax equivalent basis decreased four basis points to 3.70% for the second quarter of 2024, compared to 3.74% in the preceding quarter. Net interest margin for the current quarter was impacted by increased funding costs reflecting the persistent high interest rate environment, partially offset by increased yields on loans due to new loans being originated at higher interest rates and adjustable rate loans repricing higher. The increase in the overall cost of funding liabilities was primarily due to the increase in rates across all deposits and most borrowing categories due to higher market rates generally, as well as a shift in the average balance of non-interest-bearing deposits to higher costing interest-bearing checking accounts and savings accounts. Net interest income decreased for the six months ended June 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 six months ended June 30, 2024, compared to 4.15% for the same period in the prior year. Interest Income. Interest income for the quarter ended June 30, 2024 was $189.1 million, compared to $184.7 million for the preceding quarter. The increase in interest income occurred primarily as a result of average yields on total interest-earning assets increasing nine basis points. The increased yield on interest-earning assets primarily reflects increases in both the average yields and average balances of loans. The increased interest income on loans for the current quarter compared to the preceding quarter was due to the average loan yields increasing to 5.96% for the quarter ended June 30, 2024, from 5.87% in the preceding quarter, reflecting new loans being originated at higher interest rates and adjustable rate loans repricing higher. The average balance of loans receivable for the quarter ended June 30, 2024 increased compared to the preceding quarter, primarily reflecting increases in the average balances of multifamily construction and one- to four-family loans. 54 Table of Contents Interest and dividend income on total investment securities for the current quarter decreased from the preceding quarter due to a decrease in the average balance of total investment securities, partially offset by a higher average yield earned on total investment securities during the current quarter compared to the preceding quarter. The average balance of total investment securities decreased to $3.71 billion for the quarter ended June 30, 2024 (excluding the effect of fair value adjustments), compared to $3.78 billion for the preceding quarter. The average yield on the combined portfolio increased to 3.14% for the quarter ended June 30, 2024, from 3.11% in the preceding quarter. Interest income for the six months ended June 30, 2024 was $373.8 million, compared to $338.8 million for the same period in the prior year, primarily reflecting an increase in the average yield on interest-earning assets, mostly due to rising interest rates, as well as an increase in the average balance of interest-earning assets. Interest Expense. Interest expense for the quarter ended June 30, 2024 increased $4.9 million, or 9%, compared to the preceding quarter. The increase occurred as a result of a 13 basis point increase in the average cost of all funding liabilities to 1.66% 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 and FHLB advances, partially offset by a decrease in the average balance of non-interest-bearing deposits. Interest expense for the six months ended June 30, 2024 was $108.3 million, compared to $42.9 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 average balance of funding liabilities reflects decreases in non-interest-bearing deposits and money market accounts, 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 June 30, 2024 increased $4.2 million, or 9%, 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 2.32% for the quarter ended June 30, 2024, compared to 2.15% 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 certificates of deposit. The average rate paid on total deposits, which includes non-interest-bearing deposits, was 1.50% for the quarter ended June 30, 2024, compared to 1.37% in the preceding quarter. Average deposit balances increased to $13.10 billion for the quarter ended June 30, 2024, from $13.06 billion for the preceding quarter. Deposit interest