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 September 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 September 30, 2024, we had total consolidated assets of $16.19 billion, total loans of $11.22 billion, total deposits of $13.54 billion and total shareholders’ equity of $1.79 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. Third Quarter 2024 Financial Highlights • Revenue was $153.7 million for the third quarter of 2024, compared to $149.7 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 $153.7 million in the third quarter of 2024, compared to $150.5 million in the preceding quarter. • Net interest income was $135.7 million in the third quarter of 2024, compared to $132.5 million in the preceding quarter. • Net interest margin, on a tax equivalent basis, was 3.72%, compared to 3.70% in the preceding quarter. • Mortgage banking operations revenue was $3.2 million for the third quarter of 2024, compared to $3.0 million in the preceding quarter. • Return on average assets was 1.13%, compared to 1.02% in the preceding quarter. • Net loans receivable increased 1% to $11.07 billion at September 30, 2024, compared to $10.99 billion at June 30, 2024. • Non-performing assets were $45.2 million, or 0.28% of total assets, at September 30, 2024, compared to $33.3 million, or 0.21% of total assets at June 30, 2024. • The allowance for credit losses - loans was $154.6 million, or 1.38% of total loans receivable, as of September 30, 2024, compared to $152.8 million, or 1.37% of total loans receivable, at June 30, 2024. • Total deposits increased to $13.54 billion at September 30, 2024, compared to $13.08 billion at June 30, 2024. • Core deposits represented 89% of total deposits at September 30, 2024. • Dividends paid to shareholders were $0.48 per share in the quarter ended September 30, 2024. • Common shareholders’ equity per share increased 6% to $52.06 at September 30, 2024, compared to $49.07 at the preceding quarter end. • Tangible common shareholders’ equity per share* increased 8% to $41.12 at September 30, 2024, compared to $38.12 at the preceding quarter end. *Non-GAAP Financial Measures: Management has presented non-GAAP financial measures in this discussion and analysis because it believes these measures 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 Nine Months Ended September 30, Sep 30, 2024 Jun 30, 2024 Sep 30, 2023 2024 2023 ADJUSTED REVENUE Net interest income (GAAP) $ 135,675 $ 132,546 $ 141,766 $ 401,180 $ 437,596 Non-interest income (GAAP) 18,063 17,199 12,658 46,853 30,357 Total revenue (GAAP) 153,738 149,745 154,424 448,033 467,953 Exclude: Net loss on sale of securities — 562 2,657 5,465 14,436 Net change in valuation of financial instruments carried at fair value (39) 190 654 1,143 4,357 Adjusted revenue (non-GAAP) $ 153,699 $ 150,497 $ 157,735 $ 454,641 $ 486,746 Quarters Ended Nine Months Ended September 30, Sep 30, 2024 Jun 30, 2024 Sep 30, 2023 2024 2023 ADJUSTED EARNINGS Net income (GAAP) $ 45,153 $ 39,795 $ 45,854 $ 122,507 $ 141,000 Exclude: Net loss on sale of securities — 562 2,657 5,465 14,436 Net change in valuation of financial instruments carried at fair value (39) 190 654 1,143 4,357 Banner Forward expenses (1) — — 996 — 1,334 Related net tax expense (benefit) 9 (180) (1,033) (1,586) (4,830) Total adjusted earnings (non-GAAP) $ 45,123 $ 40,367 $ 49,128 $ 127,529 $ 156,297 Diluted earnings per share (GAAP) $ 1.30 $ 1.15 $ 1.33 $ 3.54 $ 4.09 Adjusted diluted earnings per share (non-GAAP) $ 1.30 $ 1.17 $ 1.43 $ 3.69 $ 4.54 Return on average assets 1.13 % 1.02 % 1.17 % 1.04 % 1.21 % Adjusted return on average assets (2) 1.13 % 1.04 % 1.25 % 1.08 % 1.34 % Return on average equity 10.39 % 9.69 % 11.68 % 9.76 % 12.27 % Adjusted return on average equity (3) 10.39 % 9.83 % 12.51 % 10.16 % 13.60 % Quarters Ended Nine Months Ended September 30, Sep 30, 2024 Jun 30, 2024 Sep 30, 2023 2024 2023 ADJUSTED EFFICIENCY RATIO Non-interest expense (GAAP) $ 96,291 $ 98,128 $ 95,891 $ 292,060 $ 285,917 Exclude: Banner Forward expenses (1) — — (996) — (1,334) CDI amortization (590) (724) (857) (2,037) (2,898) State and municipal tax expense (1,432) (1,394) (1,359) (4,130) (3,888) REO operations (103) (297) 383 (180) 585 Adjusted non-interest expense (non-GAAP) $ 94,166 $ 95,713 $ 93,062 $ 285,713 $ 278,382 Net interest income (GAAP) $ 135,675 $ 132,546 $ 141,766 $ 401,180 $ 437,596 Non-interest income (GAAP) 18,063 17,199 12,658 46,853 30,357 Total revenue (GAAP) 153,738 149,745 154,424 448,033 467,953 Exclude: Net loss on sale of securities — 562 2,657 5,465 14,436 Net change in valuation of financial instruments carried at fair value (39) 190 654 1,143 4,357 Adjusted revenue (non-GAAP) $ 153,699 $ 150,497 $ 157,735 $ 454,641 $ 486,746 Efficiency ratio (GAAP) 62.63 % 65.53 % 62.10 % 65.19 % 61.10 % Adjusted efficiency ratio (non-GAAP) (4) 61.27 % 63.60 % 59.00 % 62.84 % 57.19 % (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 September 30, 2024 June 30, 2024 December 31, 2023 September 30, 2023 Shareholders’ equity (GAAP) $ 1,793,721 $ 1,690,766 $ 1,652,691 $ 1,520,607 Exclude goodwill and other intangible assets, net 376,768 377,358 378,805 379,663 Tangible common shareholders’ equity (non-GAAP) $ 1,416,953 $ 1,313,408 $ 1,273,886 $ 1,140,944 Total assets (GAAP) $ 16,188,676 $ 15,816,194 $ 15,670,391 $ 15,507,880 Exclude goodwill and other intangible assets, net 376,768 377,358 378,805 379,663 Total tangible assets (non-GAAP) $ 15,811,908 $ 15,438,836 $ 15,291,586 $ 15,128,217 Common shareholders’ equity to total assets (GAAP) 11.08 % 10.69 % 10.55 % 9.81 % Tangible common shareholders’ equity to tangible assets (non-GAAP) 8.96 % 8.51 % 8.33 % 7.54 % TANGIBLE COMMON SHAREHOLDERS’ EQUITY PER SHARE September 30, 2024 June 30, 2024 December 31, 2023 September 30, 2023 Shareholders’ equity (GAAP) $ 1,793,721 $ 1,690,766 $ 1,652,691 $ 1,520,607 Tangible common shareholders’ equity (non-GAAP) $ 1,416,953 $ 1,313,408 $ 1,273,886 $ 1,140,944 Common shares outstanding at end of period 34,456,688 34,455,752 34,348,369 34,345,949 Common shareholders’ equity (book value) per share (GAAP) $ 52.06 $ 49.07 $ 48.12 $ 44.27 Tangible common shareholders’ equity (tangible book value) per share (non-GAAP) $ 41.12 $ 38.12 $ 37.09 $ 33.22 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. 49 Table of Contents Comparison of Financial Condition at September 30, 2024 and December 31, 2023 General : Total assets increased $518.3 million to $16.19 billion at September 30, 2024, from $15.67 billion at December 31, 2023. The increase was primarily due to loan growth and an increase in cash in interest-bearing deposits, partially offset by a decrease in the securities portfolio. 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 September 30, 2024 was 83%. 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 $414.2 million at September 30, 2024, compared to December 31, 2023, reflecting increased commercial real estate loans, multifamily loans, one-to-four family residential loans, land and land development loans and commercial business loans, partially offset by decreased commercial construction and one-to-four family construction loans. At September 30, 2024, loans receivable totaled $11.22 billion compared to $10.81 billion at December 31, 2023. 