BANNER CORP

Comparison of Results of Operations for the Years Ended December 31, 2025 and 2024

General. For the year ended December 31, 2025, net income was $195.4 million, or $5.64 per diluted share, compared to net income of $168.9 million, or $4.88 per diluted share for the year ended December 31, 2024. Current year results included increases in net interest income and non-interest income, partially offset by increases in non-interest expense and the provision for credit losses.

Our operating results depend largely on net interest income, which increased $46.2 million to $587.9 million for the year ended December 31, 2025, compared to the prior year, primarily reflecting increased yields on loans due to adjustable rate loans repricing higher, as well as higher average loan balances and decreased funding costs. Revenues (net interest income and non-interest income) increased $52.1 million, or 9%, to $660.7 million for the year ended December 31, 2025, compared to the year ended December 31, 2024, primarily due to increased interest income on loans, decreased funding costs and a net gain on the sale of securities during the year ended December 31, 2025, compared to a net loss on the sale of securities during the prior year.

We recorded a $13.0 million provision for credit losses for the year ended December 31, 2025, compared to a $7.6 million provision for credit losses for the year ended December 31, 2024. The provision for credit losses for the year ended December 31, 2025, reflects risk rating downgrades, as well as growth in loan balances.

Total non-interest income for the year ended December 31, 2025, increased to $72.8 million compared to $66.9 million for the year ended December 31, 2024, primarily due to the recognition of a net gain on the sale of securities during the year ended December 31, 2025, compared to a net loss on the sale of securities during the prior year.

Total non-interest expense increased to $408.8 million for the year ended December 31, 2025, compared to $391.5 million for the year ended December 31, 2024, largely as a result of increases in salary and employee benefits, information and computer data services expense, payment and card processing services expense, and professional and legal expenses.

Net Interest Income. Net interest income increased for the year ended December 31, 2025, compared to $541.7 million for the year ended December 31, 2024, primarily reflecting increased yields on loans due to adjustable rate loans repricing higher, as well as higher average loan balances and lower funding costs. The higher average yield on interest-earning assets, compared to the same period in the prior year, reflects loans being a higher percentage of interest-earnings assets.

The net interest margin on a tax equivalent basis of 3.96% for the year ended December 31, 2025, was 21 basis points higher than the prior year. The increase in net interest margin reflects a 13 basis-point increase in yields on average interest-earning assets and an eight basis-point decrease in the cost of funding liabilities. The increase in average yields on interest-earning assets during the current year reflects the benefit of variable rate interest-earning assets repricing higher. The decrease in the overall cost of funding liabilities was primarily due to the decrease in the overall rate paid on deposits and the decrease in the average balance of borrowings.

Interest Income. Interest income for the year ended December 31, 2025, was $805.0 million, compared to $766.1 million for the prior year, an increase of $38.9 million. This increase was a result of yields on interest-earning assets increasing 13 basis points to 5.39%, as well as the average balance of interest-earning assets increasing $367.6 million to $15.17 billion. The increased yield on interest-earning assets primarily reflects increases in the average yields on loans, with the increase concentrated in real estate loans, partially offset by a slight decline in commercial and agricultural loan yields.

Interest income on loans increased $46.4 million from the prior year to $702.0 million for the year ended December 31, 2025. The increase was primarily due to the average loan yields increasing 15 basis points to 6.12%, reflecting the impact of market interest rates being higher than average portfolio interest rates. Average loans receivable increased $508.2 million to $11.63 billion, primarily reflecting increases in the average balances of real estate secured loans.

Interest and dividend income on investment securities decreased $7.4 million for the year ended December 31, 2025, due to a decline in the average balance and average yield of the investment securities portfolio. The combined average balance of total investment securities decreased $140.6 million to $3.54 billion (excluding the effect of fair value adjustments). The average yield on the combined portfolio decreased to 3.02%, reflecting a 37 basis-point decrease in the yield on other securities.

Interest Expense. Interest expense for the year ended December 31, 2025, was $217.0 million, compared to $224.4 million for the prior year, a decrease of $7.4 million, or 3%. The decrease occurred as a result of an eight basis-point decrease in the average cost of all funding liabilities to 1.55%, partially offset by the average balance of funding liabilities increasing $274.7 million to $14.04 billion. The decrease in the average cost of our funding liabilities was primarily due to lower average interest rates paid on deposits and borrowings, reflecting both the lower rates and the impact of changes in funding composition. The increase in the average balance of funding liabilities reflects increases in interest-bearing transaction and savings accounts, partially offset by decreases in money market accounts and total borrowings.

Deposit interest expense increased $1.3 million to $200.8 million for the year ended December 31, 2025, compared to the prior year, as a result of the average balance of interest-bearing deposits increasing by $504.1 million, partially offset by the average cost of total deposits decreasing three basis points to 1.47%. The increase in the average balance of total interest-bearing deposits was primarily due to increases in the average balances of interest-bearing transaction and savings accounts, partially offset by a decrease in the average balances of money market accounts. The decrease in the average cost of deposits between the periods was primarily due to the average cost of interest-bearing deposits decreasing 12 basis points to 2.20% for the year ended December 31, 2025, compared to 2.32% in the prior year. The decrease in the average cost of interest-bearing deposits was primarily the result of a five basis-point decrease in the cost of savings accounts, a 12 basis-point decrease in the cost of money market accounts and a 38 basis-point decrease in the cost of certificates of deposit, partially offset by a seven basis-point increase in the cost of interest-bearing checking accounts.

The average rate paid on total borrowings decreased 68 basis points to 4.29% for the year ended December 31, 2025, reflecting a 103 basis-point decrease in the average cost of FHLB advances, 37 basis-point decrease in the average cost of other borrowings, and 61 basis-point decrease in the average cost of our subordinated debt. The decrease in the average balance of total borrowings was due to a $33.4 million decrease in the average balance of FHLB advances, a $41.8 million decrease in the average balance of other borrowings and a $48.5 million decrease in the average balance of our subordinated debt.