expense for the six months ended June 30, 2024 increased to $93.5 million, compared to $29.8 million for the same period in the prior year. Average deposit balances decreased to $13.08 billion for the six months ended June 30, 2024, from $13.13 billion for the same period a year earlier, while the average rate paid on deposits increased to 1.44% for the six months ended June 30, 2024 from 0.46% for the same period in the prior year. The average cost of interest-bearing deposits increased by 143 basis points to 2.24% for the six months ended June 30, 2024, compared to 0.81% 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. Interest expense on total borrowings for the quarter ended June 30, 2024 increased $626,000, or 9%, compared to the prior quarter, due to an increase in both the average balance of and rate paid on total borrowings. The average balance of total borrowings was $614.2 million for the quarter ended June 30, 2024, compared to $575.3 million for the preceding quarter, largely due to an increase in the average balance of FHLB advances. The average rate paid on total borrowings for the quarter ended June 30, 2024 increased to 5.07% from 4.98% for the preceding quarter. Interest expense on total borrowings for the six months ended June 30, 2024 increased to $14.9 million from $13.2 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 $594.8 million for the six months ended June 30, 2024, compared to $645.9 million for the same period a year earlier. The decrease was due to a $12.9 million decrease in the average balance of FHLB advances and a $30.5 million decrease in the average balance of other borrowings. The average rate paid on total borrowings for the six months ended June 30, 2024 increased to 5.02% from 4.11% for the same period a year earlier. 55 Table of Contents 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. ANALYSIS OF NET INTEREST SPREAD Quarters Ended (rates / ratios annualized) Jun 30, 2024 Mar 31, 2024 (dollars in thousands) Average Balance Interest and Dividends Yield / Cost (3) Average Balance Interest and Dividends Yield / Cost (3) Interest-earning assets: Held for sale loans $ 11,665 $ 206 7.10 % $ 9,939 $ 167 6.76 % Mortgage loans 9,006,857 129,230 5.77 % 8,892,561 125,284 5.67 % Commercial/agricultural loans 1,874,039 31,761 6.82 % 1,830,095 30,847 6.78 % Consumer and other loans 132,661 2,156 6.54 % 133,854 2,196 6.60 % Total loans (1) 11,025,222 163,353 5.96 % 10,866,449 158,494 5.87 % Mortgage-backed securities 2,672,187 16,850 2.54 % 2,728,640 17,076 2.52 % Other securities 958,809 11,181 4.69 % 984,639 11,501 4.70 % Interest-bearing deposits with banks 58,022 578 4.01 % 45,264 459 4.08 % FHLB stock 21,080 365 6.96 % 19,073 209 4.41 % Total investment securities 3,710,098 28,974 3.14 % 3,777,616 29,245 3.11 % Total interest-earning assets 14,735,320 192,327 5.25 % 14,644,065 187,739 5.16 % Non-interest-earning assets 926,411 943,725 Total assets $ 15,661,731 $ 15,587,790 Deposits: Interest-bearing checking accounts $ 2,156,214 7,621 1.42 % $ 2,104,242 6,716 1.28 % Savings accounts 3,147,522 17,200 2.20 % 3,066,448 15,279 2.00 % Money market accounts 1,659,327 9,124 2.21 % 1,674,159 8,388 2.02 % Certificates of deposit 1,503,597 14,905 3.99 % 1,500,429 14,230 3.81 % Total interest-bearing deposits 8,466,660 48,850 2.32 % 8,345,278 44,613 2.15 % Non-interest-bearing deposits 4,634,738 — — % 4,711,922 — — % Total deposits 13,101,398 48,850 1.50 % 13,057,200 44,613 1.37 % Other interest-bearing liabilities: FHLB advances 259,549 3,621 5.61 % 212,989 2,972 5.61 % Other borrowings 175,518 1,160 2.66 % 180,692 1,175 2.62 % Junior subordinated debentures and subordinated notes 179,178 2,961 6.65 % 181,579 2,969 6.58 % Total borrowings 614,245 7,742 5.07 % 575,260 7,116 4.98 % Total funding liabilities 13,715,643 56,592 1.66 % 13,632,460 51,729 1.53 % Other non-interest-bearing liabilities (2) 294,794 303,412 Total liabilities 14,010,437 13,935,872 Shareholders’ equity 1,651,294 1,651,918 Total liabilities and shareholders’ equity $ 15,661,731 $ 15,587,790 Net interest income/rate spread (tax equivalent) $ 135,735 3.59 % $ 136,010 3.63 % Net interest margin (tax equivalent) 3.70 % 3.74 % Reconciliation to reported net interest income: Adjustments for taxable equivalent basis (3,189) (3,051) Net