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 Sep 30, 2024 Dec 31, 2023 Sep 30, 2023 Year End Prior Year Qtr. End Commercial real estate: Owner-occupied $ 990,516 $ 915,897 $ 911,540 8 % 9 % Investment properties 1,583,863 1,541,344 1,530,087 3 4 Small balance CRE 1,218,822 1,178,500 1,169,828 3 4 Total Commercial real estate 3,793,201 3,635,741 3,611,455 4 5 Multifamily real estate 889,866 811,232 766,571 10 16 Construction, land and land development: Commercial construction 124,051 170,011 168,061 (27) (26) Multifamily construction 524,108 503,993 453,129 4 16 One- to four-family construction 507,350 526,432 536,349 (4) (5) Land and land development 370,690 336,639 346,362 10 7 Total Construction, land and land development 1,526,199 1,537,075 1,503,901 (1) 1 Commercial business: Commercial business 1,281,615 1,255,734 1,263,747 2 1 Small business scored 1,087,714 1,022,154 1,000,714 6 9 Total Commercial business 2,369,329 2,277,888 2,264,461 4 5 Agricultural business, including secured by farmland 346,686 331,089 334,626 5 4 One- to four-family residential 1,575,164 1,518,046 1,438,694 4 9 Consumer: Consumer—home equity revolving lines of credit 622,615 588,703 579,836 6 7 Consumer—other 101,546 110,681 111,873 (8) (9) Total Consumer 724,161 699,384 691,709 4 5 Total loans receivable $ 11,224,606 $ 10,810,455 $ 10,611,417 4 % 6 % Commercial real estate loans totaled $3.79 billion, or 34% of our loan portfolio, and multifamily real estate loans totaled $889.9 million, or 8% of our loan portfolio, at September 30, 2024. Commercial real estate loans increased by $157.5 million during the first nine months of 2024, while multifamily real estate loans increased by $78.6 million, primarily due to the conversion of construction loans to the permanent loans upon the completion of the construction phase. 50 Table of Contents Our construction, land and land development loans totaled $1.53 billion, or 14% of our loan portfolio, at September 30, 2024, compared to $1.54 billion at December 31, 2023. Multifamily construction loans increased $20.1 million, or 4%, to $524.1 million at September 30, 2024, compared to December 31, 2023. Multifamily construction and one- to four-family construction loans each represented approximately 5% of our total loan portfolio at September 30, 2024. Multifamily construction loans were comprised primarily of affordable housing projects and, to a lesser extent, market rate multifamily projects across our footprint. Commercial construction loans decreased $46.0 million, or 27%, to $124.1 million at September 30, 2024, compared to $170.0 million at December 31, 2023, due to the completion of the construction phase. Land and land development loans increased $34.1 million, or 10%, to $370.7 million at September 30, 2024, compared to December 31, 2023. 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 $2.72 billion at September 30, 2024 and $2.60 billion at December 31, 2023. Commercial and agricultural business loans represented approximately 24% of our loan portfolio at September 30, 2024. Our commercial business lending also includes participation in certain syndicated loans, including shared national credits, which totaled $226.2 million, or 2% of our loan portfolio, at September 30, 2024, compared to $239.0 million, or 2% of our loan portfolio, at December 31, 2023. 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 September 30, 2024, one- to four-family residential loans retained in our portfolio increased $57.1 million, to $1.58 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, offset by the transfer of certain pools of one- to four-family residential loans to held for sale. One- to four-family residential loans represented 14% of our loan portfolio at September 30, 2024. Our consumer loan activity is primarily directed at meeting demand from our existing deposit clients. At September 30, 2024, consumer loans, including home equity revolving lines of credit, increased $24.8 million to $724.2 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 Nine Months Ended Sep 30, 2024 Jun 30, 2024 Sep 30, 2023 Sep 30, 2024 Sep 30, 2023 Commercial real estate $ 114,372 $ 102,258 $ 62,337 $ 283,992 $ 232,745 Multifamily real estate 314 2,774 12,725 3,473 51,686 Construction and land 472,506 546,675 421,656 1,456,454 1,158,478 Commercial business 179,871 167,168 157,833 501,754 418,063 Agricultural business 5,877 22,255 17,466 62,538 69,014 One-to four- family residential 24,488 34,498 43,622 76,554 130,505 Consumer 96,137 120,470 70,043 282,752 243,486 Total commitment amount for loan originations (excluding loans held for sale) $ 893,565 $ 996,098 $ 785,682 $ 2,667,517 $ 2,303,977 Loans held for sale increased to $78.8 million at September 30, 2024, compared to $11.2 million at December 31, 2023. The increase in loans held for sale was primarily the result of the transfer of $47.5 million of one- to four-family residential loans from portfolio to held for sale during the third quarter of 2024. Originations of loans held for sale increased to $197.7 million for the nine months ended September 30, 2024, compared to $187.1 million for the same period last year. The volume of one- to four-family residential mortgage loans sold was $255.7 million during the nine months ended September 30, 2024, compared to $190.4 million in the same period a year ago. The following table presents loans by geographic concentration at the dates indicated (dollars in thousands): Sep 30, 2024 Dec 31, 2023 Sep 30, 2023 Percentage Change Amount Percentage Amount Amount Year End Prior Year Qtr. End Washington $ 5,203,637 46 % $ 5,095,602 $ 5,046,028 2 % 3 % California 2,796,965 25 2,670,923 2,570,175 5 9 Oregon 2,108,229 19 1,974,001 1,929,531 7 9 Idaho 652,148 6 610,064 600,648 7 9 Utah 85,316 1 68,931 57,711 24 48 Other 378,311 3 390,934 407,324 (3) (7) Total loans receivable $ 11,224,606 100 % $ 10,810,455 $ 10,611,417 4 % 6 % 51 Table of Contents Investment Securities: Total securities decreased $181.0 million to $3.25 billion at September 30, 2024, from $3.43 billion at December 31, 2023, primarily due to securities sales, paydowns and maturities exceeding purchases during the nine-month period ended September 30, 2024. Purchases during the nine months ended September 30, 2024, consisted primarily of state and local government obligations. The average effective duration of the Company’s securities portfolio was 6.3 years at September 30, 2024, compared to 6.5 years at December 31, 2023. Fair value adjustments for securities designated as available-for-sale increased $64.7 million for the nine months ended September 30, 2024, which was included, net of the associated tax expense of $15.5 million, as a component of other comprehensive income, and occurred as a result of decreases in market interest rates during the nine months ended September 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. The following table sets forth the Company’s deposits by type of deposit account as of the dates indicated (dollars in thousands): Percentage Change Sep 30, 2024 Dec 31, 2023 Sep 30, 2023 Year End Prior Year Qtr. End Non-interest-bearing $ 