Financial Data and Key Metrics Changes - Banner Corporation reported a net profit available to common shareholders of $55.6 million or $1.61 per diluted share for Q1 2023, compared to $1.27 per share for Q1 2022 and $1.58 per share for Q4 2022 [10] - Core earnings for Q1 2023 were $75.9 million, up from $49.7 million in Q1 2022, reflecting a 24% increase in revenue from core operations to $170.4 million [11] - Return on average assets was 1.44% for Q1 2023, indicating strong core performance [12] Business Line Data and Key Metrics Changes - Loan growth increased by 11% year-over-year, with core deposits representing 93% of total deposits [12] - Delinquent loans as of March 31st were 0.37% of total loans, up from 0.21% a year ago, while adversely classified loans were 1.46% [15] - The multifamily portfolio grew 16% year-over-year, with 50% of it being affordable housing [22] Market Data and Key Metrics Changes - Total loans increased by $6 million from the prior quarter, with a notable growth in 1-4 family real estate loans [27] - Core deposits decreased by $692 million from the prior quarter, primarily due to outflows of rate-sensitive balances [28] - Agricultural loans were down 8% from the linked quarter but up 11% year-over-year [25] Company Strategy and Development Direction - The company continues to implement its "Banner Forward" initiatives aimed at maintaining a moderate risk profile and supporting stakeholders [9] - The strategic focus remains on growing new client relationships and maintaining core funding positions [12] - The company aims to navigate economic cycles with a strong capital position and robust reserve methodology [48] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about new client acquisition despite economic pessimism and increasing rates [44] - The current economic environment is expected to have a longer tail, presenting opportunities for growth [48] - Management noted that the bank has not seen material impacts from recent bank failures, maintaining client confidence [40] Other Important Information - Banner was recognized as one of America's 100 Best Banks and received an outstanding CRA rating [13] - The company published its inaugural environmental, social, and governance highlights report, reflecting its commitment to community support [12] Q&A Session Summary Question: Deposit flows and impacts from bank failures - Management noted that deposit declines in Q1 were less than in Q4, primarily driven by non-operating balances moving to higher-yielding investments [39][40] Question: Loan growth and risk-adjusted returns - Management indicated that loan growth expectations have moderated but remain optimistic about new client acquisition [44] Question: Deposit costs and betas - The deposit beta for interest-bearing deposits is expected to be similar to the last rate cycle, around 25% [51] Question: Loan to deposit ratio comfort level - Management indicated a comfort level in the mid-80% range for the loan to deposit ratio, depending on market conditions [69] Question: Changes in customer behavior post-bank failures - Management reported no major shifts in customer behavior but noted increased inquiries from potential new clients [72]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________to__________ Commission File Number 0-26584 BANNER CORPORATION (Exact name of registrant as specified in its charter) Washington 91-1691604 (State or other jurisdic ...

Banner Corporation (NASDAQ:BANR) Q4 2022 Earnings Conference Call January 20, 2023 11:00 AM ET Company Participants Mark Grescovich - President and Chief Executive Officer Rich Arnold - Head of Investor Relations Jill Rice - Chief Credit Officer Peter Conner - Chief Financial Officer Conference Call Participants Jeff Rulis - D.A. Davidson David Feaster - Raymond James Andrew Liesch - Piper Sandler Andrew Terrell - Stephens Kelly Motta - KBW Tim Coffey - Janney Montgomery & Scott Operator Hello, everyone, an ...

Fourth Quarter 2022 Photo by Salvador Saldana Photo by Yvonne McDonald Photo by Maria DeVecchio Photo by Siti Alimah Disclosure Statement This presentation deals with Banner's business outlook and will include forward-looking statements. Those statements include descriptions of management's plans, objectives or goals for future operations, products or services, forecast of financial or other performance measures and statements about Banner's general outlook for economic and other conditions. Additional forw ...

PART I – FINANCIAL INFORMATION [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents Banner Corporation's unaudited consolidated financial statements, including condition, operations, comprehensive income, equity changes, and cash flows, for the periods ended September 30, 2022 [Consolidated Statements of Financial Condition](index=4&type=section&id=Consolidated%20Statements%20of%20Financial%20Condition) Total assets decreased to **$16.36 billion**, while net loans grew to **$9.69 billion**, and shareholders' equity declined to **$1.41 billion** due to comprehensive loss Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | Change | | :--- | :--- | :--- | :--- | | **Total Assets** | **$16,360,809** | **$16,804,872** | **($444,063)** | | Total cash and cash equivalents | $821,921 | $2,134,300 | ($1,312,379) | | Net loans receivable | $9,691,178 | $8,952,664 | $738,514 | | Total securities | $4,157,408 | $4,186,896 | ($29,488) | | **Total Liabilities** | **$14,952,150** | **$15,114,545** | **($162,395)** | | Total deposits | $14,234,266 | $14,326,933 | ($92,667) | | **Total Shareholders' Equity** | **$1,408,659** | **$1,690,327** | **($281,668)** | | Accumulated other comprehensive (loss) income | ($369,190) | $184 | ($369,374) | [Consolidated Statements of Operations](index=6&type=section&id=Consolidated%20Statements%20of%20Operations) Q3 2022 net income was **$49.1 million**, with year-to-date net income at **$141.0 million**, impacted by credit loss provisions and lower mortgage banking income Key Performance Metrics (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | **Net Interest Income** | **$146,443** | **$130,146** | **$394,108** | **$375,361** | | Provision (Recapture) for Credit Losses | $6,087 | ($8,638) | $3,660 | ($28,145) | | Total Non-interest Income | $15,585 | $25,334 | $62,185 | $71,942 | | Total Non-interest Expense | $95,034 | $102,145 | $278,282 | $288,296 | | **Net Income** | **$49,070** | **$49,884** | **$140,998** | **$151,121** | | **Diluted EPS** | **$1.43** | **$1.44** | **$4.09** | **$4.32** | - Mortgage banking operations income dropped significantly to **$105 thousand** in Q3 2022 from **$9.6 million** in Q3 2021, and to **$8.5 million** for the first nine months of 2022 from **$28.3 million** in the same period of 2021[10](index=10&type=chunk) [Consolidated Statements of Comprehensive (Loss) Income](index=8&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20%28Loss%29%20Income) The company reported a **$228.4 million** comprehensive loss for the nine months, driven by a **$369.4 million** other comprehensive loss from unrealized securities losses Comprehensive Income (Loss) Summary (in thousands) | Component | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | **Net Income** | **$140,998** | **$151,121** | | Other Comprehensive Loss | ($369,374) | ($54,130) | | *Unrealized holding loss on securities (pre-tax)* | *($422,728)* | *($62,711)* | | **Comprehensive (Loss) Income** | **($228,376)** | **$96,991** | [Consolidated Statements of Changes in Shareholders' Equity](index=9&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) Shareholders' equity declined to **$1.41 billion**, primarily due to a **$369.4 million** other comprehensive loss and **$45.7 million** in dividends Shareholders' Equity Reconciliation - 9 Months Ended Sep 30, 2022 (in thousands) | Description | Amount | | :--- | :--- | | **Balance, January 1, 2022** | **$1,690,327** | | Net income | $140,998 | | Other comprehensive loss, net of tax | ($369,374) | | Accrual of dividends on common stock | ($45,652) | | Repurchase of common stock | ($10,960) | | Stock-based compensation & other | $2,666 | | **Balance, September 30, 2022** | **$1,408,659** | [Consolidated Statements of Cash Flows](index=13&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Cash