BANNER CORP 10-Q

ITEM 3 – Quantitative and Qualitative Disclosures About Market Risk Market Risk and Asset/Liability Management Our financial condition and operations are influenced significantly by general economic conditions, including the absolute level of interest rates as well as changes in interest rates and the slope of the yield curve. Our profitability is dependent, to a large extent, on our net interest income, which is the difference between the interest received from our interest-earning assets and the interest expense incurred on our interest-bearing liabilities. Our activities, like all financial institutions, inherently involve the assumption of interest rate risk. Interest rate risk is the risk that changes in market interest rates will have an adverse impact on the institution’s earnings and underlying economic value. Interest rate risk is determined by the maturity and repricing characteristics of an institution’s assets, liabilities and off-balance-sheet contracts. Interest rate risk is measured by the variability of financial performance and economic value resulting from changes in interest rates. Interest rate risk is the primary market risk affecting our financial performance. 62 Table of Contents For the Company, the greatest source of interest rate risk results from the mismatch of maturities or repricing intervals for rate sensitive assets, liabilities and off-balance-sheet contracts. This mismatch, or gap, is generally characterized by a substantially shorter maturity structure for interest-bearing liabilities than interest-earning assets, although our floating-rate assets tend to be more immediately responsive to changes in market rates than most deposit liabilities. Additional interest rate risk results from mismatched repricing indices and formula (basis risk and yield curve risk), and product caps and floors and early repayment or withdrawal provisions (option risk), which may be contractual or market driven, that are generally more favorable to clients than to us. An exception to this generalization is the beneficial effect of interest rate floors on a portion of our performing floating-rate loans, which help us maintain higher loan yields in periods when market interest rates decline significantly. However, in a declining interest rate environment, as loans with floors are repaid they generally are replaced with new loans which have lower interest rate floors. As of September 30, 2025, our loans with interest rate floors totaled $5.50 billion and had a weighted average floor rate of 4.91%, compared to a current average note rate of 6.47%. Our loans with interest rates at their floors at September 30, 2025, totaled $1.18 billion and had a weighted average note rate of 4.50%. The Company actively manages its exposure to interest rate risk through on-going adjustments to the mix of interest-earning assets and funding sources that affect the repricing speeds of loans, investments, interest-bearing deposits and borrowings. The principal objectives of asset/liability management are to evaluate the interest rate risk exposure; to determine the appropriate level of risk given our operating environment, business plan strategies, performance objectives, capital and liquidity constraints, and asset and liability allocation alternatives; and to manage our interest rate risk consistent with regulatory guidelines and policies approved by the Board of Directors. Through such management, we seek to reduce the vulnerability of our earnings and capital position to changes in the level of interest rates. Our actions in this regard are taken under the guidance of the Asset/Liability Management Committee, which is comprised of members of our senior management. The Committee closely monitors our interest sensitivity exposure, asset and liability allocation decisions, liquidity and capital positions, and local and national economic conditions and attempts to structure the loan and investment portfolios and funding sources to maximize earnings within acceptable risk tolerances. Sensitivity Analysis Our primary monitoring tool for assessing interest rate risk is asset/liability simulation modeling, which is designed to capture the dynamics of balance sheet, interest rate and spread movements and to quantify variations in net interest income resulting from those movements under different rate environments. The sensitivity of net interest income to changes in the modeled interest rate environments provides a measurement of interest rate risk. We also utilize economic value analysis, which addresses changes in estimated net economic value of equity arising from changes in the level of interest rates. The net economic value of equity is estimated by