4,688,244 $ 4,792,369 $ 5,197,854 (2) % (10) % Interest-bearing checking 2,344,561 2,098,526 2,006,866 12 17 Regular savings accounts 3,339,859 2,980,530 2,751,453 12 21 Money market accounts 1,643,631 1,680,605 1,760,066 (2) (7) Interest-bearing transaction & savings accounts 7,328,051 6,759,661 6,518,385 8 12 Total core deposits 12,016,295 11,552,030 11,716,239 4 3 Interest-bearing certificates 1,521,853 1,477,467 1,458,313 3 4 Total deposits $ 13,538,148 $ 13,029,497 $ 13,174,552 4 % 3 % Total deposits increased $508.7 million at September 30, 2024, compared to December 31, 2023, with core deposits increasing $464.3 million and certificates of deposit increasing $44.4 million. The increase in core deposits primarily reflects an increase in third-party insured sweep accounts and normal seasonal increases primarily from agricultural clients. The increase in certificates of deposit is a result of higher rates attracting clients to these deposit types. We had $50.3 million of brokered deposits at September 30, 2024, compared to $108.1 million at December 31, 2023. Core deposits represented 89% of total deposits at both September 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): Sep 30, 2024 Dec 31, 2023 Sep 30, 2023 Number of deposit accounts 459,127 463,750 466,159 Average account balance per account $ 30 $ 29 $ 28 The following table presents deposits by geographic concentration at the dates indicated (dollars in thousands): Sep 30, 2024 Dec 31, 2023 Sep 30, 2023 Percentage Change Amount Percentage Amount Amount Year End Prior Year Qtr. End Washington $ 7,413,414 55 % $ 7,247,392 $ 7,241,341 2 % 2 % Oregon 2,997,843 22 2,852,677 2,918,446 5 3 California 2,423,295 18 2,269,557 2,342,345 7 3 Idaho 703,596 5 659,871 672,420 7 5 Total deposits $ 13,538,148 100 % $ 13,029,497 $ 13,174,552 4 % 3 % 52 Table of Contents Borrowings: We had $230.0 million of FHLB advances at September 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 $28.3 million to $154.5 million at September 30, 2024, compared to $182.9 million at December 31, 2023. The decrease in borrowings reflects the increased use of deposits to fund loan growth. At September 30, 2024, the Company’s off-balance sheet liquidity included additional borrowing capacity of $3.23 billion at the FHLB and $1.53 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 $66.3 million at September 30, 2024, compared to $66.4 million at December 31, 2023. Subordinated notes, net of issuance costs were $80.2 million at September 30, 2024, compared to $92.9 million at December 31, 2023. The decrease was due to Banner Bank’s purchase of $13.0 million of Banner’s subordinated debt during the nine months ended September 30, 2024. Shareholders’ Equity: Total shareholders’ equity increased $141.0 million to $1.79 billion, or 11.08% of total assets, at September 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 $72.3 million increase in retained earnings as a result of $122.5 million in net income, partially offset by the accrual of cash dividends during the nine months ended September 30, 2024. In addition, accumulated other comprehensive loss decreased by $63.6 million, primarily due to a decrease in the unrealized losses on the security portfolio. There were no shares of common stock repurchased during the nine months ended September 30, 2024. Tangible common shareholders’ equity, which excludes goodwill and other intangible assets and is a non-GAAP financial measure, increased $143.1 million to $1.42 billion, or 8.96% of tangible assets, at September 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 “Third Quarter 2024 Financial Highlights.” 53 Table of Contents Comparison of Results of Operations for the Three Months Ended September 30, 2024 and June 30, 2024, and for the Nine Months Ended September 30, 2024 and 2023 For the quarter ended September 30, 2024, net income was $45.2 million, or $1.30 per diluted share, compared to $39.8 million, or $1.15 per diluted share, for the preceding quarter. For the nine months ended September 30, 2024, net income was $122.5 million, or $3.54 per diluted share, compared to $141.0 million, or $4.09 per diluted share for the same period a year earlier. The increase in net income for the current quarter compared to the preceding quarter was primarily due to an increase in revenue with increases in both net interest income and non-interest income as well as decreases in non-interest expense and the provision for credit losses. Net income for the nine months ended September 30, 2024, included a decrease in net interest income and an increase in non-interest expense, partially offset by an increase in non-interest income and a decrease in the provision for credit losses. The increase in net interest income compared to the preceding quarter reflects an increase in interest-earning assets and net interest margin. Net interest margin for the current quarter benefited from increased yields on loans due to new loans being originated at higher interest rates and adjustable rate loans repricing higher, partially offset by increased funding costs. On September 18, 2024, the Federal Open Market Committee of the Federal Reserve System decreased the target range for the federal funds rate by 50 basis points, and as the change occurred late in the third quarter of 2024, it had minimal impact on our current quarter net interest margin. We recorded a $1.7 million provision for credit losses for the quarter ended September 30, 2024, compared to a $2.4 million provision for credit losses in the preceding quarter. The provision for credit losses for the current quarter primarily reflected an increase in the reserve for collateral dependent loans. The provision for credit losses for the preceding quarter primarily reflected loan growth and an increase in the reserve for collateral dependent loans. We recorded a $4.6 million provision for credit losses for the nine months ended September 30, 2024, compared to an $8.3 million provision for credit losses for the same period a year ago. Total non-interest income increased for the quarter ended September 30, 2024, compared to the preceding quarter and increased during the nine months ended September 30, 2024, compared to the same period a year ago. The increase in non-interest income during the current quarter compared to the preceding quarter was primarily due to decreases in the net loss recognized on the sale of securities and in the net loss recognized for fair value adjustments on financial instruments carried at fair value. The increase in non-interest income during the nine months ended September 30, 2024, compared to the same period last year was also primarily due to a reduction in the net loss recognized on the sale of securities and a decrease in the net loss recognized for fair value adjustments on financial instruments carried at fair value as well as an increase in mortgage banking operations revenues. Total non-interest expense decreased for the quarter ended September 30, 2024, compared to the preceding quarter and increased during the nine months ended September 30, 2024, compared to the same period a year ago. The decrease in non-interest expense for the current quarter compared to the prior quarter reflects a decrease in salary and employee benefits, primarily resulting from decreased medical premiums expense and unemployment and workers compensation expense. The increase in non-interest expense compared to the same period a year ago primarily reflects increases in salary and employee benefits, occupancy and equipment expense, payment and card processing services expense and deposit insurance expense, partially offset by a decrease in professional and legal expenses. 