and cash equivalents decreased by **$1.31 billion**, with **$157.4 million** from operations, **$1.37 billion** used in investing, and **$104.2 million** used in financing Cash Flow Summary - 9 Months Ended Sep 30 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided from operating activities | $157,367 | $329,723 | | Net cash used by investing activities | ($1,365,547) | ($819,963) | | Net cash (used by) provided from financing activities | ($104,199) | $1,456,639 | | **Net Change in Cash and Cash Equivalents** | **($1,312,379)** | **$966,399** | | Cash and cash equivalents, beginning of period | $2,134,300 | $1,234,183 | | **Cash and cash equivalents, end of period** | **$821,921** | **$2,200,582** | [Selected Notes to the Consolidated Financial Statements](index=15&type=section&id=Selected%20Notes%20to%20the%20Consolidated%20Financial%20Statements) This section details disclosures on securities, loans, credit losses, goodwill, deposits, fair value, commitments, and legal proceedings, supporting financial statements [Note 3: Securities](index=17&type=section&id=Note%203%3A%20SECURITIES) Total securities portfolio was **$4.16 billion**, with AFS securities showing **$438.0 million** in unrealized losses due to rising interest rates Securities Portfolio Summary (in thousands) | Category | Amortized Cost | Fair Value | Gross Unrealized Losses | | :--- | :--- | :--- | :--- | | Trading | $27,203 | $28,383 | N/A | | Available-for-Sale | $3,433,541 | $2,996,173 | ($437,953) | | Held-to-Maturity | $1,133,246 | $947,416 | ($185,885) | - At September 30, 2022, there were **313** available-for-sale securities with unrealized losses, a significant increase from **97** at year-end 2021, which management attributes to changes in interest rates rather than credit deterioration[57](index=57&type=chunk) [Note 4: Loans Receivable and the Allowance for Credit Losses - Loans](index=22&type=section&id=Note%204%3A%20LOANS%20RECEIVABLE%20AND%20THE%20ALLOWANCE%20FOR%20CREDIT%20LOSSES%20-%20LOANS) Total loans grew to **$9.83 billion**, with an allowance for credit losses of **$135.9 million**, and nonaccrual loans at **$13.5 million** Loan Portfolio Composition (in thousands) | Loan Category | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Commercial real estate | $3,656,024 | $3,787,513 | | Construction, land and land development | $1,442,326 | $1,309,321 | | Commercial business | $2,448,943 | $2,245,022 | | One- to four-family residential | $1,025,143 | $657,474 | | Consumer | $662,172 | $555,902 | | **Total loans** | **$9,827,096** | **$9,084,763** | Allowance for Credit Losses - Loans Activity (in thousands) | Description | Nine Months Ended Sep 30, 2022 | | :--- | :--- | | Beginning balance | $132,099 | | Provision for credit losses | $2,115 | | Recoveries | $2,955 | | Charge-offs | ($1,251) | | **Ending balance** | **$135,918** | - Total nonaccrual loans decreased to **$13.5 million** at September 30, 2022, from **$22.3 million** at year-end 2021[126](index=126&type=chunk)[128](index=128&type=chunk) [Note 6: Goodwill, Other Intangible Assets and Mortgage Servicing Rights](index=39&type=section&id=Note%206%3A%20GOODWILL%2C%20OTHER%20INTANGIBLE%20ASSETS%20AND%20MORTGAGE%20SERVICING%20RIGHTS) Goodwill remained at **$373.1 million**, CDI decreased to **$10.7 million**, and mortgage servicing rights covered **$2.80 billion** in loans - Goodwill of **$373.1 million** was assessed for impairment as of December 31, 2021, with management concluding that no impairment was indicated[139](index=139&type=chunk) - The unpaid principal balance of loans for which mortgage and SBA servicing rights are recognized totaled **$2.80 billion** at September 30, 2022[144](index=144&type=chunk) [Note 7: Deposits](index=40&type=section&id=Note%207%3A%20DEPOSITS) Total deposits were **$14.23 billion**, with core deposits representing **95%** and certificates of deposit decreasing to **$721.9 million** Deposit Composition (in thousands) | Deposit Type | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Non-interest-bearing accounts | $6,507,523 | $6,385,177 | | Interest-bearing transaction and saving accounts | $7,004,799 | $7,103,125 | | Certificates of deposit | $721,944 | $838,631 | | **Total deposits** | **$14,234,266** | **$14,326,933** | [Note 12: Commitments and Contingencies](index=49&type=section&id=Note%2012%3A%20COMMITMENTS%20AND%20CONTINGENCIES) Off-balance-sheet commitments totaled **$3.94 billion**, and the company accrued **$11.3 million** for legal proceedings, including a class action lawsuit - Commitments to extend credit increased to **$3.94 billion** at September 30, 2022, from **$3.53 billion** at year-end 2021[189](index=189&type=chunk) - The company is defending a class action lawsuit, Bolding et al. v. Banner Bank, related to wage claims by mortgage loan officers. The company has accrued **$11.3 million** for legal proceedings as of September 30, 2022[348](index=348&type=chunk)[349](index=349&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=56&type=section&id=Item%202%20%E2%80%93%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial condition, operations, asset quality, liquidity, and capital, providing an executive overview and detailed comparisons [Executive Overview](index=56&type=section&id=Executive%20Overview) Q3 2022 net income was **$49.1 million**, driven by higher interest income despite lower mortgage banking income, with the 'Banner Forward' initiative ongoing Q3 2022 Performance Summary | Metric | Q3 2022 | Q2 2022 | | :--- | :--- | :--- | | Net Income | $49.1 million | $48.0 million | | Diluted EPS | $1.43 | $1.39 | | Adjusted Earnings (Non-GAAP) | $49.0 million | $43.2 million | | Adjusted Diluted EPS (Non-GAAP) | $1.42 | $1.25 | - The 'Banner Forward' initiative, focused on enhancing revenue and reducing operating expenses, is ongoing. Revenue enhancements are beginning to positively impact earnings, with full implementation expected by the end of **2023**[227](index=227&type=chunk) [Comparison of Financial Condition](index=62&type=section&id=Comparison%20of%20Financial%20Condition%20at%20September%2030%2C%202022%20and%20December%2031%2C%202021) Total assets decreased to **$16.36 billion**, loans grew to **$9.83 billion**, deposits fell by **$92.7 million**, and shareholders' equity declined to **$1.41 billion** - Total loans receivable increased by **8.2%** to **$9.83 billion** at Sep 30, 2022 from **$9.08 billion** at Dec 31, 2021, with notable growth in one- to four-family residential loans, which increased **55.9%**[253](index=253&type=chunk)[254](index=254&type=chunk) - Total deposits decreased by **0.6%** to **$14.23 billion**, impacted by a branch sale that transferred **$178.2 million** of deposits. Core deposits now represent **95%** of total deposits, up from **94%** at year-end 2021[268](index=268&type=chunk) - Tangible common shareholders' equity to tangible assets (a non-GAAP measure) decreased to **6.41%** from **7.93%** at year-end 2021, mainly due to the decrease in Accumulated Other Comprehensive Income (AOCI)[271](index=271&type=chunk)[239](index=239&type=chunk) [Comparison of Results of Operations](index=66&type=section&id=Comparison%20of%20Results%20of%20Operations) Net interest income for Q3 2022 increased to **$146.4 million** with a **3.85%** margin, while non-interest income decreased to **$15.6 million**, and a **$6.1 million** credit loss provision was recorded - Net interest margin on a tax equivalent basis increased by **41 basis points** to **3.85%** in Q3 2022 compared to **3.44%** in Q2 2022, driven by a **43 basis-point** increase in the average yield on interest-earning assets[280](index=280&type=chunk) - A provision for credit losses of **$6.1 million** was recorded in Q3 2022, compared to a **$4.5 million** provision in Q2 2022, primarily reflecting loan growth and a deterioration in forecasted economic conditions[275](index=275&type=chunk) - Mortgage banking operations revenue decreased by **$3.9 million** quarter-over-quarter, reflecting reduced loan sale volumes and gain-on-sale margins due to rising interest rates[298](index=298&type=chunk) [Asset Quality](index=74&type=section&id=Asset%20Quality) Asset quality improved, with non-performing assets decreasing to **$15.6 million** (**0.10%** of