Table 13, Analysis of Net Interest Spread, 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. Average balances are computed using daily average balances.

The following table provides an analysis of our net interest spread for the last three years (dollars in thousands):

Table 13: Analysis of Net Interest Spread

(footnotes follow)

(1)Average balances include loans accounted for on a nonaccrual basis and 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 $9.4 million, $8.7 million and $7.4 million for the years ended December 31, 2025, 2024 and 2023, respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $4.2 million, $4.1 million and $4.4 million for the years ended December 31, 2025, 2024 and 2023, respectively.

The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown (in thousands). Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Effects on interest income attributable to changes in rate and volume (changes in rate multiplied by changes in volume) have been allocated between changes in rate and changes in volume (in thousands):

Table 14: Rate/Volume Analysis

Provision and Allowance for Credit Losses. We recorded an $11.6 million provision for credit losses - loans in the year ended December 31, 2025, compared to an $8.6 million provision for credit losses - loans in 2024.

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. The provision for credit losses - loans for the current year reflects growth in the loan portfolio and risk rating downgrades. The prior year provision for credit losses - loans also primarily reflected loan growth and risk rating downgrades. Future assessments of the expected credit losses will not only be impacted by changes to the reasonable and supportable forecast, but will also include an updated assessment of qualitative factors, as well as consideration of any required changes in the reasonable and supportable forecast reversion period.

The following table sets forth an analysis of our allowance for credit losses - loans for the periods indicated (dollars in thousands):

Table 15: Changes in Allowance for Credit Losses - Loans

The following table sets forth the breakdown of the allowance for credit losses – loans by loan category at the dates indicated (dollars in thousands):

Table 16: Allocation of Allowance for Credit Losses - Loans

The allowance for credit losses - unfunded loan commitments was $15.0 million as of December 31, 2025, compared to $13.6 million as of December 31, 2024. The increase in the allowance for credit losses - unfunded loan commitments reflects an increase in unfunded loan commitments and credit downgrades, primarily within the construction, land and land development loan category.

The following table sets forth an analysis of our allowance for credit losses - unfunded loan commitments for the periods indicated (dollars in thousands):

Table 17: Changes in Allowance for Credit Losses - Unfunded Loan Commitments

Non-interest Income. The following table presents the key components of non-interest income for the years ended December 31, 2025, 2024 and 2023 (dollars in thousands):

Table 18: Non-interest Income

Non-interest income increased for the year ended December 31, 2025, compared to the year ended December 31, 2024. The increase was primarily due to the recognition of a net gain on the sale of securities during the year ended December 31, 2025, compared to a net loss on the sale of securities during the prior year. Additionally, revenue from mortgage banking operations increased. This was partially offset by a decrease in miscellaneous income.

A net gain of $374,000 was recognized in the current period on the sale of securities, compared to $5.2 million in strategic losses recorded during the year ended December 31, 2024. The prior year losses were taken to mitigate rising interest rate risk in the securities portfolio.

Revenue from mortgage banking operations, including gains from one- to four-family and multifamily loan sales and loan servicing fees, increased for the year ended December 31, 2025, compared to the prior year. The volume of one- to four-family loans sold during the year ended December 31, 2025, increased compared to the prior year, although overall volumes remained low due to reduced refinancing and purchase activity in the current rate environment. We sold $453.8 million of one- to four-family loans held for sale for the year ended December 31, 2025, compared to $408.9 million for the year ended December 31, 2024. The increase was also impacted by increases in the pricing on the one- to four-family loans sold during the current year. Sales of one- to four-family loans held for sale for the year ended December 31, 2025, resulted in gains of $9.1 million, compared to $8.0 million for the year ended December 31, 2024.

Miscellaneous income decreased for the year ended December 31, 2025, compared to the year ended December 31, 2024, primarily due to losses incurred on the disposal of assets during 2025.

Non-interest Expense. The following table represents key elements of non-interest expense for the years ended December 31, 2025, 2024 and 2023 (dollars in thousands).

Table 19: Non-interest Expense

Non-interest expense for the year ended December 31, 2025, increased compared to the same period in 2024. The increase was primarily due to increases in salary and employee benefits, information and computer data services expense, payment and card processing services expense, and professional and legal expenses.

Salary and employee benefits increased for the year ended December 31, 2025, compared to the prior year, primarily due to normal annual salary and wage increases, an increase in loan and deposit related commission expense, and an increase in medical claims expense.

Information and computer data services expense increased for the year ended December 31, 2025, compared to the prior year, primarily due to an increase in software expenses related to additional software service contracts and the implementation of a new loan and deposit origination system during 2025.

Payment and card processing services increased for the year ended December 31, 2025, compared to the prior year, primarily reflecting increases in online banking costs and rewards program expenses.

Professional and legal expenses increased for the year ended December 31, 2025, from the year ended December 31, 2024, primarily due to an increase in legal expenses and a pending legal settlement accrual.

Income Taxes. For the year ended December 31, 2025, we recognized $43.5 million in income tax expense for an effective rate of 18.2%, which reflects our statutory tax rate reduced by the effect of tax-exempt income, certain tax credits, and tax benefits related to restricted stock vesting. Our blended federal and state statutory income tax rate is 24.0%, representing a blend of the statutory federal income tax rate of 21.0% and apportioned effects of the state and local jurisdictions where we do business. For the year ended December 31, 2024, we recognized $40.6 million in income tax expense for an effective tax rate of 19.4%.

Comparison of Results of Operations for the Years Ended December 31, 2024 and 2023

See Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2024, previously filed with the SEC.