54 Table of Contents OPERATING DATA: Quarters Ended Nine Months Ended (In thousands) September 30, 2024 June 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Interest income $ 195,841 $ 189,138 $ 179,064 $ 569,667 $ 517,834 Interest expense 60,166 56,592 37,298 168,487 80,238 Net interest income 135,675 132,546 141,766 401,180 437,596 Provision for credit losses 1,692 2,369 2,027 4,581 8,267 Net interest income after provision for credit losses 133,983 130,177 139,739 396,599 429,329 Deposit fees and other service charges 10,741 10,590 10,916 32,353 32,078 Mortgage banking operations 3,180 3,006 2,049 8,521 6,426 Net loss on sale of securities — (562) (2,657) (5,465) (14,436) Net change in valuation of financial instruments carried at fair value 39 (190) (654) (1,143) (4,357) All other non-interest income 4,103 4,355 3,004 12,587 10,646 Total non-interest income 18,063 17,199 12,658 46,853 30,357 Salary and employee benefits 61,832 63,831 61,091 188,032 184,452 All other non-interest expenses 34,459 34,297 34,800 104,028 101,465 Total non-interest expense 96,291 98,128 95,891 292,060 285,917 Income before provision for income tax expense 55,755 49,248 56,506 151,392 173,769 Provision for income tax expense 10,602 9,453 10,652 28,885 32,769 Net income $ 45,153 $ 39,795 $ 45,854 $ 122,507 $ 141,000 PER COMMON SHARE DATA: Quarters Ended Nine Months Ended September 30, 2024 June 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Net income: Basic $ 1.31 $ 1.15 $ 1.33 $ 3.56 $ 4.11 Diluted 1.30 1.15 1.33 3.54 4.09 Net Interest Income. Net interest income increased for the quarter ended September 30, 2024, compared to the preceding quarter. The increase was primarily due to increases in the average yields on loans, partially offset by an increase in the cost of funding liabilities. Net interest margin on a tax equivalent basis increased two basis points to 3.72% for the third quarter of 2024, compared to 3.70% in the preceding quarter. Net interest margin for the current quarter benefited from increased yields on loans due to new loans being originated at higher interest rates and adjustable rate loans repricing higher, partially offset by increased funding costs. The increase in the overall cost of funding liabilities was primarily due to the increase in rates across all deposits and other borrowings due to competition for deposits in the higher rate environment, as well as an increase in the average balances of higher costing interest-bearing checking accounts and savings accounts. Net interest income decreased for the nine months ended September 30, 2024, compared to the same period one year earlier, primarily due to increased funding costs, partially offset by an increase in the average yields on interest-earning assets. The higher funding costs and average yields on interest-earning assets compared to same period a year ago was primarily the result of higher interest rates. The higher funding costs was also impacted by a shift in the average balance of non-interest-bearing deposits to higher costing interest-bearing checking accounts, savings accounts and certificates of deposit. The net interest margin on a tax equivalent basis decreased to 3.72% for the nine months ended September 30, 2024, compared to 4.07% for the same period in the prior year. Interest Income. Interest income for the quarter ended September 30, 2024 was $195.8 million, compared to $189.1 million for the preceding quarter. The increase in interest income primarily reflects increases in both the average yields and average balances of loans. The increased yield on interest-earning assets was primarily a result of average yields on total interest-earning assets increasing eight basis points. The increased interest income on loans for the current quarter compared to the preceding quarter was due to the average loan yields increasing to 6.04% for the quarter ended September 30, 2024, from 5.96% in the preceding quarter, as the loan portfolio continued to reprice to higher interest rates for the majority of the quarter. The average balance of loans receivable for the quarter ended September 30, 2024 increased compared to the preceding quarter, primarily reflecting increases in the average balances of mortgage loans, specifically commercial real estate and multifamily loans. 55 Table of Contents Interest and dividend income on total investment securities for the current quarter decreased from the preceding quarter due to a lower average yield earned on total investment securities during the current quarter compared to the preceding quarter and a decrease in the average balance of total investment securities. The average balance of total investment securities decreased to $3.63 billion for the quarter ended September 30, 2024 (excluding the effect of fair value adjustments), compared to $3.71 billion for the preceding quarter. The average yield on the combined portfolio decreased to 3.12% for the quarter ended September 30, 2024, from 3.14% in the preceding quarter. Interest income for the nine months ended September 30, 2024 was $569.7 million, compared to $517.8 million for the same period in the prior year, primarily reflecting an increase in the average yield on interest-earning assets, mostly due to the high interest rate environment, as well as an increase in the average balance of interest-earning assets. Interest Expense. Interest expense for the quarter ended September 30, 2024 increased $3.6 million, or 6%, compared to the preceding quarter. The increase occurred as a result of a seven basis-point increase in the average cost of all funding liabilities to 1.73% and an increase in the average balance of funding liabilities during the current quarter. The average balance of funding liabilities increased primarily due to higher average balances of interest-bearing transaction and savings accounts, partially offset by a decrease in the average balance of non-interest-bearing deposits and FHLB advances. Interest expense for the nine months ended September 30, 2024 was $168.5 million, compared to $80.2 million for the same period in the prior year. The increase occurred as a result of an increase in the average cost of all funding liabilities compared to the same period in the prior year, partially offset by a decrease in average balances of funding liabilities. The decrease in the overall average balance of funding liabilities primarily reflects decreases in non-interest-bearing deposits, money market accounts and other borrowings, partially offset by higher average balances of interest-bearing transaction checking and savings accounts and certificates of deposit. Deposit interest expense for the quarter ended September 30, 2024 increased $4.9 million, or 