interest income and margin, as reported $ 132,546 3.62 % $ 132,959 3.65 % Additional Key Financial Ratios: Return on average assets 1.02 % 0.97 % Adjusted return on average assets (4) 1.04 % 1.08 % Return on average equity 9.69 % 9.14 % Adjusted return on average equity (4) 9.83 % 10.24 % Average equity/average assets 10.54 % 10.60 % Average interest-earning assets/average interest-bearing liabilities 162.27 % 164.16 % Average interest-earning assets/average funding liabilities 107.43 % 107.42 % Non-interest income/average assets 0.44 % 0.30 % Non-interest expense/average assets 2.52 % 2.52 % Efficiency ratio 65.53 % 67.55 % Adjusted efficiency ratio (4) 63.60 % 63.70 % (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 and $2.0 million for the quarters ended June 30, 2024 and March 31, 2024, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $1.0 million for both the quarters ended June 30, 2024 and March 31, 2024. (4) Represents non-GAAP financial measures. See non-GAAP financial measure reconciliations presented above following Second Quarter 2024 Highlights. 56 Table of Contents Six Months Ended June 30, 2024 Six Months Ended June 30, 2023 Average Balance Interest and Dividends Yield / Cost (3) Average Balance Interest and Dividends Yield / Cost (3) Interest-earning assets: Held for sale loans $ 10,802 $ 373 6.94 % $ 54,375 $ 1,409 5.23 % Mortgage loans 8,949,709 254,514 5.72 % 8,340,792 218,997 5.29 % Commercial/agricultural loans 1,852,067 62,608 6.80 % 1,739,091 52,909 6.14 % Consumer and other loans 133,258 4,352 6.57 % 138,004 4,252 6.21 % Total loans (1) 10,945,836 321,847 5.91 % 10,272,262 277,567 5.45 % Mortgage-backed securities 2,700,413 33,926 2.53 % 3,025,907 37,552 2.50 % Other securities 971,724 22,682 4.69 % 1,294,743 28,027 4.37 % Interest-bearing deposits with banks 51,643 1,037 4.04 % 49,229 1,165 4.77 % FHLB stock 20,077 574 5.75 % 19,955 247 2.50 % Total investment securities 3,743,857 58,219 3.13 % 4,389,834 66,991 3.08 % Total interest-earning assets 14,689,693 380,066 5.20 % 14,662,096 344,558 4.74 % Non-interest-earning assets 935,068 930,208 Total assets $ 15,624,761 $ 15,592,304 Deposits: Interest-bearing checking accounts $ 2,130,228 14,337 1.35 % $ 1,825,386 3,237 0.36 % Savings accounts 3,106,985 32,479 2.10 % 2,575,726 6,779 0.53 % Money market accounts 1,666,743 17,512 2.11 % 2,061,767 9,806 0.96 % Certificates of deposit 1,502,013 29,135 3.90 % 969,607 9,961 2.07 % Total interest-bearing deposits 8,405,969 93,463 2.24 % 7,432,486 29,783 0.81 % Non-interest-bearing deposits 4,673,330 — — % 5,701,953 — — % Total deposits 13,079,299 93,463 1.44 % 13,134,439 29,783 0.46 % Other interest-bearing liabilities: FHLB advances 236,269 6,593 5.61 % 249,131 6,421 5.20 % Other borrowings 178,105 2,335 2.64 % 208,645 1,152 1.11 % Junior subordinated debentures and subordinated notes 180,379 5,930 6.61 % 188,142 5,584 5.99 % Total borrowings 594,753 14,858 5.02 % 645,918 13,157 4.11 % Total funding liabilities 13,674,052 108,321 1.59 % 13,780,357 42,940 0.63 % Other non-interest-bearing liabilities (2) 299,103 286,084 Total liabilities 13,973,155 14,066,441 Shareholders’ equity 1,651,606 1,525,863 Total liabilities and shareholders’ equity $ 15,624,761 $ 15,592,304 Net interest income/rate spread (tax equivalent) $ 271,745 3.61 % $ 301,618 4.11 % Net interest margin (tax equivalent) 3.72 % 4.15 % Reconciliation to reported net interest income: Adjustments for taxable equivalent basis (6,240) (5,788) Net interest income and margin $ 265,505 3.63 % $ 295,830 4.07 % Additional Key Financial Ratios: Return on average assets 1.00 % 1.23 % Adjusted return on average assets (4) 1.06 % 1.39 % Return on average equity 9.42 % 12.57 % Adjusted return on average equity (4) 10.03 % 14.16 % Average equity/average assets 10.57 % 9.79 % Average interest-earning assets/average interest-bearing liabilities 163.21 % 181.50 % Average interest-earning assets/average funding liabilities 107.43 % 106.40 % Non-interest income/average assets 0.37 % 0.23 % Non-interest expense/average assets 2.52 % 2.46 % Efficiency ratio 66.52 % 60.61 % Adjusted efficiency ratio (4) 63.65 % 56.33 % (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 $4.2 million and $3.5 million for the six months ended June 30, 2024 and June 30, 2023, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $2.1 million and $2.3 million for the six months ended June 30, 2024 and June 30, 2023, respectively. (4) Represents non-GAAP financial measures. See non-GAAP financial measure reconciliations presented above following Second Quarter 2024 Highlights. 