BANNER CORP

Comparison of Financial Condition at March 31, 2024 and December 31, 2023

General: Total assets decreased $152.1 million to $15.52 billion at March 31, 2024, from $15.67 billion at December 31, 2023. The decrease compared to the prior quarter was primarily due to the sale of securities and normal cash flows from the security portfolio, partially offset by loan growth.

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 March 31, 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 $58.6 million at March 31, 2024, compared to December 31, 2023, primarily reflecting increased one-to-four family residential loans, multifamily construction loans, and home equity revolving lines of credit, partially offset by decreased one-to-four family construction loans and total commercial real estate loans. At March 31, 2024, our loans receivable totaled $10.87 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):

Our commercial real estate loans totaled $3.61 billion, or 33% of our loan portfolio, at March 31, 2024. In addition, multifamily real estate loans totaled $809.1 million and comprised 7% of our loan portfolio at March 31, 2024. Commercial real estate loans decreased by $26.4 million during the first three months of 2024, while multifamily real estate loans decreased by $2.1 million.

Our construction, land and land development loans totaled $1.57 billion, or 14% of our loan portfolio at March 31, 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 $69.0 million, or 14%, to $573.0 million at March 31, 2024, compared to December 31, 2023. Multifamily construction loans represented approximately 5% of our total loan portfolio at March 31, 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 $30.5 million, or 6%, to $495.9 million at March 31, 2024, compared to $526.4 million at December 31, 2023. One- to four-family construction loans represented approximately 5% of our total loan portfolio at March 31, 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 $2.61 billion at both March 31, 2024 and December 31, 2023. Commercial and agricultural business loans represented approximately 24% of our loan portfolio at March 31, 2024. Our commercial business lending also includes participation in certain syndicated loans, including shared national credits, which totaled $218.7 million, or 2% of our loan portfolio, at March 31, 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 March 31, 2024, one- to four-family residential loans retained in our portfolio increased $48.8 million, to $1.57 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 March 31, 2024.

Our consumer loan activity is primarily directed at meeting demand from our existing deposit clients. At March 31, 2024, consumer loans, including home equity revolving lines of credit, increased $4.2 million to $703.6 million, compared to $699.4 million at December 31, 2023.

The following table shows the commitment amount for loan origination (excluding loans held for sale) activity for the periods indicated (in thousands):

Loans held for sale decreased to $9.4 million at March 31, 2024, compared to $11.2 million at December 31, 2023, as sales exceeded originations of held-for-sale loans during the three months ended March 31, 2024. Originations of loans held for sale increased to $48.4 million for the three months ended March 31, 2024, compared to $39.6 million for the same period last year. The volume of one- to four-family residential mortgage loans sold was $65.9 million during the three months ended March 31, 2024, compared to $40.5 million in the same period a year ago.

The following table presents loans by geographic concentration at the dates indicated (dollars in thousands):

Investment Securities: Total securities decreased $149.6 million to $3.28 billion at March 31, 2024, from $3.43 billion at December 31, 2023, primarily due to the securities sales, paydowns and maturities. Securities sales, paydowns and maturities exceeded purchases during the three-month period ended March 31, 2024. Purchases during the three months ended March 31, 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 6.6 years at March 31, 2024, compared to 6.5 years at December 31, 2023. Fair value adjustments for securities designated as available-for-sale decreased $21.8 million for the three months ended March 31, 2024, which was included, net of the associated tax benefit of $5.2 million, as a component of other comprehensive income, and largely occurred as a result of increases in market interest rates during the three months ended March 31, 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 during 2023 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):

Total deposits increased $129.3 million at March 31, 2024, compared to December 31, 2023, with core deposits increasing $120.9 million and certificates of deposit increasing $8.4 million. The increase in core deposits was primarily due to increases in savings accounts. Certificates of deposit increased 1% at March 31, 2024, compared to December 31, 2023, reflecting higher rates attracting clients to these deposit types, partially offset by a $531,000 decrease in brokered deposits. We had $107.5 million of brokered deposits at March 31, 2024, compared to $108.1 million at December 31, 2023. Core deposits represented 89% of total deposits at both March 31, 2024 and December 31, 2023, respectively. 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):

The following table presents deposits by geographic concentration at the dates indicated (dollars in thousands):

Borrowings: We had $52.0 million of FHLB advances at March 31, 2024, compared to $323.0 million at December 31, 2023, reflecting paydowns of the FHLB advances due to cash flows from the security portfolio and an increase in core deposits. At March 31, 2024, the Company’s off-balance sheet liquidity included additional borrowing capacity of $3.27 billion at the FHLB and $1.66 billion at the Federal Reserve as well as federal funds line of credit agreements with other financial institutions of $125.0 million. Other borrowings, consisting of retail repurchase agreements primarily related to client cash management accounts, increased $464,000 to $183.3 million at March 31, 2024, compared to $182.9 million at December 31, 2023. Junior subordinated debentures totaled $66.6 million at March 31, 2024, compared to $66.4 million at December 31, 2023. Subordinated notes, net of issuance costs were $89.5 million at March 31, 2024, compared to $92.9 million at December 31, 2023. The decrease in subordinated notes was due to Banner Bank’s purchase of $3.5 million of Banner’s subordinated debt during the first quarter of 2024.

Shareholders’ Equity: Total shareholders’ equity increased $11.8 million to $1.66 billion at March 31, 2024, as compared to $1.65 billion at December 31, 2023. The increase in shareholders’ equity was primarily due to a $20.8 million increase in retained earnings as a result of $37.6 million in net income, partially offset by the accrual of cash dividends during the three months ended March 31, 2024. In addition, accumulated other comprehensive loss increased by $10.3 million, primarily due to an increase in the unrealized losses on the security portfolio. There were no shares of common stock repurchased during the three months ended March 31, 2024. Tangible common shareholders’ equity, which excludes goodwill and other intangible assets and is a non-GAAP financial measure, increased $12.5 million to $1.29 billion, or 8.50% of tangible assets at March 31, 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 First Quarter 2024 Highlights.