10%, compared to the preceding quarter. The increase was the result of a larger percentage of core deposits being in interest-bearing accounts and an increase in higher cost certificates of deposit, as well as an overall increase in the average rate paid on interest-bearing deposits. The cost of interest-bearing deposits increased to 2.45% for the quarter ended September 30, 2024, compared to 2.32% in the preceding quarter. The increase in the average cost of interest-bearing deposits was primarily the result of an increase in the cost of interest-bearing checking and savings accounts. The average rate paid on total deposits, which includes non-interest-bearing deposits, was 1.61% for the quarter ended September 30, 2024, compared to 1.50% in the preceding quarter. Average deposit balances increased to $13.32 billion for the quarter ended September 30, 2024, from $13.10 billion for the preceding quarter. Deposit interest expense for the nine months ended September 30, 2024 increased to $147.2 million, compared to $60.8 million for the same period in the prior year. The average cost of interest-bearing deposits increased to 2.31% for the nine months ended September 30, 2024, compared to 1.07% in the same period a year earlier. The increase in the cost of interest-bearing deposits was the result of an overall increase in the average rate paid on interest-bearing deposits, reflecting the increase in market interest rates. Average total deposit balances increased to $13.16 billion for the nine months ended September 30, 2024, from $13.14 billion for the same period a year earlier, while the average rate paid on total deposits increased to 1.49% for the nine months ended September 30, 2024 from 0.62% for the same period in the prior year. Interest expense on total borrowings for the quarter ended September 30, 2024 decreased $1.4 million, or 18%, compared to the prior quarter, primarily due to a decrease in the average balance of total borrowings. The average balance of total borrowings decreased to $499.9 million for the quarter ended September 30, 2024, compared to $614.2 million for the preceding quarter, primarily due to a $98.1 million decrease in the average balance of FHLB advances. The average rate paid on total borrowings for the quarter ended September 30, 2024 increased to 5.08% from 5.07% for the preceding quarter. Interest expense on total borrowings for the nine months ended September 30, 2024 increased to $21.2 million from $19.5 million for the same period a year earlier due to an increase in the rate paid on total borrowings, partially offset by a decrease in the average balance of total borrowings. The average balance of total borrowings was $562.9 million for the nine months ended September 30, 2024, compared to $610.4 million for the same period a year earlier. The decrease was primarily due to a $32.1 million decrease in the average balance of other borrowings. The average rate paid on total borrowings for the nine months ended September 30, 2024 increased to 5.04% from 4.26% for the same period a year earlier. 56 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) Sep 30, 2024 Jun 30, 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 $ 26,954 $ 453 6.69 % $ 11,665 $ 206 7.10 % Mortgage loans 9,207,468 135,497 5.85 % 9,006,857 129,230 5.77 % Commercial/agricultural loans 1,879,215 32,547 6.89 % 1,874,039 31,761 6.82 % Consumer and other loans 128,548 2,154 6.67 % 132,661 2,156 6.54 % Total loans (1) 11,242,185 170,651 6.04 % 11,025,222 163,353 5.96 % Mortgage-backed securities 2,623,399 16,498 2.50 % 2,672,187 16,850 2.54 % Other securities 943,310 11,120 4.69 % 958,809 11,181 4.69 % Interest-bearing deposits with banks 51,604 493 3.80 % 58,022 578 4.01 % FHLB stock 16,664 412 9.84 % 21,080 365 6.96 % Total investment securities 3,634,977 28,523 3.12 % 3,710,098 28,974 3.14 % Total interest-earning assets 14,877,162 199,174 5.33 % 14,735,320 192,327 5.25 % Non-interest-earning assets 981,290 926,411 Total assets $ 15,858,452 $ 15,661,731 Deposits: Interest-bearing checking accounts $ 2,295,723 9,497 1.65 % $ 2,156,214 7,621 1.42 % Savings accounts 3,268,647 19,299 2.35 % 3,147,522 17,200 2.20 % Money market accounts 1,611,543 9,184 2.27 % 1,659,327 9,124 2.21 % Certificates of deposit 1,540,637 15,805 4.08 % 1,503,597 14,905 3.99 % Total interest-bearing deposits 8,716,550 53,785 2.45 % 8,466,660 48,850 2.32 % Non-interest-bearing deposits 4,601,755 — — % 4,634,738 — — % Total deposits 13,318,305 53,785 1.61 % 13,101,398 48,850 1.50 % Other interest-bearing liabilities: FHLB advances 161,413 2,263 5.58 % 259,549 3,621 5.61 % Other borrowings 159,439 1,147 2.86 % 175,518 1,160 2.66 % Junior subordinated debentures and subordinated notes 179,075 2,971 6.60 % 179,178 2,961 6.65 % Total borrowings 499,927 6,381 5.08 % 614,245 7,742 5.07 % Total funding liabilities 13,818,232 60,166 1.73 % 13,715,643 56,592 1.66 % Other non-interest-bearing liabilities (2) 311,803 294,794 Total liabilities 14,130,035 14,010,437 Shareholders’ equity 1,728,417 1,651,294 Total liabilities and shareholders’ equity $ 15,858,452 $ 15,661,731 Net interest income/rate spread (tax equivalent) $ 139,008 3.60 % $ 135,735 3.59 % Net interest margin (tax equivalent) 3.72 % 3.70 % Reconciliation to reported net interest income: Adjustments for taxable equivalent basis (3,333) (3,189) Net interest income and margin, as reported $ 135,675 3.63 % $ 132,546 3.62 % Additional Key Financial Ratios: Return on average assets 1.13 % 1.02 % Adjusted return on average assets (4) 1.13 % 1.04 % Return on average equity 10.39 % 9.69 % Adjusted return on average equity (4) 10.39 % 9.83 % Average equity/average assets 10.90 % 10.54 % Average interest-earning assets/average interest-bearing liabilities 161.42 % 162.27 % Average interest-earning assets/average funding liabilities 107.66 % 107.43 % Non-interest income/average assets 0.45 % 0.44 % Non-interest expense/average assets 2.42 % 2.52 % Efficiency ratio 62.63 % 65.53 % Adjusted efficiency ratio (4) 61.27 % 63.60 % (1) Average balances include loans accounted for on a nonaccrual basis and accruing loans 90 days or more past due. Amortization of net deferred loan fees/costs is included with interest on loans. (2) Average other non-interest-bearing liabilities include fair value adjustments related to junior subordinated debentures. (3) Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $2.3 million and $2.2 million for the quarters ended September 30, 2024 and June 30, 2024, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $1.0 million for both the quarter ended September 30, 2024 and June 30, 2024. (4) Represents non-GAAP financial measures. See non-GAAP financial measure reconciliations presented above following Third Quarter 2024 Highlights. 