57 Table of Contents 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): Quarters Ended Six Months Ended CHANGE IN THE ALLOWANCE FOR CREDIT LOSSES - LOANS Jun 30, 2024 Mar 31, 2024 Jun 30, 2023 Jun 30, 2024 Jun 30, 2023 Balance, beginning of period $ 151,140 $ 149,643 $ 141,457 $ 149,643 $ 141,465 Provision for credit losses – loans 1,953 1,424 3,559 3,377 4,333 Recoveries of loans previously charged off: Commercial real estate 98 1,389 74 1,487 258 One- to four-family residential 17 16 36 33 153 Commercial business 324 781 524 1,105 643 Agricultural business, including secured by farmland 195 106 2 301 111 Consumer 112 159 117 271 286 746 2,451 753 3,197 1,451 Loans charged off: Commercial real estate (347) — — (347) — Construction and land — — (156) — (156) One- to four-family residential — — (4) — (34) Commercial business (137) (1,809) (566) (1,946) (1,724) Consumer (507) (569) (363) (1,076) (655) (991) (2,378) (1,089) (3,369) (2,569) Net (charge-offs) recoveries (245) 73 (336) (172) (1,118) Balance, end of period $ 152,848 $ 151,140 $ 144,680 $ 152,848 $ 144,680 Net (charge-offs) recoveries / Average loans receivable (0.002) % 0.001 % (0.003) % (0.002) % (0.011) % Allowance for credit losses - loans as a percentage of total loans 1.37 % 1.39 % 1.38 % 1.37 % 1.38 % 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 June 30, 2024, we recorded a provision for credit losses - loans of $2.0 million, compared to a provision for credit losses - loans of $1.4 million during the preceding quarter. The provision for credit losses - loans for the current quarter primarily reflects loan growth and an increase in the reserve for collateral dependent loans. The provision for credit losses - loans for the preceding quarter primarily reflected loan growth in the construction and one- to four-family loan portfolios. 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): Quarters Ended Six Months Ended CHANGE IN THE ALLOWANCE FOR CREDIT LOSSES - UNFUNDED LOAN COMMITMENTS Jun 30, 2024 Mar 31, 2024 Jun 30, 2023 Jun 30, 2024 Jun 30, 2023 Balance, beginning of period $ 13,597 $ 14,484 $ 13,443 $ 14,484 $ 14,721 Provision/(recapture) for credit losses - unfunded loan commitments 430 (887) 1,221 (457) (57) Balance, end of period $ 14,027 $ 13,597 $ 14,664 $ 14,027 $ 14,664 The increase in the allowance for credit losses - unfunded loan commitments for the current quarter primarily reflects an increase in unfunded loan commitments in the one- to four-family construction portfolio as well as an increase in the forecast model related to construction, land and land development loans. 58 Table of Contents Non-interest Income. The following table presents the key components of non-interest income for the periods indicated (dollars in thousands): Quarters Ended Six Months Ended Jun 30, 2024 Mar 31, 2024 Change Amount Change Percent Jun 30, 2024 Jun 30, 2023 Change Amount Change Percent Deposit fees and other service charges $ 10,590 $ 11,022 $ (432) (4) % $ 21,612 $ 21,162 $ 450 2 % Mortgage banking operations 3,006 2,335 671 29 5,341 4,377 964 22 Bank owned life insurance 2,367 2,237 130 6 4,604 4,574 30 1 Miscellaneous 1,988 1,892 96 5 3,880 3,068 812 26 17,951 17,486 465 3 35,437 33,181 2,256 7 Net loss on sale of securities (562) (4,903) 4,341 (89) (5,465) (11,779) 6,314 (54) Net change in valuation of financial instruments carried at fair value (190) (992) 802 (81) (1,182) (3,703) 2,521 (68) Total non-interest income $ 17,199 $ 11,591 $ 5,608 48 % $ 28,790 $ 17,699 $ 11,091 63 % The increase in non-interest income during the current quarter compared to the preceding quarter was primarily due to an increase in mortgage banking operations revenue and 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 deposit fees and other service charges. The increase in non-interest income for the six months ended June 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. Revenue from mortgage banking operations increased $671,000 for the quarter ended