total assets) and the allowance for credit losses at **$135.9 million** Non-Performing Assets (in thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | Sep 30, 2021 | | :--- | :--- | :--- | :--- | | Total non-performing loans | $15,193 | $22,836 | $28,861 | | REO and other repossessed assets | $357 | $869 | $869 | | **Total non-performing assets** | **$15,550** | **$23,705** | **$29,730** | | **NPA / Total Assets** | **0.10%** | **0.14%** | **0.18%** | - Substandard loans decreased to **$136.4 million** at September 30, 2022, from **$198.4 million** at year-end 2021, primarily due to risk rating upgrades[311](index=311&type=chunk) [Liquidity and Capital Resources](index=76&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with **$2.50 billion** FHLB and **$1.10 billion** FRBSF capacity, robust capital ratios, and a **$0.44** per share quarterly dividend - The company has substantial available liquidity, with **$2.50 billion** in credit capacity from the FHLB and **$1.10 billion** from the FRBSF as of September 30, 2022[316](index=316&type=chunk) - The current quarterly common stock dividend rate is **$0.44** per share, which management believes balances investment in the bank with returning cash to shareholders[317](index=317&type=chunk) [Capital Requirements](index=77&type=section&id=Capital%20Requirements) Banner Corporation and Banner Bank maintained capital levels exceeding regulatory requirements, with CET1 at **11.27%** and Total Capital at **13.85%** Banner Corporation Regulatory Capital Ratios (Consolidated) | Ratio | Actual (Sep 30, 2022) | Minimum Adequately Capitalized | | :--- | :--- | :--- | | Common equity tier 1 capital | 11.27% | 4.50% | | Tier 1 capital to risk-weighted assets | 11.96% | 6.00% | | Total capital to risk-weighted assets | 13.85% | 8.00% | | Tier 1 leverage capital to average assets | 9.06% | 4.00% | [Quantitative and Qualitative Disclosures About Market Risk](index=78&type=section&id=Item%203%20%E2%80%93%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is asset-sensitive to interest rate risk; a **+100** bps rate shock increases net interest income by **3.3%**, while a **-100** bps shock decreases it by **6.3%** Interest Rate Sensitivity Analysis (as of Sep 30, 2022) | Rate Shock (Basis Points) | Estimated % Change in Net Interest Income (Next 12 Months) | | :--- | :--- | | +300 | +5.8% | | +200 | +5.3% | | +100 | +3.3% | | -100 | -6.3% | | -200 | -13.4% | - As of September 30, 2022, the company had **$4.23 billion** in loans with interest rate floors, which helps maintain loan yields in declining rate environments. Of these, **$1.09 billion** had interest rates at their floors[327](index=327&type=chunk) [Controls and Procedures](index=82&type=section&id=Item%204%20%E2%80%93%20Controls%20and%20Procedures) Management concluded disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting - The CEO and CFO concluded that as of September 30, 2022, the company's disclosure controls and procedures were effective[345](index=345&type=chunk) - No material changes to internal control over financial reporting occurred during the third quarter of 2022[346](index=346&type=chunk) PART II – OTHER INFORMATION [Legal Proceedings](index=83&type=section&id=Item%201%20%E2%80%93%20Legal%20Proceedings) The company faces a class action lawsuit (Bolding et al. v. Banner Bank) for wage claims, with **$11.3 million** accrued for legal proceedings - The company is defending a class action lawsuit (Bolding et al. v. Banner Bank) regarding wage claims under the Fair Labor Standards Act (FLSA) and state laws for mortgage loan officers[349](index=349&type=chunk) - As of September 30, 2022, the company had accrued **$11.3 million** for legal proceedings, though the ultimate outcome is unknown[348](index=348&type=chunk) [Risk Factors](index=83&type=section&id=Item%201A%20%E2%80%93%20Risk%20Factors) No material changes to risk factors were reported for the period, consistent with the prior Annual Report on Form 10-K - No material changes to risk factors were reported for the period[350](index=350&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=83&type=section&id=Item%202%20%E2%80%93%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No common stock was repurchased in Q3 2022, with **1,512,510** shares remaining available under the existing authorization - No shares were repurchased under the publicly announced authorization during the quarter ended September 30, 2022[351](index=351&type=chunk)[352](index=352&type=chunk) - The company has **1,512,510** shares remaining that may be purchased under its current stock repurchase authorization[351](index=351&type=chunk)[352](index=352&type=chunk)

Financial Data and Key Metrics Changes - Banner Corporation reported a net profit available to common shareholders of $49.1 million, or $1.43 per diluted share for Q3 2022, compared to $1.44 per share in Q3 2021 and $1.39 per share in Q2 2022 [9] - Pretax pre-provision earnings, excluding certain expenses, were $66.9 million for Q3 2022, up from $57.8 million in Q2 2022 [10] - Core revenue from operations increased by 9% to $161.5 million compared to $148.2 million in Q2 2022 [10] - Return on average assets was 1.18% for Q3 2022 [10] Business Line Data and Key Metrics Changes - Core deposits increased by 1.5% compared to September 30, 2021, representing 95% of total deposits [11] - Loans outside of PPP loans increased by 10% year-over-year [11] - Delinquent loans as of September 30 were 0.22% of total loans, up from 0.20% a year ago [13] - Core portfolio loan growth, excluding PPP loans, was $388 million or 4.1% for the quarter, with an annualized growth rate of 16.3% [14] Market Data and Key Metrics Changes - Commercial loans, excluding PPP, grew by nearly 5% or $53 million in the quarter, with an annualized rate of 18% [14] - The agricultural loans reflected an 8% year-over-year increase, excluding PPP loans [17] - The consumer mortgage portfolio saw significant growth due to holding completed construction mortgage loans on the balance sheet [17] Company Strategy and Development Direction - The company is focused on the "Banner Forward" initiative, which aims to accelerate growth in commercial banking, deepen retail client relationships, and streamline back-office operations [7] - The company continues to emphasize its core values and commitment to clients, communities, and shareholders [8] - The company is positioned to navigate economic cycles effectively, with a strong credit culture and solid reserve for loan losses [17] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism regarding loan growth, anticipating mid to upper single-digit growth in Q4 and into 2023, barring significant economic downturns [31] - The economic environment is described as uncertain, with management prepared for potential recession impacts [17] - Management noted that credit quality metrics remain strong, with a focus on maintaining a moderate risk profile [9][13] Other Important Information - The company announced a quarterly dividend of $0.44 per share [11] - Banner Corporation received recognition for client satisfaction, ranking as the number one bank in the Northwest by JD Power [12] Q&A Session Summary Question: Expense guidance and efficiency initiatives - Management does not anticipate material additional restructuring costs from the Banner Forward initiative, expecting a low 90s core run rate going into 2023 [26][27] Question: Core deposit management - Management expects modest runoff of price-sensitive deposits but continues to acquire new clients, particularly in small business and commercial sectors [29] Question: Loan growth expectations - Management anticipates maintaining mid to upper single-digit loan growth in Q4 and into 2023, despite potential economic challenges [31] Question: Margin guidance - New loans are being added in the mid to upper fives range, with expectations for deposit betas to catch up as rates rise [33][35] Question: Provision for loan losses - Provisioning was driven by loan growth and qualitative factors related to economic sentiment [36] Question: Balance sheet growth and bond portfolio - The bond portfolio is expected to gradually amortize, with cash flows around $75 million to $80 million per quarter [39] Question: Total capital ratio and share repurchases - Management is cautious about share repurchases due to economic uncertainty, with expectations for the total capital ratio to improve over time [41] Question: Fee income outlook - Management expects a rebound in fee income in Q4, following a significant mark on the multifamily loans held for sale in Q3 [43] Question: Noninterest-bearing deposits - Seasonal increases in noninterest-bearing deposits are typical in Q3, with expectations for plateauing in Q4 [48]

