BANNER CORP

Comparison of Results of Operations for the Three Months Ended September 30, 2025 and June 30, 2025, and the Nine Months Ended September 30, 2025 and 2024

For the quarter ended September 30, 2025, net income was $53.5 million, or $1.54 per diluted share, compared to $45.5 million, or $1.31 per diluted share, for the preceding quarter. For the nine months ended September 30, 2025, our net income was $144.1 million, or $4.15 per diluted share, compared to $122.5 million, or $3.54 per diluted share, for the same period a year earlier. The increase in net income for the comparable periods was primarily due to increases in net interest income and non-interest income.

Net interest income was $150.0 million in the third quarter of 2025, compared to $144.4 million in the preceding quarter, and $435.5 million for the nine months ended September 30, 2025, compared to $401.2 million for the comparable period a year ago. The increases in net interest income for both periods reflect higher yields and an increase in the average balance of interest-earning assets. The increase in net interest income for the nine months ended September 30, 2025 compared to the same period a year ago also reflects a decrease in funding costs.

We recorded a $2.7 million provision for credit losses for the quarter ended September 30, 2025, compared to a $4.8 million provision for credit losses in the preceding quarter. The provision for credit losses in the current quarter was driven by changes in both portfolio mix and individually evaluated loans. We recorded a $10.6 million provision for credit losses for the nine months ended September 30, 2025, compared to a $4.6 million provision for credit losses for the same period a year ago.

Total non-interest income increased for the quarter ended September 30, 2025, compared to the preceding quarter, and increased during the nine months ended September 30, 2025, compared to the same period a year ago. The increase from the preceding quarter was primarily due to an increase in miscellaneous income, reflecting gains on the sale of assets during the current quarter, compared to losses on the disposal of assets related to building and lease exits during the prior quarter associated with Banner’s reduction of excess office space. The increase in non-interest income during the nine months ended September 30, 2025, compared to the same period last year, was primarily due to a decrease in the net loss recognized on the sale of securities and positive fair value adjustments on financial instruments carried at fair value during the current period.

Total non-interest expense increased slightly for the quarter ended September 30, 2025, compared to the preceding quarter and increased for the nine months ended September 30, 2025, compared to the same period a year ago. Non-interest expense for the current quarter reflects increases in miscellaneous expenses and advertising and marketing expenses, partially offset by a decrease in salary and employee benefits. The increase in non-interest expense during the nine months ended September 30, 2025, compared to the same period last year primarily reflects increases in salary and employee benefits, information and computer data services expenses and professional and legal expenses.

Net Interest Income. Net interest income increased for the quarter ended September 30, 2025, compared to the preceding quarter. The $5.6 million increase was due to an increase in interest income, primarily attributable to a five basis point increase in the average loan yield to 6.17% and an increase in average loan balances, while interest expense was essentially flat for the quarter.

Net interest margin on a tax equivalent basis was 3.98% for the third quarter of 2025, compared to 3.92% for the preceding quarter. Net interest margin for the current quarter, compared to the preceding quarter, benefited from higher yields on interest-earning assets, primarily due to an increase in the average loan yield.

Net interest income increased by $34.3 million, or 9%, to $435.5 million for the nine months ended September 30, 2025, compared to $401.2 million for the same period one year earlier. The increase was primarily the result of a $30.3 million increase in interest income, reflecting both adjustable-rate loans repricing higher and new loans being originated at rates higher than the overall loan portfolio, and a $532.7 million increase in the average balance of loans. In addition, funding costs decreased by seven basis points for the nine months ended September 30, 2025 as compared to the same period in the prior year. The net interest margin on a tax equivalent basis increased to 3.94% for the nine months ended September 30, 2025, compared to 3.72% for the same period in the prior year.

Interest Income. Interest income for the quarter ended September 30, 2025 was $205.8 million, compared to $200.3 million for the preceding quarter. The increase was primarily due to higher average loan yields and balances, as well as increases in both the average balance and yield on interest-bearing deposits held at other banks. The total average loan yield increased five basis points to 6.17%, while the total average loan balance increased $32.9 million.

Loan yields increased five basis points to 6.17% for the quarter ended September 30, 2025, from 6.12% in the preceding quarter, due to new loans being originated at higher interest rates and adjustable rate loans repricing higher. The increase in average loan balances primarily reflected growth in real estate secured loans, particularly commercial real estate and construction loans, which together contributed the largest share of the quarterly increase in interest income.

The total investment securities average balance increased to $3.61 billion for the quarter ended September 30, 2025 (excluding the effect of fair value adjustments), compared to $3.49 billion for the preceding quarter. The average yield on the combined portfolio increased to 3.06% for the quarter ended September 30, 2025, from 2.98% for the preceding quarter. Interest income on interest-bearing deposits with banks also increased, reflecting both a higher average balance and an increase in yield to 4.16%, compared to 3.06% in the prior quarter.