June 30, 2024, compared to the preceding quarter and increased $964,000 for the six months ended June 30, 2024, compared to the same period a year earlier. The increase from the preceding quarter and the prior year included 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. The increase from the preceding quarter also reflects an increase in the percentage of loans sold servicing retained. The prior year period also 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 $2.0 million and $3.3 million for the quarter and six months ended June 30, 2024, respectively, compared to $1.3 million in the preceding quarter, and $2.7 million for the six months ended June 30, 2023. Home purchase activity accounted for 89% of one- to four-family mortgage loan originations in both the second quarter of 2024 and the preceding quarter. Miscellaneous income increased for the six months ended June 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. The net loss on sale of securities recognized for the prior quarter and the six months ended June 30, 2023 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 six months ended June 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 six months ended June 30, 2023 was also impacted by declines in the market valuation of investment securities held for trading. 59 Table of Contents Non-interest Expense. The following table represents key elements of non-interest expense for the periods indicated (dollars in thousands): Quarters Ended Six Months Ended Jun 30, 2024 Mar 31, 2024 Change Amount Change Percent. Jun 30, 2024 Jun 30, 2023 Change Amount Change Percent Salary and employee benefits $ 63,831 $ 62,369 $ 1,462 2 % $ 126,200 $ 123,361 $ 2,839 2 % Less capitalized loan origination costs (4,639) (3,676) (963) 26 (8,315) (7,888) (427) 5 Occupancy and equipment 12,128 12,462 (334) (3) 24,590 23,964 626 3 Information and computer data services 7,240 7,320 (80) (1) 14,560 14,229 331 2 Payment and card processing services 5,691 5,710 (19) — 11,401 9,287 2,114 23 Professional and legal expenses 1,201 1,530 (329) (22) 2,731 4,521 (1,790) (40) Advertising and marketing 1,198 1,079 119 11 2,277 1,746 531 30 Deposit insurance 2,858 2,809 49 2 5,667 4,729 938 20 State and municipal business and use taxes 1,394 1,304 90 7 2,698 2,529 169 7 Real estate operations, net 297 (220) 517 (235) 77 (202) 279 (138) Amortization of core deposit intangibles 724 723 1 — 1,447 2,041 (594) (29) Miscellaneous 6,205 6,231 (26) — 12,436 11,709 727 6 Total non-interest expense $ 98,128 $ 97,641 $ 487 — % $ 195,769 $ 190,026 $ 5,743 3 % The slight increase in non-interest expense for the current quarter compared to the prior quarter primarily reflects an increase in salary and employee benefits, an increase in real estate operations, net expense, offset by an increase in capitalized loan origination costs. The increase in non-interest expense for the six months ended June 30, 2024, compared to the same period a year earlier primarily reflects increases in salary and employee benefits, payment and card processing services expense and deposit insurance expense, partially offset by a decrease in professional and legal expenses. Salary and employee benefits increased for the quarter and six months ended June 30, 2024, compared to the quarter ended March 31, 2024 and the six months ended June 30, 2023, primarily as the result of normal annual salary and wage increases and an increase in loan production related commission expense. Payment and card processing services expense increased for the six months ended June 30, 2024, compared to the same period a year earlier, primarily due to an increase in online banking costs and operational losses. Professional and legal expense decreased for the six months ended June 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. Expenses related to real estate operations, net increased for the quarter ended June 30, 2024, primarily due to an increase in property tax expense related to a real estate foreclosure that occurred during the second quarter of 2024, compared to a gain recognized on the sale of foreclosed properties in the prior quarter. Our efficiency ratio was 65.53% for the current quarter, compared to 67.55% in the preceding quarter. Our adjusted efficiency ratio, a non-GAAP