Financial Highlights - Loan growth reached 3.9% (15.5% annualized)[5] - Total loan originations (excluding HFS) amounted to $989 million[5] - Core deposits experienced annualized growth of 1.7%, constituting 95% of total deposits[5] - Net interest margin (tax equivalent) increased by 41 basis points to 3.85%[5] - The efficiency ratio (adjusted, non-GAAP) decreased by 242 basis points to 57%[5] - A provision for credit losses of $6.1 million was made, driven by loan growth; Allowance for credit losses – loans was 1.38% of total loans[5] - Non-performing assets remained low at 0.10% of total assets[5] Revenue and Expenses - Core revenue for the quarter ending 09/30/22 was $161 million, with a last twelve months (LTM) amount of $591 million[25] - Noninterest income for the quarter ending 09/30/22 was $15.0 million, with an LTM amount of $75.1 million[28] - Core operating expenses for the quarter ending 09/30/22 were $92 million, with an LTM amount of $351 million[60] Balance Sheet and Asset Quality - As of 9/30/2022, interest-bearing deposits totaled $7.064 billion[35] - As of 9/30/2022, loans yielded 4.82%[49] - Non-performing assets (NPAs) were $16 million, representing 0.10% of total assets as of 09/30/22[73]

[PART I – FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20%E2%80%93%20FINANCIAL%20INFORMATION) This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis for the period ended June 30, 2022 [Consolidated Statements of Financial Condition](index=4&type=section&id=Consolidated%20Statements%20of%20Financial%20Condition) Total assets decreased by $419.7 million to $16.39 billion, driven by reduced cash and deposits, while shareholders' equity declined due to unrealized losses on available-for-sale securities | Metric (in millions) | June 30, 2022 | December 31, 2021 | Change (in millions) | | :-------------------- | :------------ | :---------------- | :------------------- | | Total assets | $16,385.2 | $16,804.9 | $(419.7) | | Total liabilities | $14,899.4 | $15,114.5 | $(215.1) | | Total shareholders' equity | $1,485.8 | $1,690.3 | $(204.5) | | Cash and cash equivalents | $1,170.8 | $2,134.3 | $(963.5) | | Total securities | $4,274.1 | $4,186.9 | $87.2 | | Loans receivable | $9,456.8 | $9,084.8 | $372.0 | | Total deposits | $14,212.6 | $14,326.9 | $(114.3) | [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations) Net income for Q2 2022 decreased to $48.0 million from $54.4 million year-over-year, primarily due to a provision for credit losses and lower mortgage banking income | Metric (in millions) | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2021 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total interest income | $133.0 | $133.6 | $255.9 | $258.1 | | Total interest expense| $4.0 | $6.0 | $8.2 | $12.9 | | Net interest income | $129.0 | $127.6 | $247.7 | $245.2 | | Provision (recapture) for credit losses | $4.5 | $(10.3) | $(2.4) | $(19.5) | | Total non-interest income | $27.2 | $22.3 | $46.6 | $46.6 | | Total non-interest expense| $92.1 | $92.6 | $183.2 | $186.2 | | NET INCOME | $48.0 | $54.4 | $91.9 | $101.2 | | Basic EPS | $1.40 | $1.57 | $2.68 | $2.90 | | Diluted EPS | $1.39 | $1.56 | $2.66 | $2.88 | [Consolidated Statements of Comprehensive Income](index=7&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Comprehensive income for Q2 2022 resulted in a significant loss of $(53.9) million, primarily driven by substantial unrealized losses on available-for-sale securities | Metric (in millions) | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2021 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | NET INCOME | $48.0 | $54.4 | $91.9 | $101.2 | | Other comprehensive (loss) income | $(101.8) | $25.3 | $(256.1) | $(30.8) | | COMPREHENSIVE (LOSS) INCOME | $(53.9) | $79.7 | $(164.2) | $70.4 | - Unrealized holding losses on available-for-sale securities were a major contributor to the comprehensive loss, with a **$(129.4) million loss** for the three months and **$(282.4) million loss** for the six months ended June 30, 2022[11](index=11&type=chunk) [Consolidated Statements of Changes in Shareholders' Equity](index=8&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) Shareholders' equity decreased by $204.5 million, mainly due to accumulated other comprehensive loss, cash dividends, and stock repurchases, partially offset by net income | Metric (in millions) | Dec 31, 2021 | Jun 30, 2022 | Change (in millions) | | :-------------------- | :----------- | :----------- | :------------------- | | Total Shareholders' Equity | $1,690.3 | $1,485.8 | $(204.5) | | Retained earnings | $390.8 | $452.2 | $61.4 | | Accumulated other comprehensive (loss) income | $0.2 | $(255.9) | $(256.1) | - The company repurchased **200,000 shares** of common stock at a cost of **$10.96 million** during the six months ended June 30, 2022[21](index=21&type=chunk) - Cash dividends declared per common share increased to **$0.44** for the quarter ended June 30, 2022, from $0.41 in the prior year[9](index=9&type=chunk) [Consolidated Statements of Cash Flows](index=11&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow significantly decreased to $115.4 million, while financing activities shifted to a net outflow of $110.2 million, primarily due to reduced deposit growth | Cash Flow Activity (in millions) | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided from operating activities | $115.4 | $319.7 | | Net cash used by investing activities | $(968.6) | $(1,085.9) | | Net cash (used by) provided from financing activities | $(110.2) | $999.9 | | Net change in cash and cash equivalents | $(963.5) | $233.7 | - The decrease in cash from operating activities was partly due to a gain on sale of branches of **$(7.8) million** in 2022, which is a non-cash adjustment[23](index=23&type=chunk) - Financing activities shifted from a large inflow to an outflow, driven by a significant decrease in net deposit increases (**$63.8 million** in 2022 vs. **$1.07 billion** in 2021) and repayment of **$50.5 million** in junior subordinated debentures[26](index=26&type=chunk) [Selected Notes to the Consolidated Financial Statements](index=13&type=section&id=Selected%20Notes%20to%20the%20Consolidated%20Financial%20Statements) This section provides detailed disclosures on accounting policies, recent standards, and specific financial instrument notes, including securities, loans, deposits, and fair value measurements [Note 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES](index=13&type=section&id=Note%201%3A%20BASIS%20OF%20PRESENTATION%20AND%20SIGNIFICANT%20ACCOUNTING%20POLICIES) The unaudited condensed consolidated financial statements are prepared under GAAP for interim reporting, with no significant changes in accounting policies during H1 2022 - Financial statements are prepared in accordance with GAAP for interim financial information and SEC regulations, with all necessary adjustments included[32](index=32&type=chunk) - Management's critical accounting policies, including those for interest income, credit losses, fair value, intangible assets, and deferred taxes, involve significant judgment and estimation, with no significant changes in application during H1 2022[33](index=33&type=chunk) [Note 2: ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED](index=14&type=section&id=Note%202%3A%20ACCOUNTING%20STANDARDS%20RECENTLY%20ISSUED%20OR%20ADOPTED) The company adopted ASU 2020-04, 2021-01, and 2022-02, related to reference rate reform and TDRs, with no material impact expected on financial statements - The company adopted ASU 2020-04 and 2021-01 for Reference Rate Reform, electing certain expedients for hedge relationships, with no material impact on financial statements[36](index=36&type=chunk)[39](index=39&type=chunk) - ASU 2022-02, eliminating TDR