Interest income for the nine months ended September 30, 2025 was $600.0 million, compared to $569.7 million for the same period in the prior year, an increase of $30.3 million. This increase primarily reflected a 16 basis point increase in the average yield on interest-earning assets, to 5.40%, along with higher average balances. Loan growth was the primary contributor, with the average loan balances increasing $532.7 million compared to the prior year, supported by growth in the commercial real estate and residential mortgage portfolios.

Interest Expense. Interest expense was relatively flat for the quarter ended September 30, 2025 as compared to the preceding quarter. Average funding liabilities increased by $124.8 million, primarily due to a $370.2 million increase in average deposit balances, partially offset by a $163.3 million decrease in average balance of FHLB advances. The average cost of funding liabilities decreased three basis points, to 1.57% for the quarter ended September 30, 2025.

Interest expense for the nine months ended September 30, 2025 was $164.5 million, compared to $168.5 million for the same period in the prior year. The decrease resulted from a seven basis-point decrease in the average cost of funds to 1.57% from 1.64%, partially offset by a $268.0 million, or 2%, increase in average funding liabilities. The increase in the average balance of funding liabilities reflects increases in interest-bearing transaction and savings accounts, partially offset by decreases in non-interest-bearing deposits, money market accounts, and total borrowings.

Deposit interest expense for the quarter ended September 30, 2025 increased 6% to $52.3 million, compared to $49.3 million for the preceding quarter. The increase was primarily due to increases in both the average balance and the average rate paid on interest-bearing deposits. The average rate paid on total deposits, including non-interest-bearing deposits, was 1.50% for the quarter ended September 30, 2025 and 1.47% for the preceding quarter. The average rate paid on interest-bearing deposits increased to 2.25% for the quarter ended September 30, 2025, compared to 2.21% in the preceding quarter. The increase in the rate paid on interest-bearing deposits reflects higher average rates paid across all interest-bearing deposit categories, except certificates of deposit, as well as shifts in the deposit mix. Total average deposit balances, including non-interest-bearing deposits, increased to $13.79 billion for the quarter ended September 30, 2025, from $13.42 billion for the preceding quarter.

Deposit interest expense for the nine months ended September 30, 2025 increased $3.1 million to $150.3 million, compared to $147.2 million for the same period in the prior year. Average deposit balances increased to $13.55 billion for the nine months ended September 30, 2025, from $13.16 billion for the same period a year earlier, while the average rate paid on interest-bearing deposits decreased by eight basis points to 2.23% for the nine months ended September 30, 2025, compared to 2.31% in the same period a year earlier. The decrease in the average rate paid on interest-bearing deposits was primarily the result of a 33 basis-point decrease in the cost of certificates of deposit.

Interest expense on total borrowings for the quarter ended September 30, 2025, decreased 45% to $3.6 million, compared to $6.5 million for the prior quarter, primarily due to decreases in both the average balance and the rate paid on total borrowings. The average balance of total borrowings decreased to $342.3 million for the quarter ended September 30, 2025, compared to $587.7 million for the preceding quarter, primarily due to a $163.3 million decrease in the average balance of FHLB advances. The average rate paid on total borrowings for the quarter ended September 30, 2025, decreased to 4.18% from 4.47% for the preceding quarter.

Interest expense on total borrowings for the nine months ended September 30, 2025 decreased to $14.2 million from $21.2 million for the same period a year earlier, due to decreases in both the average balance and rate paid on total borrowings. Average total borrowings were $436.4 million for the nine months ended September 30, 2025, compared to $562.9 million for the same period a year earlier. The decrease was primarily due to a $42.5 million decrease in the average balance of FHLB advances, a $46.3 million decrease in the average balance of other borrowings and a $37.7 million decrease in the average balance of junior subordinated debentures and subordinated notes. The average rate paid on total borrowings for the nine months ended September 30, 2025 decreased to 4.35% from 5.04% for the same period a year earlier.

Analysis of Net Interest Spread. The following table presents for the periods indicated our condensed average balance sheet information, together with interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities with additional comparative data on our operating performance (dollars in thousands). Average balances are computed using daily average balances.

(1)Average balances include loans accounted for on a nonaccrual basis and accruing loans 90 days or more past due. Amortization of net deferred loan fees/costs is included with interest on loans.

(2)Average other non-interest-bearing liabilities include fair value adjustments related to junior subordinated debentures.

(3)Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $2.4 million and $2.3 million for the quarters ended September 30, 2025 and June 30, 2025, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $1.1 million for both the quarters ended September 30, 2025 and June 30, 2025.

(4)Represents non-GAAP financial measures. See non-GAAP financial measure reconciliations presented above following Third Quarter 2025 Highlights.

(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 $7.0 million and $6.5 million for the nine months ended September 30, 2025 and 2024, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $3.1 million for both the nine months ended September 30, 2025 and 2024.

(4)Represents non-GAAP financial measures. See non-GAAP financial measure reconciliations presented above following Third Quarter 2025 Highlights.