financial measure, was 63.60% for the current quarter, compared to 63.70% in the preceding quarter. The efficiency ratio for the current quarter reflects an increase in total revenues. See non-GAAP financial measure reconciliations presented above under “Second Quarter 2024 Financial Highlights.” Income Taxes. For the quarter ended June 30, 2024, we recognized $9.5 million in income tax expense for an effective tax rate of 19.2%, 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 March 31, 2024, we recognized $8.8 million in income tax expense for an effective tax rate of 19.0%. For the six months ended June 30, 2024, we recognized $18.3 million in income tax expense for an effective tax rate of 19.1%, compared to $22.1 million in income tax expense for an effective tax rate of 18.9% for the same period in the prior year. 60 Table of Contents Asset Quality Maintaining a moderate risk profile by employing appropriate underwriting standards, avoiding excessive asset concentrations and aggressively managing troubled assets has been and will continue to be a primary focus for us. We actively engage with our borrowers to resolve adversely classified loans and other problem assets. Non-Performing Assets: Non-performing assets were $33.3 million, or 0.21% of total assets, at June 30, 2024, compared to $30.1 million, or 0.19% of total assets, at December 31, 2023. Our allowance for credit losses - loans was $152.8 million, or 498% of non-performing loans, at June 30, 2024, compared to $149.6 million, or 506% of non-performing loans, at December 31, 2023. The following table sets forth information with respect to our non-performing assets at the dates indicated (dollars in thousands): June 30, 2024 December 31, 2023 June 30, 2023 Nonaccrual Loans: Secured by real estate: Commercial $ 2,326 $ 2,677 $ 2,478 Construction and land 3,999 3,105 2,280 One- to four-family 8,184 5,702 7,605 Commercial business 8,694 9,002 8,439 Agricultural business, including secured by farmland 1,586 3,167 3,997 Consumer 3,380 3,204 3,272 28,169 26,857 28,071 Loans more than 90 days delinquent, still on accrual: Secured by real estate: Construction and land — 1,138 — One- to four-family 1,861 1,205 60 Commercial business — 1 — Consumer 692 401 49 2,553 2,745 109 Total non-performing loans 30,722 29,602 28,180 REO, net 2,564 526 546 Total non-performing assets $ 33,286 $ 30,128 $ 28,726 Total non-performing assets to total assets 0.21 % 0.19 % 0.18 % Total nonaccrual loans to loans before allowance for credit losses – loans 0.25 % 0.25 % 0.27 % Loans 30-89 days past due and on accrual $ 11,850 $ 19,744 $ 6,259 For the six months ended June 30, 2024, interest income was reduced by $838,000 as a result of nonaccrual loan activity, which included the reversal of $267,000 of accrued interest as of the date the loan was placed on nonaccrual. There was no interest income recognized on nonaccrual loans for the six months ended June 30, 2024. The following table presents the Company’s portfolio of loans by risk grade at the dates indicated (in thousands): June 30, 2024 December 31, 2023 June 30, 2023 Pass $ 10,971,850 $ 10,671,281 $ 10,315,687 Special Mention 50,027 13,732 11,745 Substandard 121,971 125,442 144,975 Total $ 11,143,848 $ 10,810,455 $ 10,472,407 The increase in special mention from December 31, 2023 primarily reflects loan downgrades. The decrease in substandard loans from the prior year quarter primarily reflects paydowns and payoffs of substandard loans, as well as risk rating upgrades. Liquidity and Capital Resources Our primary sources of funds are deposits, borrowings, proceeds from loan principal and interest payments and sales of loans, and the maturity of and interest payments on mortgage-backed and investment securities. While maturities and scheduled amortization of loans and securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, competition and our pricing strategies. 