57 Table of Contents Nine Months Ended September 30, 2024 Nine Months Ended September 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 $ 16,225 $ 826 6.80 % $ 55,157 $ 2,174 5.27 % Mortgage loans 9,036,256 390,011 5.77 % 8,427,034 337,282 5.35 % Commercial/agricultural loans 1,861,182 95,155 6.83 % 1,768,685 82,803 6.26 % Consumer and other loans 131,676 6,506 6.60 % 138,246 6,478 6.26 % Total loans (1) 11,045,339 492,498 5.96 % 10,389,122 428,737 5.52 % Mortgage-backed securities 2,674,555 50,424 2.52 % 2,971,124 55,386 2.49 % Other securities 962,183 33,802 4.69 % 1,220,074 40,155 4.40 % Interest-bearing deposits with banks 51,630 1,530 3.96 % 47,330 1,694 4.79 % FHLB stock 18,931 986 6.96 % 18,772 632 4.50 % Total investment securities 3,707,299 86,742 3.13 % 4,257,300 97,867 3.07 % Total interest-earning assets 14,752,638 579,240 5.24 % 14,646,422 526,604 4.81 % Non-interest-earning assets 950,588 930,934 Total assets $ 15,703,226 $ 15,577,356 Deposits: Interest-bearing checking accounts $ 2,185,796 23,834 1.46 % $ 1,874,518 7,427 0.53 % Savings accounts 3,161,266 51,778 2.19 % 2,604,089 15,179 0.78 % Money market accounts 1,648,208 26,696 2.16 % 1,971,514 16,445 1.12 % Certificates of deposit 1,514,982 44,940 3.96 % 1,118,874 21,733 2.60 % Total interest-bearing deposits 8,510,252 147,248 2.31 % 7,568,995 60,784 1.07 % Non-interest-bearing deposits 4,649,297 — — % 5,571,896 — — % Total deposits 13,159,549 147,248 1.49 % 13,140,891 60,784 0.62 % Other interest-bearing liabilities: FHLB advances 211,135 8,856 5.60 % 219,461 8,654 5.27 % Other borrowings 171,838 3,482 2.71 % 203,932 2,251 1.48 % Junior subordinated debentures and subordinated notes 179,941 8,901 6.61 % 186,964 8,549 6.11 % Total borrowings 562,914 21,239 5.04 % 610,357 19,454 4.26 % Total funding liabilities 13,722,463 168,487 1.64 % 13,751,248 80,238 0.78 % Other non-interest-bearing liabilities (2) 303,367 289,558 Total liabilities 14,025,830 14,040,806 Shareholders’ equity 1,677,396 1,536,550 Total liabilities and shareholders’ equity $ 15,703,226 $ 15,577,356 Net interest income/rate spread (tax equivalent) $ 410,753 3.60 % $ 446,366 4.03 % Net interest margin (tax equivalent) 3.72 % 4.07 % Reconciliation to reported net interest income: Adjustments for taxable equivalent basis (9,573) (8,770) Net interest income and margin $ 401,180 3.63 % $ 437,596 3.99 % Additional Key Financial Ratios: Return on average assets 1.04 % 1.21 % Adjusted return on average assets (4) 1.08 % 1.34 % Return on average equity 9.76 % 12.27 % Adjusted return on average equity (4) 10.16 % 13.60 % Average equity/average assets 10.68 % 9.86 % Average interest-earning assets/average interest-bearing liabilities 162.60 % 179.07 % Average interest-earning assets/average funding liabilities 107.51 % 106.51 % Non-interest income/average assets 0.40 % 0.26 % Non-interest expense/average assets 2.48 % 2.45 % Efficiency ratio 65.19 % 61.10 % Adjusted efficiency ratio (4) 62.84 % 57.19 % (1) Average balances include loans accounted for on a nonaccrual basis and accruing loans 90 days or more past due. Amortization of net deferred loan fees/costs is included with interest on loans. (2) Average other non-interest-bearing liabilities include fair value adjustments related to junior subordinated debentures. (3) Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $6.5 million and $5.4 million for the nine months ended September 30, 2024 and 2023, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $3.1 million and $3.4 million for the nine months ended September 30, 2024 and 2023, respectively. (4) Represents non-GAAP financial measures. See non-GAAP financial measure reconciliations presented above following Third Quarter 2024 Highlights. 58 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 Nine Months Ended CHANGE IN THE ALLOWANCE FOR CREDIT LOSSES - LOANS Sep 30, 2024 Jun 30, 2024 Sep 30, 2023 Sep 30, 2024 Sep 30, 2023 Balance, beginning of period $ 152,848 $ 151,140 $ 144,680 $ 149,643 $ 141,465 Provision for credit losses – loans 1,967 1,953 2,943 5,344 7,276 Recoveries of loans previously charged off: Commercial real estate 65 98 170 1,552 428 Construction and land — — 29 — 29 One- to four-family residential 14 17 59 47 212 Commercial business 613 324 403 1,718 1,046 Agricultural business, including secured by farmland 1 195 19 302 130 Consumer 41 112 126 312 412 734 746 806 3,931 2,257 Loans charged off: Commercial real estate — (347) — (347) — Construction and land (145) — — (145) (156) One- to four-family residential — — — — (34) Commercial business (414) (137) (616) (2,360) (2,340) Agricultural business, including secured by farmland — — (564) — (564) Consumer (405) (507) (289) (1,481) (944) (964) (991) (1,469) (4,333) (4,038) Net charge-offs (230) (245) (663) (402) (1,781) Balance, end of period $ 154,585 $ 152,848 $ 146,960 $ 154,585 $ 146,960 Net charge-offs / Average loans receivable (0.002) % (0.002) % (0.006) % (0.004) % (0.017) % Allowance for credit losses - loans as a percentage of total loans 1.38 % 1.37 % 1.38 % 1.38 % 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 both the quarter ended September 30, 2024 and the preceding quarter, we recorded a provision for credit losses - loans of $2.0 million. The provision for credit losses - loans for the current quarter primarily reflects an increase in the reserve for collateral dependent loans. The provision for credit losses - loans for the preceding quarter primarily reflected loan growth and an increase in the reserve for collateral dependent loans. Future assessments of the expected credit losses will not only be impacted by changes in both the composition and amount of loans, and to the reasonable and supportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required changes in the reasonable and supportable forecast reversion period. The provision for credit losses - unfunded loan commitments reflects the amount required to maintain the allowance for credit losses - unfunded loan commitments at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. The following table sets forth an analysis of our allowance for credit losses - unfunded loan commitments for the periods indicated (dollars in thousands): Quarters Ended Nine Months Ended CHANGE IN THE ALLOWANCE FOR CREDIT LOSSES - UNFUNDED LOAN COMMITMENTS Sep 30, 2024 Jun 30, 2024 Sep 30, 2023 Sep 30, 2024 Sep 30, 2023 Balance, beginning of period $ 14,027 $ 13,597 $ 14,664 $ 14,484 $ 14,721 (Recapture) provision for credit losses - unfunded loan commitments (262) 430 346 (719) 289 Balance, end of period $ 13,765 $ 14,027 $ 15,010 $ 13,765 $ 15,010 The decrease in the allowance for credit losses - unfunded loan commitments for the current quarter primarily reflects a decrease in unfunded loan commitments in the one- to four-family construction, construction, land and land development, and agricultural loan portfolios. 