recognition guidance and introducing vintage disclosures, is effective for fiscal years beginning after December 15, 2022, and is not expected to have a material impact[39](index=39&type=chunk)[42](index=42&type=chunk) - ASU 2022-03, clarifying fair value measurement of equity securities subject to contractual sale restrictions, is effective for fiscal years beginning after December 15, 2023, and is not expected to have a material impact[43](index=43&type=chunk)[44](index=44&type=chunk) [Note 3: SECURITIES](index=16&type=section&id=Note%203%3A%20SECURITIES) Total securities increased to $4.27 billion, but available-for-sale securities incurred significant unrealized losses of $(298.7) million due to rising interest rates | Securities (in millions) | June 30, 2022 Fair Value | December 31, 2021 Fair Value | Change (in millions) | | :------------------------ | :----------------------- | :--------------------------- | :------------------- | | Trading | $27.9 | $27.0 | $0.9 | | Available-for-sale | $3,094.4 | $3,639.0 | $(544.6) | | Held-to-maturity | $1,036.3 | $541.9 | $494.4 | | Total securities | $4,274.1 | $4,186.9 | $87.2 | - Gross unrealized losses on available-for-sale securities increased significantly to **$(298.7) million** at June 30, 2022, from **$(51.1) million** at December 31, 2021, primarily due to changes in interest rates[47](index=47&type=chunk)[50](index=50&type=chunk) - **$458.6 million** of securities were transferred from available-for-sale to held-to-maturity during Q1 2022 to mitigate the impact of future interest rate changes on Accumulated Other Comprehensive Income (AOCI)[63](index=63&type=chunk) [Note 4: LOANS RECEIVABLE AND THE ALLOWANCE FOR CREDIT LOSSES - LOANS](index=21&type=section&id=Note%204%3A%20LOANS%20RECEIVABLE%20AND%20THE%20ALLOWANCE%20FOR%20CREDIT%20LOSSES%20-%20LOANS) Total loans receivable grew by $372.1 million to $9.46 billion, while the allowance for credit losses decreased due to improved economic forecasts and reduced adversely classified loans | Loan Category (in millions) | June 30, 2022 Amount | December 31, 2021 Amount | Change (in millions) | | :--------------------------- | :------------------- | :----------------------- | :------------------- | | Commercial real estate | $3,245.2 | $3,287.5 | $(42.3) | | Multifamily real estate | $575.2 | $530.9 | $44.3 | | Construction, land & development | $1,396.5 | $1,309.3 | $87.2 | | Commercial business | $1,206.9 | $1,170.8 | $36.1 | | Small business scored | $865.8 | $792.3 | $73.5 | | Agricultural business | $283.4 | $280.6 | $2.8 | | One- to four-family residential | $868.2 | $657.5 | $210.7 | | Consumer | $595.6 | $555.9 | $39.7 | | Total loans receivable | $9,456.8 | $9,084.8 | $372.0 | | Metric (in millions) | June 30, 2022 | December 31, 2021 | | :-------------------- | :------------ | :---------------- | | Allowance for credit losses – loans | $128.7 | $132.1 | | TDRs | $4.4 | $5.5 | - The allowance for credit losses - loans decreased by **$3.4 million** from December 31, 2021, to June 30, 2022, primarily due to a recapture of provision for credit losses reflecting improved economic forecasts and a decrease in adversely classified loans[128](index=128&type=chunk)[288](index=288&type=chunk)[289](index=289&type=chunk) - SBA Paycheck Protection Program (PPP) loans decreased significantly to **$31.0 million** at June 30, 2022, from **$133.9 million** at December 31, 2021, due to loan forgiveness[65](index=65&type=chunk)[250](index=250&type=chunk)[254](index=254&type=chunk) [Note 5: REAL ESTATE OWNED, NET](index=38&type=section&id=Note%205%3A%20REAL%20ESTATE%20OWNED%2C%20NET) Real Estate Owned (REO) decreased to $340 thousand at June 30, 2022, from $852 thousand at December 31, 2021, primarily due to dispositions exceeding additions | REO Activity (in thousands) | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :-------------------------- | :-------------------------- | :-------------------------- | | Balance, beginning of period| $852 | $816 | | Additions from loan foreclosures | — | $423 | | Proceeds from dispositions | $(864) | $(783) | | Gain on sale of REO | $352 | $307 | | Balance, end of period | $340 | $763 | - The company had no foreclosed one- to four-family residential real estate properties held as REO at June 30, 2022[134](index=134&type=chunk) [Note 6: GOODWILL, OTHER INTANGIBLE ASSETS AND MORTGAGE SERVICING RIGHTS](index=38&type=section&id=Note%206%3A%20GOODWILL%2C%20OTHER%20INTANGIBLE%20ASSETS%20AND%20MORTGAGE%20SERVICING%20RIGHTS) Goodwill remained stable, while Core Deposit Intangibles decreased to $11.9 million due to amortization and branch sales, and mortgage servicing rights increased | Intangible Asset (in millions) | Dec 31, 2021 | Jun 30, 2022 | Change (in millions) | | :------------------------------ | :----------- | :----------- | :------------------- | | Goodwill | $373.1 | $373.1 | $0 | | Core Deposit Intangibles (CDI) | $14.9 | $11.9 | $(3.0) | | Total Intangibles | $388.0 | $385.0 | $(3.0) | - CDI amortization expense was **$2.8 million** for the six months ended June 30, 2022[137](index=137&type=chunk) - Mortgage servicing rights increased to **$17.6 million** at June 30, 2022, from $17.2 million at January 1, 2022, with no impairment charges recorded during the period[142](index=142&type=chunk) [Note 7: DEPOSITS](index=40&type=section&id=Note%207%3A%20DEPOSITS) Total deposits decreased by $114.4 million to $14.21 billion, primarily due to a decline in certificates of deposit and core deposits, partly from branch sales | Deposit Type (in millions) | June 30, 2022 | December 31, 2021 | Change (in millions) | | :-------------------------- | :------------ | :---------------- | :------------------- | | Non-interest-bearing | $6,388.8 | $6,385.2 | $3.6 | | Interest-bearing transaction and savings | $7,067.4 | $7,103.1 | $(35.7) | | Certificates of deposit | $756.3 | $838.6 | $(82.3) | | Total deposits | $14,212.6 | $14,326.9 | $(114.3) | - The decrease in total deposits was primarily due to the sale of four branches, which included the transfer of **$178.2 million** of related deposits[263](index=263&type=chunk)[310](index=310&type=chunk) - Core deposits (non-interest-bearing and interest-bearing transaction and savings accounts) represented **95%** of total deposits at June 30, 2022[265](index=265&type=chunk) [Note 8: FAIR VALUE OF FINANCIAL INSTRUMENTS](index=41&type=section&id=Note%208%3A%20FAIR%20VALUE%20OF%20FINANCIAL%20INSTRUMENTS) The company uses a three-level hierarchy for fair value measurements, with significant unobservable inputs for certain securities, loans, and debentures, whose values are sensitive to discount rate changes | Financial Instrument (in millions) | Fair Value Level | June 30, 2022 Fair Value | December 31, 2021 Fair Value | | :---------------------------------- | :--------------- | :----------------------- | :--------------------------- | | Securities—trading | 3 | $27.9 | $27.0 | | Securities—available-for-sale | 2 | $3,094.4 | $3,639.0 | | Securities—held-to-maturity | 2, 3 | $1,036.3 | $541.9 | | Loans receivable | 3 | $9,322.4 | $9,100.5 | | Junior subordinated debentures | 3 | $72.2 | $119.8 | - A **25 basis-point increase/decrease** in the discount rate for TPS securities would result in a **$758 thousand decrease/increase** in fair value[243](index=243&type=chunk) - A **25 basis-point increase/decrease** in the discount rate for junior subordinated debentures would result in a **$1.9 million decrease/increase** in fair value[244](index=244&type=chunk) | Level 3 Financial Instruments (in millions) | June 30, 2022 Fair Value | December 31, 2021 Fair Value | | :------------------------------------------- | :----------------------- | :--------------------------- | | Corporate bonds (TPS securities) | $27.9 | $27.0 | | Junior subordinated debentures | $72.2 | $119.8 | | SBA servicing rights | $1.0 | $1.2 | | Investments in limited partnerships | $11.9 | $10.3 | [Note 9: INCOME TAXES AND DEFERRED TAXES](index=47&type=section&id=Note%209%3A%20INCOME%20TAXES%20AND%20DEFERRED%20TAXES) Income tax expense for Q2 2022 was $11.6 million with an effective tax rate of 19.5%, and the company holds tax credit investments with unfunded commitments | Metric (in millions) | 3 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income