61 Table of Contents Our primary investing activity is the origination of loans and, in certain periods, the purchase of securities or loans. During the six months ended June 30, 2024 and 2023, our loan originations, including originations of loans held for sale, exceeded our loan repayments by $501.2 million and $437.8 million, respectively. There were $4.7 million of loan purchases during the six months ended June 30, 2024, and no loan purchases during the six months ended June 30, 2023. During the six months ended June 30, 2024 and 2023, we received proceeds of $175.0 million and $113.9 million, respectively, from the sale of loans. Securities purchased during the six months ended June 30, 2024 and 2023 totaled $19.3 million and $52.8 million, respectively, and securities repayments, maturities and sales in those periods were $202.7 million and $390.4 million, respectively. Our primary financing activity is gathering deposits. Total deposits increased by $49.8 million during the six months ended June 30, 2024, primarily due to an increase in certificates of deposit. Core deposits were $11.55 billion at both June 30, 2024 and December 31, 2023. Certificates of deposit are generally more vulnerable to competition and more price sensitive than other retail deposits and our pricing of those deposits varies significantly based upon our liquidity management strategies at any point in time. At June 30, 2024, certificates of deposit totaled $1.53 billion, or 12% of our total deposits, including $1.45 billion which were scheduled to mature within one year. The increase in certificates of deposit during 2024 was due to clients seeking higher yields moving excess non-interest-bearing funds to higher-yielding certificates of deposit. While no assurance can be given as to future periods, historically, we have been able to retain a significant amount of our certificates of deposit as they mature. The Bank’s estimated uninsured deposits were $4.09 billion or 31% of total deposits at June 30, 2024, compared to $4.08 billion or 31% of total deposits at December 31, 2023. The estimated uninsured deposit calculation includes $326.5 million and $305.3 million of collateralized public deposits at June 30, 2024 and December 31, 2023, respectively. Estimated uninsured deposits also includes cash held by the Company of $63.9 million and $108.2 million at June 30, 2024 and December 31, 2023, respectively. Banner Bank’s estimated uninsured deposits, excluding collateralized public deposits and cash held at the holding company, were 28% of total deposits at both June 30, 2024 and December 31, 2023. We had $398.0 million of FHLB advances at June 30, 2024, compared to $323.0 million at December 31, 2023. Other borrowings decreased to $166.0 million at June 30, 2024 from $182.9 million at December 31, 2023. Subordinated notes, net of issuance costs decreased to $89.6 million at June 30, 2024, compared to $92.9 million at December 31, 2023, due to Banner Bank’s purchase of $3.5 million of Banner’s subordinated debt during the first quarter of 2024. We must maintain an adequate level of liquidity to ensure the availability of sufficient funds to accommodate deposit withdrawals, to support loan growth, to satisfy financial commitments and to take advantage of investment opportunities. During the six months ended June 30, 2024, we used our sources of funds primarily to fund loan growth. At June 30, 2024, we had outstanding loan commitments totaling $4.03 billion, relating to undisbursed loans in process and unused credit lines. While representing potential growth in the loan portfolio and lending activities, this level of commitments is proportionally consistent with our historical experience and does not represent a departure from normal operations. We generally maintain sufficient cash and readily marketable securities to meet short-term liquidity needs; however, our primary liquidity management practice to supplement deposits is to increase or decrease short-term borrowings, including FHLB advances and Federal Reserve Bank of San Francisco (FRBSF) borrowings. We maintain credit facilities with the FHLB, which provide for advances that in the aggregate would equal the lesser of 45% of the Bank’s assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB stock). At June 30, 2024, under these credit facilities based on pledged collateral, the Bank had $3.02 billion of available credit capacity. Advances under these credit facilities totaled $398.0 million at June 30, 2024. At June 30, 2024, the Bank also had uncommitted federal funds line of credit agreements with other financial institutions totaling $125.0 million. No balances