59 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 Nine Months Ended Sep 30, 2024 Jun 30, 2024 Change Amount Change Percent Sep 30, 2024 Sep 30, 2023 Change Amount Change Percent Deposit fees and other service charges $ 10,741 $ 10,590 $ 151 1 % $ 32,353 $ 32,078 $ 275 1 % Mortgage banking operations 3,180 3,006 174 6 8,521 6,426 2,095 33 Bank owned life insurance 2,445 2,367 78 3 7,049 6,636 413 6 Miscellaneous 1,658 1,988 (330) (17) 5,538 4,010 1,528 38 18,024 17,951 73 — 53,461 49,150 4,311 9 Net loss on sale of securities — (562) 562 (100) (5,465) (14,436) 8,971 (62) Net change in valuation of financial instruments carried at fair value 39 (190) 229 nm (1,143) (4,357) 3,214 (74) Total non-interest income $ 18,063 $ 17,199 $ 864 5 % $ 46,853 $ 30,357 $ 16,496 54 % nm = not meaningful The increase in non-interest income during the current quarter compared to the preceding quarter was primarily due to decreases in the net loss recognized on the sale of securities and the net loss recognized on the valuation of financial instruments carried at fair value, partially offset by a decrease in miscellaneous income. The increase in non-interest income for the nine months ended September 30, 2024, compared to the same period a year earlier was primarily due to decreases in the net loss recognized on the sale of securities and the net loss recognized on the valuation of financial instruments carried at fair value, as well as increases in revenue from mortgage banking operations and miscellaneous income. Revenue from mortgage banking operations increased $174,000 for the quarter ended September 30, 2024, compared to the preceding quarter and increased $2.1 million for the nine months ended September 30, 2024, compared to the same period a year earlier. The volume of one- to four-family loans sold during the current quarter and the nine months ended September 30, 2024 increased relative to the comparable periods, although overall volumes remained low due to reduced refinancing and purchase activity in the current rate environment. The increase was also impacted by increases in the pricing on the one- to four-family loans sold during the current period. The current year also benefited from a $284,000 gain related to the sale of $19.8 million of one- to four-family portfolio loans during the second quarter of 2024. In addition, the prior year period reflected a downward lower of cost or market adjustment on multifamily loans held for sale. In 2023, the Bank discontinued the origination of multifamily loans for sale into the secondary market. All of the multifamily loans held for sale were transferred to the held for investment loan portfolio and the related lower of cost or market adjustment was reversed in the fourth quarter of 2023. Gains on sales of one- to four-family loans resulted in income of $2.1 million and $5.4 million for the quarter and nine months ended September 30, 2024, respectively, compared to $2.0 million in the preceding quarter, and $4.2 million for the nine months ended September 30, 2023. Home purchase activity accounted for 88% of one- to four-family mortgage loan originations in the third quarter of 2024, compared to 89% in the preceding quarter. Miscellaneous income increased for the nine months ended September 30, 2024, compared to the same period a year earlier, primarily as a result of an increase in the gain on sale of SBA loans. There were no sales of securities during the current quarter and the net loss on the sale of securities recognized for the prior periods reflected strategic sales of securities to minimize the impact of increasing rates on our securities portfolio. The net loss for fair value adjustments for changes in the valuation of financial instruments carried at fair value for the prior quarter and the nine months ended September 30, 2023 were due to declines in the current market valuation of limited partnership investments. The net loss for fair value adjustments for changes in the valuation of financial instruments carried at fair value for the nine months ended September 30, 2023 was also impacted by declines in the market valuation of investment securities held for trading. 60 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 Nine Months Ended Sep 30, 2024 Jun 30, 2024 Change Amount Change Percent. Sep 30, 2024 Sep 30, 2023 Change Amount Change Percent Salary and employee benefits $ 61,832 $ 63,831 $ (1,999) (3) % $ 188,032 $ 184,452 $ 3,580 2 % Less capitalized loan origination costs (4,354) (4,639) 285 (6) (12,669) (12,386) (283) 2 Occupancy and equipment 12,040 12,128 (88) (1) 36,630 35,686 944 3 Information and computer data services 7,134 7,240 (106) (1) 21,694 21,347 347 2 Payment and card processing services 5,346 5,691 (345) (6) 16,747 14,459 2,288 16 Professional and legal expenses 2,102 1,201 901 75 4,833 7,563 (2,730) (36) Advertising and marketing 1,161 1,198 (37) (3) 3,438 3,108 330 11 Deposit insurance 2,874 2,858 16 1 8,541 7,603 938 12 State and municipal business and use taxes 1,432 1,394 38 3 4,130 3,888 242 6 Real estate operations, net 103 297 (194) (65) 180 (585) 765 (131) Amortization of core deposit intangibles 590 724 (134) (19) 2,037 2,898 (861) (30) Miscellaneous 6,031 6,205 (174) (3) 18,467 17,884 583 3 Total non-interest expense $ 96,291 $ 98,128 $ (1,837) (2) % $ 292,060 $ 285,917 $ 6,143 2 % The decrease in non-interest expense for the current quarter compared to the prior quarter reflects a decrease in salary and employee benefits. The increase in non-interest expense for the nine months ended September 30, 2024, compared to the same period a year earlier primarily reflects increases in salary and employee benefits as well as payment and card processing services expense, partially offset by a decrease in professional and legal expenses. Salary and employee benefits increased for the nine months ended September 30, 2023, primarily as a result of normal annual salary and wage increases and an increase in loan production related commission expense. Other notable changes included payment and card processing services expense, which increased for the nine months ended September 30, 2024, compared to the same period a year earlier, primarily due to an increase in online banking costs and fraud losses. Professional and legal expense decreased for the nine months ended September 30, 2024, compared to the same period a year ago primarily due to a reduction in legal and consulting expenses as well as one-time reductions in litigation settlement costs. Our efficiency ratio was 62.63% for the current quarter, compared to 65.53% in the preceding quarter. Our adjusted efficiency ratio, a non-GAAP financial measure, was 61.27% for the current quarter, compared to 63.60% in the preceding quarter. The efficiency ratio for the current quarter reflects an increase in total revenues in addition to the decrease in non-interest expenses. See non-GAAP financial measure reconciliations presented above under “Third Quarter 2024 Financial Highlights.” Income Taxes. For the quarter ended September 30, 2024, we recognized $10.6 million in income tax expense for an effective tax rate of 19.0%, which reflects our blended statutory tax rate reduced by the effect of tax-exempt income, certain tax credits, and tax benefits related to restricted stock vesting. Our statutory income tax rate is 23.7%, representing a statutory federal income tax rate of 21.0% and apportioned effects of the state income tax rates. For the quarter ended June 30, 2024, we recognized $9.5 million in income tax expense for an effective tax rate of 19.2%. For the nine months ended September 30, 2024, we recognized $28.9 million in income tax expense for an effective tax rate of 19.1%, compared to $32.8 million in income tax expense for an effective tax rate of 18.9% for the same period in the prior year. 61 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 totaled $45.2 million, or 0.28% of total assets, at September 30, 2024, compared to $30.1 million, or 0.19% of total assets, at December 31, 2023. Our allowance for credit losses - loans was $154.6 million, or 359% of non-performing loans, at September 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): September 30, 2024 December 31, 2023 September 30, 2023 Nonaccrual Loans: Secured by real estate: Commercial $ 2,127 $ 2,677 $ 1,365 Construction and land 4,286 3,105 5,538 One- to four-family 9,592 5,702 5,480 Commercial business 10,705 9,002 5,289 Agricultural business, including secured by farmland 7,703 3,167 3,170 Consumer 4,636 3,204 3,378 39,049 26,857 24,220 Loans more than 90 days delinquent, still on accrual: Secured by real estate: Commercial 2,258 — — Construction and land 380 1,138 — One- to four-family 961 1,205 1,799 Commercial business — 1 — Consumer 359 401 245 3,958 2,745 2,044 Total non-performing loans 43,007 29,602 26,264 REO, net 2,221 526 546 Total non-performing assets $ 45,228 $ 30,128 $ 26,810 Total non-performing assets to total assets 0.28 % 0.19 % 0.17 % Total nonaccrual loans to total loans receivable 0.35 % 0.25 % 0.23 % Loans 30-89 days past due and on accrual $ 13,030 $ 19,744 $ 6,108 For the nine months ended September 30, 2024, interest income was reduced by $1.6 million as a result of nonaccrual loan activity, which included the reversal of $569,000 of accrued interest as of the date the loan was placed on nonaccrual. There was no interest income recognized on nonaccrual loans for the nine months ended September 30, 2024. The following table presents the Company’s portfolio of loans by risk grade at the dates indicated (in thousands): September 30, 2024 December 31, 2023 September 30, 2023 Pass $ 11,022,014 $ 10,671,281 $ 10,467,498 Special Mention 52,497 13,732 19,394 Substandard 150,095 125,442 124,525 Total $ 11,224,606 $ 10,810,455 $ 10,611,417 The increase in special mention and substandard from December 31, 2023, primarily reflects loan downgrades, partially offset by paydowns and payoffs of substandard loans. 62 Table of Contents 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. Our primary investing activity is the origination of loans and, in certain periods, the purchase of securities or loans. During the nine months ended September 30, 2024 and 2023, our loan originations, including originations of loans held for sale, exceeded our loan repayments by $744.9 million and $666.6 million, respectively. There were $4.7 million of loan purchases during the nine months ended September 30, 2024, and no loan purchases during the nine months ended September 30, 2023. During the nine months ended September 30, 2024 and 2023, we received proceeds of $276.8 million and $212.0 million, respectively, from the sale of loans. Securities purchased during the nine months ended September 30, 2024 and 2023 totaled $53.2 million and $54.2 million, respectively, and securities repayments, maturities and sales in those periods were $284.4 million and $508.7 million, respectively. Our primary financing activity is gathering deposits. Total deposits increased by $508.7 million during the nine months ended September 30, 2024, primarily due to an increase in core deposits. Core deposits were $12.02 billion at September 30, 2024, compared to $11.55 billion at 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 September 30, 2024, certificates of deposit totaled $1.52 billion, or 11% of our total deposits, including $1.46 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 $4.39 billion or 32% of total deposits at September 30, 2024, compared to $4.08 billion or 31% of total deposits at December 31, 2023. The estimated uninsured deposit calculation includes $318.0 million and $305.3 million of collateralized public deposits at September 30, 2024 and December 31, 2023, respectively. Estimated uninsured deposits also includes cash held by the Company of $69.2 million and $108.2 million at September 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 29% of total deposits at September 30, 2024, compared to 28% of total deposits at December 31, 2023. We had $230.0 million of FHLB advances at September 30, 2024, compared to $323.0 million at December 31, 2023. Other borrowings decreased to $154.5 million at September 30, 2024 from $182.9 million at December 31, 2023. Subordinated notes, net of issuance costs decreased to $80.2 million at September 30, 2024, compared to $92.9 million at December 31, 2023, due to Banner Bank’s purchase of $3.5 million and $9.5 million of Banner’s subordinated debt during the first and third quarters of 2024, respectively. 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 nine months ended September 30, 2024, we used our sources of funds primarily to fund loan growth. At September 30, 2024, we had outstanding loan commitments totaling $4.01 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 September 30, 2024, under these credit facilities based on pledged collateral, the Bank had $3.23 billion of available credit capacity. Advances under these credit facilities totaled $230.0 million at September 30, 2024. In addition, the Bank has been approved for participation in the FRBSF’s Borrower-In-Custody program. Under this program, based on pledged collateral, the Bank had available lines of credit of approximately $1.53 billion as of September 30, 2024, subject to certain collateral requirements, namely the collateral type and risk rating of eligible pledged loans. We had no funds borrowed from the FRBSF at September 30, 2024 or December 31, 2023. At September 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 September 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 September 30, 2024, Banner (on an unconsolidated basis) had liquid assets of $69.5 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. 63 Table of Contents 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 September 30, 2024. 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 nine months ended September 30, 2024, total shareholders’ equity increased $141.0 million, to $1.79 billion or 11.08% of total assets. At September 30, 2024, tangible common shareholders’ equity, which excludes goodwill and other intangible assets, was $1.42 billion, or 8.96% of tangible assets. Tangible common shareholders’ equity represents a non-GAAP financial measure. See, non-GAAP financial measure reconciliations presented above under “Third 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 September 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 September 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 $ 1,988,948 14.92 % $ 1,066,549 8.00 % $ 1,333,186 10.00 % Tier 1 capital to risk-weighted assets 1,725,690 12.94 % 799,912 6.00 % 799,912 6.00 % Tier 1 leverage capital to average assets 1,725,690 10.91 % 632,760 4.00 % n/a n/a Common equity tier 1 capital 1,639,190 12.30 % 599,934 4.50 % n/a n/a Banner Bank Total capital to risk-weighted assets $ 1,862,242 13.95 % $ 1,067,758 8.00 % $ 1,334,697 10.00 % Tier 1 capital to risk-weighted assets 1,698,984 12.73 % 800,818 6.00 % 1,067,758 8.00 % Tier 1 leverage capital to average assets 1,698,984 10.74 % 632,851 4.00 % 791,063 5.00 % Common equity tier 1 capital 1,698,984 12.73 % 600,614 4.50 % 867,553 6.50 %