separately valuing our assets and liabilities under varying interest rate environments. The extent to which assets gain or lose value in relation to the gains or losses of liability values under the various interest rate assumptions determines the sensitivity of net economic value to changes in interest rates and provides an additional measure of interest rate risk. We perform an interest rate sensitivity analysis that incorporates beginning-of-the-period rate, balance and maturity data, using various levels of aggregation of that data, as well as certain assumptions concerning the maturity, repricing, amortization and prepayment characteristics of loans and other interest-earning assets and the repricing and withdrawal of deposits and other interest-bearing liabilities into an asset/liability simulation model. The interest rate sensitivity analysis includes a rate ramp sensitivity scenario, which assumes a gradual change in market interest rates at all maturities during the first year, as well as a rate shock interest rate sensitivity scenario, which assumes an instantaneous and sustained uniform change in market interest rates at all maturities. We update and prepare simulation modeling at least quarterly for review by senior management and oversight by the Board of Directors. We believe the data and assumptions are realistic representations of our portfolio and possible outcomes under the various interest rate scenarios. Nonetheless, the interest rate sensitivity of our net interest income and net economic value of equity could vary substantially if different assumptions were used or if actual experience differs from the assumptions used. 63 Table of Contents The following tables set forth, as of September 30, 2025, the estimated changes in our net interest income over one-year and two-year time horizons for our rate ramp and rate shock interest rate sensitivity scenarios, and the estimated changes in economic value of equity for our rate shock interest rate sensitivity scenario based on the indicated interest rate environments (dollars in thousands): Interest Rate Risk Indicators - Rate Ramp September 30, 2025 Estimated Increase (Decrease) in Change (in Basis Points) in Interest Rates (1) Net Interest Income Next 12 Months Net Interest Income Next 24 Months +300 $ 7,000 1.1 % $ 34,027 2.6 % +200 8,760 1.4 40,532 3.1 +100 6,465 1.0 28,976 2.2 0 — — — — -100 (8,272) (1.3) (35,819) (2.8) -200 (14,668) (2.3) (66,294) (5.1) -300 (20,054) (3.2) (94,437) (7.3) (1) Assumes a gradual change in market interest rates at all maturities during the first year; however, no rates are allowed to go below zero. Interest Rate Risk Indicators - Rate Shock September 30, 2025 Estimated Increase (Decrease) in Change (in Basis Points) in Interest Rates (1) Net Interest Income Next 12 Months Net Interest Income Next 24 Months Economic Value of Equity +300 $ 10,102 1.6 % $ 57,758 4.5 % $ (341,196) (11.5) % +200 18,581 3.0 64,790 5.0 (182,736) (6.1) +100 14,986 2.4 45,120 3.5 (65,493) (2.2) 0 — — — — — — -100 (18,698) (3.0) (54,879) (4.3) 26,509 0.9 -200 (33,015) (5.3) (103,539) (8.0) 8,142 0.3 -300 (45,398) (7.3) (150,281) (11.6) (64,985) (2.2) (1) Assumes an instantaneous and sustained uniform change in market interest rates at all maturities; however, no rates are allowed to go below zero. At September 30, 2025, the Company’s interest rate risk profile reflected a moderately asset-sensitive position in the near term, with net interest income projected to increase under rising rate scenarios and decrease under falling rate scenarios. In contrast, the estimated long-term economic value of the balance sheet was more sensitive to interest rate changes, declining under rising rate scenarios and changing less under falling rate scenarios. Overall, the results indicate that near-term earnings are expected to benefit from higher interest rates, while the long-term economic value of equity is more sensitive to market rate movements. Another monitoring tool for assessing interest rate risk is gap analysis. The matching of the repricing characteristics of assets and liabilities may be analyzed by examining the extent to which assets and liabilities are interest sensitive and by monitoring an institution’s interest sensitivity gap. An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated to mature or reprice, based upon certain assumptions, within that same time period. A gap is considered positive when the amount of interest-sensitive assets exceeds the amount of interest-sensitive liabilities. A gap is considered negative when the amount of interest-sensitive liabilities exceeds the amount of interest-sensitive assets. Generally, during a period of rising rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income. Certain shortcomings are inherent in gap analysis. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of some borrowers to service their debt may decrease in the event of a severe change in market rates. 64 Table of Contents The following table presents our interest sensitivity gap between interest-earning assets and interest-bearing liabilities at September 30, 2025 (dollars in thousands), based on the amounts of interest-earning assets and interest-bearing liabilities which are anticipated by us, based upon certain assumptions, to reprice or mature in each of the future periods shown. At September 30, 2025, total interest-earning assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same time period by $3.22 billion, representing a one-year cumulative gap to total assets ratio of 19.44%. Both the interest rate risk indicators and interest sensitivity gaps as of September 30, 2025 were within our internal policy guidelines, and management believes the current level of interest rate risk to be reasonable. Within 6 Months After 6 Months Within 1 Year After 1 Year Within 3 Years After 3 Years Within 5 Years After 5 Years Within 10 Years Over 10 Years Total Interest-earning assets: (1) Construction loans $ 1,352,946 $ 77,054 $ 75,088 $ 9,542 $ 3,408 $ — $ 1,518,038 Fixed-rate mortgage loans 254,617 180,323 691,663 595,071 708,511 399,667 2,829,852 Adjustable-rate mortgage loans 1,365,047 525,043 1,531,363 939,861 384,371 2,616 4,748,301 Fixed-rate mortgage-backed securities 85,136 92,038 365,770 395,239 725,119 706,850 2,370,152 Adjustable-rate mortgage-backed securities 174,501 49 205 220 3,743 — 178,718 Fixed-rate commercial/agricultural loans 120,616 83,808 269,022 140,817 144,276 14,692 773,231 Adjustable-rate commercial/agricultural loans 919,619 25,450 94,368 47,057 1,013 — 1,087,507 Consumer and other loans 576,679 53,209 49,034 17,880 17,946 40,052 754,800 Investment securities and interest-earning deposits 553,442 26,285 21,850 86,090 120,063 420,852 1,228,582 Total rate sensitive assets 5,402,603 1,063,259 3,098,363 2,231,777 2,108,450 1,584,729 15,489,181 Interest-bearing liabilities: (2) Regular savings 511,999 168,791 579,739 455,444 771,028 1,218,821 3,705,822 Interest checking accounts 343,383 114,715 405,935 332,909 593,755 944,126 2,734,823 Money market deposit accounts 198,569 116,874 366,105 245,705 319,024 216,293 1,462,570 Certificates of deposit 1,166,135 316,019 50,247 7,509 473 — 1,540,383 FHLB advances 100,000 — — — — — 100,000 Junior subordinated debentures 89,178 — — — — — 89,178 Retail repurchase agreements 120,536 — — — — — 120,536 Total rate sensitive liabilities 2,529,800 716,399 1,402,026 1,041,567 1,684,280 2,379,240 9,753,312 Excess of interest-sensitive assets over interest-sensitive liabilities $ 2,872,803 $ 346,860 $ 1,696,337 $ 1,190,210 $ 424,170 $ (794,511) $ 5,735,869 Cumulative excess of interest-sensitive assets $ 2,872,803 $ 3,219,663 $ 4,916,000 $ 6,106,210 $ 6,530,380 $ 5,735,869 $ 5,735,869 Cumulative ratio of interest-earning assets to interest-bearing liabilities 213.56 % 199.18 % 205.76 % 207.32 % 188.56 % 158.81 % 158.81 % Interest sensitivity gap to total assets 17.34 2.09 10.24 7.19 2.56 (4.80) 34.63 Ratio of cumulative gap to total assets 17.34 19.44 29.68 36.87 39.43 34.63 34.63 (Footnotes on following page) 65 Table of Contents Footnotes for Table of Interest Sensitivity Gap (1) Adjustable-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due to mature, and fixed-rate assets are included in the period in which they are scheduled to be repaid based upon scheduled amortization, in each case adjusted to take into account estimated prepayments. Mortgage loans and other loans are not reduced for allowances for credit losses and non-performing loans. Mortgage loans, mortgage-backed securities, other loans and investment securities are not adjusted for deferred fees or unamortized acquisition premiums and discounts. (2) Adjustable-rate liabilities are included in the period in which interest rates are next scheduled to adjust rather than in the period they are due to mature. Although regular savings, demand, interest checking, and money market deposit accounts are subject to immediate withdrawal, based on historical experience management considers a substantial amount of such accounts to be core deposits having significantly longer maturities. For the purpose of the gap analysis, these accounts have been assigned decay rates to reflect their longer effective maturities. If all of these accounts had been assumed to be short-term, the one-year cumulative gap of interest-sensitive assets would have been a negative $3.2 billion, or negative 19.50% of total assets, at September 30, 2025.