were outstanding under these agreements as of June 30, 2024 or December 31, 2023. Availability of lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs and the agreements may restrict consecutive day usage. Management believes it has adequate resources and funding potential to meet our foreseeable liquidity requirements. Banner is a separate legal entity from the Bank and, on a stand-alone level, must provide for its own liquidity, and pay its own operating expenses and cash dividends. At June 30, 2024, Banner (on an unconsolidated basis) had liquid assets of $64.2 million. During the quarter ended June 30, 2024, Banner and the Bank entered into an intercompany loan agreement for $50.0 million, which reduced Banner’s cash balance while maintaining liquidity with the note receivable from the Bank. The note has a term of one year, automatically renewable each quarter. The note eliminates upon consolidation. Banner’s primary sources of funds consist of capital raised through dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. We currently expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board of Directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.48 per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of our cash to our shareholders. Assuming continued dividend payments during 2024 at this rate of $0.48 per share, our average total dividend paid each quarter would be approximately $16.5 million based on the number of outstanding shares at June 30, 2024. 62 Table of Contents As noted below, Banner Corporation and its subsidiary bank continued to maintain capital levels in excess of the requirements to be categorized as “Well-Capitalized” under applicable regulatory standards. During the six months ended June 30, 2024, total shareholders’ equity increased $38.1 million, to $1.69 billion or 10.69% of total assets. At June 30, 2024, tangible common shareholders’ equity, which excludes goodwill and other intangible assets, was $1.31 billion, or 8.51% of tangible assets. Tangible common shareholders’ equity represents a non-GAAP financial measure. See, non-GAAP financial measure reconciliations presented above under “Second Quarter 2024 Financial Highlights.” Capital Requirements Banner is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. The Bank, as a state-chartered, federally insured commercial bank, is subject to the capital requirements established by the FDIC. The capital adequacy requirements are quantitative measures established by regulation that require Banner and the Bank to maintain minimum amounts and ratios of capital. The Federal Reserve requires Banner to maintain capital adequacy that generally parallels the FDIC requirements. The FDIC requires the Bank to maintain minimum capital ratios of total capital, tier 1 capital, and common equity tier 1 capital to risk-weighted assets as well as tier 1 leverage capital to average assets. In addition to the minimum capital ratios, the Bank has to maintain a capital conservation buffer consisting of additional common equity tier 1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. At June 30, 2024, Banner and the Bank each exceeded all regulatory capital requirements to be “well capitalized.” The actual regulatory capital ratios calculated for Banner Corporation and Banner Bank as of June 30, 2024, along with the minimum capital amounts and ratios, were as follows (dollars in thousands): Actual Minimum to be Categorized as “Adequately Capitalized” Minimum to be Categorized as “Well-Capitalized” Amount Ratio Amount Ratio Amount Amount Banner Corporation—consolidated Total capital to risk-weighted assets $ 1,955,333 14.62 % $ 1,069,901 8.00 % $ 1,337,377 10.00 % Tier 1 capital to risk-weighted assets 1,693,543 12.66 % 802,426 6.00 % 802,426 6.00 % Tier 1 leverage capital to average assets 1,693,543 10.80 % 627,282 4.00 % n/a n/a Common equity tier 1 capital 1,607,043 12.02 % 601,820 4.50 % n/a n/a Banner Bank Total capital to risk-weighted assets 1,833,271 13.70 % 1,070,352 8.00 % 1,337,940 10.00 % Tier 1 capital to risk-weighted assets 1,671,481 12.49 % 802,764 6.00 % 1,070,352 8.00 % Tier 1 leverage capital to average assets 1,671,481 10.66 % 627,468 4.00 % 784,335 5.00 % Common equity tier 1 capital 1,671,481 12.49 % 602,073 4.50 % 869,661 6.50 %