tax expense | $11.6 | $21.5 | $23.9 | | Effective tax rate | **19.5%** | **19.0%** | **19.1%** | | Tax Credit Investments (in millions) | June 30, 2022 | December 31, 2021 | | :------------------------------------ | :------------ | :---------------- | | Tax credit investments | $56.0 | $56.6 | | Unfunded commitments | $28.0 | $31.2 | [Note 10: CALCULATION OF WEIGHTED AVERAGE SHARES OUTSTANDING FOR EARNINGS PER SHARE (EPS)](index=48&type=section&id=Note%2010%3A%20CALCULATION%20OF%20WEIGHTED%20AVERAGE%20SHARES%20OUTSTANDING%20FOR%20EARNINGS%20PER%20SHARE%20(EPS)) Diluted weighted average shares outstanding for EPS were 34.45 million for Q2 2022, reflecting the dilutive effect of unvested restricted stock | Metric (in thousands, except shares) | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2021 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic weighted average shares outstanding | 34,307,001 | 34,736,639 | 34,303,889 | 34,854,357 | | Diluted weighted shares outstanding | 34,451,740 | 34,933,714 | 34,532,935 | 35,149,986 | [Note 11: STOCK-BASED COMPENSATION PLANS](index=48&type=section&id=Note%2011%3A%20STOCK-BASED%20COMPENSATION%20PLANS) Stock-based compensation expense was $2.3 million for Q2 2022, with $15.3 million in unrecognized expense to be amortized over the next 33 months - Stock-based compensation expense for restricted stock grants was **$2.3 million** for Q2 2022 (down from $2.5 million YoY) and **$4.3 million** for the six months ended June 30, 2022 (down from $4.7 million YoY)[187](index=187&type=chunk) - Unrecognized compensation expense for these awards totaled **$15.3 million** as of June 30, 2022, to be amortized over the next 33 months[187](index=187&type=chunk) [Note 12: COMMITMENTS AND CONTINGENCIES](index=48&type=section&id=Note%2012%3A%20COMMITMENTS%20AND%20CONTINGENCIES) The company has significant off-balance-sheet commitments, including $3.98 billion in credit extensions and $242.7 million in loan originations, with an allowance for unfunded commitments of $14.2 million | Commitment Type (in millions) | June 30, 2022 | December 31, 2021 | | :----------------------------- | :------------ | :---------------- | | Commitments to extend credit | $3,978.3 | $3,527.1 | | Standby letters of credit | $35.6 | $21.8 | | Commitments to originate loans | $242.7 | $106.6 | | Risk participation agreements | $53.2 | $40.1 | - The allowance for credit losses - unfunded loan commitments was **$14.2 million** at June 30, 2022, an increase from $12.4 million at December 31, 2021[190](index=190&type=chunk) [NOTE 13: DERIVATIVES AND HEDGING](index=50&type=section&id=NOTE%2013%3A%20DERIVATIVES%20AND%20HEDGING) The company uses derivatives, primarily interest rate swaps, for asset/liability management and client financing, with cash flow hedges resulting in net unrealized losses of $15.1 million in AOCI - Derivatives designated as cash flow hedges resulted in net unrealized losses of **$15.1 million** (net of taxes) recorded in AOCI at June 30, 2022, compared to $958 thousand at December 31, 2021[202](index=202&type=chunk) | Derivative Type (in millions) | June 30, 2022 Notional/Contract Amount | December 31, 2021 Notional/Contract Amount | | :----------------------------- | :------------------------------------- | :----------------------------------------- | | Interest Rate Swaps (designated) | $400.0 | $400.0 | | Interest rate swaps (non-designated) | $462.0 | $551.6 | | Mortgage loan commitments | $33.6 | $88.0 | | Forward sales contracts | $12.8 | $56.1 | - The company generally posts collateral against derivative liabilities, totaling **$26.0 million** at June 30, 2022[209](index=209&type=chunk) [NOTE 14: REVENUE FROM CONTRACTS WITH CLIENTS](index=54&type=section&id=NOTE%2014%3A%20REVENUE%20FROM%20CONTRACTS%20WITH%20CLIENTS) Deposit fees and other service charges increased by $3.5 million (18.7%) for the six months ended June 30, 2022, driven by higher deposit transaction account activity | Revenue Category (in millions) | 3 Months Ended Jun 30, 2022 | 3 Months Ended Jun 30, 2021 | 6 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2021 | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Deposit service charges | $5.9 | $4.5 | $11.4 | $8.6 | | Debit and credit card interchange fees | $6.1 | $5.9 | $11.8 | $11.2 | | Merchant services income | $4.1 | $3.8 | $7.6 | $6.9 | | Other service charges | $1.2 | $1.2 | $3.2 | $2.6 | | Total deposit fees and other service charges | $11.0 | $9.8 | $22.2 | $18.7 | - Deposit fees and other service charges increased by **$3.5 million (18.7%)** for the six months ended June 30, 2022, compared to the same period a year earlier, driven by increased deposit transaction account activity[294](index=294&type=chunk) [Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations](index=54&type=section&id=Item%202%20%E2%80%93%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of financial performance, condition, asset quality, liquidity, and capital resources, highlighting key trends and significant changes [Executive Overview](index=55&type=section&id=Executive%20Overview) Banner Corporation reported Q2 2022 net income of $48.0 million, benefiting from a branch sale gain and increased interest income, despite a provision for credit losses - Net income for Q2 2022 was **$48.0 million ($1.39 diluted EPS)**, up from $44.0 million ($1.27 diluted EPS) in Q1 2022[223](index=223&type=chunk) - Q2 2022 results were positively impacted by a **$7.8 million gain** on a branch sale and increased interest income, partially offset by decreased mortgage banking income and a **$4.5 million provision for credit losses**[223](index=223&type=chunk)[228](index=228&type=chunk)[231](index=231&type=chunk) - The "Banner Forward" initiative, focused on revenue growth and expense reduction, incurred **$1.6 million** in expenses during Q2 2022, with full implementation expected by the end of 2023[225](index=225&type=chunk) | Metric (in millions, except EPS) | Q2 2022 (GAAP) | Q1 2022 (GAAP) | Q2 2022 (Non-GAAP Adjusted) | Q1 2022 (Non-GAAP Adjusted) | | :-------------------- | :------------- | :------------- | :-------------------------- | :-------------------------- | | Net income | $48.0 | $44.0 | $43.2 | $46.1 | | Diluted EPS | $1.39 | $1.27 | $1.25 | $1.33 | | Total revenue | $156.2 | $138.1 | $148.3 | $137.6 | | Non-interest expense | $92.1 | $91.2 | $88.2 | $85.4 | | Efficiency ratio | **58.94%** | **66.04%** | **59.46%** | **62.09%** | [Comparison of Financial Condition at June 30, 2022 and December 31, 2021](index=61&type=section&id=Comparison%20of%20Financial%20Condition%20at%20June%2030%2C%202022%20and%20December%2031%2C%202021) Total assets decreased to $16.39 billion, while loans grew to $9.46 billion, and shareholders' equity declined by $204.5 million due to unrealized losses on available-for-sale securities - Total assets decreased by **$419.7 million** to **$16.39 billion** at June 30, 2022, from $16.80 billion at December 31, 2021, mainly due to a decrease in cash and interest-bearing deposits[249](index=249&type=chunk) - Total loans receivable increased by **$372.1 million (4.1%)** to **$9.46 billion** at June 30, 2022, from $9.08 billion at December 31, 2021, with significant growth in one-to-four family residential loans (**32.0% increase**)[249](index=249&type=chunk)[250](index=250&type=chunk) - Total deposits decreased by **$114.4 million (0.8%)** to **$14.21 billion** at June 30, 2022, from $14.33 billion at December 31, 2021, partly due to the sale of four branches and related deposit transfers[263](index=263&type=chunk)[266](index=266&type=chunk) - Shareholders' equity decreased by **$204.5 million** to **$1.49 billion**, primarily due to a **$256.1 million decrease** in Accumulated Other Comprehensive Income (AOCI) from unrealized losses on available-for-sale securities[267](index=267&type=chunk) | Loan Category (in millions) | Jun 30, 2022 | Dec 31, 2021 | % Change | | :--------------------------- | :----------- | :----------- | :------- | | Owner-occupied CRE | $845.2 | $831.6 | **1.6%** | | Investment properties | $1,628.1 | $1,674.0 | **(2.7)%** | | Small balance CRE | $1,191.9 | $1,281.9 | **(7.0)%** | | Multifamily real estate | $575.2 | $530.9 | **8.3%** | | Commercial construction | $194.0 | $168.0 | **15.5%** | | One- to four-family construction | $625.5 | $568.8 | **10.0%** | | Land and land development | $320.0 | $313.5 | **2.1%** | | Commercial business (excl. PPP) | $1,176.3 | $1,038.2 | **13.3%** | | SBA PPP loans | $31.0 | $133.9 | **(76.9)%** | | One- to four-family residential | $868.2 | $657.5 | **32.0%** | | Consumer (incl. HELOC) | $595.6 | $555.9 | **7.1%** | | Total loans receivable | $9,456.8 | $9,084.8 | **4.1%** | [Comparison of Results of Operations for the Three Months Ended June 30, 2022 and March 31, 2022 and the Six Months Ended June 30, 2022 and 2021](index=64&type=section&id=Comparison%20of%20Results%20of%20Operations%20for%20the%20Three%20Months%20Ended%20June%2030%2C%202022%20and%20March%2031%2C%202022%20and%20the%20Six%20Months%20Ended%20June%2030%2C%202022%20and%202021) Q2 2022 net income increased to $48.0 million due to higher net interest income and a branch sale gain, while six-month net income decreased year-over-year due to lower mortgage banking income - Net interest income increased by **$10.4 million (9%)** to **$129.0 million** in Q2 2022 compared to Q1 2022, primarily due to higher yields on loans and investment securities from rising interest rates[226](index=226&type=chunk)[273](index=273&type=chunk) - Net interest margin (tax equivalent) increased to **3.44%** in Q2 2022 from 3.18% in Q1 2022, reflecting the impact of Federal Reserve rate hikes[274](index=274&type=chunk) - Non-interest income increased by **$7.7 million** to **$27.2 million** in Q2 2022 compared to Q1 2022, mainly due to a **$7.8 million gain** on branch sales[228](index=228&type=chunk)[293](index=293&type=chunk) - Mortgage banking operations revenue decreased by **$462 thousand** in Q2 2022 compared to Q1 2022, and by **$10.3 million** for the six months ended June 30, 2022 YoY, due to reduced loan sales volume and lower gain on sale margins from increased interest rates[294](index=294&type=chunk) - A **$4.5 million provision for credit losses** was recorded in Q2 2022, compared to a **$7.0 million recapture** in Q1 2022, reflecting loan growth and deteriorating economic forecasts[231](index=231&type=chunk)[269](index=269&type=chunk)[288](index=288&type=chunk) - Non-interest expenses increased by **$0.9 million** to **$92.1 million** in Q2 2022 compared to Q1 2022, but decreased by **$2.9 million** for the six months ended June 30, 2022 YoY, primarily due to reduced staffing and consulting expenses[229](index=229&type=chunk)[271](index=271&type=chunk)[296](index=296&type=chunk) [Asset Quality](index=73&type=section&id=Asset%20Quality) Non-performing assets decreased to $19.1 million (0.12% of total assets), and the allowance for credit losses provided strong coverage at 688% of non-performing loans | Metric (in millions) | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :-------------------- | :------------ | :---------------- | :------------ | | Non-performing assets | $19.1 | $23.7 | $31.5 | | Non-performing assets to total assets | **0.12%** | **0.14%** | **0.19%** | | Nonaccrual loans | $16.7 | $22.3 | $28.6 | | Loans >90 days delinquent, still accruing | $2.1 | $0.6 | $2.1 | | REO, net | $0.3 | $0.9 | $0.8 | | Allowance for credit losses - loans | $128.7 | $132.1 | $148.0 | | Allowance for credit losses - loans to non-performing loans | **688%** | **578%** | **481%** | - Substandard loans decreased during the six months ended June 30, 2022, primarily due to payoffs and risk rating upgrades[305](index=305&type=chunk) - The company had **$4.4 million** of Troubled Debt Restructuring (TDR) loans performing under their restructured repayment terms at June 30, 2022[302](index=302&type=chunk)[303](index=303&type=chunk) [Liquidity and Capital Resources](index=74&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity is primarily from deposits, loan payments, and securities, with $2.41 billion in FHLB and $876.8 million in FRBSF credit capacity, while shareholders' equity decreased due to AOCI losses - Total deposits decreased by **$114.4 million** during H1 2022, with certificates of deposit decreasing by **$82.3 million** and core deposits by **$32.1 million**, partly due to branch sales[310](index=310&type=chunk) - The company had **$2.41 billion** of available credit capacity from FHLB and **$876.8 million** from FRBSF at June 30, 2022, with no outstanding advances[314](index=314&type=chunk) - Total shareholders' equity decreased by **$204.5 million** to **$1.49 billion** at June 30, 2022, primarily due to a **$256.1 million decrease** in AOCI[316](index=316&type=chunk) | Metric (in millions) | June 30, 2022 | December 31, 2021 | | :-------------------- | :------------ | :---------------- | | Tangible common shareholders' equity | $1,100.8 | $1,302.4 | | Tangible common shareholders' equity to tangible assets | **6.88%** | **7.93%** | [Capital Requirements](index=76&type=section&id=Capital%20Requirements) Both Banner Corporation and Banner Bank exceeded all regulatory capital requirements at June 30, 2022, maintaining capital levels significantly above "Well-Capitalized" thresholds - Both Banner Corporation and Banner Bank exceeded all regulatory capital requirements at June 30, 2022[318](index=318&type=chunk)[320](index=320&type=chunk) | Capital Ratio | Banner Corporation (Actual) | Minimum "Well-Capitalized" | Banner Bank (Actual) | Minimum "Well-Capitalized" | | :------------ | :-------------------------- | :------------------------- | :------------------- | :------------------------- | | Total capital to risk-weighted assets | **13.80%** | **10.00%** | **13.27%** | **10.00%** | | Tier 1 capital to risk-weighted assets | **11.92%** | **6.00%** | **12.22%** | **8.00%** | | Tier 1 leverage capital to average assets | **8.74%** | n/a | **8.95%** | **5.00%** | | Common equity tier 1 capital | **11.21%** | n/a | **12.22%** | **6.50%** | [Item 3 – Quantitative and Qualitative Disclosures About Market Risk](index=76&type=section&id=Item%203%20%E2%80%93%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company actively manages interest rate risk through asset/liability modeling, with sensitivity analysis indicating a 4.1% increase in net interest income for a 100 basis-point rate hike [Market Risk and Asset/Liability Management](index=78&type=section&id=Market%20Risk%20and%20Asset%2FLiability%20Management) Interest rate risk, arising from asset/liability repricing mismatches, is the primary market risk, actively managed to optimize earnings within acceptable risk tolerances - Interest rate risk, stemming from mismatches in asset/liability repricing, is the primary market risk[323](index=323&type=chunk)[324](index=324&type=chunk) - The company actively manages interest rate risk through adjustments to the mix of interest-earning assets and funding sources, aiming to maximize earnings within acceptable risk tolerances[324](index=324&type=chunk)[325](index=325&type=chunk) - Loans with interest rate floors totaled **$3.90 billion** at June 30, 2022, with a weighted average floor rate of **4.10%** compared to a current average note rate of **4.77%**[324](index=324&type=chunk) [Sensitivity Analysis](index=78&type=section&id=Sensitivity%20Analysis) Asset/liability simulation modeling shows a 100 basis-point interest rate increase would boost net interest income by 4.1% over 12 months, while a decrease would reduce it by 7.9% - Asset/liability simulation modeling is the primary tool for assessing interest rate risk, quantifying variations in net interest income under different rate environments[326](index=326&type=chunk) | Change in Interest Rates (Basis Points) | Estimated Increase (Decrease) in Net Interest Income Next 12 Months (in millions) | Estimated Increase (Decrease) in Net Interest Income Next 24 Months (in millions) | Estimated Increase (Decrease) in Economic Value of Equity (in millions) | | :-------------------------------------- | :------------------------------------------------------------------ | :------------------------------------------------------------------ | :-------------------------------------------------------- | | +400 | $57.3 (10.0%) | $122.7 (10.5%) | $(623.5) (19.6%) | | +300 | $43.9 (7.6%) | $94.1 (8.0%) | $(494.0) (15.5%) | | +200 | $38.1 (6.6%) | $84.4 (7.2%) | $(345.1) (10.9%) | | +100 | $23.3 (4.1%) | $52.7 (4.5%) | $(187.2) (5.9%) | | -25 | $(10.0) (1.7%) | $(24.0) (2.1%) | $43.6 (1.4%) | | -50 | $(21.7) (3.8%) | $(52.4) (4.5%) | $64.7 (2.0%) | | -100 | $(45.3) (7.9%) | $(110.4) (9.4%) | $72.5 (2.3%) | - At June 30, 2022, the one-year cumulative interest sensitivity gap to total assets was **24.96%**, indicating that interest-earning assets repricing within one year exceeded interest-bearing liabilities[335](index=335&type=chunk) [Item 4 – Controls and Procedures](index=82&type=section&id=Item%204%20%E2%80%93%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2022[341](index=341&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2022[342](index=342&type=chunk) [PART II – OTHER INFORMATION](index=83&type=section&id=PART%20II%20%E2%80%93%20OTHER%20INFORMATION) This part includes disclosures on legal proceedings, risk factors, equity security sales, and other miscellaneous information [Item 1 – Legal Proceedings](index=83&type=section&id=Item%201%20%E2%80%93%20Legal%20Proceedings) The company is involved in various legal proceedings, including a class action lawsuit, and has accrued $11.8 million related to these matters - The company has accrued **$11.8 million** related to legal proceedings as of June 30, 2022[344](index=344&type=chunk) - A class and collective action lawsuit, Bolding et al. v. Banner Bank, alleges failure to pay required wages to mortgage loan officers, with the court allowing the case to proceed to trial or settlement[345](index=345&type=chunk) [Item 1A – Risk Factors](index=83&type=section&id=Item%201A%20%E2%80%93%20Risk%20Factors) No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021, were reported - No material changes in risk factors were reported since the 2021 Form 10-K[346](index=346&type=chunk) [Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds](index=83&type=section&id=Item%202%20%E2%80%93%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased 200,000 shares of common stock during Q2 2022 under a renewed authorization, with 1,512,510 shares remaining available | Period | Total Number of Common Shares Purchased | Average Price Paid per Common Share | | :------------------------- | :-------------------------------------- | :---------------------------------- | | April 1, 2022 - April 30, 2022 | 84 | $59.69 | | May 1, 2022 - May 31, 2022 | 201,428 | $54.83 | | June 1, 2022 - June 30, 2022 | — | — | | Total for quarter | 201,512 | $54.83 | - The company repurchased **200,000 shares** under its repurchase authorization during Q2 2022, with **1,512,510 shares** remaining available for future repurchase[347](index=347&type=chunk)[348](index=348&type=chunk) [Item 3 – Defaults upon Senior Securities](index=84&type=section&id=Item%203%20%E2%80%93%20Defaults%20upon%20Senior%20Securities) This item is not applicable to the company - This item is not applicable to the company[348](index=348&type=chunk) [Item 4 – Mine Safety Disclosures](index=84&type=section&id=Item%204%20%E2%80%93%20Mine%20Safety%20Disclosures) This item is not applicable to the company - This item is not applicable to the company[348](index=348&type=chunk) [Item 5 – Other Information](index=84&type=section&id=Item%205%20%E2%80%93%20Other%20Information) This item is not applicable to the company - This item is not applicable to the company[348](index=348&type=chunk) [Item 6 – Exhibits](index=85&type=section&id=Item%206%20%E2%80%93%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including organizational documents, employment agreements, incentive plans, and certifications - The exhibit list includes restated articles of incorporation, amended bylaws, employment agreements, incentive plans, and certifications (CEO/CFO)[350](index=350&type=chunk) - XBRL instance, schema, calculation, definition, and label linkbase documents are included as exhibits[350](index=350&type=chunk)[351](index=351&type=chunk) [SIGNATURES](index=87&type=section&id=SIGNATURES) This section contains the duly authorized signatures of the company's President, CEO, and CFO, affirming the accuracy of the report [SIGNATURES](index=87&type=section&id=SIGNATURES) The report was signed by Mark J. Grescovich, President and CEO, and Peter J. Conner, EVP, Treasurer, and CFO, on August 4, 2022 - The report was signed by Mark J. Grescovich (President and CEO) and Peter J. Conner (EVP, Treasurer, and CFO) on August 4, 2022[354](index=354&type=chunk)

Financial Data and Key Metrics Changes - Banner Corporation reported a net profit available to common shareholders of $48 million or $1.39 per diluted share for Q2 2022, compared to $1.56 per share in Q2 2021 and $1.27 per share in Q1 2022 [8][22] - Pre-tax pre-provision earnings were $57.8 million for Q2 2022, up from $49.7 million in Q1 2022 [9] - Core revenue from operations increased 8% to $148.3 million compared to $137.6 million in Q1 2022 [10] - Return on average assets was 1.16% for Q2 2022 [10] Business Line Data and Key Metrics Changes - Core deposits increased by 5% compared to June 30, 2021, representing 95% of total deposits [11] - Core portfolio loan growth, excluding PPP loans, was $338 million or 3.7% for the quarter, with an annualized growth rate of 14.9% [15] - Commercial loans, excluding PPP, grew by nearly 9% or $94 million in Q2 2022, with balances now 5% higher than reported as of June 2021 [16] - The consumer mortgage portfolio grew by $150 million or 21% quarter-over-quarter, and home equity lines increased by $36 million or 8% [20] Market Data and Key Metrics Changes - Delinquent loans as of June 30 remained low at 0.19% of total loans, down from 0.21% in the prior quarter [14] - Adversely classified loans decreased to 1.63% of total loans, down from 1.95% in the linked quarter [14] - Nonperforming assets were low at $19.1 million, representing 0.12% of total assets [14] Company Strategy and Development Direction - The company is focused on the "Banner Forward" initiative, which aims to accelerate growth in commercial banking, deepen retail client relationships, and streamline back office operations [7][8] - The strategy includes expanding loan production and enhancing fee income through various initiatives [56] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism regarding loan growth despite economic uncertainties, expecting to maintain high single-digit growth rates [48] - The company is prepared for potential economic challenges, emphasizing a conservative approach to underwriting and asset quality management [61][21] Other Important Information - Banner has made significant commitments to support minority-owned businesses and local nonprofits, totaling over $1.5 million [12] - The company received recognition for client satisfaction, being ranked 1 bank in the Northwest by J.D. Power [12] Q&A Session Summary Question: Loan growth outlook and campaigns - Management confirmed that small business and residential mortgage campaigns are ongoing and expected to continue until the end of the month [34][36] Question: Provisioning and reserve ratio - Management indicated that provisioning is influenced by loan growth and economic conditions, with a conservative approach expected moving forward [38][39] Question: Deposit runoff behavior - Management noted that while some deposit outflows are anticipated due to rate sensitivity, the core deposit base remains resilient [42][45] Question: Loan growth expectations for the second half of the year - Management expects to maintain high single-digit loan growth, supported by strong pipelines in commercial and agricultural sectors [49][48] Question: M&A discussions and appetite - Management stated that while M&A activity has slowed, discussions continue, and they remain open to opportunities when market conditions are favorable [51][52] Question: Revenue opportunities from Banner Forward - Management anticipates sustained loan growth and fee income improvements as a result of the Banner Forward initiative [54][56] Question: Underwriting and portfolio maintenance - Management confirmed that underwriting practices remain conservative, with ongoing monitoring of credit quality [60][61] Question: Expense guidance and inflation pressures - Management acknowledged wage inflation pressures and adjusted core expense guidance to the high 80s to low 90 million range [68][70]