Provision and Allowance for Credit Losses. Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. These factors include, among others, changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions. The following table sets forth an analysis of our allowance for credit losses - loans for the periods indicated (dollars in thousands):

The provision for credit losses - loans reflects the amount required to maintain the allowance for credit losses - loans at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. During the quarter ended September 30, 2025, we recorded a provision for credit losses - loans of $1.4 million, compared to a provision for credit losses - loans of $4.2 million during the preceding quarter. The provision for credit losses in the quarter was driven by changes in both portfolio mix and individually evaluated loans. The provision for credit losses for the preceding quarter primarily reflected loan growth, as well as risk rating migration. Future provisions for credit losses will continue to be influenced by changes in the amount and composition of the loan portfolio, updates to the reasonable and supportable forecast of future economic conditions, revisions to qualitative factor assessments, and any necessary changes to the reversion period applied in estimating expected credit losses.

The provision for credit losses - unfunded loan commitments reflects the amount required to maintain the allowance for credit losses - unfunded loan commitments at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. The following table sets forth an analysis of our allowance for credit losses - unfunded loan commitments for the periods indicated (dollars in thousands):

The increase in the allowance for credit losses - unfunded loan commitments for the current quarter reflects an increase in unfunded loan commitments, primarily in the construction portfolio.

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

The increase in non-interest income during the current quarter compared to the preceding quarter was primarily due to a $2.0 million increase in miscellaneous income, which included gains recognized on asset disposals as part of the building and lease exits during the current quarter of $1.4 million, compared to $919,000 of losses incurred on asset disposals related to building and lease exits during the second quarter of 2025.

The increase in non-interest income for the nine months ended September 30, 2025, compared to the same period a year earlier, was primarily due to a $5.8 million reduction in net losses on the sale of securities. A net gain of $374,000 was recognized in the current period, compared to $5.5 million in strategic losses recorded during the nine months ended September 30, 2024, which were taken to mitigate rising interest rate risk in the securities portfolio. In addition, the $626,000 improvement in the fair value of financial instruments during the first nine months of 2025, compared to a $1.1 million negative valuation change in the same period of 2024, contributed to the increase. These instruments primarily include limited partnership investments, which were positively impacted by current market valuations.

Revenue from mortgage banking operations increased $1.1 million for the nine months ended September 30, 2025, compared to the same period a year earlier. This increase was the result of higher volumes of one- to four-family loans sold, with gains on these loan sales totaling $6.5 million, compared to $5.4 million in the prior-year period.

Miscellaneous income increased $1.2 million for the nine months ended September 30, 2025, compared to the same period a year earlier, primarily due to an increase in the gain on sale of SBA loans and higher income from back-to-back swaps.

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

The increase in non-interest expense for the current quarter reflects increases in miscellaneous expenses and advertising and marketing expenses, partially offset by a decrease in salary and employee benefits. In addition, the current quarter included $1.0 million of building and lease exit costs, compared to $834,000 of such costs in the previous quarter. The increase in non-interest expense for the nine months ended September 30, 2025, compared to the same period a year earlier primarily reflects increases in salary and employee benefits, information and computer data services, and professional and legal expenses, partially offset by a decrease in the amortization of core deposit intangibles.

Salary and employee benefits decreased for the current quarter, compared to the quarter ended June 30, 2025, as a result of decreased medical premiums expense and payroll taxes, and increased for the nine months ended September 30, 2025 compared to the nine months ended September 30, 2024, primarily from increased loan production-related commission expense and normal salary and wage increases.

Information and computer data services for the nine months ended September 30, 2025 increased from the comparable period primarily due to increases in computer software expenses as the Company invested in technology enhancements.

Professional and legal expense increased for the nine months ended September 30, 2025, compared to the same period a year earlier, primarily due to one-time reductions in litigation settlement costs that occurred during the nine months ended September 30, 2024.

Advertising and marketing expenses increased in the current quarter compared to the prior quarter due to increases in direct mail marketing and community development expenses. However, these expenses decreased $366,000, or 11%, for the nine-month period due to lower spending compared to the prior year.

Miscellaneous expenses increased in the current quarter compared to the prior quarter due to an increase in talent acquisition and other employee-related expenses.

Our efficiency ratio was 59.76% for the current quarter, compared to 62.50% in the preceding quarter. Our adjusted efficiency ratio, a non-GAAP financial measure, was 58.54% for the current quarter, compared to 60.28% in the preceding quarter. The improvement in the efficiency ratio and adjusted efficiency ratio for the current quarter reflects an increase in total revenues and adjusted revenues, respectively. See non-GAAP financial measure reconciliations presented above under “Third Quarter 2025 Financial Highlights.”

Income Taxes. For the quarter ended September 30, 2025, we recognized $12.5 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 24.0%, 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, 2025, we recognized $10.5 million in income tax expense for an effective tax rate of 18.8%. For the nine months ended September 30, 2025, we recognized $33.7 million in income tax expense for an effective tax rate of 18.9%, compared to $28.9 million in income tax expense for an effective tax rate of 19.1% for the same period in the prior year.